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MDA’s mission is to develop an integrated and layered Ballistic Missile Defense System to defend the United States, its deployed forces, friends, and allies against ballistic missile attacks. This mission requires complex coordination and the integration of many and varied defensive components—space-based sensors; ground- and sea-based surveillance and tracking radars; advanced ground- and sea-based interceptors; and battle management, command, control, and communications. Prior to MDA’s establishment in 2002, the services, along with the support and coordination of the Ballistic Missile Defense Organization, separately managed the development and acquisition of ballistic missile defense weapon systems as major defense acquisition programs. In 2002, the President established ballistic missile defense as a national priority and directed DOD to proceed with plans to develop and put in place an initial capability beginning in 2004. To expedite the delivery of an operationally capable Ballistic Missile Defense System, in 2002 the Secretary of Defense re-chartered the Ballistic Missile Defense Organization as MDA and directed MDA to manage all ballistic missile defense systems then under development and transferred those systems controlled by the military services to the agency. The systems transferred from the services and the new systems whose development MDA initiates are all considered to be “elements” of the Ballistic Missile Defense System. The Secretary also directed MDA to manage the Ballistic Missile Defense System as an evolutionary program, and to develop and field increasingly effective ballistic missile defense capabilities. To do so, he directed that systems developed by MDA would not be subject to DOD’s traditional joint requirements determination and acquisition processes until a mature ballistic missile defense capability had been developed and was ready to be handed over to a military service for production and operation. MDA’s mission is to develop and field ballistic missile defenses against threats posed by adversaries from all regions, at all ranges, and in all phases of flight. At the direction of the Secretary of Defense and in order to meet a presidential directive, the MDA began fielding in 2004 a limited capability to defend the United States against long-range ballistic missile attacks. This Ground-based Midcourse Defense system, which is intended to protect the U.S. homeland against incoming long-range ballistic missiles launched from Northeast Asia and the Middle East, was first made operational in 2006. MDA has added to this limited capability since it was first fielded by upgrading additional Air Force early warning radars, developing and fielding land- and sea-based radars, and fielding an initial capability for command and control, battle management, and communications. Additionally, to provide sea-based defenses against regional threats for deployed U.S. forces, friends, and allies, MDA has upgraded software and radar systems on 18 Aegis destroyers and cruisers, and delivered interceptors for use on these vessels, to defend against short- and medium-range threats. Early in the next decade, MDA plans to field an additional radar in the Czech Republic and ground-based interceptors in Poland to defend Europe and North America from ballistic missile threats originating in the Middle East. Over the long term, MDA also is developing interceptor payloads that would be capable of defeating more advanced threats—such as the use of multiple warheads or decoys— and “boost-phase” capabilities to enable DOD to shoot down ballistic missiles shortly after liftoff. To incorporate the views of the combatant commands—which is critical in determining and prioritizing needed capabilities—the President made the U.S. Strategic Command responsible in 2003 for advocating for desirable missile defense characteristics and capabilities on behalf of all combatant commands to MDA. To fulfill this responsibility, U.S. Strategic Command and the MDA created the Warfighter Involvement Process in 2005. A key output of this process is the Prioritized Capabilities List, which is intended to specify how the combatant commands collectively prioritize the full range of capabilities needed to perform ballistic missile defense missions. To operate and support ballistic missile defense elements over the long term, DOD plans to transition the responsibility for supporting ballistic missile defense elements from MDA to the services. Transitioning involves designating lead military service responsibilities for providing personnel, force protection, operations and support, and for developing doctrine, organization, and facilities requirements for its respective element. The transition process may culminate in a transfer—which is the reassignment of the MDA program office responsibilities to the lead service. Oversight of MDA is executed by the Under Secretary of Defense for Acquisition, Technology, and Logistics. Because MDA is not subject to DOD’s traditional joint requirements determination and acquisition processes, DOD developed alternative oversight mechanisms. For example, in 2007 the Deputy Secretary of Defense established the Missile Defense Executive Board, which is to provide the Under Secretary of Defense for Acquisition, Technology, and Logistics, or Deputy Secretary of Defense, as necessary, with a recommended ballistic missile defense strategic program plan and feasible funding strategy for approval. In September 2008, the Deputy Secretary of Defense also established a life cycle management process for the Ballistic Missile Defense System. The Deputy Secretary of Defense directed the Board to use the process to oversee the annual preparation of a required capabilities portfolio and develop a program plan to meet the requirements with Research, Development, Test, and Evaluation; procurement; operations and maintenance; and military construction in defensewide accounts. MDA’s exemption from traditional DOD processes allowed it the flexibility to quickly develop and field an initial ballistic missile defense capability; however, we have previously reported that DOD’s implementation of this approach has resulted in several management challenges that have not been fully addressed. These challenges include immature processes for incorporating combatant command priorities, inadequate baselines to measure progress, and incomplete planning for long-term operations and support. With the start of a new administration and the appointment of a new MDA Director, DOD now has an opportunity to better balance the flexibility inherent in MDA’s unique roles and missions with the need for effective management and oversight of ballistic missile defense programs, and to more fully address the challenges that affect its ability to plan and resource ballistic missile defenses. DOD has taken some steps to address combatant command capability needs through the Warfighter Involvement Process, but this process faces key limitations to its effectiveness. For example, based on combatant command inputs received through the Warfighter Involvement Process, MDA initiated new programs in fiscal year 2008 to develop and deploy sea- based defenses against short-range missiles. However, when the Secretary of Defense created MDA in 2002, the agency initially lacked a mechanism for obtaining and considering the combatant commands’ priorities as it developed ballistic missile defenses. The lack of such a mechanism made it difficult for MDA and the combatant commands to be sure that MDA was addressing the commands’ highest priority capability needs. Although U.S. Strategic Command and MDA established the Warfighter Involvement Process in 2005, we reported in July 2008 that this process is still evolving and had not yet yielded a clear and effective approach for MDA to follow when making investment decisions. Our report identified several shortcomings that inhibited the process’ effectiveness. For example: U.S. Strategic Command’s and MDA’s roles and responsibilities for implementing the process were not fully documented, which left the combatant commands without an agreed-upon method for influencing MDA investments and for holding MDA accountable. U.S. Strategic Command has since issued guidance that documents how the process operates, but this guidance is not binding on MDA and will require updating as the process evolves. As of March 2009 MDA had drafted but not yet issued similar guidance. As a result, the combatant commands continue to lack both transparency into the agency’s decision-making process and assurance that MDA will implement the process in a manner that addresses their needs. The process has not yet resulted in effective methodologies for the combatant commands to clearly identify and consistently prioritize their capability needs. For example, in preparing the 2007 Prioritized Capabilities List—intended to give combatant commanders input into development priorities—combatant commands used differing criteria for assessing capabilities, and not all commands clearly distinguished among their top priorities. As a result, the list did not provide MDA with clear information about how to best address the combatant commands’ needs. DOD agreed with our recommendation that U.S. Strategic Command improve the methodologies for identifying and prioritizing capabilities, but has not yet completed the 2009 Prioritized Capabilities List. Senior civilian DOD leadership has not been involved in the Warfighter Involvement Process to adjudicate potential differences among the combatant commands’ priorities and provide perspective on how to invest resources against priorities as the leadership would under traditional DOD processes. Lacking such senior-level involvement, MDA has not benefited from receiving a broader perspective on which of the commands’ needs is the most significant. To address this shortcoming, we recommended that senior civilian leadership review the commands’ priorities before they are sent to MDA. DOD partially agreed with our recommendation, but it did not clearly identify the steps it would take to implement the recommendation. A congressionally mandated independent review, released in August 2008, of MDA’s roles, missions, and structure also identified the need to improve the Warfighter Involvement Process. Although the independent review found that the Warfighter Involvement Process provided a potential mechanism for the combatant commands to influence Ballistic Missile Defense System developments, the review made several recommendations to make the process more effective. In particular, as our July 2008 report recommended, the independent review recommended that DOD improve the methodologies used to develop and prioritize the combatant commands’ capability needs so that the Prioritized Capabilities List provides more adequate guidance to MDA. Since our July 2008 report was issued, U.S. Strategic Command has responded to our recommendation that the combatant commands compare their priorities with MDA’s long-term funding plans and provide an assessment—called the Capability Assessment Report—to MDA. U.S. Strategic Command expects the first assessment to be completed by the end of April 2009. The assessment represents the combatant commands’ official assessment of MDA’s response to the 2007 Prioritized Capabilities List, and is also intended to provide a basis for MDA to make capability trade-offs and programmatic adjustments to ensure acquisition of the warfighters’ desired capabilities. U.S. Strategic Command provided MDA with a preliminary overview of the assessment in June 2008 so that MDA and the Missile Defense Executive Board could use the information during the formulation of the fiscal year 2010 budget. However, until the MDA’s fiscal year 2010 budget is presented to Congress, we are unable to assess the extent to which the agency’s investments are reflective of the commands’ priorities. MDA’s approach to establishing baselines has limited the ability for DOD and congressional decision makers to measure MDA’s progress on cost, schedule, and testing; however, new DOD initiatives could help improve acquisition accountability. Baselines are starting points that are used to measure progress on cost, schedule, and testing. Tracking progress against a baseline can signal when a program is diverting from its planned budget and schedule. Overall, the Ballistic Missile Defense System does not have baselines that are useful for oversight. Specifically, cost baselines have not been established, test baselines remain relatively unstable, and production and fielding are outpacing testing and modeling. MDA has not yet established cost baselines that are useful to hold the agency accountable for how it expends resources, but has indicated that it is taking steps to do so. Baselined total costs and unit costs are fundamental markers most programs use to measure performance. However, MDA’s unique roles and missions exempted the agency from a requirement to establish baselines for total or unit costs. As a result, in March 2009 we reported for the sixth consecutive year that we were unable to assess MDA’s actual costs against baseline costs. However, in response to recommendations in our March 2009 report, MDA agreed to provide total cost baselines for its block structure, which describes the agency’s approach to acquiring and delivering new increments of ballistic missile defense capabilities to the services and combatant commands for operational use. While Block 1 capabilities (to defend the United States from a limited, long-range North Korean attack) will not be baselined, MDA has agreed to submit cost baselines for Block 2 capabilities (to defend U.S. forces and allies from short- to medium-range threats in one theater) and portions of Block 3 capabilities (to expand the defense of the United States to include limited threats from Iran) as part of its submission to the President’s fiscal year 2010 budget, expected in Spring 2009. MDA also stated that it will submit total cost baselines for the rest of Block 3 and all of Block 5 capabilities (to expand the defense of U.S. forces and allies) by the spring of 2010. MDA also has made some progress with developing a schedule baseline for its blocks and their associated capabilities, but has faced challenges in meeting this baseline. MDA identifies its schedule baseline as the fiscal year dates for early, partial, and full capability deliveries of hardware and functionality for a block; as a result, schedule changes and their effects on the Ballistic Missile Defense System’s development can be determined by comparing the changes with the original schedule. However, by trying to conform to the schedule baseline, production and fielding decisions have outpaced testing and modeling. Specifically, MDA determines the capability levels of individual elements through a formal declaration process that is based on a combination of models, simulations, and ground tests that are all anchored to flight test data. However, flight test cancellations and delays have resulted in MDA revising and reducing the basis it uses to declare when missile defense capabilities can be considered for operational use. As a result, recent fielding decisions have been made with a more limited understanding of system effectiveness than planned. MDA’s testing baselines also have not been effective for oversight, but a new MDA initiative to review its testing program could lead to improvements. In our March 2009 report, we found that MDA’s officially approved test baseline, the Integrated Master Test Plan, changes frequently, often because MDA has changed the substance of a test, the timing of a test, or added new tests to the baseline. For example, based on its September 2006 plan, MDA had expected the Ground-based Midcourse Defense element to conduct seven interceptor flight tests from the start of fiscal year 2007 through the first quarter of 2009. However, MDA was only able to conduct two of these flight tests. As a result of these frequent changes, we concluded that MDA’s test baseline is therefore not effective for oversight. Recognizing the challenges to the testing program, in February 2009, the Director, MDA testified before this Subcommittee that the agency is undertaking a review of its program. This review, according to MDA, will identify critical variables that have not been proven to date, determine what test scenarios are needed to collect the relevant test data, and develop an affordable and prioritized schedule of flight and ground tests. If MDA’s review accomplishes its intended goals, then it could both improve oversight and help close the gaps that exist between testing, modeling, and simulation. In our March 2009 report, we made several recommendations to MDA that would improve its preparation of cost, schedule, and testing baselines, which are needed to help decision makers in DOD and Congress to exercise oversight of MDA’s acquisition approach. For example, in the area of cost we recommended that MDA complete total cost baselines before requesting additional funding for Blocks 2 and 3. Regarding schedule baselines, we recommended that MDA synchronize the development, manufacturing, and fielding schedules of Ballistic Missile Defense System assets with the testing and validation schedules to ensure that items are not fielded before their performance has been validated through testing. In the testing area, we recommended that MDA reassess its flight tests scheduled for the end of fiscal year 2009 to ensure that they can be reasonably conducted. DOD generally concurred with all 11 of our recommendations. DOD has taken some initial steps to plan for long-term operations and support of ballistic missile defense operations, but planning efforts to date are incomplete because of difficulties in transitioning responsibilities from MDA to the services and in establishing operation and support cost estimates. Our prior work has shown that clear roles and responsibilities can improve outcomes by identifying who is accountable for various activities. However, in September 2008, we reported that DOD had not identified clear roles and responsibilities among MDA and the services for long-term support planning. In our September 2008 report we recommended that DOD establish a process for long-term support planning that adheres to key principles for life cycle management. This includes establishing timelines for planning that must be completed before each element is fielded, involving services in support and transition planning and deciding when support responsibilities will be transitioned to the services, specifying roles and responsibilities for MDA and the services for life cycle management, and identifying who is accountable for ensuring these actions are accomplished. Since our September 2008 report was issued, DOD has made some progress in planning for transition of some ballistic missile defense elements. For example, in January 2009 MDA and the Army agreed on the overarching terms and conditions for the transition and transfer of elements from MDA to the Army, including Ground-based Midcourse Defense, Terminal High Altitude Area Defense, and the AN/TPY-2 Forward-based Radar. However, the agreement neither identifies when these elements are expected to transfer to the Army, nor addresses the specific details on how operations and support costs will be funded following the transfer. Until DOD establishes a transition and transfer process that adheres to key principles for life cycle management, DOD will be unable to ensure that individual elements will be sustained in the long term, and DOD’s long-term support planning will continue to face challenges. Moreover, DOD has established limited operation and support cost estimates for ballistic missile defense elements, and the estimates that have been developed are not transparent to DOD senior leadership and congressional decision makers. DOD has not required that full cost estimates for ballistic missile defense operations and support be developed, validated, and reviewed. As a result, the Future Years Defense Plan—DOD’s 6-year spending plan—does not fully reflect these costs. Prior GAO work has shown that operations and support costs are typically 70 percent of a weapon’s life cycle costs. Specifically, our work found that DOD has not addressed ballistic missile defense operation and support costs in the following three ways: First, in our September 2008 report, we found that MDA and the services have jointly developed and agreed on cost estimates for only two of the seven elements we examined. Joint cost estimates for the other five elements are not yet complete and are likely to change over time, perhaps significantly, because MDA and the services are still determining key assumptions, such as how support will be provided— by contractor, the service, or a combination of the two—and where some elements may be fielded and operated. These determinations will affect military construction and operation and support costs, such as maintenance, base operating support, and facilities. Second, in September 2008 we found that DOD did not plan to independently verify the operation and support cost estimates for all the ballistic missile defense elements we reviewed. Independently validated cost estimates are especially important to formulating budget submissions because, historically, cost estimates created by weapon system program offices are lower than those that are created independently. In January 2009, MDA and the Army agreed in principle that full, independently verified life cycle cost estimates may be among the criteria for transferring elements to the Army. However, as of February 2009, DOD had not developed plans to prepare these estimates. Table 1 shows whether, as of February 2009, the joint operation and support cost estimates have been completed, whether the cost estimates have been independently verified, and the status of the joint estimates. Third, we reported in September 2008 that decision makers’ visibility of ballistic missile defense operation and support costs was further hindered because MDA and the services had agreed only on which organization is responsible for funding operation and support costs after fiscal year 2013 for two of the seven elements we reviewed— Aegis Ballistic Missile Defense and Upgraded Early Warning Radar. It is still unclear how DOD intends to fund long-term operations and support costs. Although the MDA and Navy agreed in January 2009 on how to fund operation and support costs for the Sea-Based X-Band Radar through 2013, the agreement does not specify whether these costs will be funded through the defensewide fund or through a transfer of MDA’s appropriated funds to the Navy after that time. Additionally, in February 2009 Army and Air Force officials told us that the services had not reached agreements with MDA about how to fund operation and support costs beyond 2013 for four of the seven elements we reviewed. As a result of these limitations, DOD and the services would face unknown financial obligations for supporting ballistic missile defense fielding plans and that most of these costs would not be reflected in DOD’s future years’ spending plan for fiscal years 2010 through 2015. To address these cost transparency challenges, we recommended that DOD establish a requirement to estimate ballistic missile defense operation and support costs, including detailing when credible estimates are to be developed, updated, and reviewed, and requiring periodic independent validation of operation and support costs for each element. In its response to our recommendations, DOD stated that it has established a new ballistic missile defense life cycle management process to oversee the annual preparation of a required capabilities portfolio and a program plan to meet those requirements through defensewide accounts. This process is intended in part to provide decision makers with clear, credible, and transparent cost information. DOD has recently taken some steps to improve oversight of the development of the Ballistic Missile Defense System, such as the creation of both the Missile Defense Executive Board and its life cycle management process, but obstacles remain. For example, DOD’s actions do not yet provide comprehensive information for acquisition oversight; and have not yet clearly defined the roles and responsibilities of MDA and the services, including how defensewide accounts will be used to fund the ballistic missile defense program over the long term. Additionally, as DOD seeks to improve transparency and accountability, sustained top leadership will be needed to build upon this recent progress. Establishment of a new Missile Defense Executive Board in 2007 has been a step forward in improving transparency and accountability. The board is chartered to review and make recommendations on MDA’s acquisition strategy, plans, and funding. One step the board has taken to improve transparency and accountability was its adoption of its life cycle management process, a process designed to clarify the ballistic missile defense roles of MDA, the services, combatant commands, and Office of the Secretary of Defense. Additionally, the Under Secretary of Defense for Acquisition, Technology, and Logistics has directed MDA to take actions based on Missile Defense Executive Board recommendations. For example, the Under Secretary directed MDA to incorporate into its budget proposal the interceptor inventory recommended by a Joint Staff study and endorsed by the Missile Defense Executive Board. Although the establishment of the Missile Defense Executive Board represents progress, this new board does not yet provide comprehensive acquisition oversight of the ballistic missile defense program. As we reported in March 2009, the Under Secretary of Defense for Acquisition, Technology, and Logistics plans to hold program reviews for several Ballistic Missile Defense System elements to further increase acquisition oversight of the Ballistic Missile Defense System. According to DOD officials, these reviews are designed to provide comprehensive information that will be used as the basis for Missile Defense Executive Board recommendations for the Ballistic Missile Defense System business case and baseline process—a process which, according to these officials, is similar to the traditional Defense Acquisition Board process for reviewing other major acquisition programs. However, it is unclear whether the information provided to the Missile Defense Executive Board will be comparable to that produced for other major acquisition program reviews, as most of the information appears to be derived or presented by MDA as opposed to independent sources as required for traditional major defense acquisition programs. Additionally, the Missile Defense Executive Board’s life cycle management process is intended to facilitate more detailed agreements between MDA and the services to clearly establish their respective roles and responsibilities; however, these efforts are still in their early stages. For example, although MDA is developing memorandums of agreement with the services, the annexes that would lay out the specific responsibilities for such things as planning, programming, budgeting, execution, and life cycle management for each ballistic missile defense element have yet to be completed. Further, the annexes are expected to provide details about the how the services and MDA will work more closely together to manage the elements through joint program offices. The MDA Director told us that these new program offices would provide the services greater influence in the design of ballistic missile defenses. We have previously reported that early involvement by the services is important, because weapons design influences long-term operations, support, and costs—responsibilities likely borne by the services, not MDA. A potential area of concern between MDA and services could be centered around how DOD will use the defensewide accounts established in the life cycle management process to fund the ballistic missile defense program over the long term. The defensewide accounts are intended to pay for ballistic missile defense costs other than those already agreed to be paid by the services, including research and development, procurement, and operations and support costs. In September 2008, we reported that the Missile Defense Executive Board’s life cycle management process lacked concrete details for implementation and was not well defined. In theory, the defensewide accounts would allow all costs to be clearly identified and would alleviate the pressure on the services’ budgets to fund operation and support for ballistic missile defense programs. However, MDA and the services have not yet determined the amount and duration of funding for the individual ballistic missile defense elements that will come from the defensewide accounts. While DOD has recently been taking positive steps to improve transparency and accountability for ballistic missile defense programs, long-term success will require sustained involvement by top DOD leadership. Leadership and oversight of missile defense has been sporadic in the past. DOD had a senior-level group, called the Missile Defense Support Group, dedicated to the oversight of MDA since the agency’s founding that met many times initially; however, it did not meet after June 2005. This leadership vacuum was not filled until the Missile Defense Executive Board was established 2 years later. The Missile Defense Executive Board has a more robust charter than its predecessor, and an additional strength of the board is that its chair, the Under Secretary of Defense for Acquisition, Technology, and Logistics, used it as his primary oversight tool over the last year. In sum, whether or not DOD continues to manage missile defense outside its customary acquisition processes, the management challenges we have found in our work will need to be addressed. Sustained DOD leadership will be required to ensure that the needs of combatant commands are considered, that acquisition is adequately managed and overseen, and that planning occurs for the long-term operations and support of these multi- billion dollar systems. Madam Chairman and Members of the Subcommittee, this concludes my prepared remarks. I would be happy to answer any questions you or other Members of the Subcommittee may have. John H. Pendleton, (202) 512-3489, [email protected] In addition to the contact named above, Marie A. Mak, Assistant Director; David Best; Renee S. Brown; Tara Copp Connolly; Nicolaas C. Cornelisse; Kasea L. Hamar; Ronald La Due Lake; Jennifer E. Neer; Kevin L. O’Neill, Analyst in Charge; and Karen D. Thornton made key contributions to this report. Defense Acquisitions: Production and Fielding of Missile Defense Components Continue with Less Testing and Validation Than Planned. GAO-09-338. Washington, D.C.: March 13, 2009. Defense Acquisitions: Charting a Course for Improved Missile Defense Testing. GAO-09-403T. Washington, D.C.: February 25, 2009. Defense Acquisitions: Sound Business Case Needed to Implement Missile Defense Agency’s Targets Program. GAO-08-1113. Washington, D.C.: September 26, 2008. Missile Defense: Actions Needed to Improve Planning and Cost Estimates for Long-Term Support of Ballistic Missile Defense. GAO-08-1068. Washington, D.C.: September 25, 2008. Ballistic Missile Defense: Actions Needed to Improve the Process for Identifying and Addressing Combatant Command Priorities. GAO-08-740. Washington, D.C.: July 31, 2008. Defense Acquisitions: Progress Made in Fielding Missile Defense, but Program Is Short of Meeting Goals. GAO-08-448. Washington, D.C.: March 14, 2008. Missile Defense: Actions Needed to Improve Information for Supporting Future Key Decisions for Boost and Ascent Phase Element. GAO-07-430. Washington, D.C.: April 17, 2007. Defense Acquisitions: Missile Defense Acquisition Strategy Generates Results, but Delivers Less at a Higher Cost. GAO-07-387. Washington, D.C.: March 15, 2007. Defense Management: Actions Needed to Improve Operational Planning and Visibility of Costs for Ballistic Missile Defense. GAO-06-473. Washington, D.C.: May 31, 2006. Defense Acquisitions: Missile Defense Agency Fields Initial Capability but Falls Short of Original Goal. GAO-06-327. Washington, D.C.: March 15, 2006. Defense Acquisitions: Actions Needed to Ensure Adequate Funding for Operation and Sustainment of the Ballistic Missile Defense System. GAO-05-817. Washington, D.C.: September 6, 2005. Defense Acquisitions: Status of Ballistic Missile Defense Program in 2004. GAO-05-243. Washington, D.C.: March 31, 2005. Missile Defense: Actions Are Needed to Enhance Testing and Accountability. GAO-04-409. Washington, D.C.: April 23, 2004. Missile Defense: Actions Being Taken to Address Testing Recommendations, but Updated Assessment Needed. GAO-04-254. Washington, D.C.: February 26, 2004. Missile Defense: Additional Knowledge Needed in Developing System for Intercepting Long-Range Missiles. GAO-03-600. Washington, D.C.: August 21, 2003. Missile Defense: Alternate Approaches to Space Tracking and Surveillance System Need to Be Considered. GAO-03-597. Washington, D.C.: May 23, 2003. Missile Defense: Knowledge-Based Practices Are Being Adopted, but Risks Remain. GAO-03-441. Washington, D.C.: April 30, 2003. Missile Defense: Knowledge-Based Decision Making Needed to Reduce Risks in Developing Airborne Laser. GAO-02-631. Washington, D.C.: July 12, 2002. Missile Defense: Review of Results and Limitations of an Early National Missile Defense Flight Test. GAO-02-124. Washington, D.C.: February 28, 2002. Missile Defense: Cost Increases Call for Analysis of How Many New Patriot Missiles to Buy. GAO/NSIAD-00-153. Washington, D.C.: June 29, 2000. Missile Defense: Schedule for Navy Theater Wide Program Should Be Revised to Reduce Risk. GAO/NSIAD-00-121. Washington, D.C.: May 31, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | To more quickly field ballistic missile defenses, the Missile Defense Agency (MDA) has been exempted from traditional Department of Defense (DOD) requirements development, acquisition, and oversight processes since its creation in 2002. Instead, MDA has unique roles and missions to develop and field weapon systems that address a variety of ballistic missile threats. To date, MDA has spent about $56 billion and plans to spend about $50 billion more through 2013 to develop an integrated Ballistic Missile Defense System. The system consists of a layered network of capabilities that includes defensive components such as sensors, radars, interceptors, and command and control. In reviews of DOD's approach to acquire, operate, and maintain ballistic missile defense systems, GAO has previously reported on several challenges that have stemmed from the broad flexibilities provided to MDA. This testimony summarizes the challenges facing DOD in acquiring and operating its ballistic missile defense systems and describes DOD's efforts to improve transparency and accountability. This statement is based primarily on previously issued GAO reports and testimonies. GAO also reviewed documents and interviewed key officials to update past work and identify DOD and MDA efforts to address previous recommendations. While MDA's exemption from traditional DOD processes allowed it to quickly develop and field an initial ballistic missile defense capability, this approach has led to several challenges. DOD now has an opportunity to better balance the flexibility inherent in MDA's unique roles with the need for effective management and oversight of ballistic missile defense programs. Furthermore, the start of a new administration and the appointment of a new MDA Director offer DOD the chance to more fully address the challenges identified in GAO's prior work. These include the following: (1) Incorporating Combatant Command Priorities: While DOD established a process in 2005 to address the combatant commands' needs for ballistic missile defense capabilities, GAO reported in 2008 that the process was evolving and had yet to overcome key limitations to its effectiveness, including the need for more effective methodologies to clearly identify and prioritize the combatant commands' needs. Additionally, when developing ballistic missile defenses, MDA lacked a departmentwide perspective on which of the commands' needs were most significant. (2) Establishing Adequate Baselines to Measure Progress: MDA's flexible acquisition approach has limited the ability for DOD and congressional decision makers to measure MDA's progress on cost, schedule, and testing. Specifically, as GAO reported in March 2009, MDA's baselines have been inadequate to measure progress and hold MDA accountable. However, GAO also reported that new MDA initiatives to improve baselines could help improve acquisition accountability. (3) Planning for Long-Term Operations and Support: DOD has taken initial steps to plan for ballistic missile defense support, but efforts to date are incomplete as difficulties in transitioning responsibilities from MDA to the services have complicated long-term planning. Additionally, although operation and support costs are typically 70 percent of a weapon system's life cycle costs, DOD has not required that full cost estimates for ballistic missile defense operations and support be developed and validated, and DOD's 6-year spending plan does not fully reflect these costs. DOD has recently taken some steps to improve transparency and accountability of ballistic missile defense programs, such as the creation of a Missile Defense Executive Board to provide top level oversight and a life cycle management process that established defensewide funding accounts. Although these are positive steps, they do not yet provide comprehensive information for acquisition oversight; and have not yet clearly defined the roles and responsibilities of MDA and the services, including how the defensewide account will be used to fund the ballistic missile defense program over the long term. As DOD seeks to improve transparency and accountability, sustained top leadership will be needed to build upon this recent progress. |
Since the early 1990s, state agencies and private companies have set up hundreds of residential programs and facilities in the United States. Many of these programs are intended to provide a less restrictive alternative to incarceration or hospitalization for youth who may require intervention to address emotional or behavioral challenges. A wide array of government or private entities, including government agencies and faith-based organizations, operate these programs. Some residential programs advertise themselves as focusing on a specific client type, such as those with substance abuse disorders or suicidal tendencies. As we reported in our October 2007 testimony, no federal laws define what constitutes a residential program, nor are there any standard, commonly recognized definitions for specific types of programs. For our purposes, we define programs based on the characteristics we have identified during our work. For example: Wilderness therapy programs place youth in different natural environments, including forests, mountains, and deserts. According to wilderness therapy program material, these settings are intended to remove the “distractions” and “temptations” of modern life from teens, forcing them to focus on themselves and their relationships. These programs are typically 28 days in length at a minimum, but parents can continue to enroll their child for longer at an additional cost. Boot camps are residential programs in which strict discipline and regime are dominant principles. Many boot camps emphasize behavioral modification elements, and some military-style boot camps also emphasize uniformity and austere living conditions. Boot camps might be included as part of a wilderness therapy school or therapeutic boarding, but many boot camps exist independently. These programs are offered year-round and some summer programs last up to 3 months. Boarding schools (also called academies) are generally advertised as providing academic education beyond the survival skills a wilderness therapy program might teach. These programs frequently enroll youth whose parents force them to attend against their will. The schools can include fences and other security measures to ensure that youth do not leave without permission. While these programs advertise year-round education, the length of stay varies for each student; contracts can require stays of up to 21 months or more. Ranch programs typically emphasize remoteness and large, open spaces available on program property. Many ranch programs advertise the therapeutic value of ranch-related work. These programs also generally provide an opportunity for youth to help care for horses and other animals. Although we could not determine the length of a typical stay at ranch programs, they operate year-round and take students for as long as 18 months. See appendix I for further information about the location of various types of residential programs across the United States. In addition to these programs, the industry includes a variety of ancillary services. These include referral services and educational consultants to assist parents in selecting a program, along with transport services to pick up a youth and bring him or her to the program location. Parents frequently use a transport service if their child is unwilling to attend the program. Private programs generally charge high tuition costs. For example, one wilderness program stated that their program costs over $13,000 for 28 days. In addition to tuition costs, these programs frequently charge additional fees for enrollment, uniforms, medical care, supplemental therapy, and other services—all of which vary by program and can add up to thousands of extra dollars. Costs for ancillary services vary. The cost for transport services depends on a number of factors, including distance traveled and the means of transportation. Referral services do not charge parents fees, but educational consultants do and typically charge thousands of dollars. Financial and loan services are also available to assist parents in covering the expense of residential programs and are often advertised by programs and referral services. See appendix II for further information about the cost of residential programs across the United States. There are no federal oversight laws—including reporting requirements— pertaining specifically to private residential programs, referral services, educational consultants, or transportation services, with one limited exception. The U.S. Department of Health and Human Services oversees psychiatric residential treatment facilities (PRTFs) receiving Medicaid funds. In order to be eligible to receive funds under Medicaid, PRTFs must abide by regulations that govern the use of restraint and seclusion techniques on patients. They are also required to report serious incidents to both state Medicaid agencies and, unless prohibited by state law, state Protection and Advocacy agencies. In addition, the regulations require PRTFs to report patient deaths to the Centers for Medicare and Medicaid Services Regional Office. In the eight closed cases we examined, ineffective management and operating practices, in addition to untrained staff, contributed to the death and abuse of youth enrolled in selected programs. Furthermore, two cases of death were very similar to cases from our October 2007 testimony, in that staff ignored the serious medical complaints of youth until it was too late. The practice of physical restraint figured prominently in three of the cases. The restraint used for these cases primarily involved one or more staff members physically holding down a youth. Ineffective operating practices led to the most egregious cases of death and abuse, as the cases exposed problems with the entire operation of the program. Specifically, the failure of program leaders to ensure that appropriate policies and procedures were in place to deal with the serious problems of youth; ineffective management practices that led to questionable therapeutic or operational practices; and the failure of the program to share information about enrolled youth with the staff members who were attending to them created the environments that resulted in abuse and death. Moreover, in cases involving abuse, the abuse was systemic in the program and not limited to the incident discussed in our case studies. In three of the eight cases we examined, the victim was placed in the program by the state or in consultation with state authorities. See table 1 for a summary of the cases of death we examined. See table 2 for a summary of the cases of abuse we examined. For reporting purposes, we continue the numbering of case studies in this table, starting with five. The following three narratives describe selected cases in further detail. The victim, who died in 2005, was a 12-year-old male. Documents obtained from the Texas Department of Family and Protective Services indicate that the victim had a troubled family background. He was taken into state care along with his siblings at the age of 6. According to child protective service workers who visited the family’s home, the victim and his siblings were found unsupervised and without electricity, water, or food. Some of the children were huddled over a space heater, which was connected to a neighbor’s house by extension cord, in order to keep warm. As a ward of the state, the victim spent several years in various foster placements and youth programs before being placed in a private residential treatment center in August 2005. The program advertised itself as a “unique facility” that specialized in services for boys with learning disabilities and behavioral or emotional issues. The victim’s caretakers chose to place him in this program because he was emotionally disturbed. Records indicate that he was covered by Medicaid. On the evening of his death, the victim refused to take a shower and was ordered to sit on an outside porch. According to police reports, the victim began to bang his head repeatedly against the concrete floor of the porch, leading a staff member to drag him away from the porch and place him in a “lying basket restraint” for his own protection. During this restraint, the 4 feet 9½ inch tall, 87-pound boy was forced to lie on his stomach with his arms crossed under him as the staff member, a muscular male 5 feet 10 inches tall, held him still. Some of the children who witnessed the restraint said they saw the staff member lying across the victim’s back. During the restraint, the victim fought against the staff member and yelled at him to stop. The staff member told police that the victim complained that he could not breathe, but added that children “always say that they cannot breathe during a restraint.” According to police reports, after about 10 minutes of forced restraint, the staff member observed that the victim had calmed down and was no longer fighting back. The staff member slowly released the restraint and asked the victim if he wanted a jacket. The victim did not respond. The staff member told police he interpreted the victim’s silence as an unwillingness to talk due to anger about the restraint. He said he waited for a minute while the victim lay silently on the ground. When the victim did not respond to his question a second time, he tapped the victim on the shoulder and rolled him over. The staff member observed that the victim was pale and could not detect a pulse. All efforts to revive the victim failed, and he was declared dead at a nearby hospital. When the staff member demonstrated his restraint technique for the police, they found that his technique violated the restraint policies of the program. These policies prohibited staff from placing any pressure on the back of a person being restrained. The report added that this staff member was reprimanded for injuring a youth in 2002 as a result of improper restraint. After this incident, program administrators banned the staff member from participating in restraints for 1 month. The reprimand issued by program administrators over this incident noted that the staff member had actually trained other staff members in performing restraints, making the matter more serious. The police reports also cite one of the staff member’s performance evaluations that noted that he had problems with his temper. According to the reports, one of the youth in the program said the staff member could become agitated when putting youth in restraint. Although the Texas Department of Family and Protective Services alleged that the victim’s death was due to physical abuse, the official certificate of death stated that it was an accident and a grand jury declined to press charges against the staff member performing the restraint. However, the victim’s siblings obtained a civil settlement against the program and the staff member for an undisclosed amount. The program remained open until May 2006, when a 12-year-old boy drowned on a bike outing with the program. According to records from law enforcement, child protection workers, and the program, the boy fell into the water of a rain-swollen creek and was sucked into a culvert. He died after several weeks on life support. The Texas Department of Family and Protective Services cited negligent staff supervision in its review of this second death and revoked the program’s license to operate as a residential treatment center. However, the program’s directors also ran a summer camp for children with learning disabilities and social disorders licensed by the Texas Department of State Health Services, until they resigned from their positions in March 2008. The victim was 16 years old when he died, in February 2006, at a private psychiatric residential treatment facility in Pennsylvania for boys with behavioral or emotional problems. He was a large boy—6 feet 1 inch in height and weighing about 250 pounds—and suffered from bipolar disorder and asthma. The cost for placement in this facility was primarily paid for by Medicaid. According to state investigative documents we obtained, the victim was placed in intensive observation after he attempted to run away. As part of the intensive observation, he was forced to sit in a chair in the hallway of the facility and was restricted from participating in some activities with other residents. On the day of his death, staff allowed the victim to participate in arts, crafts, and games with the other youth, but would not let him leave the living area to attend other recreational activities. Instead, staff told the victim that he would have to return to his chair in the hallway. In addition, staff told him that he would have to move his chair so that he could not see the television in another room. The victim complied, moving his chair out of view of the television, but put up the hood of his sweatshirt and turned his back toward the staff. The staff ordered him to take down his hood but he refused. When one of the staff walked up to him and pulled his hood down, the victim jumped out of his chair and made a threatening posture with his fists, saying he did not want to be touched. The staff member and two coworkers then brought the victim to another room and held him facedown on the floor with his arms pulled up behind his back. The victim struggled against the restraint, yelling and trying to kick the three staff members holding him down. After about 10 minutes, the victim became limp and started breathing heavily. He complained that he was having difficulties breathing. One staff member unzipped his sweatshirt and loosened the collar of his shirt, but rather than improve, the victim became unresponsive. The staff called emergency services and began CPR. The victim was taken by ambulance to a hospital, where he died a little more than 3 hours later. In the victim’s autopsy report his death was ruled accidental, as caused by asphyxia and an abnormal heartbeat (cardiac dysrhythmia). Following the victim’s death, an investigation by the Pennsylvania Department of Health found that the policies and procedures for youth under intense observation do not prohibit them from watching television, nor do they require that youth keep their face visible to staff at all times. The investigation also found that the facility had documentation of the victim’s history of asthma, and that its training manual for restraint procedures cautioned against the risk of decreased oxygen intake during restraints for children with asthma. However, all three staff members involved in the restraint told investigators that they were unaware of any medical conditions that needed to be considered when restraining the victim. In addition, the investigation found that the facility did not provide timely training on the appropriate and safe use of restraint. The state’s Protection and Advocacy organization, Pennsylvania Protection & Advocacy, Inc. (PP&A), conducted its own investigation of the facility and found that staff members inappropriately restrained children in lieu of appropriate behavioral interventions, which resulted in neglect and abuse. Of the 45 residents interviewed by PP&A investigators, 29 said that staff at the facility subjected them to restraints. The residents reported that the restraints could last as long as 90 minutes and caused breathing difficulties. They also stated that staff often placed their knees on residents’ backs and necks during restraints. One resident reported that the blood vessels in his eyes “popped” during a restraint. Another resident said that his nose hit the ground during the restraint, causing him to choke on his own blood. Further, some of the residents reported that staff provoked them and that staff did not make any effort to de-escalate the provocations before implementing a restraint. No criminal charges were filed in regard to the victim’s death. The victim’s mother filed a civil suit over her son’s death against the facility, which is currently pending. Her son’s death was not the only fatal incident at this facility. Only 2 months before the victim’s death, in December 2005, a 17- year-old boy collapsed at the facility after a physical education class, and later died at a nearby hospital. His death was attributed to an enlarged heart. This facility remains open. This abuse victim was sent to a private drug and addiction treatment program in July 1994 at the age of 14. He was attending public school in the major metropolitan area where his family lived. The abuse victim told us that he had problems at school, including poor grades, truancy, a fight with other students, and that he had been suspended. After the victim was questioned by police about an assault on a girl at his school, a family friend with ties to the behavior modification program recommended the program to the victim’s parents. According to the victim, his first visit to the school turned into an intense intake session where he was interviewed by two program patients. Although the victim denied using drugs, the interviewers insisted that he was not being honest. After about 6 hours of questioning, the victim told the interviewers what he thought they wanted to hear—that he was smoking pot, did cocaine, and cut school to get high—so that he could end the interview. The interviewers used these statements to convince the victim’s parents to sign him into the program for immediate intervention and treatment. He ended up staying in the program for the next 4 years—even after he turned 18 and was held against his will. According to program records, the program’s part-time psychiatrist did not examine or diagnose him until he had been in the program for 14 days. This lack of psychological care continued, as program records indicate he was examined by the psychiatrist only four times during his entire stay. He was restrained more than 250 times while in the program, with at least 46 restraints lasting one hour or longer. The victim said some restraints were applied by a group of four or five staff members and fellow patients. According to the victim, they held him on his back, with one person holding his head and one person holding each limb. These restraints were imposed whenever the victim showed any reluctance to do what he was told, or, the victim told us, for doing some things without first obtaining permission from program staff. On one occasion, while he was staying with a host family and other patients, he attempted to escape from the program. The victim claims that they restrained him by wrapping him in a blanket and tying him up. According to the victim, when he turned 18, he submitted a request to leave the program but his request was denied because he had not followed the proper procedure and was a danger to himself. For expressing his desire to leave the program, he was stripped of all progress he had made to that point, and was prevented from further advancing until the program director decided he was be eligible. Incident reports filed by program staff document that after he had turned 18, the victim was restrained on 26 separate days, with at least two restraints lasting more than 12 hours. According to program rules, failure of the parents to follow program rules and fully support and participate in the program would jeopardize their son’s treatment and progress and put him at risk of expulsion. Having been led to believe that the program was the only way to help him overcome his alleged addictions and problems, his family complied with the program’s demands. Moreover, the program required parents and siblings over age 8 to attend twice weekly group therapy meetings. According to the victim, these meetings lasted for many hours, sometimes stretching into the early morning. He added that when the victim’s father refused to attend the therapy meetings for fear of losing his job, the program told him to quit. When he would not quit his job or miss work to attend the meetings, the victim said that the program convinced his mother to leave her husband. After his parents separated, the program would not allow the victim to have contact with his father. The victim said that the program never told the victim’s family that all the drug tests they performed on him returned negative results, including the initial tests done when he entered the program. In February 1998, the State of New Jersey terminated the program’s participation in the Medicaid program, holding that the program did not qualify as a children’s partial care mental health program because of its noncompliance with client rights standards and its failure to meet various staff requirements, such as staff-to-client ratios and requisite education and experience levels for staff. The program subsequently closed in November 1998, citing financial problems. About a year later, in September 1999, an administrative law judge rejected an appeal by the program to overrule the state’s termination of its Medicaid participation. The judge noted in his decision that the program effectively operated as a full-time residential facility. Moreover, he noted that all group staff at the program were either current or former patients, and only two members of the program staff met the educational requirements to qualify as direct- care professionals. The victim filed a civil lawsuit against the program, director, and a psychiatrist, which resulted in a $3.75 million settlement. Other civil suits filed by former patients included one patient who was committed to the program at the age of 13 and spent 13 years in the program. This patient reached a similar settlement against the program, director, and psychiatrists for the sum of $6.5 million. In addition, a third former patient secured a $4.5 million settlement against the program, director, and psychiatrists. Posing as fictitious parents with fictitious troubled teenagers, we found examples of deceptive marketing and questionable practices related to 10 private residential programs and 4 referral services. The most egregious deceptive marketing practices related to tax incentives and health insurance reimbursement, and were intended to make the high price of the programs appear more manageable for our fictitious parents. We also found examples of false statements and misleading representations related to a range of issues including education and admissions, as well as undisclosed conflicts of interest. In addition, we identified examples of questionable practices related to the health of youth enrolled in programs and the method of convincing reluctant parents to enroll their children. Although general consumer protection laws apply to these programs and services, there are no federal laws or regulations on marketing content and practices specific to the residential program industry. A link to selected audio clips from these calls is available at: http://www.gao.gov/media/video/gao-08-713t/. See table 3 for a selection of representations made by programs and referral agents. Case 1: One of our fictitious parents called this foundation pretending to be a parent who could not afford the cost of a residential program for his child. A representative of the foundation explained that their “most popular” method of fund-raising involved the friends and relatives of the enrolled youth making tax-deductible donations to the foundation, which in turn credited 90 percent of these “donations” specifically to pay for tuition in a program the child was attending. The foundation assigns a code number to each child, which parents ensure is listed on the donation checks. The representative also provided a fund-raising packet by mail that instructs the parents of troubled teens: “You are able to contact family, friends, business acquaintances, affiliates, churches, and professional/fraternal organizations that you know. Don’t forget corporate matching funds opportunities from your employer too.” The packet also included two template letters to send in soliciting the funds. According to an IRS official with the Tax Exempt and Governmental Entities Division, this practice is inappropriate and represents potential tax fraud on the part of the foundation. Furthermore, those who claim inappropriate deductions in this fashion would be responsible for back taxes, as well as penalties and interest. Based on this information, we referred this nonprofit foundation to the IRS for criminal investigation. Case 2: The program representative at a Montana boarding school told our fictitious parent that they must submit an application form before their child can be accepted to the school. However, after a separate undercover call made to this school by one of our fictitious parents, the program representative e-mailed us stating that our fictitious daughter had been approved for admission into the program and subsequently sent an acceptance letter. The acceptance letter stated that our fictitious child “has been approved for our school here in Montana.” This admission was based entirely on one 30-minute telephone conversation, in which our fictitious parent described his daughter as a 13-year-old who takes the psychotropic medication Risperdal, attends weekly therapy sessions, has bipolar disorder, and been diagnosed with Reactive Attachment Disorder. We did not fill out an application form for the school. Moreover, this program had previously recommended that our fictitious parents seek advice from the 501(c)(3)foundation discussed in Case 1 to help finance the cost of the program. It appears that parents do not have assurance about the integrity of the admissions process at this boarding school. Case 4: One fictitious parent asked the representative for a Texas wilderness therapy program whether there was any possibility that a health insurance company would cover the cost of the program. The representative replied that, at the completion of the program, the bookkeeper for the program would generate an itemized statement of billable charges that could be submitted to an insurance company for reimbursement. She emphasized that we should not call ahead of time to seek pre-approval, because then we would be “up the creek.” She added that this was “just the way insurance companies like it” and stated that health insurance companies reimburse “quite a bit.” She gave an example of one insurance company that reimbursed for over $11,000—almost the entire cost of the 28-day wilderness program. Representatives for both a health care insurer and a behavioral health company told us that parents who follow this advice run a real risk of not being reimbursed, especially if the health insurance company requires pre-approval of counseling or other mental health services. In this case, our fictitious parent was being led into believing that a large portion of the tuition for the program would be covered by health insurance even if pre-approval for the charges was not obtained in writing in advance of the services. Case 6: One referral agent we called stated that behavioral modification schools are “specialty schools” and that tuition costs are tax deductible under Section 213 of the Internal Revenue Tax code. The referral agent also stated that transportation costs related to bringing our fictitious child to and from the school were tax deductible under this section. However, the two programs recommended by the referral service do not appear to meet the requirements of IRS regulations for special schools. Our review of Section 213 of the Internal Revenue Tax code shows that it relates to medical expenses and specifies that, if medical expenses and transportation for treatment exceed 7.5 percent of a taxpayer’s adjusted gross income, the excess costs can be deducted on Schedule A of IRS Form 1040. Even if these expenses were deductible under this section, only expenses above 7.5 percent of the adjusted gross income would be deductible, rather than the full amount as suggested by the referral agent. An IRS authority on Section 213 with whom we spoke stated that the referral service provided us with questionable tax advice and that parents should consult a tax advisor before attempting to claim a deduction under this section. Parents improperly taking this deduction could be responsible for back taxes, as well as penalties and interest. Case 9: On its Web site, referral service “B” invites parents to call a toll- free number and states: “We will look at your special situation and help you select the best school for your teen with individual attention.” Our undercover investigators called this referral service pretending to be three separate fictitious parents and described three separate fictitious children to the agents who answered the phone. Despite these three different scenarios, we found the referral service recommended the same residential program all three times—a Missouri boot camp. Our investigation into this referral service revealed that the owner of the referral service is the husband of the boot camp owner. This relationship, was not disclosed to our fictitious parents during our telephone calls, which raises the issue of a potential conflict of interest. It appears that parents who call this referral service will not receive the objective advice they expect based on marketing information on the Web site. Mr. Chairman and Members of the Committee, this concludes my statement. We would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact Gregory D. Kutz at (202) 512-6722 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. In our examination of case studies for this testimony and our prior testimony, we found that the victims of death and abuse came from across the country and attended programs that were similarly located in numerous states. Figure 1 contains a map indicating where victims lived and the location of the program they attended. Private residential programs are located nationwide and rely heavily on the Internet for their marketing. Although Web sites list 48 of the 50 states where parents can find various types of programs, we found that they do not list programs in Nebraska and South Dakota, nor do they indicate the existence of programs in the District of Columbia. Notably, we did not find Web sites that list states with boot camps but instead instruct parents to call for locations and details. Figure 2 illustrates the types of programs and the states in which they are located, excluding boot camps. Our undercover calls to selected programs revealed that most private programs charge a high tuition for their services. Table 4 contains information related to the high cost of these programs based these phone calls. According to program and service representatives with whom we spoke, the basic cost could be discounted. For example, one program told us if parents paid for a full year upfront, they would be given a $200-per-month discount. This does not include fees by transport services for taking a child to a program. Moreover, although program and service representatives quoted these as basic program costs, they also mentioned additional one-time charges, such as an enrollment fee that can be as much as $4,600, uniform costs, or other items such as supplies. In addition, some programs charge extra for therapy, including one-on-one therapy. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | In October 2007, GAO testified before the Committee regarding allegations of abuse and death in private residential programs across the country such as wilderness therapy programs, boot camps, and boarding schools. GAO also examined selected closed cases where a youth died while enrolled in one of these private programs. Many cite positive outcomes associated with specific types of residential programs. However, due to continuing concerns about the safety and well-being of youth enrolled in private programs, the Committee requested that GAO (1) identify and examine the facts and circumstances surrounding additional closed cases where a teenager died, was abused, or both, while enrolled in a private program; and (2) identify cases of deceptive marketing or questionable practices in the private residential program industry. To develop case studies of death and abuse, GAO conducted numerous interviews and examined documents from eight closed cases from 1994 to 2006. GAO used covert testing along with other investigative techniques to identify, for selected cases, deceptive marketing or questionable practices. Specifically, posing as fictitious parents with fictitious troubled teenagers, GAO called 14 programs and related services. GAO did not attempt to evaluate the benefits of private residential programs and its results cannot be projected beyond the specific programs and services that GAO reviewed. In the eight closed cases GAO examined, ineffective management and operating practices, in addition to untrained staff, contributed to the death and abuse of youth enrolled in selected programs. The practice of physical restraint also figured prominently in three of the cases. The restraint used for these cases primarily involved one or more staff members physically holding down a youth. Posing as fictitious parents with fictitious troubled teenagers, GAO found examples of deceptive marketing and questionable practices in certain industry programs and services. For example, one Montana boarding school told GAO's fictitious parents that their child must apply using an application form before they are admitted. But after a separate call, a program representative e-mailed an acceptance letter for GAO's fictitious child even though an application was never submitted. In another example, the Web site for one referral service states: "We will look at your special situation and help you select the best school for your teen with individual attention." However, GAO called this service three times using three different scenarios related to different fictitious children, and each time the referral agent recommended a Missouri boot camp. Investigative work revealed that the owner of the referral service is married to the owner of the boot camp. GAO also called a program established as a 501(c)(3) charity that advocated a potentially fraudulent tax scheme. The scheme involves the friends and family of a child making tax-deductible "donations" to the charity, which are then credited to an account in the program the child is enrolled in. GAO referred this charity to the Internal Revenue Service for criminal investigation. |
Experts who have conducted studies on the issue of physical and sexual abuse of nursing home residents have reported that it is a serious problem with potentially devastating consequences. Nursing home residents have suffered serious injuries or, in some cases, have died as a result of abuse. Nursing homes are required to protect their residents from harm by training staff to provide proper care and by prohibiting abusive behavior. The vast majority of nursing homes participate in the Medicare and Medicaid programs and were projected to have received about $58.4 billion from the programs in 2001 for their care. State survey agencies—such as Georgia’s Department of Human Resources, Illinois’s Department of Public Health, and Pennsylvania’s Department of Health— perform surveys at least every 15 months to assess nursing homes’ compliance with federal and state laws and regulations. These surveys are designed to determine whether nursing homes are complying with Medicare and Medicaid standards. Nursing homes found to be out of compliance are cited with deficiencies, which can result in monetary penalties or other enforcement actions, including termination from federal programs, depending on their severity. In addition to periodic surveys, state survey agencies investigate complaints of inadequate care, including allegations of physical or sexual abuse. CMS requires that states designate a specific telephone number for reporting complaints and that all nursing homes publicize these numbers. Complaints can be submitted by residents, family members, friends, physicians, and nursing home staff. In addition, advocates of nursing home residents, such as long-term care ombudsmen, may file complaints.When state survey agencies receive these complaints they are responsible for investigating all allegations, determining if abuse occurred, and identifying appropriate corrective actions. CMS requires nursing home officials to notify the state survey agency of allegations of abuse in their facilities immediately. Nursing homes are also required to conduct their own investigations and submit their findings in written reports to the state survey agency within 5 working days of the incident. Depending on the severity of the circumstances, the state survey agency may visit the nursing home to investigate the incident or wait until the nursing home submits its report. Depending on the content of the facility’s report, the survey agency may request the home to conduct additional work or the agency may investigate further on its own. If the agency opts not to investigate further, it may still review the manner in which the home conducted its investigation during the agency’s next scheduled survey of the home. To protect residents from potentially abusive personnel, nursing homes must adhere to federal and state requirements concerning hiring practices. CMS’s regulations require that facilities establish policies prohibiting employment of all individuals convicted of abusing nursing home residents. Although there is no CMS requirement to do so, the three states we visited require nursing homes to conduct criminal background checks on some or all prospective employees. All nursing homes must also verify with the relevant state board of licensing the professional credentials of the licensed personnel, such as registered nurses (RN), they hire. In nursing homes, the primary caregivers are nurse aides. According to federal law, each state must maintain a registry of all individuals who have satisfactorily completed an approved nurse aide training and competency evaluation program in that state. Before employing an aide, nursing homes are required to check the registry to verify that the aide has passed a competency evaluation.Aides whose names are not included on a state’s registry may work at a nursing home for up to 4 months to complete their training and pass a state administered competency evaluation. CMS requires that if a state survey agency determines that a nurse aide is responsible for abuse, neglect, or theft of a resident’s property, this “finding” must be added to the state’s nurse aide registry. The inclusion of such a finding on a nurse aide’s record constitutes a ban on nursing home employment. As a matter of due process, nurse aides have a right to request a hearing to rebut the allegations against them, to be represented by an attorney, and to appeal an unfavorable outcome. State survey agencies are not responsible for disciplining other nursing home professionals, such as RNs, who are suspected of abuse. Such personnel are referred to their respective state licensing boards for review and possible disciplinary action. Local police departments may learn of suspected instances of resident abuse and conduct criminal investigations. In addition, state survey agencies may notify the state MFCU to pursue these allegations. States were provided financial incentives to establish MFCUs as a result of the enactment of the Medicare-Medicaid Anti-Fraud and Abuse Amendments to the Social Security Act of 1977. Although one of their primary missions is to investigate financial fraud and abuse in the Medicare and Medicaid programs, MFCUs also have authority to investigate the physical and sexual abuse of nursing home residents. MFCUs typically learn of such allegations by receiving referrals from state survey agencies. If, after investigating an allegation, the MFCU decides that there is sufficient evidence to press criminal charges, it may prosecute the case itself or refer the matter to the state’s attorney general or a local prosecutor. Most of the local police departments in the three states we visited told us that they were seldom summoned to a nursing home following an alleged instance of abuse. Several police officials indicated that, when they were called, it was sometimes after others had begun investigating, potentially hindering law enforcement’s ability to conduct a thorough investigation. Instead, state survey agencies were typically notified of allegations of abuse. However, these notifications were frequently delayed. Allegations of abuse may not be reported immediately for a variety of factors, including reluctance to report abuse on the part of residents, family members, nursing home employees, and administrators. In addition, individuals who are unaware that state survey agencies have designated special telephone numbers as complaint intake lines may have difficulty identifying these numbers in telephone directories, which could also result in delays. Victims of crimes ordinarily call the police to report instances of physical and sexual abuse, but when the victim is a nursing home resident, the police appear to be notified infrequently. Residents and family members are not required to notify local police of abusive incidents. Several police officials told us that, like any crime, police should be summoned as soon as the incident is discovered. However, police told us that when they do learn of an allegation of abuse involving a nursing home resident, it is sometimes after another entity, such as the state survey agency, has begun to investigate, thus hampering law enforcement’s evidence collection and limiting their investigations. Most of the police departments also indicated that they did not track reports of abuse allegations involving nursing home residents and thus did not have data on the number of such reports. When residents and family members do report allegations of abuse, they may complain directly to the nursing home administrator rather than contact police. According to one long-term care ombudsman, resident and family members do not always view the abuse as a criminal matter. Nursing homes are usually not compelled to notify local law enforcement when they learn of such reports. There is no federal requirement that they contact police, although some states—including Pennsylvania—have instituted such a requirement. According to an Illinois state survey agency official, a similar requirement will go into effect in that state in March 2002. Our discussions with officials from 19 local law enforcement agencies indicate that police are rarely called to investigate allegations of the abuse of nursing home residents. Besides infrequent contact from residents, family members, and nursing homes, officials from 15 of the 19 police departments we visited told us that they had little or no contact with survey agencies. Officials from several of these departments reported that they were unaware of the role state survey agencies play in investigating instances of resident abuse. Our review of 158 case files—mostly from 1999 and 2000—indicated state survey agencies were often not promptly notified of abuse allegations.While individuals filing complaints are not compelled to report allegations within a prescribed time frame, nursing homes in the states we visited are required to notify the state survey agency of abuse allegations the day they learn of the allegation or the following day. We found that both complaints from individuals and notifications from nursing homes are frequently submitted to survey agencies days, and sometimes weeks, after the abuse has taken place. As table 1 shows, 20 of the 31 complaint cases we could assess for promptness of submission contained allegations that were reported to the state survey agency 2 days or more after the abuse took place. Further, eight were reported more than 2 weeks after the alleged abuse occurred. There were comparable delays in facilities’ notifications of alleged abuse to the state survey agencies. The three states we visited require that nursing homes notify them of instances of alleged abuse immediately— interpreted by survey agency officials in all three of the states to mean the day the facility learns of the abuse or the next day. As table 2 shows, however, only about half of the 111 nursing home notifications we could assess for promptness were submitted within the prescribed time frame. Delays in notifying survey agencies of abuse prevent the agencies from promptly investigating and ensuring that nursing homes are taking appropriate steps to protect residents. Residents may remain vulnerable to abuse until corrective action is taken. Allegations of abuse of nursing home residents may not be reported promptly for a variety of reasons. For example, a recent study found that nursing home staff may be skeptical that abuse occurred. Residents may also be afraid to report abuse because of fear of retribution, according to another study and two long-term care ombudsmen we met with.According to one law enforcement official, family members are sometimes fearful that the resident will be asked to leave the home and are troubled by the prospect of finding a new place for the resident to live. In addition, nursing home staff and management do not always report abuse promptly, despite requirements to do so. According to law enforcement and state survey agency officials, staff fear losing their jobs or facing recrimination from co-workers and nursing home management. Similarly, they also said that nursing home management is sometimes reluctant to risk adverse publicity or sanctions from the state. We saw evidence of delayed reporting by family members, staff, and management in our file reviews, as illustrated by the following examples: A resident reported to a licensed practical nurse that she had been raped in the nursing home. Although the nurse recorded this information in the resident’s chart, she did not notify nursing home management. She also allegedly discouraged the resident from telling anyone else. Two months later the resident was admitted to a hospital for unrelated reasons and told hospital officials that she had been raped. It was not until hospital officials notified police of the resident’s complaint that an investigation was conducted. Investigators then discovered that the resident had also informed her daughter of the incident, but the daughter, apparently not believing her mother, had dismissed it. The resident later told police that she did not report the incident to other staff at the nursing home because she did not want to cause trouble. The case was closed because the resident could not describe the alleged perpetrator. However, the nurse was counseled about the need to immediately report such incidents. An aide, angry with a resident for soiling his bed, threw a pitcher of cold water on him and refused to clean him. Another aide witnessed the incident. Instead of informing management, the witness confided in a third employee, who reported the incident to the nursing home administrator 5 days after the abuse took place. The abusive aide was fired, and a finding of abuse was recorded in her nurse aide registry file. One nursing home employee witnessed an aide slap a resident; two other employees heard the incident. The aide denied the allegation, yet the resident developed redness, swelling, and bruising around her eye. The witnesses reported the matter to nursing home management, which investigated the situation and suspended the aide the next day. The aide was subsequently fired. However, the state survey agency was not notified of the incident by the home until 11 days after the abuse took place. During our work we discovered that nursing home residents and family members who are prepared to report abuse to the state survey agency could encounter difficulty in identifying where to report a complaint of abuse, which can further delay reporting. For example, telephone books for Chicago and Peoria, Illinois, and Athens and Augusta, Georgia, did not include complaint telephone numbers. Although telephone books in Philadelphia and Pittsburgh, Pennsylvania, contained the correct numbers for the state survey agency’s offices, they did not identify the designated complaint number, making it difficult for an individual unfamiliar with the agency to recognize its telephone number as an appropriate place to report suspected abuse. Individuals who are not already familiar with the state survey agency’s role and its complaint telephone line may encounter a confusing array of numbers both public and private in their local telephone directory. In the three states we visited we reviewed the government and consumer pages in nine telephone books and identified a wide variety of organizations, which, by their names, appeared capable of addressing complaints. However, many did not have the authority to do so. In this review, we identified 42 entities that appeared to be organizations where abuse could be reported and were not affiliated with the state survey agencies. Only six of these entities represented organizations—such as long-term care ombudsmen—that are capable of pursuing abuse allegations. The remaining 36 entities either could not be reached or could not accept complaints, despite having listings such as the “Senior Helpline.” Sometimes these entities attempted to refer us to a more appropriate organization, but with mixed success. For example, our calls in Georgia resulted in four correct referrals to the state survey agency’s designated complaint telephone line but also led to five incorrect referrals. Five other Georgia entities offered us no referrals. To facilitate reporting, nursing homes are required to post the telephone numbers of complaint lines in a prominent location within the facility. State survey agencies are expected to verify that these numbers are properly displayed when they conduct their annual inspections and have the option of citing homes with deficiencies if they fail to do so. However, deficiency data compiled by CMS do not specifically identify the number of homes cited for failure to display these numbers, and so it is not readily apparent how often nursing homes do not comply with this specific requirement. Despite its requirement that nursing homes post the complaint telephone numbers, CMS recognized that a greater awareness of how to report abuse was warranted and so, in 1998, it initiated an educational campaign regarding abuse prevention and detection in nursing homes. Because publicizing the appropriate telephone numbers for reporting abuse is critical, a key component of the campaign was the development of a poster to be used by nursing homes nationwide. According to a CMS official, the poster will identify several options for reporting abuse, including notifying nursing home management, local law enforcement, complaint telephone numbers, and CMS. In addition to displaying these numbers, the posters will feature removable cards—which individuals may retain—listing the organizations and telephone numbers contained on the poster. A pilot test of the poster was conducted in 1999. Based on feedback received from the pilot test, the poster was revised, but it has not been approved for distribution. Relatively few prosecutions result from allegations of physical and sexual abuse of nursing home residents. We identified two impediments to the successful prosecution of employees who abuse nursing home residents. First, allegations of abuse were not always referred to local law enforcement or MFCUs. When referrals were made it was often days or weeks after the incident occurred, compromising the integrity of what limited evidence might have still been available. Second, a lack of witnesses to instances of abuse made prosecutions difficult and convictions unlikely. Each of the states we visited had a different policy for referring instances of suspected abuse to law enforcement officials. While Illinois and Georgia both relied on their MFCUs to pursue criminal investigations concerning resident abuse, they followed different policies. Our review of case files in Illinois showed that the state survey agency consistently referred all reports of physical and sexual abuse—regardless of whether they were complaints or incident reports—to the MFCU, which in turn determined whether to open an investigation. As a result, the Illinois MFCU appeared to play a substantial role in abuse investigations. On the other hand, the Georgia survey agency evaluated each allegation and selectively referred cases to its MFCU according to a mutually agreed upon procedure. In accordance with this procedure, the survey agency screened complaints and incident reports before making referrals to its MFCU based on an assessment of the severity of the allegations or circumstances. Survey agency officials also told us that, in making these assessments, they considered the likelihood that reporting the abuse to the MFCU would result in a criminal conviction. The differences in Illinois’s and Georgia’s referral policies yielded dramatically different results. While the Illinois survey agency referred approximately 300 allegations of abuse to its MFCU in 1999, Georgia only referred 27 allegations in the same period. Although Illinois had more than twice as many nursing home residents as Georgia—81,500 vs. 33,800—the discrepancy in population size does not account for the significant difference in the number of referrals. Our review of the 50 Illinois cases revealed that the Illinois survey agency referred cases to its MFCU earlier than the Georgia survey agency. The Illinois cases were referred to the MFCU, on average, 3 days after receiving a report of abuse, while Georgia referred cases, on average, 15 days after learning about an allegation. Illinois’s policy of routinely referring all allegations to its MFCU enables referrals to be made more quickly than Georgia’s system of evaluating and screening all allegations prior to making selective referrals. The state survey agencies in Illinois and Georgia referred 64 of the cases we reviewed to the MFCUs for investigation. As indicated in table 3, Georgia, which referred fewer cases to its MFCU, had fewer convictions. By referring more cases to its MFCU, the Illinois survey agency presented law enforcement with the opportunity to assess whether an abusive act had been committed and whether it should be criminally pursued. In addition, by referring its cases to its MFCU sooner, on average, than Georgia, Illinois also enhanced law enforcement’s ability to conduct more timely and effective investigations. The Georgia survey agency’s screening process provided law enforcement fewer and less timely opportunities to investigate allegedly abusive caregivers. In discussing Georgia’s referral policy with survey agency and MFCU officials, we learned that the agency substantially changed its MFCU referral criteria in 2000, leading to an increased number of referrals— 111—that year. This change followed a new understanding between survey agency and MFCU officials based on the MFCU’s expressed willingness to investigate instances of abuse. Previously, the survey agency typically did not refer instances that it considered less serious—such as incidents involving nursing home employees slapping residents with no reported visible injuries—to the MFCU. According to survey agency officials, they did not refer such allegations because they believed that these cases did not meet the referral criteria. In their view, it was unlikely that the MFCU would consider such acts serious enough offenses to warrant an investigation and prosecution. The lack of compelling evidence often precludes prosecution of those who have abused nursing home residents. MFCU and local law enforcement officials indicated that nursing home residents are often unwilling or unable to provide testimony. The state survey agency and law enforcement officials we spoke to agreed with this determination. Our file reviews confirmed that residents were reluctant or unable to provide evidence against an accused abuser in 32 of the 158 cases we reviewed, thus making it difficult to pursue a criminal investigation. Our work also indicated that resident testimony could be limited by mental impairments or an inability to communicate. We noted several instances in which residents sustained unexplained black eyes, lacerations, and fractures. However, despite the existence of serious injuries, investigators could neither rule out accidental injuries nor identify a perpetrator. Prosecutions of individuals accused of abusing nursing home residents are often weakened by the time lapse between the incident and the trial. Law enforcement officials and prosecutors told us that the amount of time that elapses between an incident and a trial could ruin an otherwise successful case because witnesses do not always remember important details about the incident. Although it is not uncommon for the memories of witnesses in criminal cases to fade, impaired recall is even more prevalent among nursing home residents. Our review showed that nursing home residents may become incapable of testifying months after they were abused. For example, in one case, a victim’s roommate witnessed the abuse and positively identified the abuser during the investigation. However, by the time of the trial—nearly 5 months later—she could no longer identify the suspect in the courtroom, prompting the judge to dismiss the charges. Moreover, given the age and medical condition of many nursing home residents, many might not survive long enough to participate in a trial. One recent study of 20 sexually abused nursing home residents revealed that 11 died within 1 year of the abuse. Law enforcement officials told us that, without testimony from either a victim or a witness, conviction is unlikely. The safeguards available to states do not sufficiently protect residents from abusive employees. CMS’s requirements preclude facilities from employing an individual convicted of abusing nursing home residents but permit the hiring of those convicted of other abusive acts, such as child abuse. Although some states have established more stringent requirements, criminal background checks typically do not identify individuals who have committed a crime in another state. Nursing homes can be cited for deficiencies if they fail to adequately protect residents from abuse, but these deficiencies rarely result in the imposition of sanctions, such as civil monetary penalties, by state survey agencies. State survey agencies, which also oversee the operation of state nurse aide registries, do not adequately ensure that residents will be protected from aides who previously abused residents. Finally, states are unable to take professional disciplinary actions against other employees, such as security guards or housekeeping staff, who may have abused residents but who are neither licensed nor certified to care for residents. While CMS requires nursing homes to establish policies that prevent the hiring of individuals who have been convicted of abusing nursing home residents, this requirement does not include offenses committed against individuals outside the nursing home setting, nor does it specify that states conduct background checks on all prospective employees. CMS’s requirement does not preclude individuals with similar convictions—such as assault, battery, and child abuse—from obtaining nursing home employment. The three states we visited all apply a broader list of offenses that prohibit employment in a nursing home. Each state’s prohibition of employees includes those convicted of offenses such as kidnapping, murder, assault, battery, or forgery and is not limited to offenses against nursing home residents. However, the three states vary in their application of these prohibitions. For example, Illinois’s prohibition does not apply to employees who are not directly involved in providing care to residents and allows nurse aides who have been convicted of such offenses to apply for a waiver. Waivers may be granted if there are mitigating circumstances and allow these aides to work in nursing homes. Pennsylvania’s prohibition applies to all nursing home employees, not just those involved in patient care. Georgia’s prohibition, enacted in 2001, also applies to all nursing home employees, but only if they were convicted of abuse-related crimes within the preceding 10 years. Criminal background checks do not adequately protect residents, in part, because, as in Illinois, they may not apply to all nursing home employees.More importantly, the background checks that are performed by state and local law enforcement officials in the three states we visited are typically only statewide. Consequently, individuals who have committed disqualifying crimes in one state may be able to obtain employment at a nursing home in another state. Nationwide background checks on prospective nursing home employees can be performed by the Federal Bureau of Investigation (FBI) if nursing homes request them. These checks could identify offenses committed elsewhere, but not all states take advantage of this option. According to an FBI official, 21 states have requirements that subject some health care employees to these checks, but state requirements vary and do not always apply to prospective nursing home employees. This official told us that most of the requests the FBI receives on health care personnel are from these 21 states. He told us that, of the remaining states, only nursing homes in North Carolina and Ohio request such background checks regularly. Of the three states we visited, only Pennsylvania submits background check requests to the FBI. However, these are limited to those individuals who have lived outside the state during the 2 years prior to applying for nursing home employment. Two of the states we visited allow employees to report for duty before background checks are completed. Pennsylvania and Illinois permit new employees to report to work before criminal background checks are completed, for up to 30 days and 3 months, respectively. However, Georgia survey agency officials told us that nursing homes could be cited with a deficiency if new employees assume their duties before the nursing home receives the results of the background checks. Georgia requires that these checks be completed within 3 days of the request. CMS does not require that the results of criminal background checks be included in nurse aide registries. Of the three states we visited, only Illinois requires that the results be reported to the state survey agency by the nursing home. If the check reveals a disqualifying criminal history, it will be included in the Illinois registry. Therefore Illinois nursing homes are able to identify some aides with disqualifying convictions before offers of employment are made and criminal background checks are initiated. Officials in Georgia and Pennsylvania explained that they verify the completion of background checks for new employees, including nurse aides, as they conduct their periodic nursing home surveys. As a result, they told us that they do not believe that the results of these checks need to be added to their registries. For the states that we reviewed, sanctions were rarely imposed against nursing homes for deficiencies associated with their handling of instances of abuse. Deficiencies considered the most severe—those resulting in actual harm or immediate jeopardy to resident health or safety—could result in an immediate sanction, such as a civil monetary penalty. Deficiencies not resulting in actual harm or immediate jeopardy usually resulted in nursing homes being required to submit a plan of corrective action. Nursing homes that submit corrective action plans may also face other sanctions. The Georgia, Illinois, and Pennsylvania survey agencies eventually cited 26 nursing homes—from the 158 cases we reviewed—for abuse-related deficiencies such as failing to report allegations of abuse in a timely manner or failing to properly investigate them, as well as inadequately screening employees for criminal backgrounds, as indicated in table 4. The state survey agencies rarely recommended to CMS that civil monetary penalties be imposed against nursing homes for abuse-related deficiencies, primarily because most of the deficiencies cited for these 26 nursing homes were not categorized as placing residents’ health or safety in immediate jeopardy or resulting in actual harm to residents. Only 1 of these 26 facilities—in Illinois—was assessed a civil monetary penalty. However, the penalty was reduced on appeal. State survey agencies did not recommend other sanctions on the 25 remaining nursing homes. We found that allegedly abusive nurse aides received different treatment depending on the state in which they worked. In addition, when states determined that aides were abusive, there were frequent and long delays in the inclusion of this information in their registry files. Residents could have been exposed to abusive individuals while their cases were pending. Finally, we found that one state’s Web-based nurse aide registry lacked complete information on aides who had been found to be abusive. CMS defines abuse as the willful infliction of injury, unreasonable confinement, intimidation, or punishment with resulting physical harm, pain, or mental anguish. CMS officials told us that states may use different definitions so long as they are at least as broad as the CMS definition.While the three states we visited have definitions that appear at least as broad as the CMS definition, variations in the way these states interpret or apply their definitions affect whether aides’ actions are reflected in state registries. For example, the Georgia definition is very similar to CMS’s and defines abuse to include, among other things, the “willful infliction of physical pain, physical injury, mental anguish.” Officials there told us, however, that in order to add a finding of abuse to an aide’s registry file, they must be convinced that the aides’ actions were intentional. They are less likely to determine that an aide has been abusive if the aide’s behavior appeared to be spontaneous or the result of a “reflex” response. Officials said they would view an instance in which an aide struck a combative resident in retaliation after being slapped by the resident as an unfortunate reflex response rather than an act of abuse. Similarly, Pennsylvania defines abuse to include, among other things, “infliction of injury . . . or intimidation or punishment with resulting physical harm, pain or mental anguish.” While this definition appears to be at least as broad as the CMS definition, Pennsylvania officials told us that they would be unlikely to annotate an aide’s registry file to reflect a finding of abuse unless the aide caused serious injury or obvious pain. Our review of Pennsylvania files indicated that most of the aides that were found to have been abusive had, in fact, clearly injured residents or caused them obvious pain. However, these files also indicated that in several instances in which residents were bumped or slapped and indicated that they were in pain as the result of aides’ actions, the survey agency decided not to take action because the residents had no physical injuries. As in Georgia, agency officials indicated that they needed to establish that the action was intentional. In contrast, Illinois defines abuse as “any physical . . . or mental injury inflicted on a resident other than by accidental means.” Incidents like those not reported to registries in Georgia or Pennsylvania—reflex actions and those devoid of serious injury or obvious pain—are added to Illinois’s registry. We saw 17 such cases in Illinois in which state survey officials did find the aides to have been abusive. We also reviewed, in both Illinois and Georgia, what appeared to be comparable complaints in which a nursing home employee witnessed another staff member strike a combative resident. Both survey agencies made preliminary determinations that the employees had, in fact, abused residents. The Illinois survey agency not only included its determination in the aides’ registry files, it also referred the matter to its MFCU, resulting in a criminal conviction. The Georgia survey agency reversed its initial determination that the aide was abusive when the aide requested that the matter be reconsidered, even though the aide did not provide new evidence to disprove the allegation. Notes in the case file indicated that Georgia reversed its decision because the aide’s action was reflexive. Consequently, Georgia did not annotate the aide’s registry information to reflect a finding of abuse and did not refer this incident to its MFCU. We identified four additional instances among the 52 Georgia cases we reviewed involving nurse aides who hit or otherwise injured combative residents after these residents had tried, sometimes successfully, to harm them first. None of these cases resulted in determinations that aides were abusive. The files indicated that officials had determined that the aides did not intend to hurt the resident and were not abusive because the residents were combative. Consequently, no further actions were taken. CMS officials agreed with state survey agency officials that intent is a key factor in assessing whether an aide abused a resident. However, they would not necessarily find a reflex response to be unintentional. These officials indicated that an aide who slaps a resident back could have developed intent in an instant and thus should be considered abusive. Of the 158 cases of alleged physical and sexual abuse that we reviewed, 105 involved nurse aides. States notified 41 of these aides of their intent to annotate their registry files to reflect findings of abuse, which would prevent them from obtaining future employment in a nursing home. As table 5 shows, 27 of these 41 aides eventually had their registry files annotated. Consistent with Illinois’s broad definition of abuse and the fact that officials there have not narrowed its scope through its application, most of these aides were from that state. We found examples of delays between the time the state survey agencies learned that a nurse aide had allegedly abused a resident to the date of the agencies’ final determinations. Our review of the 71 case files from Illinois and Georgia involving allegedly abusive aides, and our review of 1999 nurse aide registry records in Pennsylvania indicated that while some determinations were made in less than 2 months, a substantial number— 12—took 10 months or more. Three of these 12 determinations took at least 2 years. Such delays can put residents of other nursing homes at risk. By the time state survey agencies have determined that some aides are abusive, these aides may have already found employment in other homes. The process of determining whether an aide actually abused a resident can be time-consuming. While CMS requires survey agencies to begin their investigation of an allegedly abusive aide within two days of learning of an allegation, it does not impose a deadline for completing these investigations. State survey agency investigations can be prolonged, particularly if law enforcement is involved. Nurse aides are entitled to due process, but nursing home residents may remain vulnerable to abuse until final determinations are made. Once officials make an initial determination that an aide abused a resident, the aide must be informed in writing. The notification must also inform the aide that the agency intends to update the registry to reflect this determination, which would prevent the aide from obtaining future employment in a nursing home in that state. Because of the severity of these consequences, aides are entitled to hearings. Hearings must be requested in writing within 30 days of the notification from the state survey agency regarding its determination and its intent to include a finding of abuse in the registry. Hearings may not be held for several months, and hearing officers may not render their decisions immediately. No entry may be made in an aide’s registry record until a final determination is made that the aide was abusive. Our analysis of nurse aide registry records from 1999 indicated that, for all aides with abuse findings recorded in their registry files in all three states, hearings added, on average, 5 to 7 months to the determination process. We identified problems with the accuracy of information contained in one state’s nurse aide registry Web site that could have resulted in the provision of inaccurate information to nursing homes screening potential employees. Our test of the accuracy of the sites for the three states we visited showed that, in some instances, findings of abuse had been annotated to an aide’s registry record but had not been included in registry information posted on the Web site. For example, four Georgia aides with final determinations of abuse did not have such findings reflected in their files at the state’s registry Web site. Agency officials confirmed our results and consequently closed the agency site for more than a week. However, they told us that the problem was limited to the site and did not affect their ability to provide correct information by telephone or fax. They also reported that the agency’s ability to provide a complete list of abusive aides in its quarterly bulletins to nursing homes was not compromised. Just as background checks would typically reveal only offenses committed in the state in which an applicant seeks employment, nurse aide registries reflect an aide’s history in a particular state. In 1998, the HHS Office of Inspector General recommended that HCFA assist in developing a national abuse registry and expand state registries to include all nursing home employees who have abused residents or misappropriated their property in facilities that receive federal reimbursement. A CMS contractor is currently conducting a feasibility study regarding the development of such a registry. The study includes a cost-benefit analysis to assess the implications of a centralized nurse aide registry and, to a lesser extent, the implications of tracking all nursing home employees. The implications of requiring other health care providers—such as home health agencies—to query nurse aide registries is also under study. The contractor is scheduled to report its findings as soon as March 2002. Although nurse aides compose the largest proportion of nursing home employees, other employees, such as laundry aides, security guards, and maintenance workers have also been alleged to have abused residents. While survey agencies can prevent abusive aides from working in nursing homes and can refer licensed personnel, such as nurses and therapists, to state licensing boards for disciplinary action, they have no similar recourse against other abusive employees, who may continue to work in nursing homes. Survey agencies can, however, cite facilities for deficiencies if appropriate actions—such as reporting and investigating the allegations—are not taken. Of the 158 cases of alleged physical and sexual abuse that we reviewed, 10 suspected perpetrators were employees who were not subject to licensing or certification requirements. None of the facilities in these cases were cited for deficiencies. Although there is no administrative process to enable the state to take actions against such employees, these employees could be criminally prosecuted. Of these 10 cases, 4 involved allegations that proved unfounded or for which evidence was inconsistent. One of the 10 employees ultimately pled guilty in court. Three others were investigated by law enforcement but were not prosecuted. The remaining 2 employees were terminated by their nursing homes but were not the subject of criminal investigations. Nursing homes are entrusted with the well-being and safety of their residents yet considerable attention has recently been focused on the inadequacies of care provided to many nursing home residents. Along with receiving quality care, residents are entitled to be protected from those who would harm them. Residents who are abused need to be assured that their allegations will be immediately referred to the proper authorities and investigated expeditiously. In addition, law enforcement authorities need to ensure that abusive individuals are prosecuted when appropriate, and survey agencies should recommend to CMS that available administrative sanctions be imposed against known abusers. Our work shows that nursing home residents need both stronger and more immediate protections. Law enforcement agencies, such as state MFCUs or local police departments, are not involved as often or as soon as they should be, especially when there are indications of potential criminal activity. Additionally, determining where to report complaints of alleged abuse can be confusing. Prompt reporting is especially crucial given the often-limited evidence available. CMS is taking important steps that may better protect residents. For example, its feasibility study on the development of a national abuse registry could lead to enhanced resident safety. However, other efforts have fallen short. For example, an important tool could be the agency’s educational campaign using a new poster in nursing homes nationwide to better inform residents and family members about how to report abuse. However, the poster has been under development for more than 3 years. More should be done to protect nursing home residents. CMS’s requirement that nursing homes not employ individuals convicted of abusing residents does not sufficiently prevent the hiring of potentially abusive individuals. Those who have committed similar offenses, such as child abuse, are eligible to work in nursing homes unless states impose a more stringent requirement. While CMS does not require criminal background checks, some states have instituted them. However, they may not be required for all prospective employees and may not identify offenses committed in other states. In addition, CMS’s definition of abuse is not sufficiently detailed to ensure that all states report every incident that CMS would consider abusive. Affording due process to nurse aides who have allegedly abused residents is important and necessary. However, determinations that nurse aides have been abusive can be time-consuming, leaving residents at risk if these aides continue to work in nursing homes. Finally, nurse aide registries may have incorrect information, allowing nursing homes to hire aides previously found abusive. Recommendations for To better protect nursing home residents, we recommend that the CMS Executive Action Ensure that state survey agencies immediately notify local law enforcement agencies or MFCUs when nursing homes report allegations of resident physical or sexual abuse or when the survey agency has confirmed complaints of alleged abuse. Accelerate the agency’s education campaign on reporting nursing home abuse by (1) distributing its new poster with clearly displayed complaint telephone numbers and (2) requiring state survey agencies to ensure that these numbers are prominently listed in local telephone directories. Systematically assess state policies and practices for complying with the federal requirement to prohibit employment of individuals convicted of abusing nursing home residents and, if necessary, develop more specific guidance to ensure compliance. Clarify the definition of abuse and otherwise ensure that states apply that definition consistently and appropriately. Shorten the state survey agencies’ time frames for determining whether to include findings of abuse in nurse aide registry files. We received comments on a draft of this report from CMS, the Department of Justice (DOJ), the three state survey agencies we visited (the Illinois Department of Public Health, the Georgia Department of Human Resources, and the Pennsylvania Department of Health), and the MFCUs in Illinois and Georgia. We also received comments from two organizations representing the nursing home industry—the American Health Care Association (AHCA) and the American Association of Homes and Services for the Aging (AAHSA). In its comments, CMS generally agreed with our recommendations and said that it is committed to protecting nursing home residents from harm and explained that it is currently investigating new ways to combat resident abuse and neglect. We have reprinted CMS’s letter in appendix II. CMS also provided technical comments, which we have incorporated as appropriate. CMS agreed with our first recommendation and said it would instruct state survey agencies to immediately notify local law enforcement agencies or MFCUs of confirmed abuse allegations. CMS also said it would thoroughly review this recommendation when it completes its analysis of its Complaint Improvement Project. We believe that immediately notifying law enforcement of suspected abuse will enhance the safety of nursing home residents, and we urge CMS’s prompt action. In responding to our second recommendation—that CMS accelerate its education campaign—the agency said that it is working with HHS to release its new poster as soon as possible, but did not indicate when it might be distributed to nursing homes. In addition, CMS agreed to request states to prominently list telephone numbers for reporting abuse in local telephone directories. CMS agreed with our third recommendation and said it will review state policies and practices and reissue guidance regarding employment prohibitions pertaining to individuals convicted of abusing nursing home residents. We believe that an assessment of the current requirements, that includes an evaluation of the states’ implementation of these requirements, could have a lasting impact on resident safety. In addressing our fourth recommendation—to clarify the definition of abuse and ensure that states consistently and appropriately apply this definition—CMS explained that states can use their own established definitions of abuse. According to CMS, the state’s definitions may be used when citing homes for deficiencies under their state licensure program but, when performing a federal survey, CMS noted that the federal definition must be used. CMS added that it would clarify this distinction with the states. However, we believe that it is also of great importance to clarify the definition of abuse that states should apply when considering whether nurse aides have abused residents and consequently may have this action reflected in their nurse aide registry files. CMS agreed to consider our fifth recommendation—to shorten the time frames for determining whether to include findings of abuse in the nurse aide registry. CMS acknowledged that a considerable amount of time may elapse before reports of abuse are finalized and reported to the nurse aide registry. CMS added this is largely attributable to steps associated with due process. CMS pointed out that, with the exception of the time taken by the states to substantiate abuse allegations, all of these time frames are specified by regulation. However, the regulations do not specify a time frame for making a final decision once the hearing has been completed and the hearing record has been closed. CMS said it would take our recommendation into account when considering changes to these regulations. We believe that reducing this time period will provide residents with greater certainty that they will not be exposed to abusive aides. We received oral comments from the Coordinator of DOJ’s Nursing Home and Elder Justice Initiative. She agreed with the findings in our report. She also added that resident abuse may be underestimated, as studies suggest a significant number of abuse cases are never reported. She said that, in order to respond appropriately to victims of abuse, local law enforcement and other “first responders” such as firefighters and paramedics, would benefit from special training. In her view, this training should include guidance regarding how to distinguish signs of physical abuse from other types of injuries, advice on interviewing elderly and confused residents, and investigative techniques and evidence preservation strategies unique to the nursing home setting. Our work did not include an evaluation of the training programs offered to law enforcement officials or “first responders.” In addition, she pointed out that DOJ could become actively involved in investigating abuse allegations in certain situations, such as those involving facilities where a pattern of abuse has been detected and instances where nursing home managers or employees have made false statements to state surveyors regarding resident care. In addition to these comments, we received technical comments from the FBI, which we incorporated as appropriate. We received comments from all three of the state survey agencies we visited as well as the Illinois MFCU. These agencies described initiatives they have undertaken to increase awareness of resident abuse and improve reporting and offered technical comments, which we incorporated as appropriate. Although we provided our draft to the Georgia MFCU, it did not offer any comments. Finally, we received comments from representatives of AHCA and AAHSA. Both organizations generally agreed with our recommendations. AHCA representatives told us that they suspect that abuse of nursing home residents is underreported. They said that they support providing more training to both caregivers and law enforcement officials. They noted that such training could discourage abusive behavior by nursing home staff and improve law enforcement’s responsiveness to instances of resident abuse. Our work did not include an evaluation of such training programs. Representatives of both AHCA and AAHSA indicated that they strongly support the establishment of a national nurse aide registry and a national criminal background check for nursing home employees. In addition, the AAHSA representatives said that they strongly agreed with our recommendation to clarify the definition of abuse. They noted that the definition of abuse has long been the subject of debate and its clarification by CMS is in the interest of residents, as well as nursing home management and staff. In addition to these comments, both AHCA and AAHSA offered technical comments, which we have incorporated as appropriate. As agreed with your offices, unless you announce its contents earlier, we plan no further distribution of this report until 30 days after its issuance date. At that time, we will send copies to the CMS administrator, interested congressional committees, and other interested parties. We will then make copies available to others upon request. If you or your staff have any questions about this report, please call me at (312) 220-7600. An additional GAO contact and other staff who made major contributions to this report are listed in appendix III. To determine the federal requirements for responding to, and investigating allegations of, abuse of nursing home residents, we reviewed federal laws and regulations. We interviewed officials from the Centers for Medicare and Medicaid Services (CMS ) regarding these requirements and also discussed their oversight of the state survey agencies responsible for surveying nursing homes and certifying their compliance with federal laws and regulations. We conducted our work in three states with relatively large nursing home populations—Illinois, Georgia, and Pennsylvania—and discussed these requirements with survey and law enforcement officials in these states. In addition, we met with officials from the three states’ departments on aging and local area agencies on aging because they may also receive abuse referrals and conduct investigations. We reviewed and discussed relevant state policies and procedures with these officials. Finally, to become familiar with the general progression of abuse investigations, we attended conferences and consulted with experts in the field of elder abuse. For each of the three states we visited, we reviewed cases involving allegations of physical and sexual abuse. Most of these cases were opened by Medicaid Fraud Control Units (MFCUs) or reported to state survey officials in 1999 or 2000. We focused on the survey agencies’ and MFCUs’ files. We did not review any of the allegations investigated by the state departments on aging or local area agencies on aging because of agency officials’ concerns with confidentiality. In total, we reviewed 158 cases to determine the circumstances and nature of the cases, the extent to which the allegations were investigated and prosecuted, and the timeliness of referrals and investigations. However, our findings cannot be generalized or projected. To assess the timeliness of reporting abuse allegations, we used the information from our case review and compared these results to federal and state guidelines. For cases that the state survey agency referred to the MFCU, we calculated the number of days between agency receipt and referral to the MFCU. We also determined the number of convictions resulting from these referrals. At the Illinois Department of Public Health (IDPH)—the state survey agency—we identified and reviewed 50 cases involving physical or sexual abuse that were reported by individuals as complaints or by nursing homes in incident reports. All of these allegations were referred by IDPH to its MFCU. These included all of the allegations of physical or sexual abuse for which the MFCU had opened investigations in 1999 and closed at the time of our review. We reviewed the relevant files at both agencies. We also examined 1 month of referrals that the MFCU reviewed but ultimately did not investigate. These referrals typically involved bruises of unknown origin, old injuries, a lack of witnesses, or instances in which the intent to hurt a resident was questionable or unfounded. In Georgia, we reviewed 52 abuse allegations. Of these, 14 were either complaints or incident reports that the state Department of Human Resources (DHR)—in which Georgia’s state survey agency is housed—had referred to the MFCU in 1999. These 14 cases represent all of the allegations of physical or sexual abuse that DHR referred to the MFCU in 1999 and for which the MFCU opened and subsequently closed an investigation. We reviewed these 14 cases at both agencies. Because DHR does not refer all physical and sexual abuse cases to the MFCU, we judgmentally selected and reviewed 38 additional abuse cases that DHR had received but had not referred to the MFCU. We chose these additional cases from the survey agency’s 1999 log of complaints, which included 60 physical and 14 sexual abuse cases, as well as from its 1999 log of incident reports, which included 361 physical and 47 sexual abuse cases. We selected cases based on the proportion of the allegations that involved physical and sexual abuse, as well as complaints and incident reports. Because local law enforcement in Pennsylvania is assigned primary responsibility for investigating the physical or sexual abuse of nursing home residents, our case file selection for this state differed from that of Illinois and Georgia. As the MFCU is typically not involved in these cases, the files we reviewed included 56 cases reported to Pennsylvania’s state survey agency—the Department of Health (DOH)—in 1999 and 2000. These cases included a mix of complaints and incident reports as well instances of both physical and sexual abuse. To identify agencies that might accept reports of abuse, we obtained several telephone books from each state, including those for large and small metropolitan areas. We reviewed government and consumer pages to identify complaint telephone numbers for state survey agencies, other social service and law enforcement agencies (excluding local police departments), and other organizations, such as long-term care ombudsmen, that appeared to be potential places for reporting abuse of nursing home residents. We called these numbers to verify that the organization would accept such a complaint. We also made follow-up calls when we were referred elsewhere. To determine the extent of law enforcement’s involvement in investigating abuse allegations, we interviewed MFCU officials in Illinois, Georgia, and Pennsylvania. We also spoke with representatives from 19 police departments from these states—including both urban and rural areas— and four prosecutors’ offices. Some of these departments and prosecutors were chosen because of their involvement in some of the cases we reviewed. To determine the extent to which nursing homes were sanctioned for violations related to abuse, we identified from the files we reviewed the nursing homes that had been cited for deficiencies related to the abuse allegations. We then searched state Web sites to obtain surveys pertaining to these homes from the time of the abuse allegation to the present and reviewed the surveys to determine what, if any, sanctions had been recommended. To evaluate whether sufficient safeguards exist to protect residents from abusive individuals, we reviewed federal and state laws regarding criminal background check requirements for nursing home employees and state nurse aide registries. We also interviewed state survey agency officials and obtained relevant documentation. We tested the accuracy of online nurse aide registry Web sites in each state we visited to verify that findings of abuse had actually been posted to the site. Survey officials in the three states provided us with lists of nurse aides who had been found to be abusive through their administrative processes. Using those lists, we tested the registries to determine whether all names and information provided to us were accurately reflected by each state’s Web site. In addition, we obtained copies of state agencies’ 1999 and 2000 quarterly bulletins that were sent to nursing homes and compared the names of nurse aides with abuse findings listed in these bulletins to the list originally obtained from the state agency. In Georgia and Illinois, we reviewed lists of aides notified by the survey agencies that their registry files would be annotated to reflect a finding of abuse. From these lists, we determined the number of aides requesting an administrative hearing and the number of findings actually entered in the registries. In Pennsylvania, we reviewed a similar list, although it only included those aides who actually had findings of abuse annotated in the registry. For all three states, we calculated the average length of time between when the state notified aides of its plan to annotate the registry to the date the agency ordered that the findings be posted. Finally, we interviewed state agency officials about their policies regarding professionals and other staff who abuse nursing home residents. Lynn Filla-Clark, Tiffani Green, Barbara Mulliken, and Christi Turner also made key contributions to this report. Nursing Workforce: Recruitment and Retention of Nurses and Nurse Aides Is a Growing Concern. GAO-01-750T. Washington, D.C.: May 17, 2001. Nursing Homes: Success of Quality Initiatives Requires Sustained Federal and State Commitment. GAO/T-HEHS-00-209. Washington, D.C.: September 28, 2000. Nursing Homes: Sustained Efforts Are Essential to Realize Potential of the Quality Initiatives. GAO/HEHS-00-197. Washington, D.C.: September 28, 2000. Nursing Home Care: Enhanced HCFA Oversight of State Programs Would Better Ensure Quality. GAO/HEHS-00-6. Washington, D.C.: November 4, 1999. Nursing Homes: HCFA Should Strengthen Its Oversight of State Agencies to Better Ensure Quality Care. GAO/T-HEHS-00-27. Washington, D.C.: November 4, 1999. Nursing Home Oversight: Industry Examples Do Not Demonstrate That Regulatory Actions Were Unreasonable. GAO/HEHS-99-154R. Washington, D.C.: August 13, 1999. Nursing Homes: HCFA Initiatives to Improve Care Are Under Way but Will Require Continued Commitment. GAO/T-HEHS-99-155. Washington, D.C.: June 30, 1999. Nursing Homes: Proposal to Enhance Oversight of Poorly Performing Homes Has Merit. GAO/HEHS-99-157. Washington, D.C.: June 30, 1999. Nursing Homes: Complaint Investigation Processes in Maryland. GAO/T-HEHS-99-146. Washington, D.C.: June 15, 1999. Nursing Homes: Complaint Investigation Processes Often Inadequate to Protect Residents. GAO/HEHS-99-80. Washington, D.C.: March 22, 1999. Nursing Homes: Stronger Complaint and Enforcement Practices Needed to Better Ensure Adequate Care. GAO/T-HEHS-99-89. Washington, D.C.: March 22, 1999. Nursing Homes: Additional Steps Needed to Strengthen Enforcement of Federal Quality Standards. GAO/HEHS-99-46. Washington, D.C.: March 18, 1999. California Nursing Homes: Federal and State Oversight Inadequate to Protect Residents in Homes With Serious Care Violations. GAO/T-HEHS- 98-219. Washington, D.C.: July 28, 1998. California Nursing Homes: Care Problems Persist Despite Federal and State Oversight. GAO/HEHS-98-202. Washington, D.C.: July 27, 1998. | Often suffering from multiple physical and mental impairments, the 1.5 million elderly and disabled Americans living in nursing homes are a highly vulnerable population. These individuals typically require extensive help with daily living, such as such as dressing, feeding, and bathing. Many require skilled nursing or rehabilitative care. In recent years, reports of inadequate care, including malnutrition, dehydration, and other forms of neglect, have led to mounting scrutiny from state and federal authorities, which share responsibility for overseeing the nation's 17,000 nursing homes. Concerns have also been growing that some residents are abused--pushed, slapped, or beaten--by the very individuals to whom their care has been entrusted. GAO found that allegations of physical and sexual abuse of nursing home residents are not reported promptly. Local law enforcement officials said that they are seldom summoned to nursing homes to immediately investigate allegations of abuse and that few allegations are ever prosecuted. Some agencies use different policies when deciding whether to refer allegations of abuse to law enforcement. As a result, law enforcement agencies were never told of some incidents or were notified only after lengthy delays. GAO found that federal and state safeguards intended to protect nursing home residents from abuse are inadequate. No federal statute requires criminal background checks for nursing home employees. Background checks are also not required by the Centers for Medicare and Medicaid Services, which sets the standards that nursing homes must meet to participate in the Medicare and Medicaid programs. State agencies rarely recommend that sanctions be imposed on nursing homes. Although state agencies compile lists of aids who have previously abused residents, which can prevent an aide from being hired at another nursing home, GAO found that delays in making these identifications can limit the usefulness of these registries. GAO summarized this report in testimony before Congress; see GAO-02-448T . |
CBP maintains two overarching goals: (1) increasing security and (2) facilitating legitimate trade and travel. Disruptions to the supply chain could have immediate and significant economic impacts. For example, in terms of containers, CBP data indicates that in 2003 about 90 percent of the world’s cargo moved by container. In the United States, almost half of all incoming trade (by value) arrived by containers on board ships. Additionally, containers arrive via truck and rail. Both admitting dangerous cargo into the country and delaying the movement of cargo containers through ports of entry could negatively affect the national economy. Therefore, CBP believes it is vital to try to strike a balance between its antiterrorism efforts and facilitating the flow of legitimate international trade and travel. The terrorist events of September 11, 2001, raised concerns about company supply chains, particularly oceangoing cargo containers, potentially being used to move WMD to the United States. An extensive body of work on this subject by the Federal Bureau of Investigation and academic, think tank, and business organizations concluded that while the likelihood of such use of containers is considered low, the movement of oceangoing containerized cargo is vulnerable to some form of terrorist action. Such action, including attempts to smuggle either fully assembled WMD or their individual components, could lead to widespread death and damage. The supply chain is particularly vulnerable to potential terrorists because of the number of individual companies handling and moving cargo through it. To move a container from production facilities overseas to distribution points in the United States, an importer has multiple options regarding the logistical process, such as routes and the selection of freight carriers. For example, some importers might own and operate key aspects of the overseas supply chain process, such as warehousing and trucking operations. Alternatively, importers might contract with logistical service providers, including freight consolidators and nonvessel-operating common carriers. In addition, importers must choose among various modes of transportation to use, such as rail, truck, or barge, to move containers from the manufacturer’s warehouse to the port of lading. CBP has implemented a layered enforcement strategy to prevent terrorists and WMD from entering the United States through the supply chain. One key element of this strategy is the C-TPAT program. Initiated in November 2001, C-TPAT is a voluntary program designed to improve the security of the international supply chain while maintaining an efficient flow of goods. Under C-TPAT, CBP officials work in partnership with private companies to review their supply chain security plans to improve members’ overall security. In return for committing to making improvements to the security of their shipments by joining the program, C-TPAT members may receive benefits that result in reduced scrutiny of their shipments (e.g., reduced number of inspections or shorter border wait times for their shipments). C-TPAT membership is open to U.S.-based companies in the trade community, including (1) air/rail/sea carriers, (2) border highway carriers, (3) importers, (4) licensed customs brokers, (5) air freight consolidators and ocean transportation intermediaries and nonvessel-operating common carriers, and (6) port authorities or terminal operators. Of these companies, CBP grants importers key program benefits. According to CBP, program membership has grown rapidly, and continued growth is expected, especially as member importers are requiring their suppliers to become C-TPAT members. For example, as of January 2003 approximately 1,700 companies had become C-TPAT members. By May 2003, the number had nearly doubled to 3,355. According to CBP officials, as of April 2005, the C-TPAT program had over 9,000 members. For fiscal year 2005, the C- TPAT budget request was about $38 million, with a requested budget for fiscal year 2006 of about $54 million for program expansion efforts. As of August 2004, CBP had hired 40 supply chain specialists, who are dedicated to serve as the principal advisers and primary points of contact for C-TPAT members. The specialists are located in Washington, D.C., Miami, Florida, Los Angeles, California, and New York, New York. CBP has a multistep review process for the C-TPAT program. Applicants first submit signed C-TPAT agreements affirming their desire to participate in the voluntary program. Applicants must also submit security profiles— executive summaries of their company’s existing supply chain security procedures—that follow guidelines jointly developed by CBP and the trade community. These security profiles are to summarize the applicant’s current security procedures in areas such as physical security, personnel security, and education and training awareness. Next, CBP established a certification process in which it reviews the applications and profiles by comparing their contents with the security guidelines jointly developed by CBP and the industry, looking for any weaknesses or gaps in the descriptions of security procedures. Once any issues are resolved to CBP’s satisfaction, CBP signs the agreement and the company is considered to be certified C-TPAT member, eligible for program benefits. However, members that are importers must first complete another review, as described below, before benefits can begin. CBP encourages all members to conduct self-assessments of their security profiles each year to determine any significant changes and to notify CBP. For example, members may be using new suppliers or new trucking companies and would need to update their security profiles to reflect these changes. For certified importers, CBP has an additional review called the vetting process in which CBP reviews information about an importer’s compliance with customs laws and regulations and violation history. Conducted concurrently with the certification process, CBP requires the vetting process for certified importers as a condition of granting them key program benefits. As part of the vetting process, CBP obtains trade compliance and intelligence information on certified importers from several data sources. If CBP gives the importer a favorable review under both the vetting process and the certification process, benefits are to begin within a few weeks. If not, benefits are not to be granted until successful completion of the validation process, as described below. The final step in the review process is validation. CBP’s stated purpose for validations is to ensure that the security measures outlined in certified members’ security profiles and periodic self-assessments are reliable, accurate, and effective. In the validation process, CBP staff meet with company representatives to verify the supply chain security measures contained in the company’s security profile. The validation process is designed to include visits to the company’s domestic and, potentially, foreign sites. The member and CBP jointly determine which elements of the member’s supply chain measures will be validated, as well as which locations will be visited. Upon completion of the validation process, CBP prepares a final validation report it presents to the company that identifies any areas that need improvement and suggested corrective actions, as well as a determination if program benefits are still warranted for the member. Announced in January 2002, the CSI program was implemented to allow CBP officials to target containers at foreign seaports so that any high-risk containers may be inspected prior to their departure for U.S. destinations. Strategic objectives for the CSI program include (1) pushing the United States’ zone of security beyond its physical borders to deter and combat the threat of terrorism; (2) targeting shipments for potential terrorists and terrorist weapons, through advanced and enhanced information and intelligence collection and analysis, and preventing those shipments from entering the United States; (3) enhancing homeland and border security while facilitating growth and economic development within the international trade community; and (4) utilizing available technologies to leverage resources and to conduct examinations of all containers posing a high risk for terrorist-related activity. To participate in the CSI program, a host nation must utilize (1) a seaport that has regular, direct, and substantial container traffic to ports in the United States; (2) customs staff with the authority and capability to inspect cargo originating in or transiting through its country; and (3) nonintrusive inspection equipment. In addition, a host nation must meet several operational criteria, including a commitment to establishing an automated risk management system. To implement the CSI program, CBP negotiates and enters into bilateral arrangements with foreign governments, specifying the placement of CBP officials at foreign ports and the exchange of information between CBP and foreign customs administrations. CBP first solicited the participation of the 20 foreign ports that shipped the highest volume of ocean containers to the United States. These top 20 ports are located in 14 countries and regions and shipped a total of 66 percent of all containers that arrived in U.S. seaports in 2001. CBP has since expanded CSI to strategic ports, which may ship lesser amounts of cargo to the United States but may also have terrorism or geographical concerns. As shown in table 1, as of February 2005, CSI was operational at 34 ports, located in 17 countries or regions. For fiscal year 2005, the CSI budget was about $126 million, with a budget of about $139 million requested in fiscal year 2006. CBP then deploys a CSI team, which generally consists of three types of officials—targeters, intelligence analysts, and special agents. These officials come from either CBP or U.S. Immigration and Customs Enforcement (ICE). The team leader is a CBP officer or targeter who is assigned to serve as the immediate supervisor for all CSI team members and is responsible for coordinating with host government counterparts in the day-to-day operations. The targeters are team members responsible for targeting shipments and referring those shipments they determine are high-risk to host government officials for inspection. The targeter may also observe inspections of containers. The intelligence analyst is responsible for gathering information to support targeters in their efforts to target containers. In addition, the special agents are to coordinate all investigative activity resulting from CSI-related actions, as well as act as liaison with all appropriate U.S. embassy attachés. Under the CSI program, the targeting of cargo is largely dependent on CBP targeters’ review of information contained within CBP’s Automated Targeting System (ATS) in conjunction with other sources to determine the risk characterization of a container. CSI teams refer any containers they characterize as high-risk to host government officials for concurrence to inspect. If host government officials, on the basis of their review, agree that the shipment is high-risk, they will proceed with an inspection using nonintrusive inspection equipment (that is, X-ray) and physical examinations, if warranted. If the host government officials determine, on the basis of their review, that a shipment is not high-risk, they will deny inspection of the shipment. For any high-risk shipment for which an inspection is not conducted, CSI teams are to place a domestic hold on the shipment, so that it will be inspected upon arrival at its U.S. destination. We have conducted previous reviews of the C-TPAT and CSI programs and CBP’s targeting and inspection strategy. In July 2003, we reported that CBP’s management of C-TPAT and CSI had not evolved from a short-term focus to a long-term strategic approach. We recommended that the Secretary of Homeland Security work with the CBP Commissioner to develop for both programs (1) strategic plans that clearly lay out the program’s goals, objectives, and detailed implementation strategies; (2) performance measures that include outcome-oriented indicators; and (3) human capital plans that clearly describe how the programs will recruit, train, and retain new staff to meet the program’s growing demands as CBP implements new program elements. In March 2004, we testified that CBP’s targeting system does not incorporate all key elements of a risk management framework and recognized modeling practices in assessing the risks posed by oceangoing cargo containers. My statement will now focus on the results of our work on the C-TPAT program. In our C-TPAT report we noted that the C-TPAT program offers numerous benefits to C-TPAT members. As table 2 shows, these benefits may reduce the scrutiny of members’ shipments. These benefits are emphasized to the trade community through direct marketing in presentations and via CBP’s Web site. Although these benefits potentially reduce the likelihood of inspection of members’ shipments, CBP officials noted that all shipments entering the United States are subject to random inspections by CBP officials or inspections by other agencies. We also reported that CBP does not grant program benefits until it has reviewed and certified applicants’ security profiles and, for importers, completed an additional review called the vetting process. According to CBP, approximately 23 percent of the security profiles it received contained shortcomings that prevented the companies from being certified and eligible for program benefits. However, CBP has stated that a company will not be rejected from participating in C-TPAT if there are problems with its security profile. Instead, CBP says it will work with companies to try to resolve and overcome any deficiencies with the profile itself. Regarding the vetting process, we reported that according to CBP, to date most members who have been vetted have proven to have favorable or neutral importing histories. CBP officials told us that not many members have been denied benefits as a result of the vetting process. Although CBP does not grant program benefits until it has certified and vetted members, we reported that neither the certification nor the vetting process provides an actual verification that the supply chain security measures contained in the C-TPAT member’s security profile are accurate and are being followed before CBP grants the member benefits. A direct examination of selected members’ security procedures is conducted later as part of CBP’s validation process, as discussed below. As we reported, we found weaknesses in the validation process that limit CBP’s ability to ensure that the C-TPAT program supports the prevention of terrorists and terrorist weapons from entering the United States. First, we reported that CBP’s validation process is not rigorous enough to achieve its stated purpose, which is to ensure that the security procedures outlined in members’ security profiles are reliable, accurate, and effective. CBP officials told us that validations are not considered independent audits, and the objectives, scope, and methodology of validations are jointly agreed upon with the member representatives. In addition, CBP has indicated that it does not intend for the validation process to be an exhaustive review of every security measure at each originating location; rather, it selects specific facets of the members’ security profiles to review for their reliability, accuracy, and effectiveness. For example, the guidance to ocean carriers for preparing a security profile directs the carriers to address, at a minimum, three broad areas (security program, personnel security, and service provider requirements), which contain several more specific security measures, such as facilities security and pre-employment screening. According to CBP officials, as well as our review of selected case files, validations examine only a few facets of members’ security profiles. CBP supply chain specialists, who are responsible for conducting most of the validations, are supposed to individually determine which segments of a company’s supply chain security will be suggested to the member for validation. To assist in this decision, supply chain specialists are supposed to compare a company’s security profile, as well as any self- assessments or other company materials or information retrievable in national databases, against the C-TPAT security guidelines to determine which elements of the profile will be validated. Once the supply chain specialist determines the level and focus of the validation, the specialist is supposed to contact the member company with a potential agenda for the validation. The two parties then jointly reach agreement on which security elements will be reviewed and which locations will be visited. Moreover, as we reported, CBP has no written guidelines for its supply chain specialist to indicate what scope of effort is adequate for the validation to ensure that the member’s security measures are reliable, accurate, and effective, in part because it seeks to emphasize the partnership nature of the program. Importantly, CBP has no baseline standard for what minimally constitutes a validation. CBP discourages supply chain specialists from developing a set checklist of items to address during the validation, as CBP does not want to give the appearance of conducting an audit. In addition, as discussed below, the validation reports we reviewed did not consistently document how the elements of members’ security profiles were selected for validation. Second, we also reported that CBP has not determined the extent to which it must conduct validations of members’ security profiles to ensure that the operation of C-TPAT is consistent with its overall approach to managing risk. In 3 years of C-TPAT operation, CBP has validated about 11 percent of its certified members. CBP’s original goal was to validate all certified members within 3 years of certification. However, CBP officials told us that because of rapid growth in program membership and its staffing constraints, it would not be possible to meet this goal. In February 2004, CBP indicated that approximately 5,700 companies had submitted signed agreements to participate in the program. As shown in figure 2, by April 2005, the number of members had grown to over 9,000, about 4,800 of which had been certified and were thus eligible for validation. According to CBP, as of April 2005, CBP staff had completed validations of 550 companies, including 174 importers. In our C-TPAT report we noted that CBP has made efforts to hire additional supply chain specialists to handle validations for the growing membership. As of August 2004, CBP had hired a total of 40 supply chain specialists to conduct validations, with 24 field office managers also available to conduct validations. CBP officials told us the bureau is currently conducting as many validations as its resources allow. However, CBP has not determined the number of supply chain specialists it needs or the extent to which validations are needed to provide reasonable assurance that the program is consistent with a sound risk management approach to securing U.S.-bound goods. Finally, we reported that it would not be possible for CBP to meet its goal of validating every member within 3 years of certification. Instead, CBP told us it is using a risk-based approach, which considers a variety of factors to prioritize which members should be validated as resources allow. CBP has an internal selection process it is supposed to apply to all certified members. Under this process CBP officials are supposed to prioritize members for validation based on established criteria but may also consider other factors. For example, recent seizures involving C- TPAT members can affect validation priorities. If a member is involved in a seizure, CBP officials noted that the member is supposed to lose program benefits and be given top priority for a validation. In addition, CBP officials told us that an importer that failed CBP’s vetting process would also be given top priority for a validation. CBP officials have taken this approach because any importer that fails the vetting process is not supposed to receive program benefits until after successful completion of the validation process. As we reported, CBP continues to expand the C-TPAT program without addressing management weaknesses that could hinder the bureau from achieving the program’s dual goals of securing the flow of goods bound for the United States and facilitating the flow of trade. First, we reported that CBP is still developing an implementation plan to address the strategies for carrying out the program’s goals and those elements required in a human capital plan. For example, CBP said it has developed new positions, training programs and materials, and a staffing plan. Further, CBP said it will continue to refine all aspects of the C-TPAT human capital plan to include headquarters personnel, additional training requirements, budget, and future personnel profiles. Second, we reported that CBP continues developing a comprehensive set of performance measures and indicators for C-TPAT. According to CBP, developing these measures for C-TPAT, as well as other programs in the bureau, has been difficult because CBP lacks data necessary to exhibit whether a program has prevented or deterred terrorist activity. For example, as noted in the C-TPAT strategic plan, it is difficult to measure program effectiveness in terms of deterrence because generally the direct impact on unlawful activity is unknown. The plan also notes that while traditional workload measures are a valuable indicator, they do not necessarily reflect the success or failure of the bureau’s efforts. CBP is working to collect more substantive information—related to C-TPAT activities (i.e., current workflow process)—to develop its performance measures. In commenting on a draft of our report, CBP indicated it has developed initial measures for the program but will continue to develop and refine these measures to ensure program success. Third, we reported that CBP’s record keeping for the program is incomplete, as key decisions are not always documented and programmatic information is not updated regularly or accurately. Federal regulations require that bureau record-keeping procedures provide documentation to facilitate review by Congress and other authorized agencies of government. Further, standards for internal control in the federal government require that all transactions be clearly documented in a manner that is complete, accurate, and useful to managers and others involved in evaluating operations. During our review of six company files for which validations had been completed, it was not always clear what facet of the security profile was being validated and why a particular site was selected at which to conduct the validation because there was not always documentation of the decision-making process. The aspects of the security profiles covered and sites visited did not always appear to be the most relevant. For example, one validation report we reviewed for a major retailer—one that imports the vast majority of its goods from Asia— indicated that the validation team reviewed facilities in Central America. CBP officials noted that it recently revised its validation report format to better capture any justification for report recommendations and best practices identified. After reviewing eight of the more recent validation reports, we noted that there appeared to be a greater discussion related to the rationale for validating specific aspects of the security profiles. However, the related company files did not consistently contain other documentation of members’ application, certification, vetting, receipt of benefits, or validation. While files contained some of these elements, they were generally not complete. In fact, most files did not usually contain anything other than copies of the member’s C-TPAT agreement, security profiles, and validation report. Further, we reported that CBP does not update programmatic information regularly or accurately. In particular, the reliability of CBP’s database to track member status using key dates in the application through validation processes is questionable. The database, which is primarily used for documentation management and workflow tracking, is not updated on a regular basis. In addition, C-TPAT management told us that earlier data entered into the database may not be accurate, and CBP has taken no systematic look at the reliability of the database. CBP officials also told us that there are no written guidelines for who should enter information into the database or how frequently the database should be updated. We made several requests over a period of weeks to review the contents of the database to analyze workload factors, including the amount of time that each step in the C-TPAT application and review process was taking. The database information that CBP ultimately provided to us was incomplete, as many of the data fields were missing or inaccurate. For example, more than 33 percent of the entries for validation date were incomplete. In addition, data on the status of companies undergoing the validation process was provided in hard copy only and included no date information. CBP officials told us that they are currently exploring other data management systems, working to develop a new, single database that would capture pertinent data, as well as developing a paperless environment for the program. Our C-TPAT report recommended that the Secretary of Homeland Security direct the Commissioner of U.S. Customs and Border Protection to take the following five actions: strengthen the validation process by providing appropriate guidance to specialists conducting validations, including what level of review is adequate to determine whether member security practices are reliable, accurate, and effective; determine the extent (in terms of numbers or percentage) to which members should be validated in lieu of the original goal to validate all members within 3 years of certification; complete the development of performance measures, to include outcome-based measures and performance targets, to track the program’s status in meeting its strategic goals; complete a human capital plan that clearly describes how the C-TPAT program will recruit, train, and retain sufficient staff to successfully conduct the work of the program, including reviewing security profiles, vetting, and conducting validations to mitigate program risk; and implement a records management system that accurately and timely documents key decisions and significant operational events, including a reliable system for (1) documenting and maintaining records of all decisions in the application through validation processes, including but not limited to documentation of the objectives, scope, methodologies, and limitations of validations, and (2) tracking member status. In commenting on a draft of the report, CBP generally agreed with our recommendations and outlined actions it either had taken or was planning to take to implement them. After our work was completed, CBP issued new security criteria for C- TPAT importers. Although we have not assessed the new criteria in detail, the new criteria appear to better define the minimum security expectations of importers participating in the C-TPAT program than the prior security guidelines. For example, under the prior security guidelines, all importers were to secure containers’ internal and external compartments and panels. Under the new security criteria, importers are to explicitly require all containers bound for the United States to have high-security seals affixed to them. In addition, the new criteria appear to place a greater emphasis on security procedures throughout importers’ supply chains than the prior guidelines. Specifically, the new criteria state that importers must have written and verifiable processes for the selection of business partners, as well as documentation of whether these business partners are either C-TPAT certified or meet the C-TPAT security criteria—requirements not found in the prior security guidelines. However, the new security criteria do not address our recommendations for improving the program and may place an even greater emphasis on the need to strengthen the validation process. According to the new criteria, importers wishing to join the C-TPAT program must submit security profiles that address the new criteria as part of the certification process. But importers who are already C-TPAT members are not required to provide any written certification that they meet the new security criteria and will not have to resubmit their security profiles. Instead, CBP will use validations to gauge whether or not these members have adopted the new security criteria. This places a greater emphasis on the need for CBP to establish guidelines for what constitutes a validation and the extent to which it must conduct validations to ensure that the C-TPAT program is consistent with its overall approach to managing risk. My statement will now focus on the results of our work on the CSI program. In our CSI report, we noted that CBP officials told us the CSI program has produced factors that contribute to CBP’s ability to target shipments at overseas seaports, including improved information sharing between the CSI teams and host government officials regarding U.S.-bound shipments and a heightened level of bilateral cooperation on and international awareness of the need for securing the global shipping system. However, we found factors that may limit the program’s effectiveness at some ports, including (1) staffing imbalances at CSI ports and (2) weaknesses in one source of data CBP relies upon to target shipments. As we reported, one factor negatively affecting CBP’s ability to target containers is staffing imbalances across ports. Although CBP’s goal is to target all U.S.-bound containers at CSI ports before they depart for the United States, it has not been able to place enough staff at some CSI ports to do so. As a result of these imbalances, 35 percent of U.S.-bound shipments from CSI ports were not targeted and were therefore not subject to inspection overseas—the key goal of the CSI program. CBP has been unable to staff the CSI teams at the levels called for in the CSI staffing model because of diplomatic and practical considerations. However, CBP’s staffing model for CSI does not consider whether some of the targeting functions could be performed in the United States. For example, the model does not consider what minimum number of targeters need to be physically located at CSI ports to carry out duties that require an overseas presence (such as coordinating with host government officials) as opposed to other duties that could be performed in the United States (such as reviewing manifests and databases). CBP has placed targeters at its National Targeting Center to assist CSI teams in targeting containers for inspection, which demonstrates that CBP does not have to rely exclusively on overseas targeters as called for in its staffing model. Further, we reported the existence of limitations in one data source CSI teams use for targeting high-risk containers. For CSI, CBP uses manifest information as one data source to help characterize the risk level of U.S.- bound shipments, information that may be unreliable and incomplete. Although CBP officials told us that the quality of the manifest data has improved, there is no method to routinely verify whether the manifest data accurately reflect the contents within the cargo container. As we reported, since the implementation of CSI through September 11, 2004, 28 percent (4,013) of containers referred to host government officials for inspection were not inspected for a variety of reasons including operational limitations that prevented the containers from being inspected before they left the port. In 1 percent of these cases, host government officials denied inspections, generally because inspection requests were based on factors not related to security threats, such as drug smuggling. Containers referred to host governments for inspection by CSI teams that are not inspected overseas are supposed to be referred for inspection upon arrival at the U.S. destination port. CBP officials noted that between July 2004 and September 2004, about 93 percent of shipments referred for domestic inspection were inspected at a U.S. port. CBP officials explained that some of these shipments were not inspected domestically because inspectors at U.S. ports received additional information or entry information that lowered the risk characterization of the shipments or because the shipments remained aboard the carrier and were never offloaded at a U.S. port. Further, we reported that for the 72 percent (10,343) of containers that were inspected overseas, CBP officials told us there were some anomalies that led to law enforcement actions but that no WMD were discovered. There are two types of radiation detection devices used at CSI ports to inspect cargo containers—radiation isotope identifier devices and radiation portal monitors—as well as various types of X-ray and gamma- ray imaging machines used at CSI ports to inspect cargo containers, each with different detection and identification capabilities. However, the inspection equipment used at CSI ports varies in detection capability, and there are no minimum requirements for the detection capability of equipment used for CSI. In addition, technologies to detect other WMD have limitations. As a result, CBP has no absolute assurance that inspections conducted under CSI are effective at detecting and identifying WMD. According to CBP officials, the bureau has not established minimum technical requirements for the nonintrusive inspection equipment or radiation detection equipment that can be used as part of CSI because of sovereignty issues, as well as restrictions that prevent CBP from endorsing a particular brand of equipment. Although CBP cannot endorse a particular brand of equipment, the bureau could still establish general technical capability requirements for any equipment used under CSI similar to other general requirements CBP has for the program, such as the country committing to establishing an automated risk management system. Because the CSI inspection could be the only inspection of a container before it enters the interior of the United States, it is important that the nonintrusive inspection and radiation detection equipment used as part of CSI provides some level of assurance of the likelihood that the equipment could detect the presence of WMD. As we reported, CBP has made some improvements in the management of CSI, but further refinements to the bureau’s management tools are needed to help achieve program goals. Regarding a strategic plan for CSI, CBP developed a strategic plan in February 2004 that contained three of the six key elements the Government Performance and Results Act (GPRA) required for executive agency strategic plans but lacked (1) a description of how performance goals and measures are related to the general goals and objectives of the program, (2) an identification of key factors external to the agency and beyond its control that could affect the achievement of general goals and objectives, and (3) a description of program evaluations. We also reported that CBP told us it was revising the CSI strategic plan to address the elements we raised in the report. We noted that it appeared that the bureau’s initial efforts in this area met the intent of our prior recommendation to develop a strategic plan for CSI, but we could not determine the effectiveness of further revisions to the plan without first reviewing and evaluating them. Further, we recommended in our July 2003 report that CBP expand efforts already initiated to develop performance measures for CSI that include outcome-oriented indicators. Until recently, CBP based the performance of CSI on program outputs such as (1) the number and percentage of bills of lading reviewed, further researched, referred for inspection, and actually inspected, and (2) the number of countries and ports participating in CSI. CBP has developed 11 performance indicators for CSI, 2 of which it identified as outcome-oriented: (1) the number of foreign mitigated examinations and (2) the percentage of worldwide U.S.-destined containers processed through CSI ports. However, CSI lacks performance goals and measures for other program objectives. In commenting on a draft of our April 2005 report, DHS noted that CBP is continuing to refine existing performance measures and develop new performance measures for its program goals. For example, CBP was developing a cost efficiency measure to measure the cost of work at a port and to contribute to staffing decisions. Our CSI report recommended that the Secretary of Homeland Security direct the Commissioner of U.S. Customs and Border Protection to take the following three actions: revise the CSI staffing model to consider (1) what functions need to be performed at CSI ports and what functions can be performed in the United States, (2) the optimum levels of staff needed at CSI ports to maximize the benefits of targeting and inspection activities in conjunction with host nation customs officials, and (3) the cost of locating targeters overseas at CSI ports instead of in the United States; establish minimum technical requirements for the capabilities of nonintrusive inspection equipment at CSI ports, to include imaging and radiation detection devices, that help ensure that all equipment used can detect WMD, while considering the need not to endorse certain companies and sovereignty issues with participating countries; and develop performance measures that include outcome-based measures and performance targets (or proxies as appropriate) to track the program’s progress in meeting all of its objectives. In commenting on a draft of the report, DHS generally agreed with our recommendations and outlined actions CBP either had taken or was planning to take to implement them. This concludes my statement. I would now be happy to answer any questions for the subcommittee. For further information about this testimony, please contact me at (202) 512-8816. Stephen L. Caldwell, Deena D. Richart, and Kathryn E. Godfrey also made key contributions to this statement. Maritime Security: Enhancements Made, But Implementation and Sustainability Remain Key Challenges. GAO-05-448T (Washington, D.C.: May 17, 2005). Container Security: A Flexible Staffing Model and Minimum Equipment Requirements Would Improve Overseas Targeting and Inspection Efforts. GAO-05-557 (Washington, D.C.: April 26, 2005). Maritime Security: New Structures Have Improved Information Sharing, but Security Clearance Processing Requires Further Attention. GAO-05-394 (Washington, D.C.: April 15, 2005). Preventing Nuclear Smuggling: DOE Has Made Limited Progress in Installing Radiation Detection Equipment at Highest Priority Foreign Seaports. GAO-05-375 (Washington, D.C.: March 31, 2005). Cargo Security: Partnership Program Grants Importers Reduced Scrutiny with Limited Assurance of Improved Security. GAO-05-404 (Washington, D.C.: March 11, 2005). Homeland Security: Process for Reporting Lessons Learned from Seaport Exercises Needs Further Attention. GAO-05-170 (Washington, D.C.: January 14, 2005). Port Security: Planning Needed to Develop and Operate Maritime Worker Identification Card Program. GAO-05-106 (Washington, D.C.: December 10, 2004). Maritime Security: Better Planning Needed to Help Ensure an Effective Port Security Assessment Program. GAO-04-1062 (Washington, D.C.: September 30, 2004). Maritime Security: Substantial Work Remains to Translate New Planning Requirements into Effective Port Security. GAO-04-838 (Washington, D.C.: June 30, 2004). Border Security: Agencies Need to Better Coordinate Their Strategies and Operations on Federal Lands. GAO-04-590 (Washington, D.C.: June 16, 2004). Homeland Security: Summary of Challenges Faced in Targeting Oceangoing Cargo Containers for Inspection. GAO-04-557T (Washington, D.C.: March 31, 2004). Rail Security: Some Actions Taken to Enhance Passenger and Freight Rail Security, but Significant Challenges Remain. GAO-04-598T (Washington, D.C.: March 23, 2004). Department of Homeland Security, Bureau of Customs and Border Protection: Required Advance Electronic Presentation of Cargo Information. GAO-04-319R (Washington, D.C.: December 18, 2003). Homeland Security: Preliminary Observations on Efforts to Target Security Inspections of Cargo Containers. GAO-04-325T (Washington, D.C.: December 16, 2003). Posthearing Questions Related to Aviation and Port Security. GAO-04-315R (Washington, D.C.: December 12, 2003). Homeland Security: Risks Facing Key Border and Transportation Security Program Need to Be Addressed. GAO-03-1083 (Washington, D.C.: September 19, 2003). Maritime Security: Progress Made in Implementing Maritime Transportation Security Act, but Concerns Remain. GAO-03-1155T (Washington, D.C.: September 9, 2003). Container Security: Expansion of Key Customs Programs Will Require Greater Attention to Critical Success Factors. GAO-03-770 (Washington, D.C.: July 25, 2003). Homeland Security: Challenges Facing the Department of Homeland Security in Balancing Its Border Security and Trade Facilitation Missions. GAO-03-902T (Washington, D.C.: June 16, 2003). Transportation Security: Federal Action Needed to Help Address Security Challenges. GAO-03-843 (Washington, D.C.: June 30, 2003). Transportation Security: Post-September 11th Initiatives and Long- Term Challenges. GAO-03-616T (Washington, D.C.: April 1, 2003). Border Security: Challenges in Implementing Border Technology. GAO-03-546T (Washington, D.C.: March 12, 2003). Customs Service: Acquisition and Deployment of Radiation Detection Equipment. GAO-03-235T (Washington, D.C.: October 17, 2002). Port Security: Nation Faces Formidable Challenges in Making New Initiatives Successful. GAO-02-993T (Washington, D.C.: August 5, 2002). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | U.S. Customs and Border Protection (CBP) has in place two programs to help address the threat posed by terrorists smuggling weapons of mass destruction (WMD) into the United States: the Customs-Trade Partnership Against Terrorism (C-TPAT) and the Container Security Initiative (CSI). In July 2003, GAO reported that these programs had management challenges that limited their effectiveness. Given plans to expand both programs, in two recently issued reports GAO examined selected aspects of both programs' operations. This statement is a summary of those publicly available reports. In return for committing to making improvements to the security of their shipments, C-TPAT members receive a range of benefits that may change the risk characterization of their shipments, thereby reducing the probability of extensive inspection. Before providing benefits, CBP reviews the self-reported information contained in applicants' membership agreements and security profiles. Also, CBP assesses the compliance history of importers before granting them benefits. However, CBP grants benefits before members undergo the validation process, which is CBP's method to verify that their security measures are reliable, accurate, and effective. Although CBP's goal was to validate members within 3 years, to date it has validated 11 percent of them. Further, the validation process is not rigorous, as the objectives, scope, and methodology of validations are jointly agreed upon with the member, and CBP has no written guidelines to indicate what scope of effort is adequate for the validation. Also, although CBP has recently moved to a risk-based approach to selecting members for validation, it has not determined the number and types of validations that are needed to manage security risks or the CBP staff required to complete them. Further, CBP has not developed a comprehensive set of performance measures for the program, and key program decisions are not always documented and programmatic information is not updated regularly or accurately. The CSI program is designed to target and inspect high-risk cargo containers at foreign ports before they leave for the United States. It has resulted in improved information sharing between U.S. and foreign customs operations and a heightened level of international awareness regarding securing the global shipping system. Yet, several factors limit CBP's ability to successfully target containers to determine if they are high-risk. One factor is staffing imbalances, caused by political and practical considerations, which impede CBP's targeting efforts at CSI ports. As a result, 35 percent of U.S.-bound shipments from CSI ports were not targeted and not subject to inspection overseas--the key goal of the CSI program. In addition, as of September 11, 2004, 28 percent of the containers referred to host governments for inspection were not inspected overseas for various reasons such as operational limitations. One percent of these referrals were denied by host government officials, generally because they believed the referrals were based on factors not related to security threats. For the 72 percent of referred containers that were inspected overseas, CBP officials told us that no WMD were discovered. However, the nonintrusive inspection equipment used at CSI ports varies in detection capability, and there are no minimum technical requirements for equipment used as part of CSI. As a result, CBP has limited assurance that inspections conducted under CSI are effective at detecting and identifying terrorist WMD in containers. Finally, CBP continues to make refinements to the strategic plan and performance measures needed to help manage the program and achieve program goals. Until these refinements are completed, it will be difficult to assess progress made in CSI operations. |
Justice is headed by the Attorney General of the United States. Along with INS, which controls the border and provides services to lawful immigrants, Justice’s other major components include the U.S. attorneys, who prosecute federal offenders and represent the United States in court; the Federal Bureau of Investigation (FBI) and the Drug Enforcement Administration, which gather intelligence, investigate crimes, and arrest criminal suspects; the U.S. Marshals Service, which protects the federal judiciary, apprehends fugitives, and detains persons in federal custody; the Bureau of Prisons, which confines convicted offenders; and the Office of Justice Programs and the Office of Community Oriented Policing Services, which provide grants and other assistance to state and local governments and community groups to support criminal and juvenile justice improvements. To fulfill its diverse missions, the department employs more than 130,000 persons located across the country and overseas. Its field locations range from one- or two-person Border Patrol stations in sparsely populated regions to large offices in major metropolitan cities. IT plays a vital role in Justice’s ability to fulfill its missions, including its important role in protecting Americans against the threat of terrorism. For example, Justice reports that it has about 250 IT systems, ranging from asset control and financial management systems to automated fingerprint identification and criminal case management systems. In fiscal year 2002, Justice reportedly invested about $2.1 billion in IT, and it plans to invest about the same amount in fiscal year 2003. IT management responsibility within Justice is vested with the CIO. The CIO’s responsibilities include overseeing the department’s IT investments, with particular focus on major systems and investments that span more than one Justice bureau. The CIO is also responsible for overseeing the IT investments and IT management processes of Justice component agencies, such as INS. The mission of INS is twofold: immigration enforcement (enforcing laws regarding illegal immigration) and immigration services (providing immigration and naturalization services for aliens who enter and reside legally in the United States). INS’s enforcement mission includes conducting inspections of persons entering the United States, detecting and preventing smuggling and illegal entry, and identifying and removing illegal entrants. INS’s immigration mission includes granting legal permanent residence status, nonimmigrant status (e.g., students and tourists), and naturalization. IT plays a significant role in INS’s ability to carry out its responsibilities. Examples of key IT systems that were the focus of our review are described in the next section. Other examples include the Deportable Alien Control System, which is intended to automate many of the functions associated with tracking the location and status of illegal aliens in removal proceedings, including detention status; the Integrated Surveillance Intelligence System, which is to provide “24-7” border coverage through ground-based sensors, fixed cameras, and computer-aided detection capabilities; and the Computer-Linked Application Information Management System 4, which is a centralized case management tracking system intended to support a variety of tasks associated with processing and adjudicating naturalization benefits. INS’s IT portfolio includes 107 systems, including 11 major systems. In fiscal years 2001 and 2002, respectively, INS reportedly invested about $297 million and $459 million in IT-related activities, and in fiscal year 2003, it plans to invest about $494 million. Four of INS’s 107 key systems are the Automated I-94 System, the Enforcement Case Tracking System, the Automated Biometric Identification System, and the Integrated Card Production System. Each of these systems has been in development and/or operation and maintenance for at least the last 5 years. INS reported that it has invested about $207 million through fiscal year 2001 in these systems. Each of these systems has an estimated total life-cycle cost exceeding $50 million, and they are therefore considered major investments, according to Justice guidance. Below is a brief description of each system. Appendix II describes the technical architectures for the Enforcement Case Tracking System, the Automated Biometric Identification System, and the Integrated Card Production System (we do not include the architecture for the Automated I-94 System because it has recently been retired). The I-94 is the paper form that INS uses to capture nonimmigrant data at air, land, or sea ports of entry. In 1995, INS began automating its I-94 process to address concerns about the reliability of the data collected on this form. About this same time, Congress passed the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, which directed the Attorney General to develop an automated entry/exit control system to collect records of arrival and departure from every alien entering and leaving the United States. Because the main source of information on individuals entering and leaving the United States was the Form I-94, INS planned to meet the 1996 act’s requirements with the Automated I-94 System. INS introduced the Automated I-94 System in 1997 as a pilot at the Philadelphia international airport and later at the Pittsburgh, Charlotte, and St. Louis international airports. It captured Form I-94 arrival and departure data electronically at these airports and transmitted them to INS’s Nonimmigrant Information System. INS planned to implement the Automated I-94 System at 17 airports in fiscal year 2002 and 18 additional airports in fiscal year 2003. INS also planned to eventually deploy the system to all air, land, and sea ports of entry. However, in August 2001, the Justice IG concluded that INS had not adequately managed the Automated I-94 project and did not know if the system was meeting its intended goals. The IG reported that INS had not (1) established measurable objectives to determine whether the system is achieving its goals, (2) established baseline data against which to measure progress, or (3) developed a cost-benefit analysis to know if investment in the system was justified. Subsequently, INS concluded that the Automated I-94 System did not effectively meet its current mission needs, and it retired the system in February 2002. According to INS, it had invested about $31.4 million in the Automated I-94 System through February 2002, including $200,000 to retire it. The Enforcement Case Tracking System (ENFORCE) currently consists of a single module, the ENFORCE Apprehension Booking Module, which supports INS’s apprehension and booking process for illegal aliens. This module is supported by the Enforcement Integrated Database, which also stores biometric data obtained through the Automated Biometric Identification System (discussed below). ENFORCE is intended to be an integrated system that supports all INS enforcement case processing and management functions. INS plans to use it to manage data on individuals, entities, and investigative cases, and to support enforcement case processing. INS plans provide for three additional modules, which are also to be supported by the Enforcement Integrated Database. Table 1 summarizes these ENFORCE components. ENFORCE is also to interface to non-INS databases, such as the FBI’s National Crime Information Center and other external sources of intelligence information. It may also interface with other INS databases, such as the National Automated Inspections Lookout System and INS benefit systems, such as the Computer-Linked Application Information Management System and the Refugee, Asylum, and Parole System. According to INS, it has invested about $47 million in ENFORCE through fiscal year 2001. The Automated Biometric Identification System (IDENT) is a biometric identification system designed to quickly screen aliens encountered by INS using biometric or other unique identification data and to verify and authenticate asylum benefit applicants. IDENT collects two fingerprints, a photograph, and biographical data on aliens and compares these fingerprints to two databases. These databases include (1) a “lookout” database that contains fingerprints and photographs of aliens who have been previously deported by INS or who have a significant criminal history and (2) a recidivist database that contains fingerprints and photographs of over a million illegal aliens who have been apprehended by INS. IDENT can be deployed as a stand-alone system or it can be deployed along with the ENFORCE system (discussed above) to provide biometric identification support for INS enforcement activities. IDENT was deployed in 1994 and is presently operational (about 1,908 IDENT and IDENT/ENFORCE workstations are currently deployed at border patrol locations, ports of entry, district offices, and asylum offices). According to INS, it has invested about $103 million in IDENT through fiscal year 2001. INS currently is investing in two major IDENT initiatives. The first is the IDENT/IAFIS program, a major Justice initiative, intended to integrate IDENT data and capabilities into the FBI’s Integrated Automated Fingerprint Identification System (IAFIS). IAFIS is an automated 10- fingerprint matching system based on rolled fingerprints, whereas IDENT collects sets of 2 flat pressed prints. IAFIS contains criminal histories of over 42 million arrestees and a database of digitized fingerprint images from people in its Criminal Master File. It accepts both electronic and paper card submissions from INS, representing criminal and civil subjects. According to INS, Justice has invested about $12 million in the IDENT/IAFIS integration through fiscal year 2001. The second initiative is the Information Technology Dissemination Plan, which is an initiative to train INS personnel on the operational use of the ENFORCE/IDENT systems and to coordinate the deployment of the IDENT equipment with the delivery of the training. According to INS, it has invested about $5 million in the plan in fiscal year 2002. The Integrated Card Production System (ICPS) produces three types of cards: the Employment Authorization Document, which proves that a person is allowed to work in the United States; the Permanent Resident Card, commonly known as a Green Card, which documents a person’s status as a lawful permanent resident with a right to live and work permanently in the United States; and the Laser Visa/Border Crossing Card, which allows certain Mexican nationals entrance into the United States. Requests for production of these cards are processed and routed to one of six ICPS printer devices operating at three different sites in the United States (in Kentucky, Nebraska, and Vermont). In fiscal year 2000, INS augmented its employment authorization card production capability by contracting for servicing from a private firm at the Kentucky site. The ICPS equipment was acquired in 1996, and the system was deployed in 1998. According to INS, it has invested $25 million in ICPS through fiscal year 2001. We and the Justice IG have issued a series of reports citing deficiencies in INS’s IT management and performance. For example, in August 2000, we reported that INS did not have an enterprise architecture to manage its IT efforts effectively and efficiently or the fundamental management structures and processes needed to effectively develop one, and we made recommendations to address these weaknesses. Since then, INS has made progress implementing our recommendations. For example, it has established architecture management structures, it has drafted architecture products detailing both its current and its target architectures, and it has plans for completing and using these products. In December 2000, we also reported that INS lacked defined and disciplined processes to select, control, and evaluate its IT investments, and as a result, it did not know whether these investments would produce value commensurate with costs and risks or whether each investment was meeting its cost, schedule, and performance commitments. To address these weaknesses, we made a series of recommendations, and INS has since taken steps to implement them. For example, it has (1) developed policies and procedures for implementing its investment management process and (2) established selection criteria for assessing the relative merits of each IT investment that address cost, schedule, benefits, and risk. In addition, the Justice IG reported in July 1999 that estimated completion dates for some IT projects had been delayed without explanation, project costs had increased with no justification for how funds are spent, and projects were nearing completion with no assurance that they would meet performance and functional requirements. Further, in March 2000, the IG reported on weaknesses in the design and implementation of INS’s IDENT system, including that IDENT was not linked with other INS or criminal databases (such as the FBI’s IAFIS database) and that INS had failed to effectively train INS personnel on using IDENT. Since then, INS has been working with the FBI to integrate IDENT and IAFIS, and to coordinate the deployment of the IDENT equipment with the delivery of user training. Later, in August 2001, the IG reported that although INS had spent $31.2 million to develop and deploy the Automated I-94 System, INS had not (1) established measurable objectives to determine whether the system is achieving its goals, (2) established baseline data against which to measure progress, or (3) developed a cost-benefit analysis to justify investment in the system. According to federal requirements and guidance, departments are responsible for ensuring that IT investments are being implemented at acceptable costs and within reasonable and expected time frames and that they are contributing to observable improvements in mission performance. While such departmental oversight is vital for all component agency IT investments, it is particularly important for agencies that have been challenged in their ability to manage these investments. However, Justice has not established an effective process for overseeing its component agency IT investments, and for the four key INS system investments that we reviewed, it has not ensured that INS satisfied approved cost, schedule, and performance investment commitments. According to Justice officials, doing so has not been a high enough priority to warrant allocation of the necessary oversight resources. Further, Justice officials stated that INS has not consistently been able to provide the project data necessary to effectively measure investments’ progress. Unless it can measure its component agencies’ progress against project commitments and take appropriate actions to address significant deviations, Justice increases the risk of investing millions of dollars in IT projects that do not perform as intended, improve mission performance, or meet cost and schedule goals. Justice recognizes this and has plans to strengthen oversight of its subsidiary agencies’ IT investments. Congress and the Office of Management and Budget (OMB) recognize the need for federal agencies to implement effective oversight processes to help ensure that IT investments meet expected cost, schedule, and performance commitments. Together, the Clinger-Cohen Act of 1996 and OMB Circular A-130 require that federal departments establish oversight processes to periodically review and monitor actual performance against expected cost, schedule, and performance commitments. Such processes provide visibility into the investments’ actual progress and allow management to take appropriate actions when performance deviates significantly from the approved commitments. Leading private and public sector organizations’ IT investment oversight processes generally include, among other things, (1) a written policy that establishes the organization’s commitment to monitoring performance against approved commitments and taking corrective actions when actual performance deviates significantly from these commitments; (2) clearly defined roles and responsibilities for implementing the policy; (3) documented procedures defining the process steps and controls for implementing the policy; (4) adequate resources (e.g., skills, training, funding, and tools) for implementing the detailed process; and (5) established measures to ensure adherence to the process and to identify opportunities for improving it. Justice has satisfied two of these five elements of an effective oversight process. First, Justice has issued policies addressing its commitment to monitoring performance against approved commitments. Second, Justice has defined high-level roles and responsibilities for doing so. Specifically, Justice’s Information Resources Management policy, dated March 2001, requires the CIO to perform oversight of components’ IT investments through the annual budget process, technical assessments, and regularly scheduled component briefings of IT investments. In addition, Justice’s IT investment management process guide, dated August 2001, states that the CIO and staff are responsible for monitoring components’ major IT investments, and requires that Justice components report, on a quarterly basis, progress against approved investment baselines (technical, cost, and schedule), including deviations from established cost and schedule commitments of 10 percent or greater. However, Justice has not yet (1) established specific procedures and controls for implementing its policies or (2) allocated human capital (both in terms of numbers or expertise) for overseeing components’ IT investments. For example, Justice officials stated that only one staff member is dedicated to overseeing INS’s IT investment portfolio, which includes 107 IT systems, and this staff member also oversees other Justice components’ IT investments. Additionally, since Justice has not established oversight procedures, it has also not established measures to assess the performance of its oversight process and identify potential improvements, another key element of effective oversight practiced by successful organizations. Without an effective process for overseeing its component agency IT investments, Justice is not positioned to exercise effective oversight, and thus is limited in its ability to take timely action and reduce the chances that these investments do not perform as intended and cost more and take longer than planned. Justice and INS guidance states that baseline cost, schedule, performance, and benefit commitments should be developed, documented, and kept current and that progress against these commitments should be measured. This guidance is consistent with the elements of effective oversight practiced by successful organizations. In effect, Justice and INS recognize that baseline investment information is vital to Justice’s ability to oversee progress and performance in delivering promised system capabilities and value, on time and within budget. For the four key IT investments that we reviewed, Justice has not followed its own guidance and measured progress against approved cost, schedule, performance, and benefit commitments. Furthermore, Justice officials stated that their current oversight activities are not focused on monitoring such progress. Rather, these officials described their oversight of INS’s IT investments as consisting of (1) reviewing INS’s annual IT budget submissions, (2) reviewing INS’s annual budget submissions for its major systems, (3) attending INS’s Executive Steering Committee meetings, (4) holding ad hoc meetings with INS project staff, and (5) conducting quarterly reviews of the progress in executing approved annual budget allocations. According to these officials, these oversight activities do not address progress against project commitments, such as delivery of expected benefits and promised system functionality and performance. Our review of available Justice documentation associated with these oversight activities confirmed this, including our review of quarterly progress reports and progress review minutes. According to Justice officials, they do not monitor the progress of INS IT investments against project commitments because doing so has not been a high enough priority to justify adequate oversight resources and because INS does not have up-to-date baseline and project data available to permit such oversight. We confirmed that INS does not have the kind of meaningful project data that would allow the measurement of progress against commitments. For the four IT investments, INS could not provide us with information needed to measure the progress of the four INS investments against commitments, such as projects plans with current baseline cost and schedule data, current cost/benefit analyses, and reports measuring progress against current baseline cost and schedule data and against expected benefits. According to INS officials who are responsible for ensuring that IT investments meet their commitments, INS has not monitored IT investments’ progress against established baseline commitments for cost, schedule, performance, and benefits. Our review of available project documentation verified this, showing that INS did not maintain complete and updated baseline cost and schedule data for the systems that we reviewed. In the case of IDENT, for example, INS did not update the project plan or cost/benefit analyses to reflect significant project scope changes that materially affected the project’s cost, schedule, performance, and benefits, such as not implementing IDENT at its Forensic Document Lab and Law Enforcement Support Center or integrating IDENT with certain existing systems. Similarly, in the case of the Automated I-94 System, the Justice IG reported that INS had not developed a project plan with cost and schedule data, and it had not established (1) measurable objectives to determine whether the system was meeting performance goals and (2) baseline data against which to measure progress. Justice’s new CIO stated that his recent assessment of Justice’s oversight activities is consistent with ours and he recognizes the need to improve IT oversight of all components, including INS. To this end, the CIO has outlined several strategic initiatives designed to strengthen the department’s management and oversight of its IT investments. Specifically, Justice intends to (1) develop process steps and procedures for managing investments in departmentwide IT projects; (2) implement a tool to improve its collection and oversight of component agency budget information and assist in overseeing these agencies’ IT investments; (3) develop a process to support the department in overseeing component agency IT investments so that they meet cost, schedule, and performance goals; and (4) identify and assess the skills, staffing, and other resources needed to conduct this oversight, among other things. These initiatives, if properly executed, could address the previously described three missing elements in Justice’s oversight process. However, these initiatives are currently goals and objectives rather than well-defined projects that are under way and being guided by detailed plans with measurable outputs and milestones. Moreover, assuming that these process changes are developed, they still need to be effectively implemented before needed oversight improvements, and the associated benefits, can be realized. Justice cannot effectively oversee what it cannot measure. In the case of INS’s IT investments, meaningful progress measurement has not occurred, and the result has been limited success in leveraging IT to improve mission performance and accountability. To Justice’s credit, it recognizes that it needs to strengthen its oversight of the IT investments made by its component agencies. To this end, it has initiatives planned that, if properly implemented, will go a long way to strengthen its oversight practices. A key to success in doing so will be for Justice leadership to treat IT investment oversight as a management priority and allocate sufficient resources to its performance. Given the department’s plans for investing heavily in IT, it is extremely important for Justice to ensure that establishing missing oversight controls and capabilities is treated as a priority, and that these are implemented effectively. To strengthen Justice’s oversight of its component agency IT investments, we recommend that the Attorney General direct the Justice CIO to ensure that oversight of IT investments is treated as a departmental priority, that initiatives intended to introduce missing oversight controls and capabilities are expeditiously planned and implemented, and that significant deviations from these oversight improvement initiative plans be reported to the Attorney General. Additionally, we recommend that the Attorney General direct the CIO to ensure that the oversight improvement initiatives provide for addressing the missing controls and capabilities discussed in this report, including having process steps and procedures for implementing the policy; devoting adequate resources (e.g., skills, training, funding, and tools) for implementing the process; and measuring process implementation and performance and identifying and implementing potential improvements. Further, in order to ensure that INS develops and collects the requisite data needed to measure IT project progress and performance and to perform departmental oversight, we recommend that the Attorney General direct the Commissioner of INS to ensure that INS adheres to existing agency system life cycle and investment requirements governing management of system cost, schedule, capability, and benefit parameters and expectations. In written comments on a draft of this report, Justice stated that it generally agreed with the substance of our report. Justice also mentioned its CIO’s initiatives to improve Justice’s oversight of its information technology projects, which are described in our draft report. In addition, Justice noted that INS is currently improving its processes and documentation related to baseline cost and schedule data, and it provided what it characterized as minor, technical comments, which are incorporated as appropriate throughout this report. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on the Judiciary; the Subcommittee on Immigration; the Senate Committee on Appropriations; the Subcommittee on Commerce, Justice, State, and the Judiciary; the House Committee on Appropriations; and the Subcommittee on Commerce, Justice, State, and Judiciary. We are also sending copies to the Attorney General, the Commissioner of the Immigration and Naturalization Service, and the Director of the Office of Management and Budget. Copies will be made available to others on request. In addition, this report will be available at no charge on our Web site at http://www.gao.gov. Should you or your staff have any questions on matters discussed in this report, please contact me at (202) 512-3439. I can also be reached by E-mail at [email protected]. Key contributors to this report were Michael Alexander, Barbara Collier, Deborah Davis, Neil Doherty, Neha Harnal, and Richard Hung. Our objective was to determine whether the Department of Justice (Justice) has effectively overseen four key Immigration and Naturalization Service (INS) information technology (IT) investments: the Automated I-94 System, the Enforcement Case Tracking System, the Automated Biometric Identification System, and the Integrated Card Production System. To address our objective, we evaluated Justice’s process for overseeing INS’s IT investments, determined adjustments Justice has made to its process in the last 2 years and its plans to improve the process, and assessed Justice’s application of its established process in overseeing each of the above systems. To evaluate Justice’s process for overseeing INS’s IT investments, we first analyzed relevant federal laws and guidance and leading public and private sector practices on IT management and oversight. Next, we assessed documentation on the process, procedures, and practices Justice used to oversee each of the four systems. To determine what INS project oversight data are reviewed and how oversight decisions are made, documented, and communicated to INS, we interviewed Justice officials, including officials of the Justice Management Division’s Information Management Security Staff and Budget Staff. We then compared Justice oversight process, policies, procedures, and practices with the federal laws, guidance, and leading practices, and we discussed any variances with cognizant Justice officials, including the Chief Information Officer. To determine what adjustments Justice has made to its oversight process for the last 2 years and its plans for further changes, we obtained and reviewed documentation addressing changes to Justice’s oversight process. We also discussed with Justice officials the changes and plans for changes to Justice’s oversight process, the reasons for changes, and how changes will improve Justice’s oversight. To determine whether Justice has followed its established process in overseeing the four systems, we first analyzed description and status data on each of them, including hardware platform elements (e.g., computers, servers, network connectivity, and communications) and software platform elements (e.g., operating system, database, and applications). We then obtained and reviewed Justice oversight documentation, including management decisions, annual IT budget submissions, budget submissions to the Office of Management and Budget and associated review comments, quarterly reviews, meeting minutes addressing Justice involvement with project activities, documentation on issues/concerns raised, and actions taken for each of the four systems. We also interviewed Justice Management Division officials to discuss the extent to which Justice follows its oversight process. We also determined the status of the four systems, including how INS measures progress against approved baseline cost, schedule, and performance commitments. To do so, we obtained and reviewed project data, such as project justification documents, project plans, requirements documentation, cost and benefit analyses, budget submissions, quarterly reports, status reports, and project meeting minutes. We also interviewed various INS officials involved with the projects, including portfolio managers, project mangers, and Information Resources Management staff to determine reported cost, schedule, and performance status information. To meet our reporting time frames, we were not able to independently verify reported status information in all cases. In cases where status information was not available or variances were found, we interviewed INS officials responsible for the project and Justice officials responsible for overseeing the projects. We conducted our work at Justice and INS headquarters in Washington, D.C., from March through September 2002 in accordance with generally accepted government auditing standards. We provide here architectural descriptions for the Enforcement Case Tracking System (ENFORCE), the Automated Biometric Identification System (IDENT), and the Integrated Card Production System (ICPS) (we do not include the architecture for the Automated I-94 System because it has recently been retired). These descriptions are based on INS-provided data and are technical in nature. ENFORCE, which is envisioned to eventually include four modules, currently consists of one module, the Enforce Apprehension Booking Module (EABM), as well as the Enforcement Integrated Database (EID). EABM supports the apprehension and booking process for illegal aliens; the data that it collects are maintained in EID. EID is the common database repository for several INS enforcement systems, including ENFORCE and IDENT; it defines all data elements that must be recorded during INS enforcement processing, and stores and manages these data. ENFORCE also receives biometric data (such as fingerprints and photographs) from the IDENT system (described next); these data are linked to the other information about an individual stored in EID. Currently, all ENFORCE workstations are integrated with IDENT. Figure 1 (pp. 24–25) is a simplified diagram of the ENFORCE system architecture. ENFORCE/IDENT workstation hardware includes a desktop or laptop computer running Windows 95 and various peripherals, including a LaserJet printer and IDENT-specific peripherals: camera to take digital photos and fingerprint scanner. Each ENFORCE/IDENT client workstation also includes a video capture board (a device that captures digital photos and fingerprints). Workstations are located at INS Border Patrol stations, ports of entry to the United States, district offices, and asylum offices in the United States and U.S. territories. The ENFORCE system hardware also includes two report servers, desktop PCs running Windows NT, which handle reporting requests from client workstations to EID and return completed reports to the client workstations. Each report server acts as a backup for the other. EID is housed on two high-capacity, centralized servers running Digital Unix. These two servers also act as backups for each other. ENFORCE is an Oracle database application implemented in a traditional client-server architecture. Servers and client workstations run Oracle, Visual C++, and embedded SQL for database access. EID is an Oracle database that stores INS enforcement data and provides the interfaces between ENFORCE and IDENT. (Most of the data exchanges between the ENFORCE and IDENT systems are accomplished through EID.) ENFORCE uses an enterprisewide private network that connects approximately 1,000 sites. The primary communications protocol is Transmission Control Protocol/Internet Protocol (TCP/IP). The ENFORCE application workstations on each INS local area network (LAN) connects to EID over the INS wide area network (WAN) through routers. (Remote-access dial-in capabilities are possible via the INS WAN). In addition, each LAN has a NetWare server for connectivity between workstations and peripherals. Information is passed around the LAN by Ethernet switches (at new sites) and hubs (at old sites). All external connections (including to other government agencies, private contractors, and local law enforcement offices) are controlled through firewalls that prevent unauthorized access to or from the network. IDENT is a two-fingerprint identification system to allow INS offices to identify criminal aliens and repeat offenders of U.S. Immigration law. IDENT captures biometric, photographic, and biographical data. IDENT’s basic function is to accept a pair of fingerprints, extract information from the prints, search the system’s databases for prior encounters, create a new record when there is no prior encounter, and identify the current immigration status of those people already in the database or report that a new record is being created. Like ENFORCE, IDENT is deployed to INS locations at Border Patrol stations, ports of entry, district offices, detention facilities, and asylum offices. At most sites, IDENT is integrated with ENFORCE’s apprehension booking module; there is also a stand-alone IDENT capability for sites without ENFORCE. (That is, the IDENT client may reside on the same PC as the ENFORCE client, or it may reside on a PC without ENFORCE.) Figure 2 (pp. 28–29) is a simplified diagram of the IDENT architecture. Each IDENT workstation (both stand-alone and ENFORCE/IDENT) includes the same hardware as described for the ENFORCE workstations: a desktop or laptop computer with a LaserJet printer, and IDENT-specific peripherals: camera to take digital photos and fingerprint scanner. Each IDENT workstation also includes a video capture board (a device that captures digital photos and fingerprints). The IDENT server application runs on a platform running the HP-UX operating system. EID is also part of the IDENT architecture: this database is housed on two high-capacity, centralized servers, running Digital Unix, which act as backups for each other. IDENT is a client-server system, made up of client components geographically dispersed at numerous field sites and server components at a central site. The client and support components are connected with the server components through INS’s WAN. IDENT can be integrated with ENFORCE or it can stand alone. IDENT is an Oracle database application that processes the following databases, which are integrated into EID: Recidivist Database: This database contains enrollment records of repeat IDENT enrollees. Lookout Database: This database contains alien criminal records and selected recidivist records. The IDENT application is implemented in C and C++, and it uses embedded SQL to access the database. IDENT uses proprietary biometric matchers. The database server is the same as that for ENFORCE. IDENT uses INS’s WAN as its primary telecommunications network. In addition, similar to ENFORCE, the IDENT application workstations on each INS LAN connect to EID over the INS WAN through routers. In addition, each LAN has a server for connectivity between workstations and peripherals. Information is passed around the LAN by Ethernet switches (at new sites) and hubs (at old sites). All external connections (including to other government agencies, private contractors, and local law enforcement offices) are controlled through firewalls that prevent unauthorized access to or from the network. The Integrated Card Production System (ICPS) consists of two main components: ICPS Print Services and the National Production Server (NPS). This system produces and prints three types of benefit cards: the optical Permanent Resident Card, the Employment Authorization Document, and the optical Laser Visa/Border Crossing Card. Depending on the card type, ICPS card production requests originate either at one of the five INS Service Centers in the United States or at the Department of State’s Consular Affairs office. The requests are first processed through either of two card production request systems: the INS’s Computer-linked Application Information Management System 3 (CLAIMS 3) system, which processes Permanent Resident Cards and Employment Authorization Documents, or the Department of State’s Consular Affairs System (DoSBCC),which processes Laser Visas/Border Crossing Cards. NPS then routes card production requests to any of six printer devices at three INS sites. (NPS also tracks card orders between the card production request systems and the printer devices.) Five of the printers are identical brand printers and can print any of the three types of ICPS cards. The sixth printer can print only the Employment Authorization Document. Figure 3 (pp. 34–35) is a simplified diagram of the ICPS system architecture. 6 Oracle Windows NT servers for the “Gateway” database (1 at each Service Center and 1 at the production facility), 1 Oracle Windows NT server for the NPS database, 11 Windows 95 client workstations for Print Services applications (2 at each Service Center and 1 at the production facility), and 6 printers. The DoSBCC system includes the following system hardware: one Windows NT server. The ICPS is a client-server-based architecture. The ICPS and NPS servers run on the Windows NT operating system, with the client workstations operating on Windows 95. The NPS and Gateway databases are relational databases using an Oracle database management system. ICPS Print Services consists of three Visual Basic executable components: CPR Loader: Extracts card production request data from CLAIMS 3 and inserts the data to the local Gateway database. Runs at all INS Service Centers. The executable files are 422 kilobytes (KB) in size. ProdReq Image Builder: Extracts images from printer Gateway databases to prepare them for use in printing. Runs only at printer sites. The executable files are 305 KB in size. Results Processor: Extracts card production results data from the Gateway database and updates CLAIMS 3. Runs at all INS Service Centers. The executable files are 271 KB in size. Additional software includes the following: ADO software (NPS and Service Centers): Middleware software used to communicate between Visual Basic and the Oracle database. Crystal Reports (NPS): Report generation software used to display data in the form of on-line reports via the NPS Web site. It is installed only on the INS Intranet Web server, not on any of the NPS servers. The primary communications protocol is TCP/IP, which is used for communication between the ICPS client and server through the INS LAN and WAN. The Gateway databases are connected to each other in a star configuration via database links across the INS WAN, allowing every database to communicate with every other database. This provides a path for card transfer in the event of a failure of the central NPS system. 6. The ICPS Results Processor extracts card production information from its local Gateway database and updates the CLAIMS 3 biographic server. Similarly, the BCC utilities program does the same for the DoSBCC database. 5. When the results come back into the database, the NPS sends the card production results to the appropriate Gateway database (service center or DoSBCC). 2. ProdReq Image Builder extracts biometric information from the printer Gateway database and converts it to files for the Central Manufacturing Executive (CME). 3. The CME software extracts the card production information from the printer Gateway database in preparation for printing the card. The CME software controls each of the assembly line devices involved in card production. Key: One directional information flow 4. After the card is printed, card production results are sent to the printer Gateway database and transferred to the central NPS database. The General Accounting Office, the investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to daily E-mail alert for newly released products” under the GAO Reports heading. | To help carry out its mission to protect the public from criminal activity, the Department of Justice invests about $2 billion annually in information technology (IT). In particular, the Immigration and Naturalization Service (INS), a Justice agency, invested about $459 million in IT in fiscal year 2002. GAO was asked to determine, for key INS IT system investments, whether Justice's oversight has been effective, ensuring that these systems deliver promised capabilities and benefits on time and within budget. Justice has not effectively overseen INS's investment in IT systems. A key indicator of oversight effectiveness is the quality of the process followed in conducting oversight. In this regard, successful public and private organizations ensure that such processes, at a minimum, provide for measuring progress against investment commitments--that is, project agreements defining what system capabilities and benefits will be delivered, by when, and at what cost. Justice does not yet have such an oversight process. Moreover, for four key INS IT investments that GAO was asked to review (see table), oversight activities that Justice has performed have not included measuring progress against approved cost, schedule, performance, and benefit commitments. As a result, Justice has not been positioned to take timely corrective action to address its component agencies' deviations from established investment commitments, and adequately ensure that promised capabilities are delivered on time and within budget. According to Justice officials, the department has not conducted this level of oversight because it has not given enough priority to the task, and because INS does not have the data that Justice would need to conduct such oversight. Justice recognizes the need to strengthen its oversight of component agencies' IT investments, and has plans to do so. Among these is an initiative to develop steps and procedures for overseeing component agency IT investments so that they meet cost, schedule, and performance goals. However, these initiatives have not progressed to the point that the department has detailed plans governing what will be done and when it will be done. Moreover, the process improvements that these initiatives are intended to put in place must still be implemented and followed before they will produce real benefits. |
Generic promotion and research programs funded through voluntary check-off contributions have existed at the local, state, and regional levels for more than 50 years. These programs were developed to expand the market for the agricultural products of a given industry. To facilitate better coordination across states, encourage equitable participation from all those who benefit from these programs, and create a larger funding base, agricultural industry groups began to seek federal legislative authority to establish mandatory national programs. The first federally authorized program was enacted in 1954, but the majority were created during the 1980s and 1990s. Of the 19 programs that have been authorized, 15 are currently active and 4 are inactive. Industry members who would pay the assessments must approve the creation of a check-off program in a referendum. Legislation for all check-off programs also provides industry members with an opportunity to terminate the program through a referendum. The U.S. Department of Agriculture (USDA), through its Agricultural Marketing Service (AMS), is responsible for (1) developing regulations to implement these check-off programs, in consultation with the affected industry, and (2) ensuring compliance with the authorizing legislation and the agency’s related orders. AMS reviews each board’s budgets, projects, and contracts to ensure that the board does not engage in prohibited activities, such as lobbying. Boards reimburse AMS for its oversight costs. Generally, USDA does not review the effectiveness of the programs. However, the legislation authorizing the Dairy Board requires the Secretary of Agriculture to submit an annual report to the Congress that includes an independent analysis of the Dairy Board’s effectiveness. In addition, USDA’s Foreign Agricultural Service requires evaluations of the check-off projects that receive funding from its Market Promotion Program. The six check-off programs vary organizationally and in the emphasis given to, and methods used to carry out, promotion and research activities. The programs we reviewed vary in the composition of their governing boards, methods used to assess industry members, and ways the programs are initiated and terminated. (See app. I for more detailed information on each board reviewed.) The authorizing legislation for each program specifies the composition of the check-off board. These boards vary by the groups represented—that is, producers, importers, and consumer advisers or public representatives—and by size. For example, the Beef Board has 101 producers and 6 importers on its board, and the Egg Board has 18 producers and their alternates. Board membership generally reflects a geographical mix of the producers assessed and can be changed administratively in some cases to reflect shifts in production. Some boards—Cotton, Egg, and Potato—are authorized to include consumer advisers or public representatives. Members of the boards are appointed for 2- or 3-year terms. The authorizing legislation for each program also sets an assessment level and specifies who in the industry should be assessed. However, these legislative provisions vary in the (1) methods used to calculate the assessment, (2) assessment of imports, (3) refunding of assessments, (4) process for revising assessment rates, (5) arrangements for giving credit to producers for contributions made to qualified state and regional check-off programs, and (6) methods for terminating the program. As table 1 shows, the six check-off boards we reviewed used several assessment methods. Smaller-volume producers are exempt from assessments for two of the six programs—egg and potato. The authorizing legislation for three of the check-off programs—beef, dairy, and soybean—gives credit to producers for contributions they make to qualified state or regional check-off programs. The Egg and Cotton boards have provided funds to state and regional groups, although they are not required to do so. Finally, three of the six programs we reviewed—beef, cotton, and potato—assess importers. In the past, many check-off programs allowed those who had been assessed but did not wish to participate in the program to request refunds of the assessment they had paid. However, most refund provisions have been eliminated. Of the six programs reviewed, only the soybean program continues to offer refunds of up to a maximum of 10 percent of the assessments collected from producers in each state. By statute, USDA must poll soybean producers to see if they want a referendum held to determine support for the refund policy. Such a poll is scheduled for July 1995. The check-off programs we reviewed also differ in their requirements for revising assessment rates. The programs with fixed rates—beef, dairy, and soybean—must have their rates revised by statutory amendment, while the other programs—cotton, eggs, and potatoes—can have their rates revised administratively within their statutory ceiling. For the egg program, any increase must be approved by referendum. All programs have termination provisions that enable producers voting in a referendum to terminate the program. The soybean program provides for periodically polling producers to determine whether they want to have a referendum on continuing the program. The dairy program is unique in that it allows dairy cooperatives to cast bloc votes for their members. However, members are given an opportunity to vote individually if they disagree with their cooperative’s position. Legislation was introduced in January 1995 in the Senate that would eliminate the dairy program’s bloc voting process because of concerns about whether it is fair and equitable. In addition, this proposed legislation would require that the Dairy Board periodically determine producers’ support for the program. No action has been taken to date on this legislation. The six boards vary considerably in the emphasis placed on, and methods used to carry out promotion (domestic and export), research, and consumer and industry information activities. (See apps. II and III for more information on the use of funds and the activities conducted by the six check-off boards.) Five of the six boards spent most of their fiscal year 1994 funds—ranging from about 56 percent for the Egg Board to 75 percent for the Potato Board—promoting agricultural products, principally in the domestic market. The Soybean Board does not promote products in the domestic retail market. However, it does provide information to domestic consumers on the use of soybean products. The boards relied on a mix of methods—television and radio advertising, print media, in-store promotions, and industry newsletters—to communicate their messages to various audiences. The boards also targeted their promotions to certain consumer or industry groups. The three major types of intended audiences were consumers, the food service industry (restaurants and institutions), and manufacturers. The boards also use different advertising methods for various target audiences. For example, the Beef, Cotton, Dairy, and Egg boards have devoted a considerable portion of their promotion budgets to television advertising campaigns intended to influence consumers. Additionally, the Egg Board has used radio tie-ins with major networks to deliver its national campaign message. Promotional efforts have included such campaigns as the Egg Board’s “I Love Eggs” and the Beef Board’s “Beef. It’s What’s For Dinner.” In contrast, the Potato Board’s 1993 consumer advertising concentrated on print advertisements in national magazines. The boards also differ in the emphasis they place on developing foreign markets; funding for export promotion activities ranged from less than 1 percent for the Egg Board to 29 percent for the Soybean Board. In addition, the boards have participated either directly or through related industry contractor organizations in the Foreign Agricultural Service’s export promotion programs—the Market Promotion Program and/or the Foreign Market Development Program. These programs provide funds for projects to promote exports through supermarket promotions, nutritional information, and technical assistance. Federal funding for these two programs has decreased over the past few years from about $237 million authorized in fiscal year 1992 to about $134 million authorized in fiscal year 1994. The percentage of fiscal year 1994 funds spent on research activities and the types of research also varied among the six boards. The percent of check-off funds spent on research varied among the boards, with the Cotton Board being the highest at about 24 percent. Research efforts of the Beef, Dairy, and Egg boards have focused primarily on nutrition education and product development. However, other boards, such as the Cotton and Soybean boards, focus their research efforts on production enhancement and product development. These efforts have included the Soybean Board’s production research on altering the genetic composition of soybeans and product development research on identifying and developing new uses for soybeans, such as soy ink and SoyDiesel fuel. In some cases, the authorizing legislation for a board prohibits it from conducting certain types of research. For example, the Dairy and Beef boards are prohibited from engaging in production research activities. In addition to promotion and research, the six boards spend funds to provide educational information to consumers and industry. In 1994, funds spent in this way ranged from about 1 percent for the Cotton Board to about 30 percent for the Soybean Board. Consumer information involves activities to provide product information to consumers through groups that influence consumers, such as educators, dieticians, physicians, and food manufacturers. These efforts have included the Egg Board’s distribution of educational kits to kindergarten through sixth grade classroom teachers across the United States. These kits contain lessons and activities about food safety, nutrition, and product characteristics. Industry information efforts have included the Beef Board’s distribution of information to commercial meat buyers in the marketing chain to help them in purchasing trimmed beef while maintaining an acceptable profit margin. In planning future activities, check-off boards rely heavily on market research and program evaluation. The boards also work with related state and regional check-off boards and industry groups to jointly plan and carry out program activities. All six boards use the results of market research to evaluate their activities and set priorities for future undertakings. This market research consists of a variety of efforts, including measuring changes in consumers’ attitude and behavior toward a board’s products, assessing consumers’ attitudes toward a board’s advertising campaigns, and identifying new uses and markets for a board’s products, including export markets. The boards also obtain market research on the views of other groups, such as health and food service professionals, that may affect demand for the product. While only the Dairy Board is legislatively required to evaluate its program’s activities, all the check-off programs we reviewed evaluate their activities using market research, and some use econometric studies.These evaluations were for specific projects as well as the overall program. Evaluations may occur during a project as well as upon its completion. We did not assess the evaluation methods used by the six check-off boards. In addition to other evaluation methods, the Dairy and Beef boards use independently prepared econometric studies to help them measure the effectiveness of their domestic programs. As part of its statutorily required annual report on the effectiveness of the dairy program, USDA’s Economic Research Service prepares an annual econometric report on the impact of the board’s advertising on the sales of two major dairy products—fluid milk and cheese. Similarly, the Beef Board prepares a biennial econometric report on the impact of its program on beef prices and calculates the return on each dollar invested. Check-off boards use several methods to evaluate the effectiveness of their export programs, including feedback from trade shows, consumer surveys, and promotion reports. In addition, board-sponsored export promotion activities that receive federal funding must comply with the Foreign Agricultural Service’s evaluation requirements. In 1993, we reported that USDA had evaluated few of the Market Promotion Program’s activities. However, our December 1994 report noted that USDA now attempts to measure the effectiveness of activities funded under the Market Promotion Program by selectively evaluating the results of participants’ ongoing activities against measurable goals provided in the participants’ funding proposals. USDA has developed a methodology to identify activities that have not been effective in expanding or maintaining market share. Our 1994 report also noted that the agency has developed an econometric model to evaluate the effectiveness of Market Promotion Program participants’ expenditures in increasing U.S. exports. All of the check-off boards we reviewed that share assessments with state and regional groups jointly plan and carry out research and promotion activities. These national boards coordinate with the state and regional boards to ensure that their efforts complement each other and achieve maximum impact. In addition, the boards plan future work with input from manufacturers, universities, and related trade groups. The joint efforts take a variety of forms. For example, the Beef Board obtains comments on its preliminary annual plan from state beef boards, with which it shares assessment revenues, and other industry-related groups. As an incentive for state groups to participate in the Egg Board’s “I Love Eggs” national campaign, the Egg Board agreed to pay a portion of the state industry group’s radio advertising costs for most of 1994. Check-off boards share marketing and research-related information with state and other organizations through monthly newsletters, annual reports, data bases, and periodic meetings. This arrangement helps ensure more efficient use of resources and avoid duplication of effort. For example, the Potato Board shares monthly briefing information and promotional material and holds an annual meeting with state program managers. Similarly, the Dairy Board has established a market research data base that it shares with related industry groups. In addition, the Dairy Board has formed a cooperative effort with a related industry group, and the Beef Board plans to work with a new industry group. In 1994, the Dairy Board and the United Dairy Industry Association undertook a cooperative effort, Dairy Management Incorporated, to formalize joint planning and funding between the two organizations. A beef industry oversight committee, in which the Beef Board participates, is recommending that two of the board’s major contractors—the National Cattlemen’s Association and the National Live Stock and Meat Board—be consolidated. The Beef Board would remain outside of this new organization but expects to coordinate and contract with it for many services. National agricultural marketing programs in the four countries we reviewed—Australia, Germany, New Zealand, and the United Kingdom—varied significantly from U.S. check-off programs in their organizational structure, sources of funding, activities performed, and emphasis on export promotion activities. These countries have a long history of exporting and have developed significant expertise in marketing. Different types of marketing organizations have evolved in these countries—some are managed by a combination of public and private representatives and draw funds partially from the public sector. (See app. IV for more detailed information on the 19 programs we reviewed in these four countries.) Some marketing programs in the four countries we reviewed perform different functions from U.S. check-off programs, which promote the products of a single industry. Some foreign programs promote many unrelated agricultural products, and others promote several related products. For example, Germany’s Central Marketing Organization of German Agricultural Industries (CMA) promotes most agricultural products in both domestic and export markets. The United Kingdom’s Food From Britain also promotes British food and drink products primarily in export markets. Other organizations in the four countries may promote several related agricultural products. New Zealand’s Meat Producers Board, for example, promotes beef, sheep, goat, and horsemeat products. Unlike U.S. check-off programs, some foreign countries’ marketing programs either have government members on their boards or are guided by councils that include government members. For example, 6 of the 13 organizations whose programs we reviewed in Australia and New Zealand have voting government representatives on their boards. In Germany, while government representatives are not on CMA’s board, they participate in a supervisory board that helps guide CMA’s activities. The assessment methods used by the marketing organizations in the four countries we reviewed also differed from the methods used by the U.S. check-off boards. While the foreign programs’ assessment rates were generally a fixed dollar amount per unit or volume sold, like the U.S. programs’ assessment rates, the foreign rates can generally be revised with the approval of the Minister of Agriculture and do not require statutory amendment. In addition, while the U.S. check-off boards we reviewed assess producers, the United Kingdom’s Meat and Livestock Commission assesses slaughterhouses and exporters as well as producers. Unlike some U.S. check-off boards that assess imported products, only 1 of the 19 foreign marketing organizations we reviewed assessed imported products. Furthermore, smaller-volume producers are generally not exempted from paying required assessments, as they sometimes are in the United States; refunds of assessments are not permitted; and the programs cannot be terminated through a referendum. According to officials of the marketing organizations we reviewed, only national legislation can terminate their programs. Some foreign marketing organizations receive significant funding from sources other than mandatory industry assessments. The United Kingdom’s Food From Britain receives about 60 percent of its funds from the government, and the remainder comes from industry contributions and user fees. New Zealand’s organizations may receive partial government funding for some research projects. In addition, other foreign organizations received funding from a variety of other sources, including fees for services, such as grading agricultural products according to quality specifications; investments in commercial enterprises; and revenues from the sales of agricultural products. Like the U.S. check-off programs, many foreign marketing programs carry out promotion and research activities. However, unlike their U.S. counterparts, these foreign programs may provide other services, such as buying and selling products, providing training to industry, inspecting products, and licensing exporters. The foreign programs, like the U.S. programs, use market research information to evaluate their marketing activities. In addition, the United Kingdom and New Zealand governments are either conducting reviews or planning to periodically review their marketing programs. Many of the marketing organizations in the four countries also performed other activities. For example, New Zealand’s Dairy, Kiwifruit, and Apple and Pear boards purchase and market all products intended for export, and Australia’s Wheat Board purchases and markets wheat and other grains for both the domestic and export markets. In addition, both the United Kingdom’s Meat and Livestock Commission and New Zealand’s Meat Producers Board conduct vocational training to improve the quality and safety of meat. The New Zealand Meat Producers Board also licenses exporters of meats covered by their program. Germany’s CMA grants its Seal of Quality to German food products that have passed required tests and inspections. It then emphasizes the quality of these products in its marketing activities. While many organizations in the four countries were active in both domestic and export markets, all but one of the marketing organizations we reviewed in Australia and New Zealand emphasized export promotion. Both countries have small domestic markets and depend much more on exporting. For example, the Australian Wool Research and Promotion Organization spent about 76 percent of its funds on export-related activities. New Zealand marketing organizations also focus most of their activities around the development of export markets. While the recent multilateral trade agreement of the Uruguay Round of GATT would limit the extent to which countries could provide subsidies to the agricultural sector, it would not limit the extent to which countries could support market development activities. As a result, market development efforts may become a more important tool for increasing agricultural exports. Some foreign competitors have a long history of exporting and have developed significant expertise in market development activities. This greater emphasis on exports may give foreign producers a competitive advantage in the global marketplace. In this context, a more vigorous export focus would seem to be in the interest of U.S. promotion and research boards. On the other hand, foreign countries now have increased access to some U.S. markets that were previously protected from import competition. Consequently, U.S. promotion and research programs for products that have had import protection may face an increasing need to promote their products in the domestic market in light of increased foreign competition. In either situation, the boards will continue to play an important role. We discussed the facts presented in this report with USDA officials—including the Deputy Administrator, Commodity and Marketing Programs, Foreign Agricultural Service, and top-level officials from Agricultural Marketing Service’s Cotton, Dairy, Fruit and Vegetable, Poultry, and Livestock and Seed divisions. In addition, we obtained comments on the facts presented in relevant sections of this report from representatives of the U.S. check-off boards and the foreign marketing organizations we reviewed. These officials generally agreed with the information discussed and updated budget and program information that had changed since we completed our fieldwork. We have incorporated this new information into the report where appropriate. At the request of the Ranking Minority Member, Subcommittee on Risk Management and Specialty Crops, House Committee on Agriculture, we reviewed 6 federally authorized U.S. check-off programs—beef, cotton, dairy, egg, potato, and soybean—and 19 comparable programs in four other countries. We selected the six U.S. check-off programs on the basis of their size, years of operation, organizational structure, and activities, including domestic and export promotion. We selected the four countries because they have industry-funded agricultural promotion and research marketing organizations that perform activities similar to those of U.S. check-off boards. To understand how the U.S. check-off programs operate, we reviewed the relevant authorizing legislation; implementing orders, plans, and regulations; and USDA guidelines. We also discussed program operations with USDA officials, including representatives from USDA’s Agricultural Marketing Service, Foreign Agricultural Service, and Economic Research Service. We also met with representatives of the six U.S. check-off boards and some of the associations that the boards have contracted with to carry out program activities. In addition, we reviewed check-off boards’ annual reports, budgets, marketing plans, program descriptions, and evaluation reports to gain an understanding of the programs’ size, complexity, and routine activities. To obtain information on similar programs in Australia, Germany, New Zealand, and the United Kingdom, we met with officials of the foreign marketing organizations and U.S. agricultural attachés posted in these countries. We also reviewed reports prepared by USDA’s Foreign Agricultural Service attachés posted in the four countries. We discussed the organizations’ establishment, structure, funding, and activities with the officials of the organizations. We reviewed relevant documents of the marketing organizations, including annual reports and other pertinent information. The information on Australia, Germany, New Zealand, and the United Kingdom does not reflect original analysis of these countries’ laws and regulations on our part but rather the views and interpretations of the officials from the marketing organizations and foreign governments with whom we spoke. We did not independently validate the data provided by the marketing organization officials and others. We conducted our review between April 1994 and April 1995 according to generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 14 days from the date of this letter. At that time, we will send copies to the Secretary of Agriculture and other interested parties. We will also make copies available to others on request. Please contact me on (202) 512-5138 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix V. Coverage/ (estimated number) Assessment refunds currently available? Total: $44,704,379. Authorized/current: $1 per head of cattle sold. All cattle producers (1.1 million) and importers of cattle and beef. Initial referendum: Delayed until 22 months after program started. Last referendum: May 1988, approved by 79%. Producers can receive credit for contributions to qualified state groups of up to 50 cents on each dollar assessed by the national board. Rate can be changed only by statutory amendment. Authorized: $1 per bale of cotton sold plus up to 1% of bale value on sales of cotton. As of 3/31/95: $1 per bale plus 0.5% of bale value. Producers (35,000) and importers of upland cotton and cotton products. Initial referendum: Prior to program start. Last referendum: July 1991, approved by 60% of those voting. Percentage portion can be changed up to the maximum by the Secretary on the basis of board’s recommendation. Rate and percentage caps can be changed only by statutory amendment. (continued) Coverage/ (estimated number) Assessment refunds currently available? Authorized/current: 15 cents per hundredweight of milk sold. Dairy farmers (125,000). Initial referendum: Delayed until 18 months after program start. Producers can receive credit for contributions to qualified state and regional groups of up to 10 cents on each 15 cents assessed by the national board. Last referendum: August 1993, approved by 71% of those voting. Rate can be changed only by statutory amendment. Authorized: Up to 20 cents per 30-dozen case of eggs sold. Producers with more than 75,000 laying hens (365). Initial referendum: Prior to program start. As of 3/31/95: 10 cents. Rate cap can be changed only by statutory amendment. Last referendum: November 1994, rate increase approved. Current rate can be changed by the Secretary up to the maximum if recommended by the board. Any increases must be approved by referendum. (continued) Coverage/ (estimated number) Assessment refunds currently available? Authorized: Up to 2 cents per hundredweight or up to 0.5% of immediate past 10-year U.S. average price on sales. Producers growing potatoes on 5 or more acres (6,200), and importers. Initial referendum: Prior to program start. Last referendum: August-September 1991, approved by 81% of those voting. Rate and percentage caps can be changed only by statutory amendment. As of 3/31/95: 2 cents per hundredweight. Current rate can be changed by the Secretary, upon the board’s recommendation, up to the maximum. (continued) Coverage/ (estimated number) Assessment refunds currently available? Authorized/current: 0.5% of net market value of soybeans sold. Producers (381,000) Initial referendum: Delayed until 32 months after program start. Producers can receive credit for contributions to qualified state groups of up 50% of the rate assessed by the national board. Initial referendum held February 1994, approved by 54%. No referendums held since then. Percentage rate can be changed only by statutory amendment. Beef, Cotton, Dairy, and Eggs: For the beef, cotton, dairy, and egg programs, the Secretary of Agriculture is required to hold a suspension/termination referendum if requested by 10 percent or more of those subject to the program (beef, dairy), or who voted in the referendum approving the order (egg), or in the most recent referendum (cotton). Potatoes: For the potato program, the Secretary is required to hold a suspension/termination referendum if requested by the board or by 10 percent or more of the potato producers. The Egg Board’s 22% of funds allocated for research is primarily used for nutrition education. The Soybean Board does not promote soybeans in the domestic retail market. But it does conduct domestic consumer and industry information activities. For example, it provides information on soybean products to dieticians and food manufacturers. Data exclude USDA’s Foreign Market Development Program and Market Promotion Program funds. We reviewed the activities of six U.S. check-off programs: the (1) Cattlemen’s Beef Promotion and Research Board, (2) Cotton Board, (3) National Dairy Promotion and Research Board, (4) American Egg Board, (5) National Potato Promotion Board, and (6) United Soybean Board. This appendix provides information on the boards’ promotion, research, and evaluation activities and their joint efforts with related groups. The Cattlemen’s Beef Promotion and Research Board, more commonly known as the Beef Board, is administered by a board of 101 producers and 6 importers. These members serve 3-year terms, with no member serving more than two consecutive terms. The Secretary appoints board members from nominations submitted by state cattle associations and state general farm organizations that meet specific requirements. Table III.1 provides an overview of the beef board. Beef and beef products. Expenditures (% of 1994 funds) Domestic promotion (55%). Export promotion (12%). Consumer and industry information (21%). Research (8%). Other (4%). No lobbying. Advertising cannot disparage other agricultural products. No production research. Cost limitation of 5% for administration and collection of assessments. Must contract with certain groups. TV campaign theme: “Beef. It’s What’s For Dinner.” Print advertisements: “30 Meals in 30 Minutes.” Nutrition. Product technology. Market research. Biennial econometric study. Individual project evaluations. Foreign Agricultural Service (FAS) evaluation. Contracts with national industry-governed organizations to manage and conduct programs. Forty-four qualified state beef councils received about 46% of the assessments, or $37 million in 1994. The board’s $44.7 million revenue is in addition to this amount. Promotion Activities. While the Beef Board’s promotion theme and creative content changed in 1992, the underlying message about beef remained relatively the same, with emphasis on variety, use, and health. In 1993-94, the board directed its consumer advertising campaign towards moderate to heavy beef users, placing primary emphasis on the meal purchaser/preparer. Women 25 to 54 years old were the major focus of the campaign. Television has been the primary medium for the Beef Board’s campaign theme, “Beef. It’s What’s For Dinner,” which reached an estimated 95 percent of the target audience. Complementing the television campaign were print advertisements featuring “30 Meals in 30 Minutes” that appeared in 18 national lifestyle, food, and women’s magazines. Similarly, in the food service sector, the board developed marketing partnerships with some national restaurant chains. Board-sponsored consumer information programs are aimed at four primary audiences: food journalists, media professionals, health care professionals, and teachers. Public relations activities are not only designed to help sell beef but also to dispel negative perceptions about beef and the U.S. cattle industry while educating consumers. However, the largest potential growth area for American beef products may not be in the United States but in foreign markets. In fiscal year 1993, exported beef and beef products, totaling $2.5 billion, accounted for nearly 10 percent of the wholesale value of all domestic production. The Beef Board’s foreign marketing efforts are directed at expanding markets in Japan, Korea, and Mexico. The board is also interested in establishing a presence in emerging world markets, such as China, Latin American nations, and Taiwan. In fiscal year 1994, the Beef Board spent about $5.6 million through its contract with the U.S. Meat Export Federation (a nonprofit organization) to promote beef exports. The Beef Board does not receive any USDA Market Promotion Program funding. However, the U.S. Meat Export Federation, which promotes beef and other meats in the export market, received about $7.2 million in Market Promotion Program funds and $1.9 million in Foreign Market Development Program funds for fiscal year 1994. Accordingly, the Beef Board benefits indirectly from this funding to the extent that the federation uses these funds to promote beef. Research Activities. According to board officials, research provides the (1) precise, highly sophisticated information that characterizes “good” marketing campaigns that achieve the highest levels of success and (2) factual foundation for supporting beef products as part of a varied, convenient, and healthful diet. The board’s research initiates the transfer of research-based information to appropriate end-users. Evaluation Efforts. The Beef Board uses several methods to evaluate its programs. It contracts with a university every other year to conduct an independent econometric evaluation of its promotion and research activities. The latest econometric review, issued in January 1994, concluded that beef check-off programs have significantly improved demand for beef. The study further estimated that beef producers had received a return of about $5.40 for every dollar invested since October 1987. During the past 2 years, the Beef Board has emphasized the evaluation of individual projects. Methods for evaluating these projects have included assessing each project against pre-established objectives, conducting interim evaluations for projects lasting longer than one year, and conducting in-depth evaluations for two to four projects each year. Joint Efforts. As directed in the authorizing legislation, the Beef Board carries out all beef promotion and research projects through nonprofit, producer-governed beef industry organizations. The Beef Industry Council of the National Live Stock and Meat Board is the primary contractor for the Beef Board’s domestic promotion and advertising. As the federation of 44 state beef councils, the Council helps coordinate state and national check-off dollars and programs. The board coordinates its foreign market development activities primarily with the U.S. Meat Export Federation. Currently, the Beef Board’s main joint effort is participation on a beef industry oversight committee that is seeking to concentrate the beef industry’s resources (check-off revenue, dues, and other revenue) on developing and implementing a single, industrywide long-range plan. This committee has recommended the consolidation of the National Cattlemen’s Association and the National Live Stock and Meat Board, two of the Beef Board’s major contractors. The Beef Board will remain outside this consolidated structure but expects to coordinate closely with the new organization. The new organization expects to include a Center for International Marketing to coordinate closely with the U.S. Meat Export Federation in carrying out international marketing programs for beef. The Cotton Board is administered by 20 producers, 4 importers, and one consumer adviser who serve 3-year terms. The Secretary of Agriculture appoints each Cotton Board member and an alternate from nominations submitted by producer organizations within each major cotton-producing state and by importer organizations in the United States. The board contracts with Cotton Incorporated, a private, nonprofit corporation, to develop and execute its marketing and research programs. Table III.2 provides an overview of the Cotton Board. Upland cotton, including cotton seed and products derived from such cotton and its seed. Expenditures (% of 1994 funds) Domestic promotion (53%). Export promotion (8%). Consumer and industry information (1%). Research (24%). State programs (5%). Other (9%). No lobbying. Advertising cannot disparage other agricultural products. Must contract with a certain group. The Fabric of Our LivesTM campaign. Joint promotion with a major consumer products company. Recognition for the Seal of CottonTM. Textile research/implementation. Agricultural research. Fiber quality. Fiber processing. Market research. Individual project evaluations. FAS evaluation. AMTEXTM Partnership (a research consortium). Promotion Activities. The board’s contractor uses the majority of its promotion funds for national television advertising (e.g., The Fabric of Our LivesTM campaign). The contractor’s marketing efforts also include trade print campaigns, retail promotions, full-scale publicity events, and collaborations with mills and manufacturers. All of these programs focus on building demand for cotton apparel and home furnishings (except for cotton carpets). Furthermore, recognition of the Seal of CottonTM increased in 1993, when the Cotton Board’s contractor signed an agreement with the largest consumer marketing company in the United States. International marketing representatives build demand for cotton in world markets through offices in Japan, Switzerland, Singapore, and Mexico. According to the Cotton Board’s contractor, with 40 to 45 percent of the U.S. cotton crop exported annually, the United States has a strong presence in the world cotton market. During the 1993-94 season, cotton exports reached 6.9 million bales, with Asia and Oceania consuming 70 percent of that total. Latin American countries, particularly Mexico, are also increasing their demand for cotton. The board’s contractor also helps leverage the U.S. cotton industry’s export sales efforts by contributing $1 million annually in matching funds to the Cotton Council International. The Cotton Council International adds this contribution to its Market Promotion Program funds to promote U.S. cotton overseas. Research Activities. According to the Cotton Board’s contractor, research plays a critical role in the demand for the industry’s fiber. For example, research may help develop new products that provide new cotton options for the retail market or innovations that enhance the cost-effectiveness of cotton mills. Furthermore, in 1993, the board’s contractor entered a new research initiative—The AMTEXTM Partnership—to help to bring together various components of the textile industry and undertake cooperative research that will increase the competitiveness of the domestic textile industry. The partnership is a consortium of fiber, textile, and apparel research organizations and national laboratories. The board’s contractor stated that the partnership will ensure that cotton remains at the leading edge of technological developments. Joint Efforts. The authorizing legislation directs the Cotton Board to contract with an organization or association whose governing body consists of cotton producers to develop and carry out promotion and research activities. Accordingly, the board contracts with an independent contractor to carry out all promotion and research activities. The Cotton Board’s contractor is the only organization that promotes cotton domestically, and the board provides about 5 percent of the contractor’s budget to fund state support programs. The contractor coordinates agriculture research with land grant universities and textile and fiber quality research with textile universities. Evaluation Efforts. The Cotton Board has not had an outside evaluation in over 10 years. However, the board uses several methods to evaluate the overall effectiveness or success of the program, primarily steady gains in market share and increased sales volume at the retail level. The board’s goal is to increase cotton’s market share of retail sales of apparel and home furnishings (except for cotton carpets) to 60 percent in the next few years. During the first 9 months of 1993, retail sales of cotton merchandise rose $3 billion and the market share for the period increased from about 55 percent to 56 percent. Other evaluation methods include measuring the recognition and awareness of the Seal of CottonTM. The National Dairy Promotion and Research Board, also known as the National Dairy Board, is administered by a board of 36 producers who serve 3-year terms, with no member serving more than two consecutive terms. The Secretary appoints board members from nominations submitted by producer organizations certified by the Secretary, general farm organizations representing producers, or other associations. Table III.3 provides an overview of the dairy board. Fluid milk, cheese, butter, and frozen dairy products. Expenditures (% of 1994 funds) Domestic promotion (68%). Export promotion (2%). Consumer and industry information (10%). Research (15%). Other (5%). No lobbying. Advertising cannot disparage other agricultural products. No production research. Limitation of 5% for administrative costs. TV. “Milk. It does a body good.” TV. “Cheddar makes everything better.” Limited branded advertising. Dairy foods. Nutrition. Market research. Mandatory annual report to the Congress (econometric study). Individual project evaluations. FAS evaluation. Undertook a cooperative effort with the United Dairy Industry Association in January 1995. Sixty-six state and regional promotion programs receive two-thirds of the assessment, or an estimated $150 million for 1994. Bloc voting. Termination referendum. Promotion Activities. The Dairy Board’s domestic promotion activities are primarily targeted at consumers, the food service industry, and manufacturers. The board uses a variety of marketing techniques and advertising themes, depending on the product and the targeted market. For example, the board promotes retail consumption of fluid milk primarily through television advertising, but it uses a mix of television, print, and radio advertising to promote cheese, butter, and frozen dairy products. The board contracts with advertising firms to assist with its market promotion activities. The board supports both generic advertising to promote consumption of the general agricultural product and branded advertising to promote the particular characteristics of a given brand of an agricultural product. In November 1992, the Dairy Board adopted a policy to encourage the dairy industry to bring new, unique products to the marketplace more quickly by offering matching funds for branded advertising. The new product must establish a new product category and cannot compete with another established dairy product. For example, the Dairy Board provided matching funds to promote Yo-J, a yogurt-juice blend that competes with juices. The board matches every $3 spent by the marketer with $1 of check-off funds. Total board expenditures to support branded advertising may not exceed 2 percent of the Dairy Board’s annual budget. Once another brand enters the product category, the board discontinues support for branded advertising. The Dairy Board established an export promotion program in 1990. In 1994, the board promoted cheese and frozen dairy products in Japan, and yogurt, ice cream, and cheese in Mexico. It carries out these activities through supermarket and food service promotions, trade missions, newsletters, participation at trade fairs, trade servicing, and seminars aimed at the press and food distributors. Export promotion in other markets includes promotional and market research in the Caribbean, the Far East, and South America. During 1994, the Dairy Board spent $1.6 million on export promotion activities. In addition, according to the board, it received $373,000 from the Foreign Market Development Program and $65,000 from the Market Promotion Program during fiscal year 1994. Research Activities. The Dairy Board divides its research into two broad categories—dairy foods research and nutrition research. Dairy foods research is intended to encourage the development of new dairy products, processes, and packaging technologies. Much of this research is conducted at research centers located at 12 universities. The centers are funded with equal contributions from the Dairy Board, the universities, and the local industry. In addition, the board funds research at two nutrition and health research institutes—the Genetics and Nutrition Institute and the Cancer of the Colon Institute. Evaluation Efforts. The board measures the effectiveness of its programs in a variety of ways, including market research and an econometric evaluation, and USDA reports the results annually to the Congress, as the board’s authorizing legislation requires. For promotions that run for short periods of time, the board compares actual to expected sales volume as one measure of the program’s effectiveness. For continuous advertising and public relations programs, the board monitors consumption rates and conducts telephone surveys to measure the change in consumer attitudes and behaviors over time. The Dairy Board’s July 1994 annual report to the Congress indicated that for 1993, advertising increased fluid milk and cheese sales by 3.5 percent and 2.5 percent, respectively. Joint Efforts. The board coordinates its activities with other state and regional industry groups and also jointly plans and funds projects. For example, the United Dairy Industry Association has been the lead organization for the fluid milk national advertising campaign, and various state and regional promotion groups also fund this effort. In January 1995, the Dairy Board and the association undertook a cooperative effort, Dairy Management Incorporated, to formalize the joint planning and funding between the two organizations. Other methods of coordinating the Dairy Board’s activities with other industry groups include sharing market research and other research information. Other. The Dairy Board’s authorizing legislation provides for a termination referendum if requested by 10 percent of those covered under the program. As a result of a petition, a nationwide referendum was conducted in August 1993 to determine whether producers favored continuing the program. For the program to continue, more than 50 percent of the producers participating in the referendum had to vote in its favor. About 71 percent of the qualified votes were cast for continuation. About 63 percent were cast by cooperative associations bloc voting for all their members. The dairy program is unique in that it allows dairy cooperatives to cast bloc votes for their members. However, members are given an opportunity to vote individually if they disagree with their cooperative’s position. Legislation was introduced in January 1995 in the Senate that would eliminate the dairy program’s bloc voting process because of concerns about whether it is fair and equitable. In addition, this proposed legislation would require that the Dairy Board periodically determine producers’ support for the program. No action has been taken to date on this legislation. The American Egg Board, known as the Egg Board, is administered by 18 producer members and their alternates who serve 2-year terms; initial appointments were for 2 and 3 years to allow for staggered terms. No member is allowed to serve more than three consecutive terms in the same position. The Secretary appoints all members from nominations submitted by eligible organizations, associations, cooperatives, or other producers. Table III.4 provides an overview of the board. Eggs, egg products, spent fowl, and products of spent fowl. Expenditures (% of 1994 funds) Domestic promotion (56%). Export promotion (<1%). Consumer and industry information (8%). Research (22%). State programs (7%). Other (about 6%). No lobbying. Advertising cannot disparage other agricultural products. “I Love Eggs” campaign. Advertising tie-in opportunities. Nutrition. Market research. Individual project evaluations. FAS evaluation. Coordinates with 41 states and various related industry groups. Promotion Activities. The Egg Board’s current advertising strategy is principally to link eggs with the positive images consumers have of the taste of eggs. The primary target for the Egg Board’s recent consumer advertising campaign, “I Love Eggs,” is women with children, who make most decisions about family breakfasts. The Egg Board is concentrating on capturing the “weekend breakfast.” The board uses a variety of marketing techniques and advertising themes, depending on the targeted audience. For example, the board promotes retail consumption of eggs primarily through television and radio advertisements and promotes eggs to the food service industry primarily through national food service trade publications and trade shows. Research Activities. The nutrition portion of the Egg Board’s budget funds nutrition research and nutrition education. In recent years, the board has used an increased portion of funds on research to evaluate the effects of dietary cholesterol on plasma lipids. Since 1991, the Egg Board has funded $1.5 million in research projects at various universities on this issue. Evaluation Efforts. The Egg Board conducts market research and evaluates individual projects. However, the board has not conducted an overall program evaluation since 1981. Board officials, however, are considering whether to conduct a program evaluation in 1995 that would include an econometric study. Joint Efforts. The Egg Board coordinates its activities with state and regional organizations by developing publicity campaigns several times each year for use by state and regional groups and by holding two joint annual meetings with state organizations. In 1994, state and regional groups received about $609,000 from the Egg Board for promotional activities. Additionally, in 1985, the board assembled a scientific advisory panel of medical and nutrition professionals to help develop strategies to communicate the importance of eggs in Americans’ diets and to assist the board in deciding which research projects to fund. Other. In 1994, as a result of a referendum, the Egg Board increased the exemption level for producer assessments from producers with 30,000 laying hens to producers with 75,000 laying hens and increased the assessment rate from 5 cents to 10 cents for each 30-dozen case of commercial eggs. The rate was increased to provide additional funds, primarily for advertising and research. The National Potato Promotion Board, known as the Potato Board, is administered by 99 domestic producers, 2 importers, and 1 public representative appointed by the Secretary of Agriculture for 3-year terms. No member serves more than two consecutive terms. Although each state is entitled to nominate at least one member, states with production exceeding 5 million hundredweight of potatoes are allowed to nominate additional members. Producers nominate producer members, and the board nominates the public member. Importers may nominate up to five importer members to serve on the board. One-third of the members’ terms expire annually. The board meets annually to review programs and to determine policy for the upcoming year. Table III.5 provides an overview of the board. Potatoes and potato products. Expenditures (% of 1994 funds) Domestic promotion (65%). Export promotion (10%). Consumer and industry information (2%). Other (23%). No lobbying. Advertising cannot disparage other agricultural products. Potato shopping cart advertisements. Quick-and-easy potato/chicken recipes in magazines. None at this time. Market research. Individual project evaluations. FAS evaluation. Partnership with Snack Food Association. Promotion Activities. The Potato Board developed 20-minute potato recipes because market research showed that potato preparation time and efficiency were of great importance to meal preparers. The board paired these recipes with chicken because chicken consumption is growing rapidly in popularity. The board also developed a software package containing 40 quick-meal ideas. In 1993, potato shopping cart advertisements were another major promotion effort. Messages about potatoes appeared on shopping carts in 23 of the largest 25 supermarket chains. These advertisements resulted in a sales increase of 9.6 percent. Additionally, the board used a “personality” to deliver advertisements to the trade. These advertisements were placed in magazines and featured potato industry people talking about why potatoes were important to them and how the board worked to increase demand. The board also provides nutrition educators with tools to spotlight potatoes, such as the Vegetable Parade Poster, which includes potatoes in the “5-a-day” food pyramid. The board has directed its export efforts to the Pacific Rim and East Asia, the largest markets for frozen potatoes and french fries. However, future efforts will be directed towards Central and South America and Mexico because the board sees potential in these markets. According to board officials, the export promotion program has increased U.S. potato exports worldwide. From 1989 to 1994, potato exports increased by 120 percent. The board received $1 million in 1994 from the Market Promotion Program. Research Activities. The Potato Board does not fund production research. Evaluation Efforts. The board measures the effectiveness of its programs in a variety of ways, including internal, external, and Foreign Agricultural Service (FAS) evaluations. The board contracted with an outside market research firm to evaluate the effectiveness of four major print advertisements. Market research results, such as potato usage and attitude-tracking studies, print advertising tests, and national eating trend surveys, provide the basis for internal evaluations of promotion projects. The board also measures its programs by participating in joint promotion evaluation projects. For example, in 1993, the Potato Board and a major research organization evaluated the board’s promotion of potato products in South Korea. In addition, the board uses independent contractors to evaluate projects funded by FAS. The board submits these evaluations to FAS at the end of the year, and FAS follows up with compliance audits to ensure that the evaluations are conducted within its regulations. Joint Efforts. The Potato Board has worked with states and other groups on market research for fresh potatoes in other countries. It also supports joint promotion efforts. For example, the Potato Board joined with a major restaurant chain in Japan to promote potatoes, with the restaurant contributing $4 million and the board $110,000. Other coordination efforts include the “Snack Food Month” promotion conducted by the board and a snack food association to promote potato chips. Other. The authorizing legislation provides for the Secretary to conduct a referendum at any time to terminate or suspend the operation of the program at the request of the board or of 10 percent or more of the potato producers. Legislation also allows the board to establish an operating monetary reserve and to carry over excess funds to subsequent fiscal years, provided that funds in the reserve do not exceed approximately 2 fiscal years’ expenses. The reserves may be used to defray any authorized expenses. In 1994, reserve funds totaled about $4.3 million. Under a procedure prescribed by the 1990 farm bill, producers and importers have voted to eliminate refunds of assessments. United Soybean Board The United Soybean Board, commonly known as the Soybean Board, is a 60-member producer board nominated by soybean producers. The Secretary of Agriculture appointed the initial board members for 1-, 2-, or 3-year terms from nominations submitted by soybean producers and eligible organizations. During each subsequent year, the Secretary appoints one-third of the board members for 3-year terms. No member may serve more than three consecutive 3-year terms. Table III.6 provides an overview of the Soybean Board. Soybeans and soybean products. Expenditures (% of 1994 funds) Domestic promotion (0%). Export promotion (29%). Consumer and industry information (30%). Research (18%). Other (22%). Lobbying allowed in some foreign countries. Advertising cannot disparage other agricultural products. Allowed to contract with certain groups. Limitation of 5% for administrative costs. Promotion activities (export only) Technical assistance to foreign feed mills and oil refiners. Consumer promotion of oil through radio and point-of-sale materials. Production. Product development and new uses. Market research. Individual project evaluations. FAS evaluation. 27 state soybean board offices representing 29 states received about 50% of the assessments, or $24 million in fiscal year 1994. The board’s $24.9 million in revenues is in addition to this amount. Refunds of assessments. Conducts a producer poll every 5 years to determine the need for a termination referendum. Promotion Activities. The Soybean Board focuses its promotion activities on soybean meal and soybean oil. Currently, all of the board’s promotion programs occur in foreign countries because the Soybean Board’s goal is to increase foreign demand for soybeans and soybean products. In 1994, between 45 and 50 percent of domestic soybean production was exported, in contrast with many agricultural commodities that are primarily consumed domestically. The Soybean Board has organized four promotion subcommittees to represent the four regions where promotion activities occur: (1) Latin America, (2) Asia, (3) Western and Northern Europe, and (4) the former Soviet Union, Central Europe, and North Africa. In addition to board expenditures for export promotion, the board’s contractor—the American Soybean Association—received about $1.7 million in Market Promotion Program funds and $6.3 million in Foreign Market Development Program funds. These funds are used in foreign markets for radio advertisements and point-of-sales promotions. Consumer information on the use of soybean products is targeted at key groups, such as dieticians and food manufacturers in both domestic and foreign markets. Research Activities. The Soybean Board’s research activities involve four primary areas of study. Production research focuses on such projects as creating soybean varieties that are drought-and pest-resistant and developing genetic improvements to boost yields. Quality-based research efforts include improving oil production, protein content, and amino acid balance. Market-focused research includes such efforts as decreasing the saturated fat content of soy oil to better compete in today’s health-conscious consumer market and expanding the utilization of soybeans through new products like SoyDiesel, Soy Ink, and Environ (building material). Basic research focuses on developing new products to compete with petroleum-based plastics and adhesives. Evaluation Efforts. The Soybean Board uses various methods to evaluate program effectiveness. For example, the board sets aside 2 percent of its budget for program evaluations. While the Soybean Board selects the program to be evaluated, its contractor, in consultation with the board, chooses an independent third party to evaluate specific projects. Other evaluation methods include reviews by a technical advisory panel. For instance, researchers are required to submit progress reports to the board so that a technical advisory panel can review them under a 9-month review system. This periodic review enables the board to terminate funding for projects that are not working out so that they are not automatically funded for another year. Additionally, for FAS-funded projects, the Soybean Board’s contractor is responsible for complying with FAS evaluation requirements. Joint Efforts. To enhance coordination, the board’s authorizing legislation requires the board to enter into agreements to ensure that its authorized activities—promotion, research, consumer information, or industry information—are each implemented by a single entity. Accordingly, the Soybean Board contracts with national, nonprofit producer-governed organizations, such as the American Soybean Association, for these four activities. The Soybean Board’s contractor implements all board plans for these four activities and coordinates with qualified state soybean boards through national and regional meetings. In addition, the board uses a technical advisory panel, which is composed of researchers, marketers, and educators, for advice on its future direction. Other. The board’s authorizing legislation provides that each producer shall have the right to demand and receive a refund from the board of any assessment collected from that producer. Of the six boards we reviewed, this is the only board that currently allows refunds. Refunds are now limited to 10 percent of the total assessments collected from producers in each state. In fiscal year 1994, the board’s refunds totaled about $9.9 million. Full refunds were allowed until April 1, 1994, after which refunds were limited to the current level. The results of a producer poll, scheduled for July 1995, will determine if the Secretary of Agriculture must hold a referendum to determine if refunds should continue. If the poll indicates that a refund referendum is needed, producers may continue to receive refunds until the results of the referendum are released. Until 1990, all check-off programs were restricted from lobbying federal, state or foreign governments. However, the Congress recognized the need for direct contact with foreign government officials in certain instances under the soybean program. Therefore, the authorizing legislation includes an exemption to the prohibition on influencing governmental action for “any action designed to market soybean or soybean products directly to a foreign government or political subdivision thereof.” We reviewed the activities of 19 marketing organizations in four countries: (1) Australia, (2) Germany, (3) New Zealand, and (4) the United Kingdom. This appendix provides information on the foreign organizations’ board structures and functions, sources of funding, role of government, types of activities carried out, and emphasis on export promotion. Australia is one of the world’s major exporters of agricultural products. It accounts for over one-half of the world’s wool exports, about one-fourth of the world’s beef exports, and nearly one-seventh of the world’s wheat exports. The country has a large resource base and a relatively small population. Therefore, its export competitiveness has always been important. In the past, the Australian government had focused its agricultural assistance on programs to help minimize the effects of unstable and low world prices on farm income. However, over the past decade, it has shifted away from price-related assistance towards more market-oriented policies. The government has gradually reduced its protectionist measures and recast the role of grower-funded marketing organizations, which concentrate their efforts on market promotion, research, and development. The six Australian marketing organizations we reviewed differ from those in the United States in organizational structure, role of government, sources of funding, types of activities performed, and emphasis on export promotion. These organizations were the (1) Australian Dairy Corporation, (2) Australian Dried Fruits Board, (3) Australian Horticultural Corporation, (4) Australian Wheat Board, (5) Australian Wine and Brandy Corporation, and (6) Australian Wool Research and Promotion Organization/International Wool Secretariat. The size and composition of these boards vary, as do their activities. Generally, research and development activities are managed by separate entities within the same industry and are funded by separate assessments. Owing to a changing economic environment, Australia’s farmers must take a more global view of their markets and compete more vigorously in the export arena. Thus, agricultural marketing and promotional boards have turned more of their attention to the export market, concentrating their efforts on expanding foreign trade. All six organizations are managed by boards. These boards range in size from 5 to 17 members and consist of grower representatives and industry and business experts. Some of the boards have independent representatives from outside the industry. In contrast to U.S. check-off boards, all but one of the Australian boards have a government representative, who generally serves as the communications link between the board and the federal government and provides the board with expert advise about government policies. Almost all representatives are nominated by the industry and officially appointed by the Minister for Primary Industries and Energy. According to board representatives, their programs may only be terminated by an act of Parliament. Annual revenues in 1993 for the six organizations ranged from $1.3 million to $1.7 billion. Except for the Australian Wheat Board, all the boards we reviewed receive some direct funding from assessments. These assessments account for as little as 23 percent to as much as 80 percent of the boards’ annual revenues. The industries vote to adjust assessment rates annually, if required, for the following fiscal year. The government collects assessments on producers through handlers and processors. The government then turns these funds over to the appropriate board. For some industries, such as honey, smaller-volume producers are exempted from paying assessments. No provisions exist for refunding the assessments. Unlike some U.S. check-off boards, none of the Australian boards assess importers of agricultural products. For four of the programs we reviewed, other major sources of revenue include government grants, which range from 13 to 30 percent of the boards’ incomes; interest income; and user fees. In the 1980s, the Australian government restructured its agricultural board system. It developed a tripartite system that separates marketing boards from statutory industry councils and research/development bodies in each industry. Now, marketing and research functions are generally conducted by separate entities within the same industry and funded by different assessments. For example, the Dairy Research and Development Corporation manages research and development for the dairy industry and receives an assessment of $0.013 per kilogram of butterfat produced, while the Australian Dairy Corporation receives $0.0377 per kilogram of milkfat produced for promotional activities. In addition to representation on some boards, government involvement in board activities ranged from simple oversight to direct economic support of research and promotional activities. The government matches each industry’s research and development assessment funds up to a maximum of 0.5 percent of the industry’s gross value of production. Boards are required to submit annual reports to Parliament for approval but do not conduct formal evaluations of their activities (except for an annual financial audit). Less than 10 years ago, the Australian agricultural economic base was experiencing a downturn characterized as the worst in decades. Because of this economic situation, the Australian government is not providing as much direct financial assistance to its agricultural sector as it once did. The government used to shield its farmers from the uncertainty of world markets by providing price supports and other financial assistance. Now, government assistance typically takes the form of export market development grants and trade enhancement programs rather than price supports. Price supports still exist in the dairy industry but are funded by a market support assessment on milk producers. Since agricultural industries must focus more on market forces than ever before, promotional and research activities have assumed a greater role. Agricultural producer boards, which are statutory marketing authorities, participate in these activities. In addition, the Australian Dairy Corporation and the Australian Wheat Board can purchase and sell products. While all boards engage in typical marketing activities, such as trade shows, point-of-sale promotions, and advertising, some practice more nontraditional marketing techniques. For example, the Australian Wine and Brandy Corporation participates in the Australian Government Officials’ Scheme, through which Australian embassies and consulates purchase domestic wine for official functions, thus increasing the product’s exposure. Australian marketing organizations also carry out other activities not generally conducted by U.S. check-off boards, such as setting quality standards for the industry and issuing export licenses. In addition, they invest in other ventures, which allow them to diversify their holdings and further expand their export businesses. For example, the Australian Dairy Corporation wholly controls Austdairy, a subsidiary that turned a profit of $1.33 million in fiscal year 1993-94. Finally, the Australian Dairy Corporation and the Australian Wheat Board purchase products and sell them in domestic and/or export markets. The Australian Dairy Corporation’s sales are limited to specific export markets—e.g., Japan and the European Union—and producers are not required to supply their products to the Australian Dairy Corporation for export to these markets. Neither of these organizations receive direct government income support. However, both boards get indirect government support through government guarantees for the borrowed funds they use to purchase their commodities. Table IV.1 summarizes selected information on the six marketing programs we reviewed in Australia. Promotes dairy products in both domestic and export markets. Authorized: 11. Members: 9 industry (includes chair), 1 government, and 1 managing director (permanent member). Total funding 1994: $310.2 millionAssessments (41%), export sales (57%), and other (2%). Purchases and sells certain products in Japan and the European Union. Export sales cost (58%), Price supports (35%), Domestic marketing (3%), Export marketing and promotion (1%), Investment (1%), Operations (1%), Interest (1%). Controls export licenses in order to fulfill trade commitments. Except for the chair, who is chosen by the Minister, and the managing director, the members are self-nominated and appointed by the Minister, Department of Primary Industries and Energy. Assessments rates (per kg. of milkfat): Market support, $0.33 (terminates as of 6/95); Promotion, $0.0377; Corporation, $0.007. (continued) Promotes exports of sultanas, raisins, and currants. Total funding 1993: $1.3 million. Overseas marketing (66%), Operations (34%). Conducts market research on these products. Authorized: 6. Members: 3 packers or exporters, 1 grower, 1 independent, and 1 chairperson (independent). Assessments (80%), government grants (13%), and interest (7%). Members are appointed by the Australian Horticultural Corporation on the basis of recommendations from an expert panel. Assessment: $10.20 per metric tonne on dried fruit production, collected 44 days after the fruit is sold. Promotes and coordinates the export of horticultural products, including apples, pears, nashi, citrus, avocados, nursery products, honey, macadamia nuts, and chestnuts in both domestic and export markets. Authorized: 8. Members: 6 industry, 1 government representative, and 1 managing director (permanent member). Total funding 1994: $6.1 million. Assessments (59%), export charges (8%), government grants (30%), and other (4%). Domestic marketing (47%), Export marketing (5%), Operations (27%), Market R&D (8%), Industry payments (7%), Meetings/conventions/ newsletters (3%), Assessment collection costs (3%). Works to improve the efficiency and quality of production and marketing of these products. Industry representatives are chosen by a selection committee and appointed by the Minister, Department of Primary Industries and Energy. The government representative is chosen directly by the Minister. Assessments: Rates vary by use and volume within the following industries: apples, pears, nashi, citrus, and avocados. Nursery, 2.5% of wholesale pot sales; Macadamia nuts, $0.015/kg.; Honey, $0.022/kg.; Chestnuts, $0.037/kg. An additional assessment on exports is charged for all products except chestnuts and nursery. (continued) Purchases, promotes, and markets wheat, grain, and their products in both domestic and export markets. Participates in related value-added activities. Authorized: 11. Members: 1 chairperson, 1 managing director, 1 government representative, and 8 industry representatives (nominated by a selection committee largely appointed by the Grains Council of Australia). Total funding 1993: $1.7 billion. Export sales (82%), domestic sales (16%), and other (2%). The board purchases and sells Australian wheat. Direct costs (59%), (e.g., storage, freight), Cost of sales (53%), Movement in pool grain inventories (–27%), Interest (9%), Operations (7%), Other (–1%). Members, except the managing director, are appointed by the Minister and may be farmers or individuals with expertise in finance, marketing, or business management. Operating expenses and other direct costs are taken out of the sales, and the profits are returned to the farmers on a pooled basis. The Wheat Industry Fund receives an assessment of 2% on all wheat sales for the board’s capital base. Promotes grape products in both domestic and export markets. Performs market research on these products. Authorized: 8. Members: 1 chairman (ministerial selection), 1 government member, and 6 members with industry or business expertise. Total funding 1994: $3.7 million. Overseas marketing (78%), Regulatory services (15%), Operations (7%). Licenses exports. Assessments (23%), user fees (35%), government grants (24%), Australian Government Officials’ Scheme (18%), and other (<1%). Sets quality standards. Assessments: For up to and including 10 tonnes processed, $146. For over 10 tonnes processed, $132 plus a certain amount per tonne, ranging from $3.07 to $0.29, based on the total product weight. (continued) AWRAP promotes wool in domestic and export markets. Authorized: 9. Members: 1 chairman, 1 managing director, 1 government representative, and 6 others with industry expertise. Total funding Dec. 1993-June 1994: $91.3 million. Export promotion (76%), Research (14%), Other (10%, includes domestic promotion). AWRAP also identifies research and development requirements and provides funding. AWRAP assessments (49%), government grants (15%), other member countries’ contributions (25%), and other (11%). IWS promotes the use of wool and wool products internationally. AWRAP board members are appointed by the Minister for Primary Industries and Energy. However, the managing director is appointed by the other board members. The appointments are based on advice from an industry selection committee. AWRAP assessments are based on the value of wool sold to an initial buyer; 3.5% of this value is used for promotional activities and 0.5% for research and development. The government matches research and development expenditures. The IWS board consists of up to 19 members: 8 from AWRAP, 3 from New Zealand, 3 from South Africa, 1 from Uruguay, 1 chief executive officer, 1 director of operations, and up to 2 additional members appointed by the IWS board. The chairman and managing director of AWRAP are the chairman and chief executive officer, respectively, of IWS. Fees: Beginning May 1, 1995, IWS will charge companies for use of its “woolmark” (trademark). (Table notes on next page) Germany is the world’s largest importer and fourth largest exporter of agricultural products, and its food and beverage industry represents Germany’s fifth most important industry. Germany’s major high-value agricultural products include milk, cheese, meats, and processed foods. More than two-thirds of its agricultural exports are purchased by other European Union countries. Because Germany is a member of the 12-member European Union, all European Union market ordinances apply to its agricultural products. These market ordinances include regulation of price support programs, production quotas and set-asides, import restrictions, and export assistance programs for targeted commodities. We reviewed the overall organizational structure, funding, and activities of the Central Marketing Organization of German Agricultural Industries (CMA) and the German Wine Institute. These two German agricultural marketing organizations varied considerably from U.S. check-off programs in organizational structure, role of government, types of activities performed, and the emphasis on export activities. Funding of the two marketing organizations was similar to U.S. check-off programs in that it came primarily from mandatory assessments, with neither organization receiving government funding. We also obtained information on the government’s Sales Promotion Fund, which collects the assessments that are used to finance both CMA and another organization—the Central Marketing and Price Reporting Office for Agricultural, Forestry and Food Products (ZMP)—which provides agricultural market information for both domestic and export markets. ZMP’s principal role is to serve as a central market and price reporting office for market reports on agricultural, forestry, and food products. ZMP’s annual funding from the Sales Promotion Fund was an estimated $8.6 million in 1994. Organizationally, CMA is a quasi-governmental agency that conducts national, generic promotions for virtually all German food and agricultural products, except for fish, forestry, and wine products. CMA is structured as a corporation, with 55 percent of its shareholders representing farmer organizations and 45 percent representing food processing or food trade organizations. The fish, forestry, and wine industries each has an independent marketing organization to promote its products. CMA is managed by a board composed of 26 industry members elected by the shareholders, who are in turn indirectly guided by the government’s Sales Promotion Fund Administrative Council. This council is composed of both industry and government members, with a government majority. The German Wine Institute is guided by the German Wine Fund, whose administrative council is composed of 44 consumer and industry representatives. The two funds are established by federal law. These two organizations’ expected funding levels for 1995 are an estimated $92.4 million for CMA and $14.2 million for the German Wine Institute. Funding comes primarily from mandatory industry assessments; neither organization received government funds. CMA’s assessments are ultimately paid by the farmers in a number of product sectors and collected by the government’s Sales Promotion Fund. According to CMA, about 70 percent of the assessment funds are from the meat and dairy product sectors. The Sales Promotion Fund Administrative Council uses the assessment funds to finance the operations of both CMA and ZMP. The German Wine Fund collects mandatory assessments from both producers and wine traders. Neither of the organizations assessed imported agricultural products. The assessments are collected for most domestic agricultural and food industry products, with few exemptions for smaller-volume producers and no provisions for refunds. Other sources of income include CMA’s user fees, which are collected to reimburse the organization for the costs associated with issuing quality assurance seals. Assessment rates are prescribed by federal law. CMA’s assessment rates were revised for the first time in 1993, resulting in increased assessment rates for the majority of the agricultural product sectors. The German Wine Institute’s assessment rates were revised in 1994. The marketing organizations in Germany engage in a variety of promotion and marketing activities, including point-of-sale promotion, media advertising, market research, and trade shows. The organizations carry out these activities in both the domestic and export markets. In addition, CMA emphasizes food quality with its CMA Seal of Quality for German food products that have passed required tests and inspections. Companies that obtain this quality seal benefit from CMA’s Seal of Quality promotions. Between 12,000 to 14,000 German food products carry CMA’s Seal of Quality. In contrast to most of the U.S. check-off programs we reviewed, the CMA and the German Wine Institute placed greater emphasis on export promotion. In 1995, CMA will spend an estimated $22.2 million, or about one-fourth of its estimated total funding, on export promotion, and the German Wine Institute will spend almost $6.2 million, or close to one-half of its total funding, on export promotion activities. CMA’s export promotion activities are guided by offices in eight countries—six in other European Union countries, one in New York, and one in Tokyo. The German Wine Institute also has offices in other European countries, Japan, and the United States. Table IV.2 summarizes selected information on the two marketing programs we reviewed in Germany. Promotes all agricultural products except fish, forestry, and wine in both domestic and export markets. Authorized: 26. Members are elected from the 53 producer and agricultural industries (manufacturers, wholesalers, and retailers) associations. Total estimated funding 1995: $92.4 million. Assessments (96%), user fees and other (4%). No government funds are provided. Domestic activities (75%). Provides central marketing support. Members are elected at the shareholder meeting. Assessment rates vary by agricultural sector. Conducts food quality tests and inspections. Issues CMA Seal of Quality. Assessments are paid by farmers. There is no assessment on imports. Trains exporters and sales personnel for food shops. Conducts market research in domestic and export markets. Markets and promotes German wines in both domestic and export markets. Conducts market research in domestic and export markets. Authorized: 44 on the Administrative Council.Members: 18 representing wine-estates and their cooperatives, 8 regional wine promotion boards, 7 industry associations and groups, and 11 wine trade and consumers. Total funding 1995: $14.2 million. Funding is almost entirely from assessments from the German wine industry. There is no government funding. Domestic activities (50%). The overall strategy is monitored by its supervisory board (7 members). Administrative Council members are appointed by the Ministry of Food, Agriculture and Forestry. Members of the supervisory board are elected by the Administrative Council. Assessments: Since 1994, the rate for producers has been $80.11 per hectare of vineyard area. In addition, the assessment rate for all wine traders was $0.80 per hectoliter of grape must (unfermented pressed juice) or wine; or per 133 kilograms of grapes or grape mash. New Zealand has a large quantity of productive land in comparison with the size of its population (3 million). Historically, trade has been concentrated on outputs from the land. The most significant productive use of land has always been agriculture. New Zealand’s producer marketing boards, which began forming in the 1920s, are among the oldest and best known government-sponsored institutions. Originally they were given broad legislative authority to negotiate freight rates and insurance charges, stabilize domestic prices through product acquisition, even out seasonal peaks in produce shipping, coordinate export promotion, and conduct other activities to improve grower returns. In the mid-1980s, as part of a widespread deregulation of key sectors of its economy, New Zealand abolished more than 30 agricultural production and export subsidy programs. As a result, New Zealand farmers lost nearly 40 percent of their gross income and had to become more responsive to the market. This deregulation also changed the fundamental role of the boards and caused them to reevaluate their operations and marketing strategies and to implement new initiatives. The seven New Zealand marketing organizations we reviewed were (1) the New Zealand Apple and Pear Marketing Board, (2) the New Zealand Dairy Board, (3) the New Zealand Game Industry Board, (4) the New Zealand Horticulture Export Authority, (5) the New Zealand Kiwifruit Marketing Board, (6) the New Zealand Meat Producers Board, and (7) Wools of New Zealand (formerly the New Zealand Wool Board). The size and composition of these organizations’ boards vary, as do their activities. In contrast to U.S. programs, most New Zealand boards’ promotion activities are focused on increasing exports. Most boards also conduct research, some of which is partially funded by the government. In addition to promotion and research, these producer boards have other functions, such as issuing export licenses, setting quality standards, and for some, purchasing and selling products in domestic and export markets. All the boards we reviewed are legislatively mandated. The organizations’ boards range in size from 5 to 13 members. Generally, board members are elected directly through various affiliated associations to 3- to 4-year terms. Other members are either nominated by the board and/or appointed by the government because of their proven experience or specialized knowledge. The boards receive no grants or concessionary loans from the government for market promotion activities. However, through its Public Good Science Fund, the New Zealand government remains the dominant supplier of research funds. Research priorities and requirements are established by a joint government and private sector board. Funding for agreed-upon projects is disbursed on the basis of bids received. New Zealand producer boards compete for government funds for particular research activities. Long-term basic research (10 to 15 years) is generally carried out by the government’s Crown Research Institutes, and applied research is generally the responsibility of the boards. New Zealand boards receive their funds in a variety of ways. Some receive their funding from mandatory assessments, others receive income from purchasing and selling products in domestic and foreign markets, and one charges fees for services. The boards that assess members generally collect them from all domestic producers, with no exemptions for smaller-volume producers or option for refunds. None of the boards we reviewed assess imports. Generally, large farms provide the majority of board revenue. For example, about 29,000 farmers pay assessments to New Zealand’s Meat Producers Board, but 5,000 to 6,000 farmers account for more than half of the total amount collected. The boards that collect assessments can change the rates, but notification of rate changes must be made in the New Zealand Gazette (which is similar to the U.S. Federal Register). For the most part, assessment rates have remained fairly consistent over the past several years. Three of the boards we reviewed—the New Zealand Dairy Board, New Zealand Kiwifruit Marketing Board, and New Zealand Apple and Pear Marketing Board—have as their primary responsibility the export of products. These boards purchase and market all products intended for export; deduct their expenses from market returns; and distribute the net returns to contributing farmers, growers, and dairy companies. The boards’ involvement in domestic promotion varies. For example, the New Zealand Kiwifruit Marketing Board promotes kiwifruit with domestic retailers, and the New Zealand Dairy Board through its subsidiary companies has limited involvement in the local market in areas such as marketing coordination with local companies and providing educational and nutritional information on dairy products. In 1993, the Apple and Pear Board Act was amended to allow for deregulation of the domestic market, and since January 1994, the New Zealand Apple and Pear Board is no longer the only seller in the domestic market. The board will no longer be involved in domestic promotion activities. Because about 85 percent of New Zealand’s agriculture products are exported, most board activities center around the development of export markets rather than domestic promotion. This is in contrast to U.S. check-off programs’ domestic focus. In addition, unlike their U.S. counterparts, some New Zealand boards also license exporters, set grading standards, ensure quality control, and purchase and sell products in both domestic and export markets. Some boards, such as the New Zealand Apple and Pear Marketing Board and the New Zealand Game Industry Board, have developed their own brand names—ENZA and Cervena, respectively—that are used primarily for export promotion. While most boards’ applied research is directed towards market development, some research is production-oriented. For example, the New Zealand Meat Producers Board provides some funds to the Meat Research Development Council, which in turn helps to fund “monitor farms.” On these farms, the farmers hold “field days” during which they demonstrate new technologies to other farmers. According to the board, the monitor farm program is well recognized and has increased on-farm productivity. The New Zealand government has sought to make the boards more accountable to producers and has taken several measures to ensure that the boards operate in the most efficient and effective manner possible. These measures include requiring performance and efficiency audits every 5 years, appointing individuals with commercial expertise to serve on the boards, and requiring financial reporting to be in line with current commercial standards. Probably the most significant of these measures is the requirement for a performance and efficiency audit every 5 years. These audits, mandated in 1992, are to provide independent assessments of the boards’ overall performance. At the time of our review, audits of the New Zealand Dairy Board and the New Zealand Horticulture Export Authority had been completed, and the New Zealand Apple and Pear Marketing Board audit was scheduled to begin soon. Table IV.3 summarizes selected information on the seven marketing programs we reviewed in New Zealand. Purchases and markets all apple and pear fruit intended for export. Authorized: 7. Members: 4 are nominated by the farmers federation; 3 are selected on the basis of their commercial expertise. Total funding 1993: $320.7 million. Sales (99%), Other (1%). Direct costs (25%), Distribution (49%), Operations & marketing (22%), Other (4%). All members are appointed by the Minister of Agriculture. No assessments. Board deducts its expenses from profit on sales of product and distributes remainder to growers. Purchases and markets dairy products intended for export. Authorized: 13. Members: 11 are elected by the cooperative dairy companies; 2 are appointed by the Minister of Agriculture on the basis of their commercial expertise. Total funding 1994: $3 billion. Sales (86%), Other (14%) (nondairy products). Operates research and development centers in selected countries, focusing on the development of in-market capabilities. No assessments. Board deducts its expenses from the profits on sales of products and distributes remainder to dairy companies. Sales cost (40%), Payment to dairy companies for manufacturing costs (27%), Subsidiary operating costs (9%), Other (24%). Promotes venison and velvet products for export. Total revenue 1993: $4.9 million. Manages industry research programs. Provides training for quality assurance standards. Authorized: 8. Members: 4 are deer farmers nominated by the Deer Farmers Association; 3 represent exporters and are nominated by the Deer Industry Association; 1 is nominated by the board. All members are appointed by the Minister of Agriculture. Assessments (92%), Other (8%). General assessment rates: Venison, $0.13/kg.; Fallow deer, $0.10/kg.; Velvet, $1.62/kg. Venison marketing (55%), Velvet marketing (10%), Research (9%), Quality assurance training (14%), Other (12%). (continued) Conducts, collects, and disseminates market research. Total revenue 1993: $310,000. Licenses exporters. Promotes compliance with grade standards. Authorized: 5. Members: 3 are appointed by various affiliated federations representing producer and exporter interests; 1 is appointed by the government on the basis of commercial expertise; and 1 chairperson, who cannot be an officeholder or member of any of the nominating bodies. Employee fees and operating costs (100%). Farmers (83%), Industry (17%). No assessments. Collects fees for services from farmers and industry. Purchases and markets all kiwifruit intended for export. Authorized: 8. Members: 4 are elected by the growers; 3 are appointed by the board on the basis of their commercial expertise and approved by the Minister of Agriculture; 1 is appointed by the Minister of Agriculture and represents the government and the interests of the consumers. Total revenue 1994: $326.6 million. Sales (99%), Other (1%). Direct sales costs (48%), Distribution (36%), Marketing (7%), Other (9%). No assessments. Board deducts its expenses from the profits on sales of kiwifruit and distributes remainder to growers. Promotes beef, sheep, goat, and horse meat products for export. Total revenue 1993: $16.9 million. Assessments (77%), Other (23%). Licenses exporters. Sets quality control standards. Export promotion (28%), Research (24%), Personnel costs such as staff relocation and salaries (27%), Other, including travel, and property (21%). Funds research and development for on-farm and off-farm development, which can provide technology transfer. Authorized: 11. Members: 6 are directly elected by meat producers; 4 are nominated by the board on the basis of their commercial expertise and appointed by the Minister of Agriculture; and 1 represents the Dairy Board and is appointed by the Minister on the basis of a recommendation of the Dairy Board. General assessment rates per head at time of slaughter: Sheep/lamb/goats, $0.25; cattle, $2.27; calves, $0.13. Informs farmers about markets, market development, and how to meet market demand through scheduled meetings. (continued) Promotes wool and wool products in both export and domestic markets. Authorized: 10. Members: 6 are elected by farmers; 2 are nominated and appointed by the government on the basis of their commercial expertise; 1 is nominated by the board and appointed by the government; and 1 (the Director General of Agriculture) serves as an ex-officio member. Total revenue 1994: $34.5 million. Assessments (82%), Other (18%). Sets value and sells wool stock until depleted. Assessment rate: 6% on value of wool sold to initial buyer. IWS (46%), Promotion & research (13%), Wool sales administration (11%), Interest expense (13%), Other (17%). Provides technical assistance to farmers. Manages a research and development program as well as provides technology transfer for research and development. There is no government representation on the board. For 40 years after World War II, British farmers were encouraged to produce as much food as possible in a bid to improve self-sufficiency in food supplies. By 1970, the United Kingdom had transformed itself from a net importer to a net exporter of grain. Today, the United Kingdom is the world’s ninth largest exporter of high-value agricultural and food products. Its major high-value exports include meat and alcoholic beverages, and more than 60 percent of its agricultural exports are purchased by the other 11 member countries of the European Union. Because the United Kingdom is a member of the 12-member European Union, all European Union market ordinances apply to its agricultural products. These market ordinances include regulation of price support programs, production quotas and set-asides, import restrictions, and export assistance programs for targeted commodities. The four United Kingdom agricultural marketing organizations we reviewed varied considerably from U.S. check-off programs in organizational structure, role of government and sources of funding, types of activities performed, and emphasis on export promotion. These organizations were (1) Food From Britain, (2) the Home-Grown Cereals Authority, (3) the Meat and Livestock Commission, and (4) the Sea Fish Industry Authority. Food From Britain is a quasi-government marketing organization that promotes British food and drink products primarily in export markets. The other three marketing organizations promote specific sector products, such as meat, in both domestic and export markets. The four organizations are managed by boards composed of both industry and independent members appointed by government ministers. The organizations’ boards range in size from 12 to 21 members, most of whom are appointed from industry nominations. However the government appoints several key board members, such as the chairman and deputy chairman, who are independent of the industry. The four marketing organizations receive funding from assessments, government grants, and fees for services to government or industry. In 1993, annual funding levels ranged from about $9.7 million for Food From Britain to about $63.5 million for the Meat and Livestock Commission. In 1993, Food From Britain received about 60 percent of its funding from the Ministry of Agriculture, Fisheries, and Food. However, the government is committed to reducing Food From Britain’s reliance on government funding and to having it rely more on private industry funding. The remaining three organizations were funded partially by assessments but also received funding from other sources, such as government grants and fees for services, which accounted for about 15 to 35 percent of their total funding. The organizations collect assessments from all domestic producers for products brought to market, with no exemptions for smaller-volume producers or provisions for assessment refunds. The Sea Fish Industry Authority was the only marketing organization we reviewed that assessed imported products. The three organizations vary in how they set assessment rates. Assessment rates for the Sea Fish Industry Authority can be adjusted from time to time, after consultation with industry, within the statutory assessment limits. The rate is imposed by the Sea Fish Industry Authority’s regulations and confirmed by the government. The government sets the Meat and Livestock Commission’s assessment limits every 3 to 4 years after consulting with the industry. The commission is then free to establish the rates for the year without government approval. The Home-Grown Cereals Authority’s assessment rates are reviewed annually and can be adjusted with government approval. Only Parliament can terminate the marketing programs. The government evaluates these marketing organizations about every 5 years. For example, the Ministry of Agriculture, Fisheries, and Food conducted a policy review of the Sea Fish Industry Authority in 1991 to evaluate, in consultation with the industry, the future role of the authority, the assessment rate, and the basis of industry funding. The government report made a number of recommendations concerning the authority’s organizational structure, funding, and activities. The marketing organizations in the United Kingdom engage in a variety of research activities and in typical marketing activities, such as trade shows, point-of-sale promotions, and advertising. Most of the organizations spend the majority of their funds on promotional activities. Notably, however, the Home-Grown Cereals Authority spends about 62 percent of its funds on research activities. In contrast to U.S. check-off programs, three of the four organizations we reviewed performed additional activities, such as vocational training, quality assurance, and collection and distribution of information to the government and industry. For example, the Meat and Livestock Commission collects and publishes information on slaughterhouse design and operations, provides industry training for the retail, wholesale, and catering sectors, and runs meat classification programs. Two of the three organizations spend over 30 percent of their funds on activities other than promotion and research. Some organizations emphasize export promotion activities. For example, Food From Britain spends almost all of its funds promoting exports of British food and drink products, primarily to other European countries and North America. The Home-Grown Cereals Authority and the Meat and Livestock Commission spent about 13 percent and 7 percent, respectively, on export promotion during 1993. Table IV.4 summarizes selected information on the four marketing organizations we reviewed in the United Kingdom. Promotes British food and drink products, primarily in export markets. Authorized: No fewer than 13 and no more than 21 industry members representing all sectors of the agrifood industry. Total funding 1993: $9.7 million. Export promotion (100%). Members are appointed by the Minister of Agriculture, Fisheries and Food and the Secretaries of State for Scotland, Wales, and Northern Ireland. The Ministers appoint one member to be chairman and another to be deputy chairman. Government grants (60%), and contributions from other agricultural marketing organizations and user fees from exporters (40%). Promotes British cereal products and oil seeds. Total funding 1993: $12.6 million. Conducts research on these products. Provides services for the government such as reporting of price information and serving as an agent of the Intervention Board for Agriculture Produce. Authorized: up to 21 industry and independent members consisting of not less than 5 nor more than 9 cereal growers, an equal number (5 to 9) of dealers and processors, and up to 3 independent members, including both the Chairman and the Deputy Chairman. Assessments (85%) and other sources (15%). Domestic promotion (6%), Export promotion (13%), Market information (9%), Research (62%), Other (10%). Members representing the interests of growers, dealers, and processors are nominated by the relevant trade organizations. All members are appointed by Ministers. Assessment rates (exclusive of value-added tax) per tonne traded for fiscal year 1993: cereal growers, $0.451; cereal dealers (net of grower contribution), $0.04; processors of cereals for animal feed, $0.03; other processors, $0.09; and oilseed growers, $0.751. (continued) Promotes beef, sheep, and pork products in both domestic and export markets. Total funding 1993: $63.5 million. Conducts research on cattle, sheep, and pigs. Assessments (65%), fee and other income (23%), reimbursement for government services (12%). Provides support services to the meat industry, including meat quality and classification. Authorized: 13 industry and independent members (maximum of 15 can be appointed) consisting of 4 from the producer sector, 4 slaughterers, wholesalers, and manufacturers, 2 retailers, and 3 independent members, including the Chairman, Deputy Chairman, and Chairman of the Consumers Committee. Two assessment rates—a general assessment and an assessment for specific species promotion. Provides planning, design, and project management services to clients in the meat industry such as meat plants. Industry members are nominated by industry sectors and appointed by Ministers. The three independent members are appointed directly by Ministers. Meat industry training courses, including the retail, wholesale, and catering sectors. General assessment rates per head for 1993 were: pigs, $0.556; cattle, $2.31; sheep, $0.391; and calves, $0.12. Producers pay 50% and slaughterhouses and livestock exporters pay 50% of the general assessment. Domestic promotion (46%), Export promotion (7%), Research (5%), Services to industry (23%), Services for the government, such as purchasing meat for the government’s Intervention Board (12%), Policy, legislation, training, and communication (5%). Species assessment rates per head for 1993: pigs, $0.511; cattle, $2.61; and sheep, $0.391. Producers pay 100% of the species assessment. (continued) Promotes sea fish products. Total funding 1994: $13.4 million. Conducts research on sea fish products. Trains all sectors of the sea fish industry. Assessments (72%), government grants and fees for services (8%), and other sources (20%). Domestic promotion (36%), Research and development (32%), Other (31%). Provides financial assistance in the form of grants and guarantees to the sea fish industry. Authorized: Up to 12 industry and independent members consisting of 8 nominated from the sea fish industry, and 4 independent members, including the chairman and the deputy chairman, and 2 other members who must be independent of any financial or commercial interests in the sea fish industry. Members are appointed by Ministers. Assessment rates per tonne on sea fish or sea fish products landed, imported, or trans-shipped at sea within British fishery limits for 1994 were: whole sea fish $11.33 and fish fillets $22.67. First purchasers pay the assessment. John F. Mitchell, Senior Attorney The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on U.S. and foreign promotion and research programs that are designed to increase domestic and foreign sales of agricultural products, focusing on: (1) how U.S. check-off programs are planned and organized; and (2) how comparable marketing organizations in Australia, Germany, New Zealand, and the United Kingdom carry out their agricultural promotion activities. GAO found that: (1) the six U.S. check-off programs reviewed vary by board composition, revenues collected, assessment methods, and options for initiating, continuing, and terminating programs; (2) check-off boards differ in their emphasis on developing domestic or foreign markets, their methods for selling their products, and their reliance on research to develop new products, enhance production, and address nutritional concerns; (3) check-off boards use market research and program evaluation techniques to plan their future activities while coordinating with related groups in preparing and carrying out these plans; (4) the foreign promotion and research programs reviewed differ from the U.S. check-off programs in their organizational structure, funding mechanisms, types of activities performed, and emphasis on export activities; (5) some foreign marketing organizations have government members on their boards or guiding councils and do not require legislative action to change their assessment rates; (6) some foreign programs promote product groups rather than a single industry; (7) in general, the foreign marketing organizations do not exempt small producers from assessments and some receive significant funding from sources other than their industry assessments; (8) foreign organizations generally engage in a wider range of promotional activities, such as buying and selling products and providing training and inspection services than their U.S. counterparts and focus more on exports than domestic sales; and (9) market development programs may become more important in the future, since the new international trade regulations do not limit their use and increase competition. |
Although there have been fluctuations in its funding sources, FAA is primarily supported by the Trust Fund (82 percent), which receives revenues from a series of excise taxes paid by users of the NAS. These excise taxes are associated with purchases of airline tickets and aviation fuel, as well as the shipment of cargo. These Trust Fund revenues are then available for use subject to appropriations. In addition to these revenues, in most years, General Fund revenues have been used to fund FAA. About $2.6 billion was appropriated for fiscal year 2006 from the General Fund for FAA’s operations. This amount represents about 18 percent of FAA’s total appropriation. The Trust Fund was established by the Airport and Airway Revenue Act of 1970 (P.L. 91-258) to help fund the development of a nationwide airport and airway system. The Trust Fund provides funding for FAA’s two capital accounts—the Airport Improvement Program (AIP) and the Facilities and Equipment (F&E) account—which provide grants to airports and funds for modernizing the air traffic control system, respectively. The Trust Fund also provides funding for the Research, Engineering, and Development (RE&D) account and supports part of FAA’s Operations account. To fund these accounts, the Trust Fund is credited with revenues collected from system users through the dedicated excise taxes. In fiscal year 2005, the ticket tax was the largest single source of Trust Fund revenue, followed by the international departure and arrival tax, the passenger segment tax, and fuel taxes (see table 1 for a description of current taxes). The administration’s reauthorization proposal would change FAA’s financing system from one based mainly on excise taxes to one based more on cost-based charges. Under the proposed system, funding for ATO would come primarily from user charges on commercial aircraft and fuel taxes on general aviation aircraft. In addition, contributions from the General Fund would be appropriated to FAA to cover ATO costs of providing services to military and other public aircraft, flight service stations, and a few other services. Funding for AIP, EAS, and part of RE&D would come from an equal fuel tax on both general and commercial aviation and a tax on arriving and departing international passengers. Funding for Safety and Operations would include some fees, but mostly General Fund contributions. The reauthorization proposal would also create an advisory board and give FAA limited borrowing authority. Table 1 compares elements of the current and proposed funding structure for FAA. The administration’s proposal also calls for changing FAA’s budget structure by establishing two new budget accounts—(1) Air Traffic Organization and (2) Safety and Operations—to align with FAA’s lines of business and proposed funding. These two new accounts would replace the Operations and F&E accounts. The proposal retains the AIP and RE&D accounts. See table 2 for a comparison of the current and proposed FAA budget structure. In January 2007, FAA released a new cost allocation study. This report sets forth a methodology for assigning air traffic costs to user groups on the basis of aircraft type. The two principal user groups are the high- performance group, which includes all fixed-wing turbine engine aircraft operations, and the piston aircraft group, which includes piston engine fixed-wing aircraft operations and helicopters. According to FAA, this cost allocation methodology is based on the assumption that high-performance users generally compete for the same air traffic control resources and their operations are more time-sensitive than piston aircraft operations, requiring more complex air traffic equipment and procedures. Piston aircraft operations, on the other hand, tend to be less time-sensitive and typically rely on less complex equipment. Differences in the speed and cruising altitudes of the two aircraft types also affect their en route costs. The current funding structure, with some modifications to the excise taxes and tax rates and changes in the levels of General Fund contributions, has successfully funded a growing FAA budget. Trust Fund revenues are projected to increase substantially at current excise tax rates. If, to fund the additional costs of NextGen or for other reasons, Congress chooses to increase spending on aviation beyond what can be paid for at current excise tax rates, it can obtain additional revenue through the current funding structure by increasing excise tax rates, the General Fund contribution, or both, although the nation’s fiscal imbalance could make such an increase difficult. Nonetheless, because some factors that drive tax revenues, such as ticket prices, are not well linked to FAA’s workload and costs, FAA has been concerned about the long-run revenue adequacy, equity, and efficiency of its funding. Some of the administration’s proposed changes for funding FAA, such as establishing direct user charges for commercial aviation and substantially increasing fuel taxes for general aviation are intended to link FAA’s revenues more closely with its costs. For other elements of FAA’s budget, however, it is not possible to establish a direct link between revenues and costs. For example, because AIP expenditures are not the direct result of costs imposed by users of the NAS, the proposal to fund AIP through equal fuel taxes on all aircraft operators can best be evaluated on equity grounds. Better alignment of FAA’s revenues and costs can address some of the concerns about the current funding system that derive from the lack of connection between some key drivers of current FAA revenues, such as ticket prices, and FAA’s workload and costs. However, the effectiveness of the proposed funding structure in linking costs with revenues depends critically on how well FAA’s new cost allocation method assigns costs to users and on how closely the proposed funding structure adheres to the principle of cost-based funding, and questions remain about both considerations. Furthermore, FAA’s method for estimating the fuel tax rates needed to collect its intended level of fuel tax revenue may have underestimated the tax rates needed by not accounting for possible reductions in fuel consumption due to the higher tax rates. The implications of some of the other proposed changes, including one creating an advisory board that can make recommendations on fee setting and another authorizing limited authority for FAA to use debt financing, are uncertain. Congress has used the current funding structure—excise taxes plus a General Fund contribution—to fund FAA for many years. As the number of air travelers has grown, so have excise tax revenues. Even though revenues fell during the early years of this decade as the demand for air travel fell, they began to rise again in fiscal year 2004, and FAA estimates that if the current taxes remain in effect at their current rates, revenues will continue to increase. While retaining the basic structure for funding FAA, Congress has at times changed the mix of excise taxes and some of the tax rates. For example, when the taxes were most recently reauthorized in 1997, Congress added the passenger segment tax while reducing the passenger ticket tax rate from 10 percent to 7.5 percent. Congress has also appropriated varying amounts of General Fund revenues for FAA during the past 25 years, ranging from 0 to 59 percent of FAA’s budget and averaging around 20 percent since fiscal year 1997. The fluctuation in the amount of the General Fund contribution occurs because the contribution is based on the incoming Trust Fund revenues that are available to fund the Operations account after revenues have been allocated to fund the F&E, AIP, RE&D accounts. Therefore, fluctuations in the Trust Fund revenues and FAA expenditures require different levels of General Fund contributions. As air traffic grows and FAA embarks on modernization through NextGen, Congress may appropriate additional funds to FAA to fund new investment and to maintain a safe and efficient airspace system, although there is considerable uncertainty about how much NextGen will cost. FAA estimates that NextGen will cost between $15 billion to $22 billion through 2025. However, funding NextGen does not mean that the current funding structure needs to be changed. According to projections prepared by the Congressional Budget Office (CBO), revenues obtained from the existing funding structure are projected to increase substantially. Assuming that the General Fund provides about 19 percent of FAA’s budget, CBO estimates that through 2016 the Trust Fund can support about $19 billion in additional spending over the baseline FAA spending levels CBO has calculated for FAA (the 2006 funding level, growing with inflation) provided that most of that spending occurs after 2010. How far this money will go to fund modernization is subject to a number of uncertainties— including the future cost of NextGen investments, the volume of air traffic, the future costs of operating the NAS, and the levels of future appropriations for AIP, all of which may influence funding for FAA. However, if the desired level of spending exceeded what was likely to be available from the Trust Fund at current tax rates, Congress could make further changes within the current structure that would provide FAA with additional revenue if Congress believed that larger FAA appropriations were appropriate—for example, if FAA experienced increased workload demands as a result of increased demand for air traffic services. Congress could raise more revenue from airspace system users for NAS modernization or for other purposes by raising the rates on one or more of the current excise taxes. Congress could also provide more General Fund revenues for FAA, although the nation’s fiscal imbalance may make a larger contribution from this source difficult. Thus, it is necessary to look at factors other than a need for more revenues to justify a major change in FAA’s funding structure. FAA has expressed concern that revenues from the current funding structure depend heavily on factors, such as ticket prices, that are not connected to FAA’s workload and costs. According to FAA, under the current structure, increases in the agency’s workload may not be accompanied by revenue increases because users are not directly charged for the costs that they impose on FAA for their use of the NAS. Revenues collected from excise taxes are primarily dependent on the price of tickets and the number of passengers on planes, while workload is driven by flight control and safety activities. This disconnect raises three key concerns about the current funding structure—its long-term revenue adequacy, equity, and efficiency. Moreover, these three concerns are supported by long-term industry trends and FAA forecasts of declines in inflation- adjusted air fares, the growing use of smaller aircraft, and FAA’s 2007 cost allocation study. The administration has used these concerns as its rationale for proposing major changes in FAA’s funding. Many of the proposed changes for funding FAA contained in the administration’s reauthorization proposal are intended to address the concerns about revenue adequacy, equity, and efficiency by linking FAA’s revenues more closely with its costs. The proposal calls for a combination of methods for funding FAA, which we previously reported might best address concerns with the current system by providing a better link between revenues and costs than any option used separately. For example, the proposal would eliminate all the excise taxes except the taxes on fuel and the tax on arriving and departing international passengers. The ATO, the largest part of FAA’s budget, would then be funded by direct user charges on commercial aircraft—including air taxis, fractionally owned aircraft, and aircraft providing charter service—that use the NAS, fuel taxes paid by general aviation users of the NAS (both turbine and piston), and General Fund revenues to cover the costs of exempt aircraft such as military and other state aircraft and flight service stations. The proposal would also allow FAA to establish a fee for all aircraft using the nation’s most congested airports. Based on the time of day or day of the week, the fee would be designed to increase efficient use of the NAS by discouraging peak-period traffic at congested airports and, thus, reducing delays. Under such a fee, cargo carriers could pay lower fees by operating at night than they would pay by operating at peak periods of the day, creating an incentive for some cargo carriers to switch daytime operations to nighttime. The fee could also create incentives for general aviation aircraft flying to and from metropolitan areas with congested airports to use other nearby airports instead. The shares of ATO costs to be recovered from commercial and general aviation aircraft, respectively, and the General Fund contribution to cover the costs of exempt aircraft would be based on the results of FAA’s cost allocation study. In addition, the proposal would authorize FAA to impose fees to pay for costs related to certain aircraft certification and registration activities that it conducts. Basing cost recovery for ATO only on cost allocation is a policy choice. In many other countries, cost recovery is based in part on cost allocation and in part on other principles, such as ability to pay. For example, some countries charge a fee for en route services based on weight and distance; weight is included as a factor in charging formulas because many believe that it reflects an aircraft operator’s ability to pay. Using additional principles for cost recovery could result in different distributions of the funding burden among user groups. For one large area of FAA’s budget, AIP, it is not possible to establish a direct link between revenues and costs because AIP expenditures are not the direct result of costs imposed by users of the NAS. FAA distributes AIP grants on the basis of congressional priorities established in authorizations and appropriations. Accordingly, equity would appear to be the best criterion to use in evaluating the administration’s proposal to fund AIP through a fuel tax of 13.6 cents per gallon on commercial and general aviation operators and a tax of $6.39 per passenger on the use of international travel facilities. According to an FAA official, the decision to establish equal tax rates for commercial and general aviation operators was made to achieve fairness and simplicity. One way to evaluate the fairness or equity of funding AIP in this way would be to compare the distribution of the funding burden among user groups with the distribution of the grants funded by AIP. With all aircraft being charged the same fuel tax rate, according to FAA forecasts for fiscal year 2009, commercial aircraft operators would pay about 88 percent of the fuel tax revenues collected primarily to fund AIP, while general aviation operators would pay 12 percent. However, under the current AIP program, about one-third of AIP grants would go to airports with no commercial service, and some additional grants would go to airports where general aviation traffic makes up a substantial share of the aircraft operations. Thus, under the administration’s proposal, commercial aviation users would appear to be paying for a large share of the benefits that come from capital spending at general aviation airports. This result is no different from what happens today; commercial aviation users currently pay for a large share of these benefits, since the largest share of the Trust Fund comes from passenger ticket taxes. Some portion of these benefits may accrue to commercial aviation users if capital spending at general aviation airports keeps general aviation traffic from using congested commercial airports. However, most of the benefits from capital spending at general aviation airports would likely go to users of those airports or their surrounding communities—or to the general public to the extent a national system of airports that includes general aviation airports creates public benefits. In that case, funding those benefits by fuel taxes paid by commercial aircraft may raise equity issues. An alternative approach that would be consistent with a policy choice to charge general aviation users less than the cost of the benefits they receive from AIP grants would be to use General Fund revenues to fund part of AIP. A better alignment of FAA’s revenues and costs can address revenue adequacy, equity and efficiency concerns, but the ability of the proposed funding structure to link revenues and costs to address these concerns depends critically on two things—first, the soundness of FAA’s cost allocation system in allocating costs to users and, second, how closely the proposed funding structure adheres to the principle of cost-based funding. FAA’s new cost allocation study was released at the end of January, so we and others have had only a short time to review it. However, we, as well as industry stakeholders, have raised a number of concerns about the study and its cost allocation methodology. For example, FAA divides NAS users into two groups: high-performance aircraft, such as jets and turboprop aircraft, and piston aircraft. According to FAA, dividing users this way creates two principal groups whose flights impose substantially different costs on FAA. High-performance aircraft which fly at higher altitudes and speeds, and normally use Instrument Flight Rules, are “controlled” through en route airspace and for landings and takeoffs by air traffic controllers. Therefore, they impose higher costs on FAA than piston aircraft which fly at lower altitudes and often use Visual Flight Rules, under which they are not “controlled” through en route airspace but can use air traffic control services for landings and takeoffs. However, FAA did not conduct a statistical cost analysis to determine whether high-performance aircraft of different types might impose sufficiently different costs on the system to warrant dividing NAS users into more than two groups. For example, differences in aircraft weight could affect terminal airspace costs even though they may not affect en route costs. Although there may be no effect of aircraft weight on en route costs, FAA officials told us that the administration’s reauthorization proposal requests authority to set terminal airspace user fees based in part on weight because they believe that larger aircraft require greater separation, thus imposing greater terminal airspace costs. Under FAA’s cost allocation methodology, fixed costs are assigned to the group that is the primary user of the air traffic control services that generate those costs. Accordingly, it might be more consistent to divide high-performance aircraft into subgroups before FAA allocated the fixed costs of air traffic control services used by aircraft in all groups to the group that is the primary user of that service. Creating only two principal groups resulted in the allocation of some portion of the fixed costs to general aviation jet aircraft, because the high- performance group, which FAA defines to include general aviation jet aircraft, is the primary user of services that are responsible for most fixed costs. If instead, for example, FAA had created three principal aircraft groups—piston, heavy high-performance, and light high-performance— and if the heavy high-performance group was the primary user of services that are responsible for most fixed costs, then the fixed costs would have been allocated only to that group. The effect of this change in methodology would likely have been that general aviation turbine users would have been allocated a smaller share of total ATO costs and a lower fuel tax rate would have been needed to collect their share of FAA’s revenues. Because a sound cost allocation methodology is central to the successful application of cost-based funding, more time may be needed for FAA to further analyze the differences among aircraft types that lead to differences in the costs they impose on the NAS. More time may also be needed for a fuller analysis and discussion of FAA’s cost allocation methodology, after which, perhaps, a wider consensus might be reached on FAA’s cost allocation methodology. At the request of this Committee, we are continuing to review FAA’s cost allocation methodology. In addition to our concerns about the cost allocation methodology, we have identified some instances in which the reauthorization proposal does not strictly adhere to the principle of cost-based funding. For example, FAA has made what it terms a policy decision to not apply the congestion charge for using terminal airspace near large, busy airports to all aircraft that fly through that airspace. Aircraft flying near busy airports and using the same airspace but not taking off or landing at these airports would not be charged, even though such flights would use air traffic control services provided by the same approach control centers. FAA officials told us that they made this decision because the approach control centers would not exist if they were not serving traffic at the busy airports. In addition, they said, FAA wanted to create incentives for general aviation aircraft to avoid flying to or from the busy airports and to use other nearby airports instead. Although that rationale could provide a justification for allocating the fixed costs of such centers to users of the busy airports, allocating all of the variable costs to users at those airports is a deviation from a cost- based approach. While such policy decisions on pricing may be appropriate in some instances for various reasons, but they create deviations from the principle of cost-based funding that may limit the ability of the administration’s proposal to address concerns about the disconnect between revenues and costs associated with the current funding structure. The proposed fuel tax rates, although much higher than current rates, may not yield the revenue that FAA expects to collect from fuel taxes. FAA estimated the tax rates necessary to collect from general aviation operators the share of ATO costs allocated to them and from both commercial and general aviation operators the revenue needed to fund the proposed level of $2.75 billion for AIP, EAS, and the portion of the RE&D account to be funded through fuel taxes (less the share paid by international passengers). FAA officials confirmed for us that in performing these estimates they did not take into account possible reductions in fuel purchases due to the increase in the tax rates. Although we do not know by how much such purchases would decline, conventional economic reasoning, supported by the opinions of industry stakeholders, suggests that some decline would take place. Therefore, the tax rate should be set taking into consideration effects on use and the resulting impact on revenue. FAA officials told us that they believe that these effects would be small because the increased tax burden is a small share of aircraft operating costs and therefore there was no need to take its impact into account. Representatives of general aviation, however, have said that the impact could be more substantial. Even if there is no change in fuel purchases due to higher tax rates, FAA’s forecasts suggest that fuel tax revenues might be less than the proposed spending to be funded by those tax revenues. Furthermore, we observe that the administration’s proposed spending for AIP is substantially below the levels at which Congress funded the program in recent years. If Congress were to adopt the proposed funding structure but fund AIP at the same level as this year, fuel tax rates would need to be raised above the proposed level to obtain enough revenue to fully fund AIP without resorting to alternative funding sources, such as the General Fund or drawing down the Trust Fund balance. The proposed creation of an advisory board raises questions about the influence that NAS users would have on fee setting and the impact that such a board would have on congressional oversight. According to the reauthorization proposal, the advisory board would be able to recommend user fee amounts to the FAA Administrator, who would have the final decision in setting fees. If the advisory board objected to the fee, the Administrator would be required to publish a written explanation in the Federal Register. Aviation stakeholders could appeal the fee to the Secretary of Transportation but there would be no judicial review of the Secretary’s appeal decision. According to a recent report by the Congressional Research Service, the FAA Administrator would have substantial discretion in how much to use the advisory board’s expertise. Congress would have no role in setting fees, whereas under the current system, Congress sets the tax rates. The combination of these elements raises the issue of how to ensure the appropriate level of congressional oversight. With a user fee, Congress would set the total amount to collect and spend from the fees through the appropriations process. The authorization of limited borrowing authority (up to $5 billion) for FAA in the administration’s proposal seems unlikely to have a major effect on FAA’s ability to pay for capital investment associated with moving to NextGen, because the payback period is relatively short. With a maximum payback period of 5 years, the advantage of matching the time period for paying for a capital investment with the time period in which the benefits of that investment are realized is unlikely to be achieved. As a result, the advantage of this type of borrowing compared to appropriations also funded by Treasury debt is less clear. In either case, user fee collections could offset the borrowing. However, it is possible that having FAA borrow from the Treasury with a relatively short time period for repayment could serve as a way to tighten and make more explicit the link between the borrowing and the fees that are the source of repayment— and could ensure that the fees were set at a level sufficient to provide the needed funds. Limiting FAA’s authority to borrow from the Treasury and collecting revenue from user fees, as proposed, is preferable to giving FAA direct access to capital markets or repaying debt with appropriations or new borrowing. The Treasury can borrow at lower interest rates than FAA could achieve by going to the capital markets because Treasury securities are considered risk-free, since they are backed by the federal government. We have recommended that only those agencies that would be able to repay their borrowing through revenue collections be granted authority to borrow. In addition, we have reported that debt financing raises issues about borrowing costs that are particularly important in light of the federal government’s long-term structural fiscal imbalance. Mandatory federal commitments to health and retirement programs will consume an ever- increasing share of the nation’s gross domestic product and federal budgetary resources. Accordingly, any program or policy change that may increase costs requires sound justification and careful consideration before adoption. The reauthorization proposal to align FAA’s budget accounts with FAA’s lines of business has advantages and disadvantages. Such a restructuring is consistent with FAA’s emphasis on aligning revenues and costs and could allow FAA to more specifically distinguish those funding options that provide a better links between costs and revenues. For example, an ATO account dedicated to the operation, maintenance, and upgrade of the NAS could better enable the agency to charge for direct usage of the NAS. In addition, such a system could show the costs attributable to each line of business, thereby supporting the agency’s internal financial management. However, some FAA activities may not be clearly divisible into discrete categories. For example, one new account—the Safety and Operations account—includes safety-related activities. Nonetheless, there could be some ambiguity in how safety activities are defined and in how their costs should be allocated between aviation users which benefit directly from a safe air traffic control system and the public which receives general safety benefits. Linking the General Fund contribution to FAA’s budget, as the administration is proposing, would explicitly recognize that users of the system are not the only beneficiaries of it. Such an approach allows for a “bottom up” calculation of the General Fund contribution that is based on the different public benefits that FAA provides, such as safety and use of the NAS by federal agencies. This approach is different from the current one, which bases the General Fund contribution on how much money is left in the Trust Fund to fund the Operations account after Trust Fund revenues for that particular year have been allocated to fund the F&E, AIP, and RE&D accounts. An approach that links a General Fund contribution to public benefits is consistent with the principle of public finance that public benefits should come from the General Fund and not from user contributions. This should not, however, be viewed as a precise determination. Some aviation activities, such as safety, benefit both users and the nonuser public. Others, such as a national airport system that includes small airports that receive federal grants, may be seen as a benefit solely to the users of those airports, to their communities, or to the broader public. In addition, such a change in the method of determining the General Fund contribution may result in an increase or a decrease in that contribution, which would have implications for how aviation activities are funded. The administration has introduced a complex proposal for funding FAA, and we believe that it deserves serious and thoughtful consideration. Adopting this proposal is not necessary to provide more money to FAA if Congress thinks that additional spending on aviation is needed to address air traffic increases and new investment demands, including NextGen, because additional funding can be provided within the current structure. However, given the current federal fiscal imbalance, appropriating additional funds to aviation may be difficult. Furthermore, the proposal may address some of the concerns that FAA and other stakeholders have raised with the current funding structure, such as equity, but only if the cost allocation from which the cost-based funding is derived is sound. FAA’s cost allocation methodology is new and has raised issues, suggesting that further analysis and more time may be needed to reach a consensus as to whether it is sufficiently sound to support a cost-based funding structure for FAA. In the meantime, the taxes that currently provide most of the revenue for FAA are scheduled to expire at the end of the current fiscal year. Given the relatively low uncommitted balance in the Trust Fund, a lapse in tax revenues could affect the funding of most FAA activities. Thus, timely reauthorization of the current tax revenues to avoid a tax lapse is critical even if Congress chooses to continue its consideration of the administration’s proposal or other alternatives for funding FAA beyond this fiscal year. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other Members of the subcommittee might have. For further information about this testimony, please contact Gerald L. Dillingham at (202) 512-2834. Other key contributors to this testimony include Jay Cherlow, Ed Laughlin, Maureen Luna-Long, Maren McAvoy, Jennifer Kim, and Elizabeth Eisenstadt. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Recently, the administration submitted a proposal for reauthorizing the Federal Aviation Administration (FAA) and the excise taxes that fund most of its budget. FAA's current authorization expires in 6 months. The proposal calls for major changes to FAA's funding and budget structure that are intended to address concerns about the long-term revenue adequacy, equity, and efficiency of FAA's current funding structure and to provide a more stable, reliable basis for funding a new air traffic control system that FAA is developing (at an estimated cost of $15 billion to 22 billion through 2025) to meet forecasted increases in air travel demand. The proposal would introduce cost-based charges for commercial users of air traffic control services, eliminate many current taxes, substantially raise fuel taxes for general aviation users, charge commercial and general aviation users a fuel tax to pay primarily for airport capital improvements, modify FAA's budget accounts to align with specific FAA activities, and link the portion of FAA's budget that comes from the Treasury's General Fund with public benefits FAA provides. This statement offers GAO's observations on the proposed changes in FAA's (1) funding and (2) budget structure and is based on GAO's analysis of FAA's proposal and a recent GAO report on FAA funding options. Funding Structure: The current funding structure has supported FAA as FAA's budget has grown, and it can continue to do so to fund planned modernization. Excise tax revenues are forecasted to increase if the current taxes are reauthorized without change and thus could support additional spending. If necessary, Congress can obtain more revenue by increasing the excise tax rates or the General Fund contribution to FAA's budget, although the nation's fiscal imbalance could make such an increase difficult. FAA is concerned because revenues from the current funding structure depend primarily on ticket prices and passenger numbers, which are not well linked to FAA's workload and costs. The proposed new funding structure would link revenues more closely with costs to ensure that revenues rise with increases in FAA's air traffic control and safety activities. According to FAA, cost-based user charges would also be more equitable and could create incentives for more efficient use of the system by aircraft operators. How well FAA's proposed funding structure, if enacted, would achieve these goals is uncertain because it depends on two unknowns--the soundness of a new FAA cost allocation methodology and the extent to which the proposed structure links revenues to costs. Also uncertain are the adequacy of FAA's proposed fuel tax rate to collect anticipated revenues, the implications of a proposed advisory board, and the impact of a proposal to give FAA limited debt-financing authority. Furthermore, GAO notes, user charges would reduce Congress's role in setting revenues. Budget Structure: Modifying FAA's budget accounts is consistent with FAA's emphasis on aligning revenues and costs, but may present implementation issues, in that some FAA activities may be difficult to categorize. More specifically, the proposed restructuring could allow FAA to better identify funding options that link revenues and costs and may improve transparency by showing how much is being spent on specific FAA activities. However, some activities, such as those related to safety, may not lend themselves to placement in discrete categories. Linking the General Fund contribution to public benefits is appropriate, but since some activities may provide both public and private benefits, judgment rather than a precise calculation may determine the contribution. Concluding Observations: The administration has introduced a complex proposal for funding FAA that GAO believes deserves serious and thoughtful consideration. While not necessary to provide more money for FAA, the proposed structure may address some of the concerns raised by the current structure if its cost allocation is sound. Because FAA's cost allocation model is new, further analysis and more time may be needed to determine whether it can adequately support a cost-based funding structure for FAA. Timely reauthorization of funding for FAA for at least the next year is, however, critical to prevent a lapse in funding for most FAA activities, regardless of the action taken on the proposed changes. |
Development and humanitarian assistance is one of five parts of the International Affairs (function 150) budget that support U.S. government foreign assistance efforts. Development and humanitarian assistance includes State and USAID assistance activities, the Millennium Challenge Corporation, the Peace Corps, Treasury contributions, and, from fiscal year 2003 through 2006, spending for the relief and reconstruction of Iraq. In fiscal year 2006, development and humanitarian assistance made up $44 billion, or just over one-half of the total $84 billion of International Affairs (function 150) budget funds available to support foreign assistance (see fig. 1). The four other types of funding in the International Affairs (function 150) budget that support foreign assistance activities include the following: International security assistance, to finance and train foreign militaries, promote nonproliferation activities, and support international peacekeeping operations; The conduct of foreign affairs, which fund the salaries, information technology, housing, and security for State staff, including those with responsibilities to administer and monitor foreign assistance activities; Foreign information and exchange activities, which include fiscal accounts supporting education, cultural exchange activities, and U.S. broadcasts overseas; and International financial programs, which primarily support the International Monetary Fund and the Export-Import Bank of the United States. (See app. II for a break down of budget amounts available from each part of the International Affairs (function 150) budget in recent years.) Of the total $44 billion of development and humanitarian assistance available in fiscal year 2006, State received about $5 billion, or 11 percent. Other agencies received more of these funds, including USAID, which received about $15 billion, or 34 percent, and the Department of Treasury, which received about $13 billion, or about 30 percent. In January 2006, the Secretary of State established F Bureau to serve as an umbrella leadership structure for coordinating all foreign assistance policy, planning, and oversight. The purpose of this reorganization was to ensure that foreign assistance is used as effectively as possible to meet broad foreign policy objectives, more fully align the foreign assistance activities carried out by the Department of State and USAID, and demonstrate responsible stewardship of taxpayer dollars. In announcing these changes, the Secretary noted that “the current structure of America’s foreign assistance risks incoherent policies and ineffective programs and perhaps even wasted resources.” The director of U.S. Foreign Assistance serves concurrently as the USAID Administrator, and has authority over all State and USAID foreign assistance funding and programs. According to State, the F Bureau provides coordination and guidance to all foreign assistance delivered through other agencies and entities of the U.S. government. Specifically, the director was given authority over program planning, implementation, and oversight of the various bureaus and offices within State and USAID, to develop a coordinated U.S. government foreign assistance strategy, including developing 5-year country specific assistance strategies and annual country-specific assistance operational plans; create and direct consolidated policy, planning, budget and implementation mechanisms and staff functions required to provide umbrella leadership to foreign assistance; provide guidance to foreign assistance delivered through other agencies and government entities, including the Millennium Challenge Corporation and the Office of the Global AIDS Coordinator; and direct the required transformation of the government’s approach to foreign assistance in order to achieve the President’s Transformational Development Goals. State’s funding available for international development and humanitarian assistance, such as democracy promotion, drug interdiction, and refugee assistance, nearly doubled between fiscal years 2000 and 2006. State uses certain fiscal budget accounts to fund its development and humanitarian assistance programs, with accounts related to refugees and international narcotics control providing the most funding. State’s funding for international development and humanitarian assistance nearly doubled from $2.4 billion in fiscal year 2000 to $4.7 billion in fiscal year 2006. This increase in the funds available each year for obligation meant more management responsibilities for State. This funding consisted primarily of annual congressional appropriations and unused portions from previous fiscal years, but it excluded money that State allocated to other agencies to obligate. After decreasing slightly in fiscal year 2001, the available funding increased steadily through fiscal year 2006, with the sharpest increases coming after fiscal year 2003 (see fig 2). These increased amounts varied by assistance areas (see table 1). About a quarter of the overall increase in funding available to State was from (1) fiscal accounts annually appropriated to the President, such as the economic support fund account, and (2) the assistance for Eastern Europe and the Baltic States account—which fund assistance in areas such as economic support, democracy promotion, and efforts to combat human trafficking. However, most of the increase was from migration and refugee assistance, Global HIV/AIDS assistance, INCLE, and drug interdiction accounts that are annually appropriated to State. The amounts appropriated by Congress to particular areas do not always match the amounts available to State each year because appropriated funds may be available for obligation for more than a year or transferred to other agencies. For example, according to State officials, State allocates most of the funding that it is appropriated from the Global HIV/AIDS Initiative account to other agencies, which then obligate the funds. For instance, in fiscal year 2006, State allocated over 90 percent of the nearly $2 billion Global HIV/AIDS Initiative appropriation to USAID, the departments of Health and Human Services and Labor, and others. State also received funding from the supplemental appropriation for Iraq Reconstruction. (See app. III for a breakdown of State’s funding from development and humanitarian assistance fiscal accounts for fiscal years 2000 through 2006). Many State bureaus are responsible for managing at least some types of development and humanitarian assistance funds. Fifteen State functional bureaus and all six regional bureaus have received development and humanitarian assistance funds to some degree since fiscal year 2000. The primary users of this funding among the bureaus include the following: Bureau of Democracy, Human Rights, and Labor (DRL); The Office to Monitor and Combat Trafficking in Persons (G/TIP); Bureau of Population, Refugees, and Migration (PRM); The Office of the U.S. Global HIV/AIDS Coordinator; Bureau of International Narcotics and Law Enforcement Affairs (INL) Bureau of European and Eurasian Affairs; and Bureau of Near Eastern Affairs. These bureaus and offices that manage development and humanitarian assistance rely on funding from particular assistance accounts. DRL and G/TIP primarily receive funds from the economic support fund to manage their respective programs. In addition, G/TIP receives some funds from the INCLE fiscal account. PRM manages money from the migration and refugee assistance and emergency refugee migration assistance accounts, and the Office of the Global AIDS Coordinator manages money from State’s Global HIV/AIDS initiative fiscal account. INL manages most of State’s funding from the INCLE account, and it manages all of State’s funding from the Andean counterdrug initiative account. The Bureau for European and Eurasian Affairs manages assistance for Eastern Europe and Baltic States and the assistance for the independent states of the former Soviet Union accounts. Finally, the Bureau of Near Eastern Affairs uses funds from the economic support fund to manage its Middle East Partnership Initiative (MEPI) democracy promotion programs. State does not always obligate all of its available funds each year. State’s authority to commit unobligated funds for spending can be carried over to the following year or may expire, depending on how long Congress makes the appropriated funding available. State obligates funds on particular foreign assistance activities as it awards grants, enters into contracts, and enters into cooperative agreements. State primarily uses grants and cooperative agreements to fund development and humanitarian assistance activities. State defines a grant as assistance used to support a public purpose, but for which no substantial involvement by government is anticipated. A cooperative agreement is a type of grant that State uses if it anticipates substantial government involvement during the course of the agreement. There are exceptions to State’s reliance on grants and cooperative agreements for delivering foreign assistance. PRM primarily uses voluntary contributions to deliver foreign assistance through international organizations. According to PRM officials, voluntary contributions do not have the same terms or conditions required for grants or cooperative agreements, but PRM contribution letters require international organizations to maintain financial reports and accounting records, provide documentation for payment requests, and submit published program and financial reports to PRM in accordance with each international organizations’ policies and procedures. According to State, INL mainly delivers its assistance through bilateral agreements with foreign governments. State primarily manages its development assistance and humanitarian programs centrally, obligating the majority of the funds and making the assistance awards from State headquarters in Washington, D.C. Grants officers and grants officer representatives have formal oversight responsibilities, though other staff also carry out such functions informally. A mix of headquarters and overseas staff monitor the implementation of program activities, and only a few bureaus have staff overseas specifically assigned to their programs. State generally carries out its program planning, solicitation of proposals, selection of grantees, and approval of the release of funds for overseas programs from its headquarters in Washington, D.C. The major bureaus and offices that are responsible for development and humanitarian assistance made assistance awards and obligated the majority of their funds—about 77 percent of the $2.6 billion in total obligations in 2006— from their headquarters in Washington. Three bureaus and one office— PRM, DRL, the Bureau of South and Central Asian Affairs and the Office of the Global HIV/AIDS Coordinator—obligated all of their funds from headquarters during fiscal year 2006. An exception was the Bureau of East Asian and Pacific Affairs, for which overseas posts obligated 86 percent of the funds. Generally, funds were obligated for assistance awards to U.S.- based nongovernmental organizations with ties to overseas organizations. The bureaus and offices in our scope awarded over 7,000 grants and cooperative agreements totaling about $1.2 billion in fiscal year 2006. Table 2 shows funds obligated in Washington and overseas during fiscal year 2006 for these bureaus and offices. Assistance awards and funds obligated by overseas posts were small in comparison with those obligated at headquarters. For example, in fiscal year 2006 the overseas posts, under the jurisdiction of the Bureau of Near Eastern Affairs, obligated about $4 million in MEPI funds, compared with over $50 million obligated at headquarters. The bureau’s regional office in Tunis obligated and disbursed the bulk of the $4 million to be used for small grants of no more than $100,000 (the grants were generally $25,000 or less). In addition, some bureaus allot small amounts of funds to overseas posts for grants up to $20,000. For example, PRM administers the Ambassador’s Fund for Refugees, which generally supports small projects, such as digging a well in a refugee camp. PRM allotted $578,000 to U.S. embassies, primarily in Africa, for such activities in fiscal year 2006. G/TIP administers a similar program, the Ambassador’s Fund for Anti-Trafficking in Persons Initiative, typically in Africa, for public awareness campaigns. In 2006 G/TIP had 54 active grants totaling about $4.9 million. Twenty-nine of the 54 grants were for small grants of $20,000. Grants officers are responsible for the legal aspects of entering into, amending, and terminating awards. Such actions include the following: approving the initial determination by the program office of the appropriate assistance instrument to be utilized; determining a potential recipient’s responsibility and management competence in carrying out a planned activity; preparing the award with the departmentwide standard award form; preparing and executing amendments to awards such as adjustments to the scope, budget, and period of performance; and carrying out all other responsibilities, as required, to ensure prudent award and administration of assistance for State within the scope of all applicable State policies, OMB circulars, and federal regulations. State has 39 grants officers, including 10 that work directly for the Office of Acquisitions Management of State’s Bureau of Administration. Five of the Administrative Bureau grants officers are responsible for awarding grants for DRL, G/TIP, and all of the regional bureaus as well as nine other bureaus. The Procurement Executive within the Bureau of Administration provides overall leadership of the procurement and grants functions for the Department of State and issues procurement and grants policy, provides quality assurance and statistical reporting, and appoints grants officers. Four of the seven primary bureaus delivering development and humanitarian assistance have grants officers assigned to their programs: PRM and the Bureau of Near Eastern Affairs each have five grants officers, INL has two, and the Bureau of East Asian and Pacific Affairs has one. The Administrative Bureau grants officers serve as a resource to overseas posts as well as to program and regional bureaus that have their own grants officers. Some of the grants officers’ duties are delegated to other staff. State Policy Directive 16 authorizes grants officers to designate technically qualified personnel as grants officer representatives to assist in grants management. The directive is mandatory for domestic grant activities, which according to State’s Office of the Procurement Executive means awards granted by a U.S-based grants officer, and is recommended for overseas grant activities. Grants officer representatives are responsible for ensuring that State exercises prudent management and oversight of the award. The representatives receive an official designation letter when they are appointed that describes their authorities and responsibilities. Some of the grants officer representatives’ authorities and responsibilities include the following: coordinating and consulting with the grantee on all programmatic, scientific, and/or technical matters that may arise in the administration of the grant; evaluating project performance to ensure compliance with the grant assisting the grantee in problem identification and resolution; promptly notifying the grants officers in writing of any noncompliance or deviation in performance or failure to make progress; visiting the grantee’s place of performance to evaluate progress or problems, with prior approval from the grants officers; promptly submitting findings to the grants officers through a trip report after visiting the grantee’s location of performance; receiving and reviewing required grantee reports (progress, financial, or other) on behalf of the government to ensure they are timely and complete; and preparing a statement of satisfactory performance, or a statement of any deviations, shortcomings, shortages, or deficiencies upon completion of the grant. The grants officer representative designation letter also describes the limitations to the grants officer representative’s authority. For example, the grants officer representative does not have the authority to modify or alter the grant or any of its terms and conditions. However, not all staff responsible for monitoring the implementation of foreign assistance activities receive formal appointments as grants officer representatives. For example, PRM grant officials told us that PRM does not designate its staff as grants officer representatives. State’s Procurement Executive officials could not tell us the extent to which staff from the six regional bureaus and the overseas posts were officially designated as grants officer representatives. PRM officials said the primary responsibility for monitoring PRM program activities rests with its refugee coordinators, and that these staff are aware of their oversight responsibilities although they do not receive a formal designation letter. Further, the officials said each PRM grant and cooperative agreement formally designates grant monitoring responsibilities. In addition, the PRM officials said that the bureau sends the refugee coordinators instructions on monitoring and evaluating the grants when it notifies them of grant awards. A variety of headquarters and overseas staff—regardless of whether they are officially assigned to a program or formally appointed as grants officer representatives—are responsible for monitoring foreign assistance activities. Monitoring is an important control to ensure that grantees comply with applicable rules and regulations. Federal monitoring requirements are detailed in the Code of Federal Regulations and OMB circulars such as OMB Circular A110, which, in part, states that federal agencies prescribe the frequency of performance reports, obtain financial information from grantees, and make site visits as needed. The grants officer determines the monitoring activities that will be required to ensure that a recipient is in adherence with department, bureau, and program requirements. State includes its monitoring requirements in the individual grant or cooperative agreement—which commits the department to exercise federal stewardship responsibility, including, but not limited to performing site visits; reviewing and responding to performance, technical, or subject matter, and financial reporting and audits—to ensure that the objectives, terms, and conditions of the award are accomplished. The bureaus in our scope that obligated the greatest amount of development and humanitarian assistance funds—PRM and INL—have overseas staff specifically assigned to manage and monitor their programs. PRM has about 22 full-time Foreign Service officers serving as refugee coordinators at 18 overseas posts to oversee refugee programs. Many of the coordinators have regional responsibility over a number of countries, and are assisted by Foreign Service nationals. PRM processed 481 grant, cooperative agreement, and contribution funding actions in fiscal year 2006. INL, which primarily provides foreign assistance through bilateral agreements with foreign governments, uses about 35 Foreign Service officers and 428 Foreign Service nationals overseas who are assigned to manage its programs in about 47 locations overseas. DRL and G/TIP rely mainly on headquarters staff to monitor their programs. DRL—which obligated considerably more funds than the remaining bureaus—uses its 36 headquarters policy analysts and program officers to monitor program implementation, including the overseas activities of the grantees. DRL staff monitor grant activities, as follows: maintaining contact with grantees, often through e-mail and meetings in Washington, D.C.; reading grantee quarterly reports to assess how well grantees are meeting their goals and objectives; and holding semiannual, internal review panels to determine whether each grant requires follow-up. DRL staff may also make monitoring trips to the projects in order to assess the grant. G/TIP, which receives a comparatively small amount of funds, uses a similar process for monitoring its centrally managed programs from headquarters. Although these bureaus use headquarters staff for monitoring, they also request assistance from the overseas posts. For example, DRL encourages the overseas posts to review proposals, attend events that grantees hosts in their country, send feedback to DRL, visit grantees regularly, and meet with DRL staff during their visits. G/’TIP also encourages overseas staff to visit its centrally managed grants. However, DRL officials stated that they cannot directly task overseas staff to monitor their programs, because any help overseas staff provide to DRL is beyond the overseas staffs’ assigned duties. Five of the six regional bureaus generally use their headquarters’ desk officers and varying levels of assistance from the overseas posts to monitor their programs. The Bureau of Near Eastern Affairs—which obligated a small amount of funds compared with PRM and INL—has full- time coordinators for MEPI. All of these staff are locally engaged, and are located at five overseas posts in Oman, Bahrain, Lebanon, Egypt, and Morocco. In addition, overseas posts are responsible for monitoring the implementation of the small grants they award. Table 3 shows the primary location of staff primarily responsible for monitoring the implementation of the foreign assistance activities of the bureaus and offices within the scope of our review. A key principle of strategic workforce planning is to define the critical skills and competencies that will be needed to achieve current and future programmatic goals. However, State does not have an accurate picture of the number and type of staff responsible for overseeing and monitoring foreign assistance responsibilities. Without this critical information, State cannot develop strategies, such as training, to address any gaps in the number, skills, and competencies of its workforce—another key strategic workforce planning principle. Internal control standards also require that all personnel possess and maintain a level of competence that allows them to accomplish their assigned duties. We found that State has inconsistent training and skills requirements for staff involved in foreign assistance oversight. For example, grants officers—who are responsible for the legal aspects of entering into, amending, and terminating awards—must meet educational and training requirements, while grants officer representatives in some State Bureaus—who are delegated some of these monitoring responsibilities—do not have to meet such requirements. In addition, grants officers responsible for awarding grants for several of the bureaus within the scope or our work and other officials whom we met with in State’s Bureau of Administration expressed concern about their ability to handle their grant monitoring responsibilities because of workload, staffing, and training issues. Finally, State has not used strategic workforce planning to align the efforts of its recently established Office of the Director of Foreign Assistance to reform the foreign assistance budget with staffing and skill requirements. We have developed a model of strategic human capital planning to help agency leaders effectively use their personnel, or human capital, and determine how well they integrate human capital considerations into daily decisionmaking and planning for the program results they seek to achieve. Our human capital model is consistent with similar efforts by OMB and the Office of Personnel Management (OPM) to develop federal human capital standards. Under the principles of effective workforce planning an agency should determine the critical skills and competencies that will be needed to achieve current and future programmatic results. State needs people with foreign assistance management skills and competencies to achieve its development and humanitarian goals and objectives. Agencies can take a range of approaches to identifying current and future skills requirements, but they should be based on the collection of fact-based information. State has not taken such action for staff with foreign assistance management responsibilities. For example, there is no specific foreign assistance grant management skill set for Foreign Service officers, according to a senior Human Resources official. Moreover, State has never specifically examined foreign assistance workload indicators to identify resulting workforce needs, according to its workforce planners. Further, although the delivery of development and humanitarian assistance is a critical component of three of State’s seven strategic goals it is not part of the official State mission as communicated by the current workforce plan. The collection of information on critical skills and competencies needed to perform an agency’s mission is one step in determining current and future human capital needs. Such information includes the number, type, and skills of staff involved in the oversight and monitoring of foreign assistance activities. However, State does not have complete and accurate information on staff that manage and monitor foreign assistance programs. We asked the bureaus and officers in our scope of work to provide information on the number and type of staff in headquarters and overseas posts that work on their development and humanitarian assistance programs and the amount of time they spend on those programs. Only 3 of the 10 bureaus could provide detailed information on overseas staff devoted to their programs. INL and PRM—the two program bureaus with overseas staff assigned to their programs—were able to provide the number of headquarters and overseas staff devoted to their programs, while the Bureau of Near Eastern Affairs was also able to provide data on the number, type of staff, and percentage of time devoted to MEPI programs in 15 countries. However, the other bureaus could provide only estimates of overseas staff devoted to foreign assistance activities. A few bureaus, such as South and Central Asian Affairs, Western Hemisphere Affairs, and African Affairs, referred to the information they provided as best guesses. East Asian and Pacific Affairs Bureau officials said they had to query their overseas posts to obtain the staffing information they provided. State officials attributed the difficulty in identifying current staff devoted to foreign assistance activities to a variety of factors. For one, State’s primary role has traditionally been to implement U.S. foreign policy. State bureaus and offices manage foreign assistance programs in support of their foreign policy objectives, and some staff in policy positions may also work on foreign assistance programs. Therefore, it is difficult to separate the foreign assistance activities from State’s diplomatic functions, according to State resource managers. Moreover, State’s mission planning process only tracks staff time by strategic objective and cannot identify staffing devoted to a specific program. State workforce planners said they do not have a systematic way of identifying personnel working on foreign assistance unless it is obvious from their job title. In response to our request for information, the workforce planners were able to identify about 300 foreign assistance- related full-time positions in headquarters functional bureaus. They said State’s most recent domestic staffing model does not contain the critical information necessary to identify foreign assistance-related functions in the regional bureaus. Furthermore, State does not have a systematic way of identifying all staff officially designated as grants officer representatives, because State does not maintain a comprehensive list of these designees. Grants officers stated that the letters designating the grants officer representatives are included in the grants file; however, State’s current grants database management system does not capture information on grants officer representatives, according to Administrative Bureau procurement officials. Thus there is no systematic workforce information on staff to whom foreign assistance responsibilities are delegated. Moreover, it is not clear whether staff with grants management responsibility who are not officially appointed as grants officer representatives are bound by the same responsibilities, authorities, and limitations described in the designation letter. In accordance with internal control standards all personnel should possess and maintain a level of competence that allows them to accomplish their assigned duties, as well as understand the importance of developing and implementing good internal control. This includes identifying appropriate knowledge and skills as well as providing needed training. However, as State does not have complete data that would allow it to identify any gaps in the numbers, skills, and competencies it needs to manage foreign assistance programs and develop strategies—such as providing training— to address those gaps, State cannot assure itself that all employees who manage and monitor foreign assistance activities have the necessary skills. We found that State has inconsistent training and skills requirements for its staff involved in foreign assistance oversight. For example, grants officers must meet a number of requirements under State Grant Policy Directive 1 to obtain a Grants Officer Warrant to award federal assistance. This directive establishes State’s policy that grants officers possess the minimum qualifications necessary to ensure that federal assistance agreements issued by State are sound and in compliance with laws and regulations. The directive requires domestic applicants to meet specific education and training qualifications to obtain a grants warrant—such as completion of a 56-hour course in grants management training and 4-year course of study leading to a bachelor’s degree. The warrant limits the dollar amount of awards the officers can make. In contrast, State does not have agencywide training requirements for grants officer representatives who are often delegated some of the grants officers’ oversight responsibilities. For example, State Policy Directive 16 states that education and special training may be considered when designating grants officer representatives, but it does not provide specifics on what training and education to consider. Further, grants officers do not have control over whether or not the grants officer representatives are qualified, because the bureau for which the assistance award is made generally appoints the grants officer representative when it submits the award package to the grants officer for final processing. For example, Near Eastern Affairs Bureau and INL grants officers stated that program staff with subject area knowledge are designated as grants officer representatives and that these staff do not have to meet any specific training requirements. Overseas staff with foreign assistance management responsibilities also do not always have to meet foreign assistance management specific training or experience requirements. For example, INL officials said that Foreign Service officers applying for their bureau’s overseas positions did not have to meet any specialized management skill requirements. INL human resources officials added that INL has difficulty matching staff with the assignments because there is no guidance on skills requirements. Further, some DRL and G/TIP officials stated that overseas staff generally lacked the training to monitor their grants. Moreover, State’s Inspector General reported that Foreign Service officers overseas with MEPI responsibilities lacked grants related training. The Inspector General further reported that political and economic officers supporting small bilateral MEPI grants and larger regional initiatives did not have grants training and showed an uncertain grasp of their oversight responsibilities and of MEPI expectations. Lack of properly trained staff could negatively impact State’s ability to effectively deliver foreign assistance, and would be an internal control weakness that puts grants at risk. Several of the Administration Bureau and Near Eastern Affairs Bureau grants officers we interviewed recommended that all grants officer representatives receive training, such as the grants management courses offered by FSI: “Introduction to Grants and Cooperative Agreements for Federal Personnel” and “Monitoring Grants and Cooperative Agreements.” The former course is required for Public Diplomacy officers substantially involved in pre and postaward assistance processes overseas. Any Federal personnel responsible for overseeing administrative, financial, or program performance of grant recipients would benefit from the latter class, according to the FSI course catalog. Although State does not have agencywide training requirements, some individual bureaus do. For example, DRL has internal training requirements for bureau staff who serve as grants officer representatives, requiring them to complete the two FSI classes on grants management, according to DRL officials. In addition, PRM officials stated that the bureau—which does not designate grants officer representatives— requires its headquarters and overseas staff to take the FSI’s Population, Refugee and Migration Officers Monitoring and Evaluation Workshop. FSI also offers a week-long introductory orientation for staff who work on refugee issues led by PRM officials. Moreover, an FSI survey in response to employee requests for grants management training suggests that Foreign Service officers overseas recognize that there is a gap in their foreign assistance management skills. FSI officials stated that the Institute conducted a needs assessment, including a survey, in response to anecdotal information about the need for the training. The officials said that based on the survey responses, FSI created a new training course—Managing Foreign Assistance Awards Overseas. According to FSI, the new training was designed to meet the changing needs of Foreign Service officers under the Diplomatic Readiness and Transformational Diplomacy Initiatives. The 3-day elective course is geared toward economic and political officers who need to learn the fundamentals of assistance awards management and who will have project management or oversight responsibilities. According to FSI, the course targets officers who will design, develop, and oversee assistance programs at post in support of mission performance plan goals, and is not geared toward officers providing assistance on activities managed from headquarters. FSI began offering the course in April 2007. The FSI officials said they were not aware of any additional training needs or proposed training related to foreign assistance management. Grants officers and other officials whom we met with expressed concern about their ability to handle their grant management responsibilities to ensure that federal funds are being spent as intended. For example, we interviewed all five Administrative Bureau grants officers responsible for awarding grants for some of the bureaus and offices in our scope. We also interviewed Bureau of Near Eastern Affairs and INL grants officers. The Administrative Bureau grants officers who are responsible for much of State’s development and humanitarian assistance awards stated that they did not have sufficient time to fully oversee the implementation of the grants, including pre and postaward activities. Preaward activities include determining the level of competition, soliciting the proposal, and selecting the grantee. Postaward activities include the monitoring required to ensure a recipient is in adherence with State, bureau, and program requirements. Various officials with whom we spoke expressed concerns about preaward management activities. Two of the Administrative Bureau grants officers told us they were concerned about whether program and regional bureau staff were sufficiently knowledgeable to solicit proposals and competitively select grantees. These grants officers stated they generally are not involved in the process for soliciting proposals and selecting the grantee because of their workload. Instead, the program bureau is responsible for the review and selection of assistance recipients prior to the award. The grants officers said that, as a result, they did not know whether the solicitations complied with relevant laws and regulations. For example, one of the grants officers did not believe a program bureau selecting grantees had sufficiently advertised its grant solicitations to reach the most potential grantees possible. Other State officials with whom we met raised this same issue. Moreover, in June 2006, State’s Inspector General raised concerns about the lack of competition for some foreign assistance awards, reporting that PRM had not consistently followed State or U.S. government policies that require applications for federal assistance to be solicited in a manner that provides for competition. In response, PRM established policies and procedures that require that all awards are advertised and that relevant State regulations to justify noncompetitive awards are complied with, according to PRM officials. The Administrative Bureau grants officers and other officials with whom we spoke also discussed postaward activities. For example, three of the grants officers told us they were concerned about the lack of time they had to devote to the grants after funds are obligated. They said they receive a number of program and financial reports from the grantees at the same time and consequently do not have enough time to thoroughly review them. They said that they rely on the grants officer representatives, who are not subject to agencywide training requirements, to review the reports and notify them of problems. The grants officers further stated that their workload did not permit them to close out the grants and that they had to rely on what the grantee reported. Grants officers and other officials also discussed issues related to site visits to monitor the grantees. For example, Administrative Bureau grants officers expressed concerns over their lack of opportunity to make site visits. They said that the program bureaus responsible for the grants would have to set aside travel funds for them to travel, but that this is rarely done. Most of the grants officers we interviewed said that they have not traveled overseas for monitoring visits and that they rely on the grants officer representatives to perform this duty. However, some of the Administrative and Near Eastern Affairs Bureau grants officers said the grants officer representatives do not consistently inform them of upcoming site visit. Grants Policy Directive 16 requires the grants officer representatives to obtain prior approval from the grants officer before visiting the grantee’s place of performance to evaluate progress or performance. For example, one of the grants officer said the grants officer representative does not consult with her on whether there are financial issues to be addressed, and another stated that the grants officer representatives focus more on programmatic rather than management or financial issues. Both stated that they do not receive any reports after site visits. We also met with about 20 DRL program and policy officers who serve as grants officer representatives, and they generally indicated that grant oversight would be improved by more frequent site visits to monitor grantee activity. The DRL grants officer representatives said they make site visits as workload, travel funds, and conditions in the country permit. A G/TIP grants officer representative expressed similar concerns, stating that G/TIP does not have the time or the budget to visit every grantee. State’s Inspector General has found the lack of monitoring to be an issue in the past, and reported in 2005 that G/TIP did not adequately monitor its grantee activities. The report found that the grants officer for G/TIP relied on a G/TIP grants officer representative who in turn relied on overseas posts to monitor grantee activity. The Inspector General found very few embassy evaluations verifying monitoring had been occurring and recommended that G/TIP improve its recordkeeping. State is implementing foreign assistance budgetary reforms without considering the potential impact of these reforms on its staffing and skills requirements, which does not conform to strategic workforce principles. One such principle is that an agency’s management lead the effort to align its human capital program with current and emerging mission and programmatic goals. The Secretary of State recently established the F Bureau within State to serve as an umbrella leadership structure for aligning and coordinating all foreign assistance, policy, planning, and oversight. Since its establishment, the F Bureau has developed a strategic framework for foreign assistance and established new priority objectives. The budget reforms could result in some countries and programs receiving more funding, while others receive less. Such changes could shift where staff with foreign assistance responsibilities are needed from one bureau to another or from headquarters to overseas missions. For example, the fiscal year 2008 budget request includes INCLE funds for many countries that had no such funding in previous years. However, as of July 2007, State had not begun to align human capital resources with the reforms, according to a senior F Bureau official. The official said that the F Bureau would eventually address human capital requirements, but he did not provide a time frame. Further, State’s Human Resources Bureau officials told us they had not attended meetings in which foreign assistance budget decisions were made that could potentially impact human capital requirements. Moreover, the Human Resources Bureau had not taken any workforce planning actions related to F Bureau reform efforts, and its future role had not been determined. Consequently, the impact of the F Bureau reforms on foreign assistance staffing and skills requirements is not clear to State officials. Strategic workforce planning focuses on developing long-term strategies for acquiring, developing, and retaining an organization’s total workforce to meet the needs of the future. A key principle of strategic workforce planning is to define the critical skills and competencies that will be needed to achieve current and future programmatic goals. However, despite its increasing role in development and humanitarian assistance, State has limited data to determine whether department staff responsible for managing and monitoring the programs have sufficient skills to ensure that applicable U.S. laws and regulations are being complied with and U.S. dollars are being spent as intended. Moreover, bureaus and offices that manage development and humanitarian assistance programs could not readily provide data on staffing devoted to foreign assistance activities, particularly overseas staffing. In accordance with human capital principles and internal control standards, agencies should have individuals with specialized knowledge, skills, and abilities necessary to perform complex and technical administrative responsibilities—such as managing grants— effectively. However, we found that State does not have departmentwide skills and training requirements for all staff who are formally or informally delegated some of the oversight and monitoring responsibilities of grants officers, who have formal responsibility for overseeing grants. We recommend that the Secretary of State (1) take steps to define the skills and competencies the department’s employees need to manage foreign assistance responsibilities, including developing information on the number and type of staff who are currently managing foreign assistance programs, their roles and responsibilities, workload, experience, and training and (2) develop a strategy to address any gaps it identifies. The Department of State provided written comments on a draft of this report. These comments and our response are reprinted in appendix IV. State also provided technical comments, which we have incorporated into this report as appropriate. In commenting on a draft of this report, the Department of State generally concurred with the report’s findings, conclusions, and recommendations. To address the recommendations State plans to (1) define critical skills and competencies needed by all department employees managing foreign assistance, (2) align workforce planning strategies with the management of foreign assistance programs departmentwide, (3) review the overseas staffing and domestic staffing models to determine if refinements are required to the components that address foreign assistance programs, (4) review the workforce plan to determine where enhancements to include aspects of foreign assistance functions are warranted, and (5) consider further training of personnel with grants management responsibilities. Although State agreed with our recommendations, the letter expressed concern that the draft report did not adequately reflect the department’s current oversight of its foreign assistance programs. State provided a detailed description of how PRM monitors and evaluates its programs as an example. We noted State’s concerns in the results in brief section of this report and have included additional details on PRM’s monitoring efforts as appropriate. We are sending this report to other interested Members of Congress and to the Secretary of State. We will also make copies available to others upon request. In addition, the report will be available at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. To determine the size and scope of the Department of State’s (State) development and humanitarian assistance, we first reviewed U.S. budget documents to identify funding supporting U.S. foreign assistance, as well as State’s part in supporting these overall efforts. We then reviewed the portion of the U.S. budget that funded development and humanitarian assistance and used State allotment reports to capture the fiscal accounts that were available to State for obligation between fiscal years 2000 and 2006. To identify overall funding supporting U.S. government foreign assistance activities, we reviewed the U.S. budget general fund to identify International Affairs (function 150) budget accounts. Function 150 budget accounts are classified by the Office of Management and Budget (OMB) as those related to international development and humanitarian assistance (function 151), international security assistance (152), the conduct of foreign affairs (153), foreign information and exchange activities (154), and international financial programs (155). We focused on the general fund because it contains the fiscal accounts that are funded from regular congressional appropriations, as opposed to accounts that are nonbudgetary or receive appropriations from other general fund accounts, or trust funds that hold foreign government payments, gifts, or contributions. To capture funds available for obligation, including the congressional appropriation as well as funds carried over from the previous year, we used the amounts shown on line 23.90 (total budgetary resources available for obligation) of the program and financing table of the Department of State and Other International Programs budget appendix for fiscal years 2002 through 2008. We used the budgets for these years because they have final (actual) amounts for fiscal years 2000 through 2006. If line 23.90 was not applicable for a certain account, such as when no unobligated funds were being carried over, we used line 22.00 (new budget authority). For accounts that had not received new funds, we used line 21.40 (unobligated balance brought forward from the previous year). To identify the 150 budget accounts from which State received funding, we used Treasury budget identification codes as well as assistance account information obtained from State’s office of the director of foreign assistance. We also referred to Treasury Financial Management Service’s combined statement on appropriations and outlays to identify accounts from which State received 150 funds and accounts State sent to other agencies, such as the Global HIV/AIDS Initiative account. From the function 150 fiscal accounts we separated out development and humanitarian budget lines (function 151) as well as the economic support fund. While the economic support fund is not a function 151 account, we included it in our scope of development and humanitarian assistance fiscal accounts because it was a primary account that State used for funding this type of assistance. To identify State’s share of the 151 account, we used allotment reports provided by State’s resource management office that reported how much development and humanitarian assistance State received annually, by fiscal account. These allotment amounts included funds carried over from the previous year, and so represented funds available to State for obligation. We used transfer data from State’s resource management office to identify transfers of the economic support fund and other fiscal accounts to the International Narcotics Control and Law Enforcement account (INCLE) and the Andean Counterdrug Initiative. We determined State’s allotment and transfer information was sufficiently reliable for our purposes, through (1) discussions with State resource management officials and (2) cross-checks with the U.S. budget appendix, the Treasury Financial Management Service’s combined statement, and publicly available information from the U.S. Agency for International Development (USAID). To identify State’s approaches to managing programs, we reviewed program information, including obligations data, monitoring plans, trip report templates, grant policy directives, and grants data. For the purposes of this review, we defined foreign assistance management as obligating funds, selecting grantees, making assistance awards, and monitoring the implementation of development and humanitarian assistance programs. The sources of the obligations data were excel spreadsheets used to track transactions, including obligations and State’s central financial management system. We reviewed the data for reasonableness and consistency of methodology and discussed the accuracy of the data with knowledgeable officials at the bureaus and offices that provided the data. Based on our analysis and discussions with the officials, we determined that these data are sufficiently reliable for our purposes. We also obtained information on the number of grants from State’s grants management database, but, as mentioned in this report, we determined this information was not reliable; and therefore, we did not use these data as support of our findings. To assess foreign assistance human capital requirements, we reviewed staffing, workload, workforce planning documents, and data from State’s Workforce Plan. We also reviewed our reports on human capital management and strategic workforce planning and consulted with GAO experts on these issues. We also assessed the extent to which certain management functions related to determining skills and training requirements met internal control standards for the federal government. We interviewed agency officials at the Bureau of Human Resources, Bureau of Resource Management, the Foreign Service Institute, and the State’s Office of the Inspector General. We also discussed staffing and skills requirements with all of the program and regional bureaus in our scope. The bureaus and offices in our scope included the Bureaus of Democracy, Human Rights, and Labor; International Narcotics and Law Enforcement Affairs; Population, Refugees, and Migration; the Office of the U.S. Global AIDS Coordinator, the Office to Monitor and Combat Trafficking in Persons, and all of the regional bureaus: African Affairs; East Asian and Pacific Affairs; European and Eurasian Affairs; Near Eastern Affairs; South and Central Asian Affairs; and Western Hemisphere Affairs. We also met with officials of the Office of the Director of Foreign Assistance; Bureau of Administration, Office of the Procurement Executive; and USAID. We interviewed a non-statistical sample of 11 grants officers that included 5 officers from the bureau responsible for awarding grants for all of the bureaus we examined. We also interviewed another non-statistical sample of 21 program and policy officers that serve as grant officer representatives. We selected these individuals to ensure that we covered the range of actual grant officers as well as the program and policy officers that serve as grant officers. We reviewed State’s fiscal year 2005 Performance and Accountability Report, publicly available assistance account obligation information, and the foreign assistance framework developed by the Office of the Director of Foreign Assistance to identify State program bureaus with comparable assistance activities to USAID. We excluded bureaus that managed military, antiterrorism, and cultural and educational exchange programs. With the exception of the regional bureaus, we also excluded some bureaus and offices managing developmental and humanitarian assistance programs obligating less than $20 million. In addition to the individual named above, Adam Cowles (Assistant Director); Donald Morrison, and La Verne Tharpes made key contributions to this report. The team benefited from the expert advice and assistance of Martin de Alteriis, Joe Carney, William Doherty, Clarette Kim, Grace Lui, Jeremy Sebest, and Mona Sehgal. | The Secretary of State has made foreign assistance a pillar of the department's Transformational Diplomacy Initiative and has sought better policy coordination, planning, and oversight by establishing a Director of Foreign Assistance (F Bureau). Even though the U.S. Agency for International Development has been the principal agency for development and humanitarian aid, the Department of State (State) has had a significant role delivering this type of assistance. Thus, it is essential that State have the right staff, with the right skills, in the right places to carry out its foreign assistance management responsibilities and ensure that U.S. funds are well spent. As requested, this report (1) describes the size and scope of development and humanitarian foreign assistance programs managed by State, (2) describes State's approaches to managing and monitoring such programs, and (3) evaluates State's processes for determining its human capital requirements for managing these programs. In fiscal year 2006, State had about $4.7 billion available for development and humanitarian assistance activities, nearly double the amount it was responsible for managing in 2000. This funding supported, for example, programs aimed at alleviating poverty and the suffering of refugees, as well as funding international drug interdiction efforts. State primarily uses grants and cooperative agreements to deliver this type of assistance. State manages its development and humanitarian assistance programs centrally, obligating about 80 percent of the funds and making awards from headquarters. State uses a variety of oversight approaches. Grants officers and grants officer representatives have formal oversight responsibilities, but other staff also carry out functions informally. A mix of headquarters and overseas staff monitor program implementation. State's strategic workforce planning does not reflect its foreign assistance activities. A key principle of strategic workforce planning is to define the critical skills and competencies that will be needed to achieve current and future programmatic goals. State has not defined its staff needs to manage and monitor its foreign assistance programs and has not collected critical information on current staff with these responsibilities. Moreover, GAO found inconsistent training and skills requirements for staff involved in foreign assistance oversight. For example, grants officers--who are responsible for the legal aspects of entering into, amending, and terminating awards--must meet educational and training requirements, while grants officer representatives--who are delegated some monitoring responsibilities--do not. Further, a recent State survey suggests that Foreign Service officers overseas recognize that there is a gap in their foreign assistance management skills. Various State officials have concerns about the department's ability to effectively manage its development and humanitarian assistance. Finally, State has not used strategic workforce planning to align F Bureau budget reforms with staffing and skill requirements. |
Tribal lands vary dramatically in size, demographics, and location. They range in size from the Navajo Nation, which consists of about 24,000 square miles, to some tribal land areas in California comprising less than 1 square mile. Over 176,000 American Indians live on the Navajo reservation, while other tribal lands have fewer than 50 Indian residents. Some Indian reservations have a mixture of Indian and non-Indian residents. In addition, most tribal lands are rural or remote, although some are near metropolitan areas. The federal government has consistently recognized Indian tribes as distinct, independent political communities with inherent powers of a limited sovereignty which has never been extinguished. To help manage tribal affairs, tribes have formed governments or subsidiaries of tribal governments including schools, housing, health, and other types of corporations. The United States has a trust responsibility to recognized Indian tribes and maintains a government-to-government relationship with those tribes. As of October 2010, there were 565 federally recognized tribes—340 in the continental United States and 225 in Alaska. According to tribal officials and government agencies, conditions on and around tribal lands—including the lack of technology infrastructure such as telecommunications lines—generally make successful economic development more difficult. In addition, a 1999 Economic Development Administration (EDA) study that assessed the state of infrastructure in American Indian communities found that these communities also had other disadvantages that made successful business development more difficult. This study found that the high cost and small markets associated with investment in Indian communities continued to deter widespread private sector involvement. To help address the needs of Indian tribes, various federal agencies provide assistance, including economic development assistance. The Bureau of Indian Affairs (BIA) in the Department of the Interior is charged with the responsibility of implementing federal Indian policy and administering the federal trust responsibility for about 2 million American Indians and Alaska Natives. BIA assists tribes in various ways, including providing for social services, developing and maintaining infrastructure, and providing education services. BIA also attempts to help tribes develop economically by, for example, providing resources to administer tribal revolving loan programs and guaranteed loan programs to improve access to capital in tribal communities. In addition to the support provided by BIA, other agencies with significant programs for tribes include the Department of Health and Human Services, which provides funding for the Head Start Program and the Indian Health Service; the Department of Housing and Urban Development, which provides support for community development and housing-related projects; and the Department of Agriculture, which provides support for services pertaining to food distribution, nutrition programs, and rural economic development. Our prior work has highlighted five broad categories of unique issues that have the potential to create uncertainty for tribes or, in some cases, private companies wishing to pursue economic activities on Indian reservations. Some of the issues that we have identified during our past work include (1) accruing land in trust for tribes and individual tribal members, (2) tribal environmental standards, (3) Indian tax provisions, (4) obtaining rights-of-way, and (5) certain legal issues that arise from the unique legal status of tribes. In addition to these five issues there may be others, such as access to financing, which may also hinder economic activity on Indian reservations. The five broad categories should only be considered as illustrative of some of the unique circumstances that exist in Indian country, which tribes or other business entities will need to take into account when they consider undertaking economic activities on tribal lands. Having a land base is essential for many tribal economic development activities such as agriculture, grazing, timber, energy development, and gaming. Since the early days of colonization, Indian lands have diminished significantly, in large part because of federal policy. By 1886, Indian lands had been reduced to about 140 million acres, largely on reservations west of the Mississippi River. Federal policy encouraging assimilation in the late 1800s and early 1900s further reduced Indian lands by two-thirds, to about 49 million acres by 1934. In 1934, however, the enactment of the Indian Reorganization Act changed the government’s Indian policy to encourage tribal self-governance. Section 5 of the act provided the Secretary of the Interior with discretionary authority to take land in trust on behalf of Indian tribes or their members. Trust status means that the federal government holds title to the land in trust for tribes or individual Indians. Once land is taken in trust it is no longer subject to state and local property taxes and zoning ordinances. In 1980, Interior established a regulatory process intended to provide a uniform approach for taking land in trust. Under the regulations, tribes or individual Indians who purchase or own property on which they pay property taxes can submit a written request to the Secretary of the Interior to have the land taken in trust; if approved, the ownership status of the property would be converted from taxable status to nontaxable Indian trust status. Some state and local governments support the federal government’s taking additional land in trust for tribes or individual Indians, while others strongly oppose it because of concerns about the impacts on their tax base and jurisdictional control. Since 1934, the total acreage held in trust by the federal government for the benefit of tribes and their members has increased from about 49 million to about 54 million acres. We reported in July 2006 that BIA generally followed its regulations for processing land in trust applications from tribes and individual Indians to take land into trust, but had no deadlines for making decisions on these applications. BIA generally responded to our recommendations to improve the processing of such applications, but this issue continues to create uncertainty in Indian country, in part, because of a February 24, 2009, Supreme Court decision and ongoing litigation. The Supreme Court held that the Indian Reorganization Act only authorizes the Secretary of the Interior to take land into trust for a tribe or its members if that tribe was under federal jurisdiction when the law was enacted in 1934. The court did not define what constituted being under federal jurisdiction but did find that a particular tribe, which was not federally recognized until 1983, was not under federal jurisdiction in 1934. It is not clear how many tribes or pending land in trust applications will be affected by this decision, but the decision raises a question about the Secretary’s authority to take land in trust for the 50 tribes that have been newly recognized since 1960 and their members. The Secretary’s decisions to take land in trust for two of these tribes—the Match-e-be-nash-she-wish Band of Potawatomi Indians of Michigan and the Cowlitz Indian tribe of Washington—have been challenged in court. Having or securing the land does not lead to economic development if that land sits idle. In the past we have reported on concerns about idle Indian lands and BIA’s process for leasing Indian lands, but we have not done any recent work on these issues. The Clean Water Act, Safe Drinking Water Act, and Clean Air Act authorize the Environmental Protection Agency (EPA) to treat Indian tribes in the same manner as it does states, referred to as TAS (treated as states), for the purposes of implementing these laws on tribal lands. On the one hand, tribes want to be treated as states and assume program responsibilities to protect their environmental resources because they are sovereign governments and have specific knowledge of their environmental needs. Tribes also generally believe that TAS status and program authority are important steps in addressing the potential impacts of economic development affecting their land. On the other hand, in some cases, states are concerned that tribes with program authority may impose standards that are more stringent than the state’s, resulting in a patchwork of standards within the state and potentially hindering the state’s economic development plans. In October 2005, we reported that since 1986, when Congress amended the first of the three environmental laws to allow TAS status for tribes, a number of disagreements between tribes, states, and municipalities had arisen, over land boundaries, environmental standards, and other issues. The disagreements had been addressed in various ways, including litigation, collaborative efforts, and changes to federal laws. For example, in City of Albuquerque v. Browner, the city challenged EPA’s approval of the nearby Pueblo of Isleta tribe’s water quality standards, which are more stringent than those of New Mexico. EPA’s approval was upheld. In other disagreements, some tribes and states have addressed the issues more collaboratively. For example, the Navajo Nation and the Arizona Department of Environmental Quality entered into a cooperative agreement that, among other things, recognizes the jurisdiction of the Navajo Nation within its reservation and establishes a plan to share the cost of pilot projects. Regarding the use of federal legislation to address disagreements, a federal statute enacted in August 2005, requires Indian tribes in Oklahoma to enter into a cooperative agreement with the state before EPA can approve a tribe’s TAS request. At the time of our October 2005 report, the Pawnee Nation was the only Oklahoma tribe that had been awarded TAS status to set its own water quality standards, and we have not conducted any more recent work on this issue. The tax code has also been used to promote economic activity in Indian country. We have reported on tax provisions regarding (1) the uncertainties that tribes faced regarding the types of activities that they could finance with tax-exempt bonds and (2) the impact of accelerated depreciation provisions. In September 2006, we reported on Indian tribal governments’ use of tax- exempt bonds under section 7871(c) of the Internal Revenue Code. Section 7871(c), which was originally enacted in 1983, generally limits the use of tax-exempt bonds by Indian tribal governments to the financing of certain activities that constitute “essential government functions.” In 1987, section 7871(e) was added to the code to limit the essential governmental functions standard further to provide that an essential governmental function does not include any function which is not customarily performed by state and local governments with general taxing powers. To date the Internal Revenue Service has not issued regulations defining essential government function. The lack of a definition has created uncertainty among tribes regarding the types of activities that they can finance using tax-exempt bonds. In addition, this custom-based essential governmental function standard has proven to be a difficult administrative standard and has led to audit disputes, based on difficulties in determining customs, the evolving nature of the functions customarily performed by state and local governments, and increasing involvement of state and local governments in quasi-commercial activities. In trying to determine what the customary practices were of state and local governments that tribes should be held accountable to, we reported that state and local governments had provided financial support for a variety of facilities, including rental housing, road transportation, parking facilities, park and recreation facilities, golf facilities, convention centers, hotels, and gaming support facilities. Section 1402 of the American Recovery and Reinvestment Act of 2009 added a $2 billion bond authorization for a new temporary category of tax- exempt bonds with lower borrowing costs for Indian tribal governments known as “Tribal Economic Development Bonds” under section 7871(f) of the Internal Revenue Code to promote economic development on Indian lands. In general, this new authority provides tribal governments with greater flexibility to use tax-exempt bonds to finance economic development projects than is allowable under the existing essential governmental function standard of section 7871(c). The Internal Revenue Service allocated the $2 billion of bond issuance authority provided by section 1402 to 134 tribal governments in two rounds. Furthermore, the act required the Secretary of the Treasury to study the effect of section 1402 and report to Congress on the results of the study, including the Secretary’s recommendation regarding the provision. According to the Treasury Department, the House Ways and Means Committee and the Senate Finance Committee indicated that, in particular, Treasury should study whether to repeal on a permanent basis the existing more restrictive essential governmental function standard for tax-exempt governmental bond financing by Indian tribal governments under section 7871(c). The act required that the study be completed no later than 1 year after enactment, which would have made the deadline February 17, 2010. The Treasury Department published a notice in the Federal Register in July 2010 seeking comments from tribal governments regarding the tribal economic development bond to assist the department in developing recommendations for the required study, but, to our knowledge, the department has not yet issued the report to Congress. There is continuing uncertainty in this area because it is unknown what the Treasury Department may recommend regarding changes to section 7871(c) and ultimately what changes, if any, Congress may adopt. A second tax measure intended to promote economic activity in Indian country is the Indian reservation depreciation provision, enacted in 1993. The provision acts as an incentive for investment on Indian reservations because it permits taxpayers to accelerate their depreciation for certain property used by businesses on Indian reservations. The provision’s special depreciation deduction schedule permits eligible taxpayers to take a larger and earlier deduction for depreciation from their business incomes than they otherwise would be allowed, thereby reducing any tax liability. Reducing tax liability earlier is an incentive for economic development because having a lower tax payment today is worth more to the taxpayer than having a lower tax payment in the future. However, in June 2008, we reported that there were insufficient data to identify users of the provision and assess whether the provision had increased economic development on Indian reservations. Securing rights-of-way across Indian lands is an important component of providing Indian lands with the critical infrastructure needed to support economic activity. We have reported on the uncertainties that telecommunication service providers and a nonprofit rural electric cooperative have faced in trying to negotiate rights-of-way involving Indian lands. In January 2006, we reported that according to several telecommunications service providers and tribal officials, obtaining a right-of-way through Indian lands is a time-consuming and expensive process that can impede service providers’ deployment of telecommunications infrastructure. The right-of-way process on Indian lands is more complex than the right-of-way process for non-Indian lands because BIA must approve the application for a right-of-way across Indian lands. BIA grants or approves actions affecting title on Indian lands, so all service providers installing telecommunications infrastructure on Indian lands must work with BIA or its contractor (a realty service provider) to obtain a right-of-way through Indian lands. To fulfill the requirements of federal regulations for rights-of-way over Indian lands and obtain BIA approval, service providers are required to take multiple steps and coordinate with several entities during the application process. These steps must be taken to obtain a right-of-way over individual Indian allotments as well as tribal lands. Several of the steps involve the landowner, which could be an individual landowner, multiple landowners, or the tribe, depending on the status of the land. Specifically, the right-of- way process requires (1) written consent by the landowner to survey the land; (2) an appraisal of the land needed for the right-of-way; (3) negotiations with the landowner to discuss settlement terms; (4) written approval by the landowner for the right-of-way; and (5) BIA approval of the right-of-way application. One telecommunication service provider told us that an individual Indian allotment of land can have over 200 owners, and federal regulations require the service provider to gain approval from a majority of them. The service provider stated that the time and cost of this process is compounded by the fact that a telecommunications service line often crosses multiple allotments. In addition, if the service provider cannot obtain consent for the right-of-way from the majority of landowners, the provider is forced to install lines that go around the allotment, which is also expensive. Rights-of-way can also be necessary to deliver energy to consumers. In September 2004, we reported that the Copper Valley Electric Association, a nonprofit rural electric cooperative, had been unable to reach agreements with several individual Alaska Natives for rights-of-way across their land. In 1906, the Alaska Native Allotment Act authorized the Secretary of the Interior to allot individual Alaska Natives a homestead of up to 160 acres. We found 14 cases where conflict exists regarding Copper Valley’s rights-of-way within Native allotments. Resolution to a number of these conflicts had been intermittently pursued since the mid- 1990s, but at the time of our report, only a few cases had been resolved using existing remedies. Copper Valley had three remedies to resolve these conflicts: (1) negotiating rights-of-way with Native allottees in conjunction with BIA; (2) relocating its electric lines outside of the allotment; or (3) exercising the power of eminent domain, also known as condemnation, to acquire the land. We reported that Copper Valley had ceased trying to resolve these conflicts because it maintains that the existing remedies are too costly, impractical, and/or potentially damaging to relationships with the community. More importantly, Copper Valley officials told us that on principle they should not have to bear the cost of resolving conflicts that they believe the federal government had caused. Section 1813 of the Energy Policy Act of 2005 required the Secretaries of Energy and of the Interior to conduct a study of issues regarding energy rights-of-ways on tribal land and issue a report to Congress on the findings, including recommending appropriate standards and procedures for determining fair and appropriate compensation to Indian tribes for granting, expanding and renewing rights-of-way. Issued in May 2007, the study focused on rights-of-way for electric transmission lines and natural gas and oil pipelines associated with interstate transit and local distribution. The study recommended that valuation of rights-of-way continue to be based on terms negotiated between the parties and that if negotiations failed to produce an agreement that has a significant regional or national effect on the supply, price, or reliability of energy resources, Congress should consider resolving such a situation through specific legislation rather than making broader changes that would affect tribal sovereignty or self-determination generally. The unique legal status of tribes has resulted in a complex set of rules that may affect economic development efforts. As we reported earlier this year, as a general principle, the federal government recognizes Indian tribes as “distinct, independent political communities” with inherent powers of self- government. Therefore, Indian tribes have sovereign immunity as well as plenary and exclusive power over their members and territory subject only to the limitations imposed by federal law. However, sovereign immunity may influence a private company’s decision to contract with an Indian tribe and the limitations imposed by federal law on Indian tribes’ civil jurisdiction over non-Indians on Indian reservations may create uncertainties regarding where lawsuits arising out of those contracts can be brought. Like the federal and state governments, Indian tribes are immune from lawsuits unless they have waived their sovereign immunity in a clear and unequivocal manner or a federal treaty or law has expressly abrogated or limited tribal sovereign immunity. For example, the Indian Tribal Economic Development and Contracts Encouragement Act of 2000 requires the Secretary of the Interior to approve any agreement or contract with an Indian tribe that encumbers Indian lands for 7 or more years; however, it prohibits the Secretary from approving the agreement or contract unless it provides remedies for breaching the agreement or contract, references a tribal law or court ruling disclosing the tribe’s right to assert sovereign immunity, or includes an express waiver of sovereign immunity. If the tribe does not waive its sovereign immunity in the agreement or contract, private companies might be hesitant to undertake the work because they will not be able to sue the tribe if any disputes arise. In addition to waiving sovereign immunity in agreements or contracts on a case-by-case basis, some tribes have formed separate entities to conduct business that are not immune from lawsuits. The Supreme Court has ruled that, as a general proposition, the inherent sovereign powers of an Indian tribe do not extend to the activities of non- tribal members. However, the Court has also recognized two exceptions to this general proposition: (1) tribes may regulate the activities of nonmembers who enter into consensual relationships with the tribe or its members through commercial dealing, contracts, leases, or other arrangements and (2) tribes may exercise civil authority over the conduct of non-Indians on fee lands within the reservation when that conduct threatens or has some direct effect on the political integrity, economic security, or the health or welfare of the tribe. In 2008, the Supreme Court ruled that a tribal court did not have jurisdiction to adjudicate a discrimination claim against a non-Indian bank brought by a company owned by tribal members because neither of the exceptions applied. The court’s opinion focuses on the tribe’s authority to regulate the bank’s sale of fee land it owned within the reservation rather than addressing whether the tribal court had authority to hear the discriminatory lending claim under the consensual relationship exception. However, some private companies believe that this decision may not eliminate all of the uncertainty as to the nature and extent of tribal court jurisdiction that makes off-reservation businesses reluctant to trade on Indian reservations or with tribal members who live on reservations. For example, the brief filed by a railroad association asked the court to adopt a brightline rule that tribal courts may not exercise jurisdiction over claims against nonmembers absent clear and unequivocal consent to tribal court jurisdiction. The association argued that such a rule would ensure that litigation against nontribal members will be addressed by a forum that the nonmember has agreed affords acceptable law, procedure, and fundamental safeguards of process and fairness. In contrast to the unique issues that can cause uncertainty or pose challenges to economic activity in Indian country, tribes can take advantage of special provisions for gaming and small business contracting. Indian gaming, a relatively new phenomenon, started in the late 1970s when a number of Indian tribes began to establish bingo operations as a supplemental means of funding tribal operations. In 1987, the U. S. Supreme Court ruled that state regulation of tribal gaming would impermissibly infringe on tribal governments, thereby barring state regulation of tribal gaming in states which did not prohibit all forms of gaming. In response, the Indian Gaming Regulatory Act of 1988 was enacted, which established a regulatory framework to govern Indian gaming operations. In section 2(4) of the act, Congress found that a principle goal of federal Indian policy is to promote tribal economic development, tribal self-sufficiency, and strong tribal government. To that end, the act generally requires that the net revenues from tribal gaming operations be used to (1) fund tribal government operations or programs, (2) provide for the general welfare of the Indian tribe and its members, (3) promote tribal economic development, (4) donate to charitable organizations, or (5) help fund operations of local government agencies. A tribe may distribute its net revenues directly to tribal members, provided that the tribe has a revenue allocation plan approved by BIA and meets certain other conditions. According to the final report of the National Gambling Impact Study Commission, gambling revenues have proven to be a critical source of funding for many tribal governments, providing much needed improvements in the health, education, and welfare of Indians living on reservations across the United States. The National Indian Gaming Commission reports that for 2009 233 tribes operating 419 gaming operations generated $26.5 billion in revenue (233 tribes represents about 40 percent of the 565 federally recognized tribes), the top 21 operations (or about 5 percent of all the operations) generated 38.7 percent of all the revenues, and the top 71 operations (or about 17 percent of all the operations) generated 69.5 percent of all the revenues. In addition, in 1986, a law was enacted that allowed Alaska Native corporation (ANC)-owned businesses to participate in the Small Business Administration’s (SBA) 8(a) program—one of the federal government’s primary means for developing small businesses owned by socially and economically disadvantaged individuals. This program allows the government to award contracts to participating small businesses without competition below certain dollar thresholds. Since 1986, special procurement advantages have been extended to ANC firms beyond those afforded to other 8(a) businesses, such as the ability to win sole-source contracts for any dollar amount. In April 2006, we reported on the use of special procurement advantages by ANCs, and found that 8(a) obligations to firms owned by ANCs increased from $265 million in fiscal year 2000 to $1.1 billion in 2004. In fiscal year 2004, obligations to ANC firms represented 13 percent of total 8(a) dollars. Sole-source awards represented about 77 percent of 8(a) ANC obligations for the six procuring agencies that accounted for the vast majority of total ANC obligations over the 5-year period. ANCs use the 8(a) program to generate revenue with the goal of providing benefits to their shareholders, but the ANCs we reviewed did not track the benefits provided to their shareholders specifically generated from 8(a) activity. Thus, an explicit link between the revenues generated from the 8(a) program and benefits provided to shareholders is not documented. Benefits vary among corporations, but include dividend payments, scholarships, internships, burial assistance, land gifting or leasing, shareholder hire, cultural programs, and support of the subsistence lifestyle. The special procurement advantages for ANCs also generally apply to tribes and Native Hawaiian organizations (NHO). To obtain more information on the benefits these entities receive from participation in the 8(a) program, SBA recently promulgated regulations that require each 8(a) program participant owned by an ANC, tribe, or NHO to submit information showing how the ANC, tribe, or NHO has provided benefits to tribal or Native communities or tribal or Native members due to its participation in the 8(a) program. The data submitted should include information relating to funding cultural programs, employment assistance, jobs, scholarships, internships, subsistence activities, and other services provided by the ANC, tribe, or NHO to the affected community. We have ongoing work looking at the use of these special procurement advantages by ANCs, tribes, and NHOs. Chairman Lankford, Ranking Member Connolly, and Members of the Subcommittee, this concludes my prepared statement. I would be pleased to answer any questions that you may have at this time. For further information about this testimony, please contact Anu K. Mittal at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Jeffery D. Malcolm, Assistant Director; Jeanette Soares, and Joe Thompson also made key contributions to this statement. Department of the Interior: Major Management Challenges. GAO-11-424T. Washington, D.C.: March 1, 2011. Indian Country Criminal Justice: Departments of the Interior and Justice Should Strengthen Coordination to Support Tribal Courts. GAO-11-252. Washington, D.C.: February 14, 2011. Tax Expenditures: Available Data Are Insufficient to Determine the Use and Impact of Indian Reservation Depreciation. GAO-08-731. Washington, D.C.: June 26, 2008. Federal Tax Policy: Information on Selected Capital Facilities Related to the Essential Governmental Function Test. GAO-06-1082. Washington, D.C.: September 13, 2006. Indian Issues: BIA’s Efforts to Impose Time Frames and Collect Better Data Should Improve the Processing of Land in Trust Applications. GAO-06-781. Washington, D.C.: July 28, 2006. Contract Management: Increased Use of Alaska Native Corporations’ Special 8(a) Provisions Calls for Tailored Oversight. GAO-06-399. Washington, D.C.: April 27, 2006. Indian Irrigation Projects: Numerous Issues Need to Be Addressed to Improve Project Management and Financial Sustainability. GAO-06-314. Washington, D.C.: February 24, 2006. Telecommunications: Challenges to Assessing and Improving Telecommunications For Native Americans on Tribal Lands. GAO-06-189. Washington, D.C.: January 11, 2006. Indian Tribes: EPA Should Reduce the Review Time for Tribal Requests to Manage Environmental Programs. GAO-06-95. Washington, D.C.: October 31, 2005. Indian Economic Development: Relationship to EDA Grants and Self- determination Contracting Is Mixed. GAO-04-847. Washington, D.C.: September 8, 2004. Alaska Native Allotments: Conflicts with Utility Rights-of-way Have Not Been Resolved through Existing Remedies. GAO-04-923. Washington, D.C.: September 7, 2004. Welfare Reform: Tribal TANF Allows Flexibility to Tailor Programs, but Conditions on Reservations Make it Difficult to Move Recipients into Jobs. GAO-02-768. Washington, D.C.: July 5, 2002. Economic Development: Federal Assistance Programs for American Indians and Alaska Natives. GAO-02-193. Washington, D.C.: December 21, 2001. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Indian tribes are among the most economically distressed groups in the United States. In 2008, the U.S. Census Bureau reported that the poverty rate among American Indian and Alaska Natives was almost twice as high as the population as a whole--27 percent compared with 15 percent. Residents of tribal lands often lack basic infrastructure, such as water and sewer systems, and sufficient technology infrastructure. Without such infrastructure, tribal communities often find it difficult to compete successfully in the economic mainstream. This testimony statement summarizes GAO's observations on (1) five broad categories of unique issues that may create uncertainty and therefore affect economic activity in Indian country and (2) tribes' use of special gaming and small business contracting provisions. It is based on prior GAO reports. GAO's previous work has identified five broad categories of unique issues that may create uncertainty for tribes or, in some cases, private companies wishing to pursue economic activities on Indian reservations. Accruing land in trust. Having a land base is essential for tribal economic development activities such as agriculture, energy development, and gaming. However, a February 2009 Supreme Court decision has raised uncertainty about the process for taking land in trust for tribes and their members. Tribal environmental standards. The Clean Water Act, Safe Drinking Water Act, and Clean Air Act authorize the Environmental Protection Agency to treat Indian tribes in the same manner as states. In some cases, however, states are concerned that tribes with this authority may impose standards that are more stringent than the state standards, which could result in a patchwork of standards within the state and potentially hinder economic activity. Indian tax provisions. Tribes face uncertainties regarding the types of activities that they can finance with tax-exempt bonds. Also, in 2008, GAO reported that there were insufficient data to (1) identify the users of a tax provision that allows for accelerated depreciation of certain property used by businesses on Indian reservations and (2) assess whether the provision had increased economic development on Indian reservations. Obtaining rights-of-way. Securing rights-of-way across Indian land is important in providing Indian lands with the infrastructure needed to support economic activity. In 2006, GAO reported that obtaining rights-of-way through Indian lands was a time-consuming and expensive process. Legal status of tribes. The unique legal status of tribes has resulted in a complex set of rules that may affect economic activities. For example, Indian tribes have sovereign immunity, which can influence a business's decision to contract with a tribe. Also, the limitations imposed by federal law on Indian tribes' civil jurisdiction over non-Indians on Indian reservations can create uncertainties over where lawsuits arising out of contracts with tribes can be brought. In contrast to these unique issues that may pose challenges to economic activity in Indian country, some Indian tribes have taken advantage of special provisions for gaming and small business contracting. The National Indian Gaming Commission reports that tribal gaming operations generated $26.5 billion in revenue for 2009. However, not all tribes have gaming operations and the majority of the revenue is generated by a fraction of the operations. Similarly, Alaska Native Corporations (ANC) have been granted special procurement advantages. In 2006, GAO reported that obligations to firms owned by ANCs that participated in the Small Business Administration's 8(a) program increased from $265 million in fiscal year 2000 to $1.1 billion in 2004. We have ongoing work looking at the use of these special procurement advantages. This testimony statement contains no new recommendations. |
FPI is a wholly owned government corporation managed by the Department of Justice’s (DOJ) Bureau of Prisons (BOP). FPI was created by Congress in 1934 and serves as a means for managing, training, and rehabilitating inmates. Under the trade name UNICOR, FPI markets about 150 types of products and services to federal agencies. Products include furniture, textiles, and electronic components. Services include data entry, engine repair, and furniture refinishing. In fiscal years 1996 and 1997, FPI had net sales of about $496 and $513 million, respectively, in products and services. In addition to buying products directly from FPI, agencies buy FPI products from central supply agencies like FSS or, in the case of the military, from DLA. FSS and DLA stock some FPI products for sale to customers; FPI delivers other products directly to customers when orders are placed with FSS or DLA. According to FPI, agencies generally deal directly with FPI when procuring services. When making orders for FPI products and services, agencies typically send FPI a hard copy order; transmit the order electronically, including through the Internet; or place the order by telephone. To attain certain public policy objectives, federal law provides for certain exceptions to the full and open competition requirement that governs most acquisitions. One of these exceptions is set forth in 18 U.S.C. 4124, which provides that federal agencies are generally required to purchase FPI products if they meet the buying agency’s requirements, and the prices charged do not exceed current market prices. Subpart 8.6 of the Federal Acquisition Regulation (FAR) implements this statutory provision. If FPI cannot meet the buying agency’s requirements, the FAR allows agencies to seek waivers from FPI. FPI’s mandatory source status for products does not apply to the services that it offers to its federal customers. Over the years, supporters and critics of FPI have debated FPI’s mandatory source status and whether FPI provides quality goods, at a reasonable price, and on a timely basis. Both sides recognize that FPI has a social objective to manage, train, and rehabilitate inmates through work programs. However, some critics have questioned whether FPI’s products and services have satisfied federal customers in terms of timeliness, as well as quality and price, and whether FPI’s mandatory status results in unfair competition with the private sector. In recent years, FPI has placed increased emphasis on timeliness as a performance indicator, as well as on overall customer satisfaction. In its fiscal year 1996 operating plan, one of FPI’s eight long-term strategic goals was to “promote total customer satisfaction by being competitive in marketplace price, quality, customer service, and delivery standards.” One of its corporate objectives for fiscal year 1996 was to “meet or exceed all customer requirements for price, quality, delivery, and service.” Beginning with its fiscal year 1997 operating plan, FPI established a specific goal for on-time delivery performance, stating that it would publicly recognize factories that reached 90 percent. For fiscal year 1998, FPI increased its on-time performance goal to 98 percent. FPI officials viewed these goals as ambitious; however, they said that setting them represented an important step toward focusing on the need to improve delivery performance. To meet our first objective, we obtained and analyzed computerized files from FPI’s customer order entry database (COED) for fiscal years 1996 and 1997, involving over 140,000 agency orders. FPI uses COED, which is maintained at its Customer Service Center in Lexington, KY, to track and record information on agency orders for products and services. Agency orders can contain one to several hundred line items. Each line item identifies a specific product and quantity and has a distinct due date. Large orders with many line items can have multiple products and due dates. Because agency orders can vary tremendously, we generally followed the same approach that FPI uses to define orders when it evaluates timeliness. Specifically, we defined an order as a shipment of products or provision of services expected by a customer for a given order on a given day. We used the COED data to determine whether orders, defined as such, were shown as being shipped in full by their respective due dates. We also examined how FPI accounts for shipping time for those orders for which the due date is when deliveries should arrive at the customer’s location, not the date by which they should be shipped. To perform a limited reliability assessment of the COED data, we obtained hard copies of, and other available documentation for, 109 randomly selected agency orders and compared various data items in the orders with data in COED. We also obtained and analyzed the results of FPI’s evaluations of timeliness for fiscal year 1997 and the first half of 1998. We compared FPI’s 1997 results with ours and reconciled any differences. We did not independently verify FPI’s analysis for fiscal year 1998. In doing our work, we held many interviews and discussions about FPI delivery practices with FPI staff at the Customer Service Center in Lexington, KY, and at FPI headquarters in Washington, D.C. We did not determine the reasons individual agency orders were delivered late or assess the effect of individual late deliveries on federal agencies. To meet the second objective, we interviewed key procurement officials from four agencies that are among FPI’s largest buyers: the General Services Administration’s (GSA) Federal Supply Service (FSS) in Arlington, VA; the Defense Logistics Agency (DLA) in Ft. Belvoir, VA; the Social Security Administration (SSA) in Baltimore, MD; and the Department of Veterans Affairs (VA) in Washington, D.C. Collectively, these agencies accounted for over one-quarter of FPI’s 1996 sales of $496 million. DLA was the second largest buying component within the Department of Defense (DOD) next to the Army. The other three agencies were among the top four civilian agencies that buy from FPI. In addition to contacting headquarters procurement officials at these agencies, we also contacted one of GSA’s nationwide commodity centers, FSS’ National Furniture Center (NFC), and three of DLA’s nationwide supply centers: the Defense Supply Center Philadelphia (DSCP) in Philadelphia, PA; the Defense Supply Center Columbus (DSCC) in Columbus, OH; and the Defense Supply Center Richmond (DSCR) in Richmond, VA. Within SSA, we spoke with officials from the two buying components that purchase products from FPI: the Office of Property Management (SSA/PM) and the Office of Operations, Contracts, and Grants (SSA/OCG). Within VA, we spoke with officials from the Office of Administration and the Office of Acquisition and Materiel Management, as well as officials with the Veterans Health Administration (VHA) from the offices of Patient Care Services and Environmental Management Services. We obtained information and views from these officials on several topics related to timeliness, including how FPI performed in meeting due dates, how due dates were set, whether due dates were driven by FPI production capabilities or mission needs, what processes were used to monitor FPI delivery performance and that of private vendors, and what remedies were available in the event of a late delivery from FPI and private vendors. Using FPI’s waiver database, we also determined the extent to which FPI granted customers waivers from buying FPI products for reasons related to timeliness. We did our work between July 1997 and May 1998 in accordance with generally accepted government auditing standards. Appendix II contains a more detailed discussion of our objectives, scope, and methodology. We requested comments on a draft of this report from the Director, Bureau of Prisons (BOP). These written comments are discussed near the end of this letter and are reprinted in appendix III. We also held exit conferences with program officials of the customer agencies we visited to verify applicable data, facts, and opinions presented in this report. Our analysis using FPI data and its general approach for measuring timeliness showed that FPI shipped 72 and 76 percent of customer orders on or before the due date in fiscal years 1996 and 1997, respectively. It also showed a wide variation in FPI performance by customer agency and some variation by product category. FPI did not meet its 90 percent on-time delivery goal in any of the months in 1997 or in any of the product categories for the year as a whole. However, FPI’s performance improved toward the end of 1997, reaching 87 percent for the month of July, and its own data showed that timeliness reached 89 percent in March 1998. In addition, our work showed that the average amount of time it took FPI to ship products in all but one of the product categories decreased from 1996 to 1997. These statistics provide insights into FPI delivery performance, such as the variation by product category and customer agency. However, it is important to recognize that they likely overstate timeliness because they did not account for shipping time for orders with due dates specified as the day the order should arrive at its destination and not the day by which the order should be shipped. As a result, our analysis, as well as FPI’s evaluations of timeliness, considered all shipments to be on time if they left the factory on or before the due date. In addition, our review of 109 randomly selected orders showed that over one-half of them had due dates in FPI’s system that were later than what customers had originally requested. Because of limited documentation, we could not always determine the reasons due dates had changed or whether customers were notified of the reasons for the changes and approved of them. Furthermore, although the results for these 109 orders were not projectable to the universe of FPI orders, they raised questions about which due dates should be used to measure timeliness, especially from the customer’s perspective. If customers are not satisfied with due dates or if this limitation is not reflected in the analysis, the usefulness of any timeliness evaluations that rely on them comes into question. FPI shipped 72 and 76 percent of customer orders on or before their due dates in fiscal years 1996 and 1997, respectively. FPI improved its performance in the latter months of fiscal year 1997, reaching 87 percent for July 1997. In fact, our analysis showed that 8 of the 12 months in fiscal year 1997 had better on-time delivery performance than the same months in fiscal year 1996. It should be noted, however, that timeliness did decrease to 84 and 82 percent, respectively, for August and September of 1997, and FPI did not meet its 90 percent on-time delivery goal in any of the months in 1997. For the 2-year period, timeliness ranged from a low of 59 percent in November 1995 to a high of 87 percent in July 1997. On average, 6,663 orders were due in each month of 1996 and 1997, ranging from 5,057 in February 1996 to 8,227 in September 1997. These orders covered the range of products FPI manufactures, as well as services, such as engine repair, data entry, and furniture refinishing. Figures 1 and 2 and tables I.1 and I.2 in appendix I show the results of our analysis by month for fiscal years 1996 and 1997. FPI’s six major product categories—data graphics, electronics, furniture, metals, systems furniture, and textiles—showed some variation in delivery performance. Our analysis showed that factories producing metals—which include metal shelving, lockers, and storage cabinets—were the most timely in 1996 at 86 percent. Factories producing furniture—which includes desks, bookcases, and ergonomic chairs—were the least timely in 1996 at 66 percent. In 1997, factories producing systems furniture were the most timely at 85 percent, and factories producing electronics—which include cables, connecters, and circuit assemblies—were the least timely at 73 percent. Median production times in 1996 ranged from 23 days for data graphics factories to 102 days for factories producing furniture. In 1997, production times ranged from 14 days for data graphics factories to 89 days for factories producing furniture. For 1997 as a whole, none of the averages for the six product categories met FPI’s 90-percent goal. However, timeliness in four of the six product categories improved from 1996 to 1997; and production time decreased in every product category except metals, where it increased slightly. Table I.3 in appendix I shows the results of our analysis by product category for 1996 and 1997, as well as some examples of the types of products under each category. Our analysis by customer agency showed wide variations in performance. To examine the data by agency, we focused on the top buyers of FPI products according to FPI’s fiscal year 1996 sales report. Orders shipped on or before the due dates to different customer agencies ranged from a low of 47 percent for VA orders to a high of 88 percent for federal judiciary orders in 1996. In 1997, VA and the federal judiciary were again the lowest and highest at 47 and 92 percent, respectively. Table I.4 in appendix I shows the results of our analysis by customer agency for 1996 and 1997. In addition, we analyzed products from FPI’s “quickship” program. FPI guarantees that it will ship products in this program within 30 days of receipt of agencies’ orders. Products in FPI’s quickship catalogue include certain types of ergonomic chairs and other furniture, linens, clothing, targets, and traffic signs. Despite FPI’s guarantee that it will ship these products within 30 days, we found that only 75 and 70 percent of quickship items were shipped within 30 days or less in fiscal years 1996 and 1997, respectively. Our analysis also showed that only 79 and 63 percent of the due dates for quickship products that were in FPI’s system for fiscal years 1996 and 1997, respectively, were within the 30-day time frame. As mentioned before and explained in detail in appendix II, we generally followed the approach FPI uses to define orders when evaluating timeliness, because agency orders vary tremendously, often involving multiple products and due dates. On-time delivery was one of several performance indicators—which include sales and earnings, inventories, and inmate staffing—that FPI updated on a regular basis. FPI monitored on-time delivery performance on a monthly basis and by product category and factory. However, we noted during our review that in evaluating timeliness, FPI did not track performance by customer agency. The monthly trend shown in our analysis for 1997 (fig. 2) generally matched FPI’s results. However, FPI’s results were slightly higher—by an average of just over 2 percent for the months in 1997. On the basis of discussions with FPI staff, we determined that this was likely due to two minor differences between our analysis and FPI’s. First, as is discussed in appendix II, we did not group the orders, as we defined them, by factory as FPI does for its evaluations, because we were not assessing the performance of individual factories from month to month. The effect of this added grouping was that the base number of orders FPI used was higher, and slightly more of these additional orders were counted as being on time rather than late. This accounted for most of the difference between the two analyses. Second, FPI’s analysis included blanket orders, which have regular shipments over an extended period of time. These orders make up about 3 percent of the orders, but they involve a large volume of data. Early in our review, we decided to request data only on regular orders, excluding the blanket orders, to minimize the amount of data we were requesting, which ultimately included over 600,000 line items. For the first half of fiscal year 1998, FPI’s timeliness statistics showed that about 85 percent of the orders were on time in October and November. In December and January, the percentages went down to 79 and then 78 percent and then increased to 83 and 89 percent in February and March, respectively. According to FPI officials, timeliness reached 90 percent in April 1998. As mentioned before, FPI set a goal of reaching 98 percent on-time delivery in fiscal year 1998. A limitation of our analysis and FPI’s timeliness evaluations is that they did not account for shipping time for due dates specified by customers as the day the order should arrive at its destination. Due dates specified by customers can be origin—meaning that the orders should be shipped by the due date—or destination, meaning that the orders should arrive at the customer’s location by the due date. FPI had data on estimated shipping times for only 18 of its 96 factories that we could have used in our analysis, and we found that several of the other factories received orders with destination due dates. Estimated shipping times for the 18 factories ranged from 3 to 10 days. In addition, FPI staff who wrote FPI’s computer program for evaluating timeliness said they had problems developing a workable approach for accounting for shipping time where appropriate. In the absence of data or a workable approach for incorporating shipping time, our analysis, as well as FPI’s timeliness evaluation, considered all shipments to be on time if FPI’s data showed that they left the factory on or before the due date. The FPI official who compiled the performance indicators acknowledged that the inability to account for shipping lead times was a fault in FPI’s system. This official said that FPI’s efforts to measure timeliness have always been hampered by the fact that FPI never knows exactly when the customer receives the products. The official said that subsequent FPI efforts to estimate shipping time have been unsuccessful. The official indicated that ideally, orders with destination due dates could be flagged as they come in, and a standard process could be used to estimate shipping time for incorporation into the due date, depending on the type of order. Because we could not account for shipping time for orders with destination due dates, our analysis and FPI’s timeliness evaluations likely overstate timeliness because they treated every due date as an origin date. Although we could not determine how much our statistics on timeliness would decrease if we could account for shipping time where appropriate, our work indicated that accounting for shipping time would have some impact. First, although our data were not projectable, we found that 53 of the 109 orders we randomly selected to assess the data in FPI’s system had due dates that customers had specified as destination. Second, as mentioned before, available data for 18 of the factories showed that estimated shipping times ranged from 3 to 10 days; and about 16 percent of the 428,000 line items that were on time in orders due in 1996 and 1997 were shipped on 1 of the 2 days prior to the due date or on the due date itself. In these cases, if the line items had destination due dates, they likely would have been late given the minimum estimate of 3 days for shipping time. Our review of 109 randomly selected orders showed that 84 of them had due dates in FPI’s order entry system that were different from what customers had originally requested. Specifically, 63 of the orders had due dates that were later than what customers originally requested, and 16 had due dates that were earlier. Five orders involved a combination of due dates for different line items that were both later and earlier than what customers originally requested. Differences between originally requested due dates and the later due dates in FPI’s system ranged from 2 to 333 days, and differences for due dates that were earlier ranged from 1 to 58 days. Only 25 of the 109 orders had due dates in FPI’s system that reflected what the customers had originally requested. Of the 68 orders with due dates that were later than what customers requested—the 63 with dates that were later plus the 5 with a combination of later and earlier due dates—available documentation and information in FPI’s system showed that 7 due date changes were initiated or caused by the customer. Nineteen had due dates that were later than what the customer had originally requested, because FPI’s production capacity was overloaded at the time the order was placed, or FPI determined that the lead time the customer specified was insufficient. In the remaining 42 cases, the documentation FPI provided for the orders and information in its system did not explain the reasons the due dates were later than what the customers had originally requested. FPI researched the 42 orders and provided an explanation for most of the differences. These explanations included customers specifying insufficient lead times for production, FPI’s production capacity being overloaded at the time the order was placed, and factory or project managers changing due dates for no specified reasons. The officials indicated that in the orders for which due dates were made earlier than the customer requested, FPI most likely was able to provide the product sooner than the customer anticipated. FPI’s Chief Operating Officer said that one reason due dates in FPI’s system could have been later than what customers originally requested was that FPI may have determined that the customers’ due dates were inconsistent with production lead times at the time the order was placed, not accepted the customer-requested due dates, and revised them to reflect production lead times. In these instances, the Chief Operating Officer said that FPI considered the revised due dates to be the original due dates, not the customer-requested due dates that were not accepted. In contrast, he said that a true due date change, from FPI’s perspective, would involve FPI accepting a customer order and its accompanying due dates and then revising them after acceptance. However, he pointed out that in such instances, the original due dates should remain unchanged in FPI’s system unless the customer initiated the due date revision. Officials at the Customer Service Center in Lexington, KY, pointed out that FPI’s production lead times and capabilities can vary throughout the year. For example, in a peak time such as the end of the fiscal year, production lead times for some product groups can increase from 90 to 150 days. These officials said they made every effort to meet customers’ needs through negotiating due dates, offering alternative products and discounts, and offering waivers from buying FPI products if necessary. Furthermore, they said that in many cases, they maintained close working relationships with customers; and for large orders, field representatives from the individual factories were often in contact with customers regularly. Our review also showed that there was limited documentation or information in FPI’s system showing that customers had been notified that the due dates they requested could not be met, the reasons for the changes, and that customers approved of the changes. FPI officials told us that it is their policy to notify the customer and request approval if customer-requested due dates cannot be met, although they added that if they received no response from the customer, they assumed that the new dates they developed were acceptable. As mentioned before, 68 orders had due dates that were later than what customers requested—available information showed that changes for 7 of these were initiated by or caused by the customer. Of the 61 remaining orders, 23 had available documentation or information in FPI’s system showing that customers were notified that the due dates they requested could not be met and the reason for the changes. In another 24 cases, FPI provided us with order acknowledgement letters they said were sent to customers. These acknowledgement letters identified the new due dates FPI had developed on the basis of its production lead times and capabilities at the time the order was placed. However, the acknowledgement letters did not provide the customers with the reasons the due dates they requested could not be met or ask for the customers’ approval of the changes. In addition, these acknowledgement letters gave no indication that FPI did not accept the customers’ requested due dates or that the dates were inconsistent with FPI’s production lead times. For the other 14 orders, FPI had no documentation or information in its system showing that customers were notified that the due dates they requested could not be met. For the 61 orders, documentation or information in FPI’s system showing that the customers had approved of the date changes was available in only 11 of these cases. In doing our work, we also found that in 16 of these 61 orders, FPI was able to ship the orders by the original customer-requested due dates, despite the due date changes that occurred. However, FPI missed original customer-requested due dates in the rest of the orders, except for one where we could not make a determination because we could not identify the exact due date. In addition, FPI missed revised due dates that were in its system in 24 of these orders. The results of our work related to the 109 orders were not projectable to the universe of agency orders; however, they provided us with insights into the COED data, as well as into FPI delivery practices. We recognize, as FPI officials pointed out, that due dates initially requested by customers may be inconsistent with production capabilities and that a number of valid reasons can exist for due date changes. In addition, FPI may encounter increases in workload and other scheduling difficulties, as any supplier would, at times when customers are under pressure to meet their agencies’ mission needs. As a result, arriving at mutually agreeable due dates may involve negotiation and compromise between the supplier and the customer, whether the supplier is FPI or a commercial vendor. This is particularly so in orders placed with commercial vendors involving indefinite delivery type contracts. FAR Sections 16.501-2 through 16.504 describe these types of contracts as having delivery schedules not known at the time of contract award and deliveries to be scheduled by placing orders with the contractor. Nonetheless, the lack of documentation showing the reasons due dates in FPI’s system were different from what customers requested and whether customers were notified of these reasons and approved of the changes impeded our ability to assess the appropriateness of many of the due dates for the sample of orders. Although the results for these 109 orders were not projectable to the universe of all FPI orders, they raised questions about which due dates should be used to measure timeliness, especially from the customer’s perspective. FPI officials said that they could do a better job documenting why customer-requested due dates could not be met and whether the customers were notified of the reasons for changes and approved of the new due dates. Just as our analysis by customer agency showed wide variations in FPI delivery performance by customer agency, officials within DLA, FSS, SSA, and VA who were involved in buying FPI products had mixed views on FPI’s performance in meeting delivery due dates, as well as on related FPI delivery practices. Headquarters officials in FSS and DLA, officials at two of the DLA supply centers, and an official in the Office of Property Management at SSA for the most part spoke positively about FPI’s overall delivery performance. In contrast, officials from VA, FSS’ National Furniture Center, one of the DLA supply centers, and SSA’s Office of Operations, Contracts, and Grants had negative experiences. Officials from DLA, FSS, and one of the two offices we contacted in SSA said that delivery due dates were driven primarily by FPI production capabilities and not agency mission needs—some of the officials expressed concern with this practice. VA officials said that it seemed that FPI attempted to work with them to reach mutually agreeable due dates; however, these officials said that FPI generally performed poorly in meeting those dates. The views expressed by these customer agency officials may not be representative of the views of all FPI customers. However, despite FPI’s goal to promote total customer satisfaction, our work showed that certain key agency customers were clearly dissatisfied with FPI’s delivery performance and practices. These agencies—DLA, FSS, SSA, and VA—all said they monitored timeliness while administering contracts for all vendors, including FPI. Although some components within these agencies had data on FPI and commercial vendor delivery performance, none of the agencies had overall data comparing FPI performance to that of commercial vendors. Nonetheless, contracting officers’ leverage in resolving procurement problems was different for FPI from the leverage contracting officers had for private sector vendors, because the rules that typically govern contracts with commercial vendors do not apply to FPI. However, agencies can use performance information to seek waivers from FPI so they can buy products commercially and can seek remedies, including damages for late deliveries. As mentioned before, our analysis showed wide variation in FPI performance by customer agency. Our discussions with selected customer agency officials we contacted from DLA, FSS, SSA, and VA also reflected this mixed FPI performance by agency. Headquarters FSS officials said that FPI’s delivery performance had generally improved over the last 10 years and that overall, FPI met FSS’ needs. FSS did not have overall data comparing FPI delivery performance to that of commercial vendors. FSS officials did say, however, that the workload associated with addressing delinquent FPI deliveries was significant. Officials at FSS’ National Furniture Center (NFC) in Arlington, VA, had more significant problems and discussed the increased workload and their general dissatisfaction with FPI delivery performance. This commodity center acts as an agent for federal customers who buy furniture—FPI’s largest product line—through GSA’s special order and multiple award schedules programs. FSS/NFC officials said that FPI delivery performance was a big problem for the center. They said that the additional workload caused by having to address FPI delivery problems exceeded staff resources available and that this was compounded by FPI’s nonresponsiveness, such as not returning phone calls. They believed that FPI was not sensitive to the due dates it agreed to with customers nor to the needs of customers ordering furniture. They added that customers often did not want to acquire furniture from FPI because of previous experiences when FPI was unreliable. FSS/NFC staff provided us with data showing that for fiscal year 1997, FPI delivered 69 percent of the 12,688 line items of furniture the center ordered on time. DLA headquarters officials, as well as officials at two of the three supply centers we contacted, were generally pleased with FPI delivery performance and generally thought it compared favorably with that of commercial vendors. Although these officials said that DLA did not have overall data comparing FPI performance to that of commercial vendors, they said that DLA routinely stocked extra products, and the officials did not perceive that their mission had been hampered by FPI delivery performance. Despite this, officials from the Defense Supply Center Philadelphia (DSCP) said that FPI was unable to meet the needs of the Army in Bosnia for body armor. According to FPI officials, FPI experienced difficulty in obtaining raw materials from its vendors on these contracts. DSCP’s Deputy Director of Clothing and Textiles said that this example illustrated the danger of allowing a mandated supplier to be the sole provider of a product manufactured to military specifications. This official said that commercial suppliers cease manufacturing products when this happens, because they know federal agencies must buy from the mandatory source and there is an insufficient civilian market for many military products. Because of this experience, DSCP now has a back-up supplier for body armor. Data from two of the DLA supply centers we contacted—DSCP and the Defense Supply Center Columbus (DSCC)—showed mixed FPI performance. DSCP reported that FPI’s overall delinquency rates on all products were 29 and 21 percent in fiscal years 1996 and 1997, respectively. The commercial supplier rates for this center were 8 and 5 percent, respectively. DSCC provided data from electronics acquisitions that showed that FPI performed better overall in timeliness and quality combined than commercial vendors—98 out of 100 points—compared to a score of 79 out of 100 for all commercial vendors. Defense Supply Center Richmond (DSCR) officials did not have any data on FPI performance, but they said that their experience had been generally positive. FPI’s two main buyers within SSA—the Office of Operations, Contracts, and Grants (SSA/OCG) and the Office of Property Management (SSA/PM)—had differing views of FPI performance. SSA/OCG handles small orders for furniture that are sent to FPI on an as-needed basis, and SSA/PM handles mostly systems furniture orders that are scheduled up to a year in advance. The Director of the Center for Ergonomic Property in SSA/PM said that FPI had not missed a delivery due date since 1993 and had sometimes exceeded the specified time frames. On the other hand, the Director of Operations Contracts in SSA/OCG told us that commercial vendors were much more responsive than FPI and delivered products in a shorter time period. This official indicated that although the effect of missed delivery dates was fairly negligible, SSA/OCG was generally dissatisfied with the requirement to do business with FPI because of problems with timeliness, as well as other factors. Although VA has not developed overall data on FPI delivery performance, headquarters officials from the Office of Acquisition and Materiel Management, as well as program officials with the Veterans Health Administration (VHA), said that FPI’s delivery performance had been a continuing, significant problem. Products with delivery problems have been furniture, seating, and signage for VA’s major renovation of its headquarters building and other facilities, textile products for the day-to-day operating needs of VHA medical centers, and patient care requirements for prescription eyeware. For example, for the renovation of VA’s headquarters building between 1992 and 1996, VA requested a waiver for the entire requirement from FPI because of past performance problems. FPI granted the waiver for the systems furniture portion of this project but denied the waiver for the case goods (such as credenzas and bookcases), seating, and signage. VA contracting officials responsible for this project said that a commercial supplier met the delivery requirements for the systems furniture; however, FPI delivery performance on the remaining requirements was poor. In addition, they said that many of the products were defective and unacceptable, and customer support was almost nonexistent. According to the VHA officials we contacted, another area with significant delivery problems was prescription eyeware for veterans. According to an official with VHA Patient Care Services, many commercial suppliers were able to provide prescription eyeglasses in 5 to 7 days; and a Navy optical laboratory, which meets DOD’s needs for eyeglasses, was able to provide them to military personnel in 4 to 6 days. An official with the American Optometric Association said that wholesale laboratories now have an average turnaround time of about 2 days for complete jobs. Under FPI’s mandatory source status, VA believed it was required to purchase eyeglasses from FPI, until an opinion was issued by VA’s Office of General Counsel in July 1997 concluding that FPI was not a mandatory source of supply for VA’s procurement of eyeglasses. VA’s experience with FPI showed that the private sector provided much more timely delivery. VA officials told us that in 1993, they requested a blanket waiver from FPI so they could buy eyeglasses commercially. FPI did not approve the blanket waiver but said that individual medical centers could request waivers, and FPI would review them on a case-by-case basis. Consequently, numerous individual hospitals tracked FPI performance and requested waivers. For example, this official said that the VHA medical center in Pittsburgh, PA, monitored FPI deliveries over a 2-month period in 1996 to support requesting a waiver from FPI and found that although FPI had promised the eyeglasses within 7 days of receiving the order, only 17 percent were delivered in that time period. In fact, he said that 32 percent of the deliveries took more than 20 days. In light of the problems VA has had with FPI delivery performance, as well as product quality and pricing, an official with VA’s Environmental Management Service said that VA had submitted a legislative proposal to the Office of Management and Budget (OMB) each year since 1988 to exempt VA from FPI’s mandatory source requirement for certain products. OMB has not approved any of these proposals. In July 1997, VA’s Office of General Counsel issued an opinion that FPI is not a mandatory source for VA’s purchase of eyeglasses. The opinion concluded that VA could procure eyeglasses from the commercial marketplace because 38 U.S.C. 8123 allows VA to procure prosthesis devices in a manner the Secretary determines proper without regard to any other provision of law and VA has defined eyeglasses as a prosthesis device. According to FPI’s Chief Operating Officer, FPI did not dispute this decision; therefore, VA may now purchase eyeglasses commercially. FPI officials said that seven VA hospitals were still buying eyeglasses from FPI and provided data indicating FPI’s on-time delivery for these hospitals, using a 7-day delivery standard, ranged from 71 to 86 percent for the period October 1, 1997, through May 21, 1998. As discussed earlier, FPI officials said that due dates were often driven by FPI’s production lead times. Officials from DLA, FSS, and one of the two offices we contacted in SSA also said that delivery due dates were driven primarily by FPI production capabilities and not agency mission needs. Headquarters FSS officials pointed out that its General Services Administration Acquisition Regulation (GSAR) specifically states that “contracting officers shall establish delivery schedules based on the lead time required by FPI.” These FSS officials said that due dates were set on a case-by-case basis and usually involved working with FPI to reach a mutual agreement. They said that when contracting with FPI and developing due dates, their approach was to weigh heavily on FPI’s ability to deliver. One top FSS official indicated that from a practical standpoint, it would not make sense to set due dates that FPI factories could not meet. Although the headquarters FSS officials indicated that FSS worked with FPI within its production capabilities, FSS/NFC officials viewed the due date setting process with FPI as more problematic. FSS/NFC’s officials said that for certain furniture products, FPI dictated the due dates to FSS/NFC staff. They said that agencies often came to FSS/NFC for contracting support when purchasing furniture from FPI. FSS/NFC staff tried to negotiate due dates with FPI, but the officials said that FPI’s proposed due dates rather than the customers’ were generally used in the contracts. They said that better prices, better quality furniture, and better delivery times were often available through commercial suppliers on FSS’ schedules. DLA headquarters officials said that the due dates were driven mostly by FPI production capabilities, but they did not view this as a problem. For the most part, these officials said that DLA planned its orders well in advance and often stocked extra levels. They said that DLA inventory managers and DLA’s automated systems alerted contracting officers when it was time to make an order to FPI so that future needs would be met. These officials said that there were exceptions to this practice, such as when a critical need arose. In these cases, they negotiated due dates with FPI. Although DLA officials focused on the fact that they stock items and are able to work within FPI’s production capabilities, we have reported on several best practices that have been successfully used in the private sector to reduce inventory levels and logistics costs. In general, these practices provide inventory users with a capability to order supplies as they are needed and then to deliver those items directly to the customer within hours after the order is placed. DLA has successfully used this approach in some areas. If DLA begins relying more on these practices, it would seem that the due dates it sets with its suppliers—including FPI—would take on greater importance. The Director of the Center for Ergonomic Property in SSA/PM was the only official we contacted who said that due dates were driven by agency mission needs. This official said that the delivery schedules are set to accommodate SSA installation needs and that FPI always meets those due dates. On the other hand, the Director of Operations Contracts in SSA/OCG said that due dates were mostly dependent on FPI production capabilities and less so on the particular need of the requesting office within SSA. This official added that on the basis of past experience, SSA/OCG expected that FPI would miss the due dates that FPI itself established. For example, this official said that on August 28, 1996, SSA/OCG placed an order for 83 chairs and agreed with FPI to a due date of November 15, 1996. SSA/OCG then received a notice from FPI on September 6, 1996, indicating that it was unable to obtain the raw materials needed to produce the chairs and that the new due date was December 3, 1996, to which they agreed. FPI was then unable to ship the chairs until January 11, 1997. The SSA/OCG official added that missed due dates often involved partial shipments, in which most of the order arrived on time but some small portion was late. This official also said that FPI often would change due dates, and the procurement officer would not find out about the changes until after the requesting office did not receive the expected delivery. VA officials did not have a view on whether due dates were primarily driven by production capabilities or agency mission needs. VA officials said that it seemed that FPI attempted to work with them to reach mutually agreeable due dates. However, they said that FPI generally performed poorly in meeting those due dates, which our analysis of FPI’s data confirmed with regard to VA. As mentioned before, we recognize that arriving at mutually agreeable due dates may involve negotiation between the supplier and the customer, whether the supplier is FPI or a private vendor. In addition, the views expressed by the agency officials we contacted about the due date setting process, as well as FPI’s delivery performance overall, may not be representative of the views of all FPI customers. However, meeting agencies’ due dates is important for customer satisfaction, and our work showed that certain key agency customers were clearly dissatisfied with FPI delivery performance and practices. Also, as mentioned before, FPI monitored on-time delivery performance on a monthly basis and by product category and factory; however, it did not monitor performance by customer agency. This may have made it difficult for FPI to recognize when certain agencies or agency components were experiencing a low rate of timeliness with FPI deliveries. DLA, FSS, SSA, and VA all said they monitored timeliness while administering contracts for all vendors, including FPI. Although some components within these agencies had data on FPI and commercial vendor delivery performance, none of the agencies had overall data comparing FPI performance to that of commercial vendors. Nonetheless, as we reported in March 1998, contracting officers’ leverage in resolving procurement problems was different for FPI from the leverage the contracting officer had for private sector vendors, because the rules that typically govern contracts with commercial vendors do not apply to FPI. Further, when agencies develop varying types of information on current and past performance of vendors, including FPI, there are major distinctions in how agencies can use this information. Specifically, for commercial vendors, agencies can use past performance information showing timeliness problems as a factor to consider in the award of contracts. However, for FPI, agencies cannot use this information to deny awarding a contract to FPI because, under the law, FPI is a mandatory source of supply. Agencies can, however, use this information to negotiate with FPI on delivery time frames or to seek a waiver from FPI so they can buy from a commercial vendor that can better meet their delivery requirements. As with awarding contracts, agencies cannot use current performance information to cancel or terminate an existing contract with FPI unless agencies request cancellation or termination provisions during the negotiation process and FPI agrees to include them in the contract. According to FPI, agencies can, however, use current performance information to seek other remedies against FPI, including damages for late deliveries. We did not determine the extent to which agencies seek, or FPI agrees to authorize, these remedies; nor did we compare or evaluate the use of remedies by contracting officers in connection with contracts with FPI or commercial vendors. Regarding waivers for reasons related to timeliness, our analysis of FPI waiver data showed that 36 and 29 percent of the 21,900 and 24,300 line items for which FPI had granted waivers in 1996 and 1997, respectively, were because FPI could not meet customers’ time frames. Inability to meet customers’ time frames was the most common reason FPI granted waivers in these years. FPI also provided data showing that it approved 85 and 83 percent of the line items for which customers requested waivers for any reason in fiscal years 1996 and 1997, respectively. Our discussions with agency officials showed that they generally do not seek waivers for reasons related to timeliness, with the exception of VA. FSS officials said that their staff typically did not request waivers but instead worked with FPI to find an acceptable solution short of requesting a waiver. This may have involved extending the due dates for orders or requesting that FPI change the production point. An FSS official said that using this approach, although resource intensive, was often in the best interest of the customer, because the customer would get the product sooner than if FSS had to obtain the waiver and initiate a new procurement. FSS/NFC officials explained that even though NFC experienced frequent, poor delivery performance on contracts with FPI, it typically did not seek waivers, because its staff had a large workload and the time invested attempting to get a waiver would be unproductive. They added that in many instances, FPI did not respond to FSS/NFC staff efforts to coordinate on delinquent deliveries. In these cases, FSS/NFC was left without any remedies other than to wait until FPI finally shipped the products. DLA headquarters officials said that they typically did not seek waivers, because they planned for deliveries far in advance; they had a good working relationship with FPI that promoted reliable performance; and their procurement staff visited the factories to detect and avert delays as they developed. However, these headquarters officials and the three supply centers said that DLA had on occasion requested waivers in the past for such reasons as FPI’s inability to produce an item or DLA’s desire to purchase part of the requirement commercially. Both SSA officials we contacted said that they seldom sought waivers for timeliness, but SSA/OCG used the waiver process for reasons related to price. The SSA/OCG official we spoke with estimated that waivers were requested in 10 percent of SSA’s potential purchases from FPI, mostly for reasons related to price. However, FPI granted a waiver on one major systems furniture order in 1995, because arbitrators for SSA’s unionized employees required the installation of systems furniture by a certain date in 1997 that FPI could not meet. VA officials said that they had sought waivers from buying FPI products for reasons related to timeliness, including the headquarters renovation example mentioned before. However, the VA officials we contacted said that because their agency is so decentralized, they could not comment on whether VA typically sought waivers for reasons related to timeliness. They said, however, that if they had gotten a waiver for the casegoods, seating, and signage for the headquarters renovation, they believed they would not have had nearly as many problems. They also said that the process of getting waivers was resource intensive. For example, prior to VA’s legal opinion that eyeglasses were not subject to the mandatory source requirement, they said that VA’s medical centers had to individually develop data and justify waivers when they wanted to purchase prescription eyeware from commercial sources because of concerns about FPI timeliness. FPI officials recognize the importance of delivering products and services on time and have data used to track delivery performance and an approach for evaluating results, including on-time goals for fiscal years 1997 and 1998. Although FPI as a whole did not meet its 90 percent on-time delivery goal in any month during 1997, it improved its delivery performance and production times in that year, and FPI data showed improvements in 1998. Our statistics, as well as FPI’s evaluations of timeliness, provided insights into delivery performance and identified areas needing improvement. However, it is important to recognize that the statistics likely overstate on-time delivery performance, because they did not account for shipping time for orders with destination due dates. FPI did not have data or a workable approach that would allow us to account for shipping time for such orders. Accounting for shipping time where appropriate would improve the accuracy of future evaluations of timeliness and provide a better picture of performance. Furthermore, over one-half of 109 randomly selected orders showed that the due dates in FPI’s system were later than what customers had originally requested; and FPI had limited documentation explaining the differences and whether customers were notified of the reasons for the changes and approved of the revised due dates. We recognize, as FPI officials pointed out, that due dates initially requested by customers may be inconsistent with production capabilities regardless of whether FPI or a private vendor is the supplier, and a number of valid reasons can exist for due date changes. However, our work raised questions about which due dates should be used for measuring timeliness, especially from the customer’s perspective. Better documentation could have given us, as well as FPI, greater insights into the reasons for due date changes and whether the due dates in its system were appropriate for measuring timeliness. Just as our analysis showed a wide variation in FPI performance by customer agency, officials within DLA, FSS, SSA, and VA had mixed views on FPI’s performance in meeting delivery due dates, as well as on FPI delivery practices overall. These views ranged from very negative to extremely positive. Officials from DLA, FSS, and one of the two offices we contacted in SSA said that delivery due dates were driven primarily by FPI production capabilities and not agency mission needs, and some of the officials expressed concern with this practice. We recognize that arriving at mutually agreeable due dates may involve negotiation between the supplier and the customer, whether the supplier is FPI or a private vendor. In addition, the views expressed by the agency officials we contacted about FPI’s delivery performance overall, as well as the due date setting process, may not be representative of the views of all FPI customers. However, our work showed that (1) certain key agency customers were clearly dissatisfied with FPI delivery performance and, to some extent, with its practices with regard to setting due dates; (2) FPI’s delivery performance varied widely by customer agency; and (3) FPI did not evaluate delivery performance by customer agency. Given this and FPI’s stated commitment to total customer satisfaction, there appear to be opportunities for FPI to begin evaluating and monitoring delivery performance by customer agency and to promote better customer relations by attempting to resolve the specific concerns key customers have with delivery performance. In order for FPI to have a more accurate and reliable measure of timeliness for use in evaluating its delivery performance, we recommend that the Director of BOP direct FPI’s Chief Operating Officer to identify orders with destination due dates and account for shipping time for these orders when evaluating delivery performance; develop and implement an approach for documenting the reasons for due date revisions, whether customers were notified of the reasons for changes, and whether customers approved of revised due dates; and appropriately consider due date revisions and whether customers approved of them in evaluating timeliness. In light of the concerns raised in this report by some of the top officials from FPI’s major buying agencies and in light of FPI’s stated broad commitment to total customer satisfaction, we also recommend that the Director of BOP direct FPI officials to contact these key customers to begin the process of resolving problems and improving relations. In addition, the Director of BOP should direct FPI’s Chief Operating Officer to begin evaluating and monitoring delivery performance by customer agency to develop data to use in its efforts to achieve greater customer satisfaction. In written comments dated June 1, 1998, BOP agreed with the report’s conclusion that delivery performance is improving but problems remain and said that BOP would implement the report’s recommendations. In commenting on the report, BOP specifically acknowledged that FPI needs to improve its documentation and customer notification processes when customer due dates cannot be met or are changed. BOP also provided its perspective on some of the other issues raised in the report. First, BOP acknowledged the importance of on-time delivery and highlighted the actions FPI is taking to improve its performance and the progress it is making. Second, BOP said that FPI would like to know how it would compare to some of the larger vendors in delivery performance and that FPI believes that for complex projects, issues related to delivery performance are not unique to FPI. Third, FPI was encouraged that some officials in DOD—FPI’s largest customer—were generally pleased with FPI’s delivery performance. BOP also noted that FPI has informed DOD that FPI will no longer be the sole provider of “Go to War” items unless DOD specifically makes such a request. Appendix III contains the full text of BOP’s written comments. We also obtained oral technical comments from FPI’s Chief Operating Officer and his staff and from program officials in the customer agencies we contacted on various portions of a draft of this report. These technical comments have been incorporated in this report as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from its issue date. At that time, we will send copies of this report to the Attorney General, the Director of BOP, the Chief Operating Officer of FPI, the Director of the Office of Management and Budget, the Administrator for Federal Procurement Policy, and the heads of the customer agencies we contacted. We will also make copies available to interested congressional committees, as well as others on request. Major contributors to this report are listed in appendix IV. If you or your staffs have any questions, please contact me on (202) 512-8387. Median production time (days) Median production time (days) Note 1: These statistics do not reflect shipping time for those orders that had destination due dates. In addition, these statistics are based on due dates from the customer order entry database. The limitations associated with these factors are discussed in the report. Note 2: Median production times exclude quickship items, which FPI aims to ship within 30 days. Median production times for quickship items were 21 days in both 1996 and 1997. Department of Defense (miscellaneous nonservice components) Our objectives were to (1) develop and assess statistics on FPI delivery performance and (2) obtain the views of selected customer agencies’ procurement officials on FPI delivery practices. As part of this work, we considered FPI’s efforts to track delivery performance and its practices with regard to setting due dates. Our work for the second objective primarily involved holding discussions with selected customer agency officials about their experiences with FPI delivery performance, the due date setting process, their efforts to monitor FPI delivery performance, and available remedies for late deliveries. To meet our first objective, we obtained and analyzed computerized data involving over 140,000 agency orders for over 600,000 line items of products and services from FPI’s customer order entry database (COED) for fiscal years 1996 and 1997. FPI uses COED, which is maintained at its Customer Service Center in Lexington, KY, to track and record information on agency orders for products and services. Agency orders can contain one to several hundred line items. Each line item identifies a specific product and quantity and has a distinct due date. Large orders with many line items can have multiple products and due dates. Because orders vary tremendously, a key factor in determining whether orders are delivered on time is how an order is defined. For its own evaluations of timeliness, FPI groups line items within orders by due date and factory. FPI defines each of these groupings—which essentially are the shipments expected for an order from a given factory on a given date—as individual orders for the purpose of measuring timeliness. This approach allows FPI to track the performance of individual factories on a weekly and monthly basis. For our analysis, we generally followed the approach FPI uses to define orders and developed timeliness statistics by month, year, product category, and customer agency. Specifically, we grouped the line items within each order by date and compared the shipping date for each line item with its due date, as FPI does for its timeliness indicator. If one of the line items within each grouping was late, that grouping, or order, was counted as late. This approach allowed us to develop monthly data that we could use to examine trends. We also developed data showing FPI’s delivery performance for each of its major customer agencies using this approach. To identify these agencies, we analyzed FPI’s fiscal year 1996 sales report. For our analysis by month, year, and customer agency, we did not group the line items by factory as FPI does because we did not focus on the performance of individual factories. However, we had to use this additional grouping when isolating orders from factories that produce products and services in six product categories—data graphics, electronics, furniture, metals, systems furniture, and textiles. We also developed timeliness statistics for products in FPI’s quickship program. FPI guarantees that it will ship products in this program within 30 days of receipt of agencies’ orders. Products in FPI’s quickship catalogue include certain types of ergonomic chairs and other furniture, linens, clothing, targets, and traffic signs. As part of our work, we also obtained and analyzed the results of FPI’s internal timeliness measure for fiscal year 1997 and the first half of 1998. We compared FPI’s results with our fiscal year 1997 analysis and reconciled any differences. We did not independently verify FPI’s analysis for fiscal year 1998. We also examined how FPI accounts for shipping time for those orders where the due date is when deliveries should arrive at the customer’s location, not the date by which they should be shipped. Due dates specified by customers can be origin—meaning that the orders should be shipped by the due date—or destination, meaning that the orders should arrive at the customer’s location by the due date. In doing our work, we did not determine the reasons individual agency orders were delivered late or assess the effect of individual late deliveries on federal agencies. In addition, we rounded the timeliness statistics presented in this report to the nearest percentage. We performed a limited reliability and validity check of FPI’s COED data by comparing a sample of hard copy customer orders with the data in the COED system. According to an FPI official knowledgeable of customer orders, FPI received more than 60 percent of its orders by hard copy in fiscal year 1997. The remainder of the orders were submitted electronically. We did not attempt to validate any electronic orders because printouts with data from these orders that FPI showed us had much less information than the hard copy orders. We selected a random sample of 240 customer orders from orders that were placed in fiscal year 1997. This sample was designed to ensure that we selected orders that had many line items as well as orders that had only a few line items. In addition, we oversampled because we knew that many of the orders probably would have been placed electronically and would not have hard copies. FPI sent us copies of the original customer orders and related documentation that were available, such as correspondence to and from customers, for 136 of the orders. Five of FPI’s six major product categories were represented in these orders. Only electronics, which accounted for less than 7 percent of orders in fiscal year 1997, was not represented. The remaining orders from the 240 we randomly selected were unavailable because either the agencies had filed their orders electronically, or the orders were not centrally located and could not be obtained in a timely manner from the individual factories. FPI officials told us that they sent us all the documentation that was readily available for the 136 orders. In addition, FPI provided us with access to its COED database in Lexington, which enabled us to review all the electronic information that was available for these orders. We reviewed the information that was available for these 136 orders and determined that 109 had due dates that customers had specified. Our timeliness analysis used three dates from the COED system. These were the dates the orders were entered into the COED system (order date), the dates the orders were due (due date), and the dates the orders were shipped (last ship date). We could not focus on the order dates because we knew there would be a time lag between the date the order was signed and the date it was entered into the COED system. In general, we noticed that this time lag was between 2 to 3 weeks. However, we could not assess whether these time lags were due to (1) delays by the customer in mailing the order, (2) the timeliness of the mail carrier, or (3) delays by FPI in entering the orders into the COED system. We could not assess the reliability of the last ship dates, because we did not have the resources to contact the agencies directly and find out if they had records of receiving the items FPI had shipped to them. Therefore, we focused on the due dates agencies had specified in the orders. We compared the customer-requested due dates with the due dates entered into COED. We attempted to document any instances where a due date for a line item in COED was different from the due date the agency had originally requested in its order. Using the information available for these orders, we also attempted to document the reasons for due date changes and other pertinent information, such as whether customers were notified of the reasons for due date changes and whether they approved of the revisions. We also documented whether customers had specified that the due dates in the orders were for destination or origin. For orders where we could not determine the reason for due date changes, FPI staff at the Customer Service Center in Lexington researched the orders to identify the reason for date changes, as well as other information, such as whether the customer was notified regarding any due date changes that may have occurred and approved of them. In addition, FPI headquarters officials provided us with other documentation for these orders at the end of our review. The results of our work related to the 109 orders are not projectable to the universe of agency orders placed in 1997 because we were only able to obtain usable information on 109 of the 240 orders in our original sample, which represented a response rate of about 45 percent. This response rate was mainly due to the fact that many of the orders were placed electronically rather than through hard copy. To meet the second objective, we interviewed key procurement officials from four agencies that we judgmentally selected who were among FPI’s largest buyers: the General Services Administration’s (GSA) Federal Supply Service (FSS) in Arlington, VA; the Defense Logistics Agency (DLA) in Ft. Belvoir, VA; the Social Security Administration (SSA) in Baltimore, MD; and the Department of Veterans Affairs (VA) in Washington, D.C. Collectively, these agencies accounted for over one-quarter of FPI’s 1996 sales of $496 million. DLA was the second largest buying component within DOD, next to the Army. The other three agencies were in the top four buyers among civilian agencies. In addition to contacting headquarters procurement officials at these agencies, we also contacted one of GSA’s nationwide commodity centers, FSS’ National Furniture Center (NFC), because furniture is FPI’s largest product line. We contacted three DLA supply centers: the Defense Supply Center Philadelphia (DSCP) in Philadelphia, PA; the Defense Supply Center Columbus (DSCC) in Columbus, OH; and the Defense Supply Center Richmond (DSCR) in Richmond, VA. Within SSA, we spoke with officials from the two buying components that purchase products from FPI, the Office of Property Management (SSA/PM) and the Office of Operations, Contracts, and Grants (SSA/OCG). Within VA, we spoke with officials from the Office of Administration and the Office of Acquisition and Materiel Management, as well as officials in the Veterans Health Administration (VHA) from the offices of Patient Care Services and Environmental Management Services. We obtained information and views from these officials on several topics related to timeliness, including how FPI performed in meeting due dates; how specific due dates were set; whether due dates were driven by FPI production capabilities or mission needs; what processes were used to monitor FPI’s delivery performance and that of private vendors; and what remedies were available in the event of a late delivery from FPI and private vendors, including a discussion of FPI’s waiver process. Although the views officials at these agencies expressed and the information they provided may not be representative of all FPI customers, they provided useful insights into FPI delivery practices from the customer’s perspective. We did not verify data we obtained related to our discussions with agency officials. Related to our discussion with these officials about the FPI waiver process, we used FPI’s waiver database to determine the extent to which FPI granted customers waivers from buying FPI products for reasons related to timeliness. We did our work between July 1997 and May 1998 in accordance with generally accepted government auditing standards. We requested written comments on this report from the Director, Bureau of Prisons (BOP). These comments are discussed near the end of the letter and are reprinted in appendix III. FPI also provided oral technical comments, which we considered in preparing the final report. We also held exit conferences with program officials of the customer agencies we visited to verify applicable data, facts, and views presented in this report. The following are GAO’s comments on the Bureau of Prisons’ letter dated June 1, 1998. 1. BOP said that it is not FPI’s policy that due dates be driven by production capabilities rather than agency missions. This seemed different from the statements made by FPI’s Chief Operating Officer during the review that it often did not accept the due dates customers requested because they were inconsistent with FPI’s production capabilities. Seeking clarity, we contacted an FPI official who was involved in preparing the written comments. This official said that the intent of the comment and the paragraph that followed was to emphasize an important point. That is, if FPI does not accept an agency-requested due date and proposes alternative dates that would impede the customer agency’s mission, FPI would likely issue a waiver if the customer requested one. 2. BOP pointed out that the random sample of orders that we used to test the accuracy and reliability of the due dates that FPI used to measure timeliness was not representative of the orders FPI receives. Specifically, BOP was concerned that a disproportionate number of high-dollar value systems furniture orders led to a skewing of the information collected because these orders have more frequent due date changes. This condition however, does not affect our conclusions on this matter or the overall message of the report. As discussed in the report, we recognize that the specific results from our work related to the 109 orders cannot be projected to the universe of FPI orders. However, the results of our analysis did, as FPI agreed in its written comments, raise questions about the due dates being used to measure timeliness, especially from the customer’s perspective. 3. BOP said that of the 61 orders that involved due dates that were later than the customer originally requested, 23 did not involve a change. According to BOP, the delivery dates requested by customer agencies for these orders did not provide sufficient lead time and, therefore, FPI had to revise the dates as a condition of accepting the order. BOP acknowledged in its written comments that nevertheless, FPI needs to improve its documentation and customer notification processes when customer due dates cannot be met or are changed. As we discussed in the report, the lack of documentation showing the reasons due dates in FPI’s system were different from what customers requested and whether customers were notified of the reasons and approved of the changes impeded our ability to assess the appropriateness of many of the due dates for measuring timeliness. Robert T. Griffis, Senior Evaluator Patricia Sari-Spear, Senior Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO: (1) developed and assessed statistics on Federal Prison Industries' (FPI) delivery performance; and (2) obtained the views of selected customer agencies' procurement officials on FPI delivery practices. GAO noted that: (1) FPI delivery performance is improving; (2) 8 of the 12 months in fiscal year (FY) 1997 had better on-time delivery performance than the same months in FY 1996; (3) however, FPI fell short of meeting its on-time delivery goal of 90 percent in FY 1997; (4) there was a wide variation in FPI performance by customer agency and some variation by product category; (5) the results of GAO's analysis and FPI's own timeliness evaluations should be viewed with two caveats in mind; (6) they both likely overstate timeliness because they did not account for shipping time for orders with due dates specified as the day the order should arrive at its destination; (7) GAO and FPI's timeliness evaluations considered all shipments to be on-time if FPI data showed that they left the factory on or before the due date; (8) accounting for shipping time for orders with destination due dates would have improved the accuracy of the timeliness evaluations and provided a better picture of performance; (9) its review of 109 randomly selected orders showed that over one-half of them had due dates in FPI's system that were later than what customers had originally requested; (10) because of limited documentation, GAO could not always determine the reasons due dates were different, including whether FPI had not accepted them, or whether customers were notified of the reasons for changes and approved of the revised due dates; (11) although the results of these 109 orders were not projectable to the universe of FPI orders, they raised questions about which due dates should be used to measure timeliness, especially from the customer's perspective; (12) just as GAO's analysis by customer agency showed wide variation in FPI delivery performance, customer agency officials within the Defense Logistics Agency, the Federal Supply Service, Social Security Administration, and Department of Veterans Affairs had mixed views on FPI's delivery performance, despite FPI's goal to promote total customer satisfaction; (13) although GAO sought the views of only selected customers, several key procurement officials within these agencies were clearly dissatisfied with FPI's delivery performance and practices; (14) FPI does not develop delivery performance data by customer agency; and (15) without these data, FPI was not in a good position to easily detect individual agencies' problems with its performance and to improve overall customer relations. |
Long-term care comprises services provided to individuals who, because of illness or disability, are generally unable to perform activities of daily living (ADL)—such as bathing, dressing, and getting around the house— for an extended period of time. These services can be provided in various settings, such as nursing facilities, an individual’s own home, or the community. The typical 65-year-old has about a 70 percent chance of needing long-term care services in his or her life. Long-term care can be expensive, especially when provided in nursing facilities. In 2005, the average cost of a year of nursing facility care was about $70,000. In 1999, the most recent year for which data were available, the average length of stay in a nursing facility was between 2 and 3 years. Long-term care insurance is used to help cover the cost associated with long-term care. Individuals can purchase long-term care insurance policies directly from insurance companies, or through employers or other groups. The number of long-term care insurance policies sold has been small– about 9 million as of 2002, the most recent year for which data were available. About 80 percent of these policies were sold through the individual insurance market and the remaining 20 percent were sold through the group market. Long-term care insurance companies generally structure their long-term care insurance policies around certain types of benefits and related options. A policy with comprehensive coverage pays for long-term care in nursing facilities as well as for care in home and community settings, while a policy with coverage for home and community-based settings pays for care only in these settings. A daily benefit amount specifies the amount a policy will pay on a daily basis toward the cost of care, while a benefit period specifies the overall length of time a policy will pay for care. Data from 2002 through 2005 show that the maximum daily benefit amounts can range from less than $100 to several hundred dollars per day, while benefit periods can range from 1 year to lifetime coverage. A policy’s elimination period establishes the length of time a policyholder who has begun to receive long-term care has to wait before his or her insurance will begin making payments towards the cost of care. According to data from 2002 through 2005, elimination periods can range from 0 to at least 730 days. Inflation protection increases the maximum daily benefit amount covered by a policy, and helps ensure that over time the daily benefit remains commensurate with the costs of care. There can be a substantial gap between the time a long-term care insurance policy is purchased and the time when policyholders begin using their benefits, and the costs associated with long-term care can increase significantly during this time. A typical gap between the time of purchase and the use of benefits is 15 to 20 years: the average age of all long-term care insurance policyholders at the time of purchase is 63, and in general policyholders begin using their benefits when they are in their mid-70s to mid-80s. Usually, automatic inflation protection increases the benefit amount by 5 percent annually on a compounded basis. A policy with automatic 5 percent compound inflation protection and a $150 per day maximum daily benefit in 2006 would be worth approximately $400 per day 20 years later. Another means to protect against inflation is a future purchase option. This option allows the consumer to increase the dollar amount of coverage every few years at an extra cost. Some future purchase options do not allow consumers to purchase extra coverage once they begin receiving their insurance benefit and the opportunity to purchase extra coverage may be withdrawn should the consumer decline a predetermined number of premium increases. A policy with a future purchase option may be less expensive initially than a policy with compound inflation protection. However, over time the policy with a future purchase option may become more expensive than a policy with compound inflation. Without inflation protection, policyholders might purchase a policy that covers the current cost of long-term care but find, many years later, when they are most likely to need long-term care services, that the purchasing power of their coverage has been reduced by inflation and that their coverage is less than the cost of their care. For example, if the cost of a day in a nursing facility increases by 5 percent every year for 20 years, a nursing facility that costs $150 per day in 2006 would cost about $400 per day 20 years later in 2026. A policy purchased in 2006 with a daily benefit of $150 without inflation protection would pay $150 per day—or 38 percent—of the daily cost of about $400 in 2026. The remaining $250 of the daily cost of the nursing facility care would have to be paid by the policyholder. Long-term care insurance policies may also include other benefits or options. For example, policies can offer coverage for home care at varying percentages of the maximum daily benefit amount. Some policies include features in which the policy returns a portion of the premium payments to a designated third party if the policyholder dies. Some policies provide coverage for long-term care provided outside of the United States or offer care-coordination services that, among other things, provide information about long-term care services to the policyholder and monitor the delivery of long-term care services. Many factors impact the premiums individuals pay for long-term care insurance. Notably, long-term care insurance companies typically charge higher premiums for policies with more extensive benefits. In general, policies with comprehensive coverage have higher premiums than policies without such coverage, and policyholders pay higher premiums the higher their maximum daily benefit amounts, the longer their benefit periods, the greater their inflation protection, and the shorter their elimination periods. For example, in Connecticut, if a 55-year-old man decided to buy a 1-year, $200 per day comprehensive coverage policy, in 2005 it would have cost him about $1,000 less per year than a comparable 3-year policy. Similarly, the age of an applicant also impacts the premium, as premiums typically are more expensive the older the policyholder at the time of purchase. For example, in Connecticut, a 55-year-old purchasing a 3-year, $200 per day comprehensive coverage policy in 2005 would pay about $2,500 per year, whereas a 70-year-old purchasing the same policy would pay about $5,900 per year. Health status may also affect premiums. Insurance companies take into account the health status of an applicant to evaluate the risk that he or she will access long-term care services. If an applicant has a medical condition that increases the likelihood of the applicant using long-term care services, but does not automatically disqualify the applicant from purchasing insurance, the applicant may receive a substandard rating from an insurance company, which may result in a higher premium. Regulation of the insurance industry, including those companies selling long-term care insurance, is a state function. Those who sell long-term care insurance must be licensed by each state in which they sell policies, and the policies sold must be in compliance with state insurance laws and regulations. These laws and regulations can vary but their fundamental purpose is to establish consumer protections that are designed to ensure that the policies’ provisions comply with state law, are reasonable and fair, and do not contain major gaps in coverage that might be misunderstood by consumers and leave them unprotected. The Health Insurance Portability and Accountability Act of 1996 (HIPAA) specified conditions under which long-term care insurance benefits and premiums would receive favorable federal income tax treatment. Individuals who purchase policies that comply with HIPAA requirements, which are therefore “tax-qualified,” can itemize their long-term care insurance premiums as deductions from their taxable income along with other medical expenses, and can exclude from gross income insurance company proceeds used to pay for long-term care expenses. Under HIPAA, tax-qualified plans must begin coverage when a person is certified as: needing substantial assistance with at least two of the six ADLs for at least 90 days due to a loss of functional capacity, having a similar level of disability, or requiring substantial supervision because of a severe cognitive impairment. HIPAA also requires that a policy comply with certain provisions of the National Association of Insurance Commissioners’ (NAIC) Long-Term Care Insurance Model Act and Regulation adopted in January 1993. This model act and regulation established certain consumer protections that are designed to prevent insurance companies from (1) not renewing a long-term care insurance policy because of a policyholder’s age or deteriorating health, and (2) increasing the premium of an existing policy because of a policyholder’s age or claims history. In addition, in order for a long-term care insurance policy to be tax-qualified, HIPAA requires that a policy offer inflation protection. The NAIC, which represents insurance regulators from all states, reported in 2005 that 41 states based their long- term care insurance regulations on the NAIC model, 7 based their regulations partially on the model, and 3 did not follow the model. Medicaid is the primary source of financing for long-term care services in the United States. In 2004, almost one-third of the total $296 billion in Medicaid spending was for long-term care. Some health care services, such as nursing facility care, must be covered in any state that participates in Medicaid. States may choose to offer other optional services in their Medicaid plans, such as personal care. Medicaid coverage for long-term care services is most often provided to individuals who are aged or disabled. To qualify for Medicaid coverage for long-term care, these individuals must meet both functional and financial eligibility criteria. Functional eligibility criteria are established by each state and are generally based on an individual’s degree of impairment, which is measured in terms of the level of difficulty in performing the ADLs and IADLs. To meet the financial eligibility criteria, an individual cannot have assets or income that exceed thresholds established by the states and that are within standards set by the federal government. Generally, the value of an individual’s primary residence and car, as well as a few other personal items, are not considered assets for the purpose of determining Medicaid eligibility. Individuals with high medical costs and whose income exceeds state thresholds can “spend down” their income on their long-term care, which may bring their income below the state- determined income eligibility limit. In all four states with Partnership programs, for the purpose of obtaining Medicaid eligibility, individuals are allowed to deduct medical expenses, including those for long-term care, in order to bring their incomes below the state-determined thresholds. In order to meet Medicaid’s eligibility requirements, some individuals may choose to divest themselves of their assets—for example, by transferring assets to their spouses or other family members. However, those who transfer assets for less than fair market value during a specified “look- back” period—a period of time before an individual applies for Medicaid during which the program reviews asset transfers—may incur a penalty, that is, a period during which they are ineligible for Medicaid coverage for long-term care services. Evidence of the extent to which individuals transfer assets for less than fair market value to become financially eligible for Medicaid coverage for long-term care is generally limited and often based on anecdote. However, our March 2007 report on asset transfers suggests that the incidence of asset transfers is low among nursing home residents covered by Medicaid. Nationwide, about 12 percent of Medicaid-covered elderly nursing home residents reported transferring cash during the 4 years prior to nursing home entry, and the median amount transferred was very small ($1,239). The percentage of nursing home residents not covered by Medicaid who transferred cash was about twice that of Medicaid-covered nursing home residents. However, the median amount of cash transferred as reported by non- Medicaid covered residents and Medicaid-covered residents did not vary greatly. In addition to the nationwide analysis, our report summarized an analysis of a sample of approved Medicaid nursing home applicants in three states who generally applied to Medicaid in 2005 or before, and found that about 10 percent of applicants had transferred assets for less than the fair market value during the 3-year look-back period before Medicaid eligibility began. The median amount transferred was about $15,000. DRA tightened the requirements on Medicaid applicants transferring assets by extending the look-back period for all asset transfers from 3 to 5 years. In addition, DRA changed the beginning date of the penalty period. Prior to enactment of DRA, the penalty period started on the first day of the month during or after which assets were transferred. DRA changed this so that the penalty period now begins on the first day of the month when the asset transfer occurred, or the date on which the individual is eligible for medical assistance under the state plan, and is receiving institutional care services that would be covered by Medicaid were it not for the imposition of the penalty period, whichever is later. The extension of the look-back period and the redefinition of the penalty period may reduce transfers of assets. The Partnership programs are public-private partnerships between states and private long-term care insurance companies. Established in 1987 as programs funded through the Robert Wood Johnson Foundation, the programs are designed to encourage individuals, especially moderate income individuals, to purchase private long-term care insurance in an effort to reduce future reliance on Medicaid for the financing of long-term care. As of October 2006, the original four Partnership programs in California, Connecticut, Indiana, and New York remained the only active Partnership programs. Partnership programs attempt to encourage individuals to purchase private long-term care insurance by offering them the option to exempt some or all of their assets from Medicaid spend-down requirements. However, Partnership policyholders are still required to meet Medicaid income eligibility thresholds before they may receive Medicaid benefits. In the four states with Partnership programs, those who purchase long-term care insurance Partnership policies generally must first use those benefits to cover the costs of their long-term care before they begin accessing Medicaid. In 2006, there were about 190,000 active Partnership policies, out of the approximately 218,000 Partnership policies that had been sold since the inception of the Partnership programs. Between September 2005 when we last reported on the Partnership programs, and August 2006, the number of Partnership policies in the four states combined increased by about 10 percent. The four states with Partnership programs vary in how they protect policyholders’ assets. The Partnership programs in California, Connecticut, Indiana, and New York have dollar-for-dollar models, in which the dollar amount of protected assets is equivalent to the dollar value of the benefits paid by the long-term care insurance policy. For example, a person purchasing a long-term care dollar-for-dollar insurance policy with $300,000 in coverage would have $300,000 of assets protected if he or she were to exhaust the long-term care insurance benefits and apply for Medicaid. However, New York’s program also offers total protection. That is, those who purchase a comprehensive long-term care insurance policy, covering a minimum of 3 years of nursing facility care or 6 years of home care, or some combination of the two, can protect all their assets at the time of Medicaid eligibility determination. In Indiana, in addition to the dollar-for-dollar models, the Partnership program offers a hybrid model that allows purchasers to obtain dollar-for-dollar protection up to a certain benefit level as defined by the state; all policies with benefits above that threshold provide total asset protection for the purchaser. Under DRA, any state that implements a Partnership program must ensure that the policies sold through that program contain certain benefits, such as inflation protection. DRA also requires that Partnership policies provide dollar-for-dollar asset protection. Insurers are not allowed to offer Partnership policies that provide the total asset protection feature found in Partnership policies in New York and Indiana. DRA also requires Partnership policies to include consumer protections contained in the NAIC Long-Term Care Insurance Model Act and Regulation as updated in October 2000. DRA established specific requirements for Partnership policies that do not apply to traditional long-term care insurance policies sold in the Partnership states, such as inflation protection and dollar-for- dollar asset protection. DRA prohibits states from creating other requirements for Partnership policies that do not also apply to traditional long-term care insurance policies in the four states with Partnership policies. The Partnership programs in California, Connecticut, Indiana, and New York, which were implemented before DRA, are not subject to these specific requirements, but in order for those programs to continue, they must maintain consumer protection standards that are no less stringent than those that applied as of December 31, 2005. The four states with Partnership programs require that Partnership policies include certain benefits—such as inflation protection and minimum daily benefit amounts—while traditional long-term care insurance policies may include these benefits but are not generally required to do so. Compared with policyholders of traditional long-term care insurance policies, a higher percentage of Partnership policyholders purchased policies with more extensive coverage. In the four states, insurance companies are not allowed to charge policyholders higher premiums for policies with asset protection, and Partnership and traditional long-term care insurance policies with comparable benefits are required to have equivalent premiums. In general, the four states with Partnership programs require that Partnership policies sold in their states include certain benefits that are not required for those states’ traditional long-term care insurance policies. A state DOI official told us that they have these benefit requirements for Partnership policies in order to protect policyholders by helping to ensure that benefits are sufficient to cover a significant portion of their anticipated long-term care costs and to protect the Medicaid program by reducing the likelihood that policyholders will exhaust their benefits and become eligible for Medicaid. In addition to asset protection, which by definition Partnership policies include, all four states require Partnership policies to include inflation protection. Three of the four Partnership states—California, Connecticut, and New York—require that Partnership policies include inflation protection that automatically increases benefit amounts by 5 percent annually on a compounded basis. The four states do not require traditional long-term care insurance policies to include inflation protection, though insurance companies in these states are required to offer inflation protection as an optional benefit. While policies with inflation protection may include coverage that is more commensurate with expected future costs of care, these policies can be two or three times as expensive as policies without inflation protection. For example, in 2005 a long-term care insurance policy with a $200 daily benefit, a 3-year benefit period, and inflation protection cost about $3,000 per year for a 60-year-old male; the same policy cost about $1,350 per year without inflation protection. An insurance company official told us that the additional cost of inflation protection is the primary reason individuals do not buy a Partnership policy. The four states with Partnership programs also require minimum daily benefit amounts for all Partnership policies, while in three of the Partnership states, traditional long-term care insurance policies are not subject to this requirement. According to Partnership and DOI officials in California and Connecticut, minimum daily benefit amounts are required for Partnership policies in order to prevent consumers from purchasing coverage that would be insufficient to cover a substantial portion of the cost of their care. According to Partnership program materials from New York, for example, the average daily cost of long-term care in a nursing facility in New York was about $263 per day in 2004. Anything less than New York’s 2004 minimum daily benefit amount of $171 for nursing facility care would therefore have required out-of-pocket payments for policyholders of more than one-third of the cost of their nursing facility care. In 2006, the required minimum daily benefit amounts for nursing facility care in Partnership policies ranged from $110 per day in Indiana to $189 per day in New York. In the four states with Partnership programs, Partnership policies are subject to minimum nursing facility benefit period requirements established by the states, but some traditional long-term care insurance policies are not subject to these same requirements. In California and Indiana, Partnership policies are required to have dollar coverage that provides for at least 1 year of care in a nursing facility, while traditional long-term care insurance policies are not subject to a minimum benefit period requirement. In New York, Partnership policies are required to have minimum nursing facility benefit periods ranging from 18 months to 4 years, depending on the type of coverage an individual purchases, while certain traditional long-term care insurance policies are required to have 1-year minimum nursing facility benefit periods. In Connecticut, Partnership and traditional long-term care insurance policies are both required to have 1-year minimum benefit periods for care provided in nursing facilities. Partnership and traditional long-term care insurance policies both typically include elimination periods, which establish the length of time a policyholder who has begun to receive long-term care has to wait before receiving long-term care insurance benefits. The four states with Partnership programs limit the length of the elimination periods that can be included in Partnership policies. Two of the four states, Connecticut and New York, also generally limit the elimination period included in traditional long-term care insurance policies. In 2006, the elimination period for Partnership policies in California was no more than 90 days, while New York had a 100-day limit and Indiana had a 180-day limit. In Connecticut, the elimination period limit for both Partnership and traditional long-term care insurance policies was 100 days. According to a New York Partnership program staff member, in New York the elimination period for traditional policies was generally no more than 180 days. The effect of increasing the elimination period is to increase the out-of-pocket costs policyholders incur in paying for their long-term care. One official from an insurance company that sells long-term care insurance policies told us that having long elimination periods could quickly deplete an individual’s assets, which might make the asset protection under the Partnership program less valuable. Unlike traditional long-term care insurance policies, Partnership policies in the four states must cover or offer case management services. Case management services can include providing individual assessments of policyholders’ long-term care needs, approving the beginning of an episode of long-term care, developing plans of care, and monitoring policyholders’ medical needs. According to a Partnership program official, by helping policyholders assess their medical needs and develop a plan of care, case management services can help policyholders use their benefit dollars efficiently. Partnership program officials in California, Connecticut, and Indiana explained that their states require that Partnership policies cover case management services provided through state-approved intermediaries that are independent of insurance company control. Partnership program officials in New York told us that Partnership policyholders have the option to seek case management services from independent case management service providers, but they can also elect to receive case management services from their own insurance company. Traditional long-term care insurance policies are not required to cover case management services, though some may offer them as an optional benefit. In addition, some insurance companies that sell traditional long-term care insurance policies may directly provide case management services. Insurance companies in the four states with Partnership programs are subject to restrictions on the types of coverage they can offer in Partnership policies, while they are allowed to offer traditional long-term care insurance policies with more coverage options. In California, Connecticut, and Indiana, insurance companies can only offer Partnership policies with two types of coverage: an option that covers only nursing facility care, and a comprehensive option that covers nursing facility care as well as care provided in the home and in community-based facilities. In New York, insurance companies may only offer Partnership policies that cover comprehensive care. The four states do not allow insurance companies to offer Partnership policies in their state that exclusively cover care provided in the home and in community-based facilities. However, in the four states, insurance companies can offer traditional long-term care insurance policies with nursing facility care only, home and community-based facility only, and comprehensive coverage options. In the four states with Partnership programs, traditional long-term care insurance policies can include—and individuals can therefore choose to purchase—generally the same benefits found in Partnership policies. However, Partnership policyholders tended to purchase benefits that are more extensive than those purchased by traditional long-term care insurance policyholders. We found that from 2002 through 2005, a higher percentage of Partnership policyholders purchased policies with more extensive coverage compared with policyholders who purchased traditional long-term care insurance nationally. Specifically, more Partnership policyholders purchased policies with higher levels of inflation protection and coverage that includes care in both nursing facility and home and community-based care settings. See table 1 for a summary of the benefits purchased by Partnership and traditional long-term care insurance policyholders. For example, while all Partnership policyholders had policies from 2002 through 2005 with the required inflation protection that generally increases daily benefit amounts by 5 percent annually, about 76 percent of traditional long-term care insurance policyholders had policies with some form of inflation protection. Similarly, during this period, 64 percent of all Partnership policyholders had policies that included daily benefit amounts of $150 or greater, while 36 percent of traditional long-term care insurance policyholders nationwide had policies that provided daily benefit amounts at this level or greater. While these differences may reflect the benefit requirements found in Partnership policies, they may also reflect the incentive offered by the asset protection benefit of Partnership policies, which may influence consumers deciding whether to buy a Partnership or traditional long-term care insurance policy. The differences may also reflect the demographic and financial characteristics of the people living in the four states with Partnership programs relative to other states. According to state officials, the four states with Partnership programs require Partnership and traditional long-term care insurance policies to have equivalent premiums if the benefits offered—except for asset protection—are otherwise comparable. According to information from one state’s Partnership program, one reason for this requirement is that, unlike other insurance company benefits, insurance companies do not provide asset protection to Partnership policyholders. Instead, the four states with Partnership programs provide the asset protection benefit by allowing Partnership policyholders to protect some or all of their assets from Medicaid spend-down requirements. However, because Partnership policies are required to have inflation protection and other benefits that traditional long-term care insurance policies are not required to have, Partnership policies are likely to have higher premiums. According to a Connecticut state official, in 1996, before the state required that Partnership and traditional long-term care insurance policies have equivalent premiums for the same benefits, Partnership policies were 25 to 30 percent more expensive than traditional long-term care insurance policies with comparable benefits. The official further explained that after the requirement was established, sales of Partnership policies in Connecticut more than tripled. State officials told us that, while both Partnership and traditional long- term care insurance policies undergo reviews by the DOI in each of the four states with Partnership programs, Partnership policies in California and Connecticut also undergo another review by state Partnership program officials. California and Connecticut Partnership program staff review Partnership policies to determine whether the policies include the benefits mandated by Partnership regulations, and whether the insurance companies can meet additional data reporting and other administrative requirements. The programs’ staff also try to ensure that the policies can be easily understood and contain all of the required language. The Partnership program offices in California and Connecticut perform their review of policies first, and then pass the application on to the DOI for further review. DOI officials in California and Connecticut told us that the Partnership office review of Partnership policies tends to be lengthier for insurance companies than the DOI review. A DOI official explained that when insurance companies add new benefit options to policies, the Partnership review can take longer. Other factors that may slow the Partnership review process include the time spent coordinating between the Partnership program and the state DOI, and the time it takes for insurance companies to learn how to complete the Partnership review process for the first time. State officials in Indiana and New York—where reviews of new Partnership policies are conducted by the DOI and not a separate Partnership program office—told us that it generally takes the same amount of time for Partnership and traditional long-term care insurance policies to pass through the review process. Before they can sell Partnership policies, insurance agents are subject to additional state training requirements compared with agents who sell only traditional long-term care insurance policies. Although each of the four states with Partnership programs has somewhat different requirements, in general the states require Partnership agents to undergo about a day of training specific to the Partnership program in addition to the training that the states require for those who sell traditional long-term care insurance. Partnership program training typically includes information on topics such as long-term care planning, Medicaid, Medicare, the specific benefits required by the Partnership program, and how Partnership policies differ from traditional long-term care insurance policies. According to some state officials, agents need training on the Partnership program and Medicaid in order to understand the program and provide appropriate advice to their clients. In 2006, in three of the four states all Partnership program training was conducted in person, rather than via correspondence or on the internet; however, in New York agents completed an online internet-based course as well as classroom training as part of the Partnership program training. According to state officials, all four Partnership states require that the provider of this specialized Partnership training be approved by the state DOI, and in Connecticut, the training is provided exclusively by Partnership program staff. Despite the complexity of long-term care insurance products, DOI officials in three states with Partnership programs reported that long-term care insurance policies, including Partnership policies, garner few complaints from policyholders. For example, from 1998 to 2005 the New York Insurance Department received an average of two to three complaints about Partnership policies each year (there were 51,262 active Partnership policies in the fourth quarter of 2005 in New York). During this time period, according to data from the New York state DOI, complaints about all long-term care insurance policies in New York related to issues such as the interpretation of policy provisions, premium amounts, and refusals to issue policies. Long-term care insurance policyholders—that is, both Partnership policyholders and traditional long-term care insurance policyholders—are more likely to have higher incomes and more assets than people without long-term care insurance. On average, Partnership policyholders are younger than traditional long-term care insurance policyholders. Those with long-term care insurance policies are also more likely to be female rather than male, and married than unmarried. In examining Partnership policyholders in two states, traditional long-term care insurance policyholders nationwide, and those without long-term care insurance nationwide, we found that Partnership and traditional long- term care policyholders are more likely to have higher incomes than those without such insurance. In California and Connecticut—the two states with Partnership programs for which we had data—at the time they purchased a policy, 55 percent of Partnership policyholders over age 55 had monthly household incomes of $5,000 or greater. In comparison, 43 percent of all households with people over age 55 in these states had monthly household incomes at this level at the time they were surveyed. Similarly, at the national level, when surveyed, 46 percent of traditional long-term care policyholders over age 55 had monthly household income of $5000 or greater, whereas 29 percent of those individuals over age 55 without long-term care insurance had such incomes. We also found that more than half (53 percent) of Partnership policyholders had household assets of $350,000 or more in California and Connecticut. Data on the asset levels of all households in those states were not available for our comparison. Nationwide, 36 percent of traditional long-term care insurance policyholders and 17 percent of people without long-term care insurance had household assets exceeding $350,000 (see table 2). In our analyses, we found that Partnership policyholders in California, Connecticut, Indiana, and New York are younger on average than traditional long-term care insurance policyholders nationally and those without long-term care insurance nationally (see table 3). We also found that those who purchase long-term insurance policies—both traditional and Partnership—are more likely to be women than men, and married than unmarried. Surveys conducted in some states with Partnership programs and our illustrative financing scenarios together suggest that in the four states with Partnership programs, the programs are unlikely to result in Medicaid savings and could result in increased Medicaid spending. Survey data show that in the absence of a Partnership program in their state, 80 percent of Partnership policyholders would have purchased a traditional long-term care insurance policy and may represent a potential source of increased spending for Medicaid. Data are not yet available to determine the extent to which the 20 percent of individuals who would have self-financed their care will access Medicaid in the absence of a Partnership program. However, our scenarios suggest that an individual could self-finance care and delay Medicaid eligibility for about the same amount of time as he or she would have with a Partnership policy, although we identify some circumstances that could delay or accelerate the time to Medicaid eligibility. Because of the amount of insurance Partnership policyholders generally purchase and their typical income and assets, few Partnership policyholders are likely to ever become eligible for Medicaid, which suggests that the Partnership programs are likely to have a small impact on Medicaid spending. The four Partnership programs are unlikely to result in savings for their state Medicaid programs and may result in increased Medicaid spending. Based on surveys of Partnership policyholders conducted by state Partnership programs in California, Connecticut, and Indiana, we estimate that, in the absence of a Partnership program in their state, 80 percent of Partnership policyholders would have purchased traditional long-term care insurance policies instead, while the other 20 percent would have self-financed their care. To assess the impact Partnership programs may have on Medicaid savings in the four states with Partnership programs, we explored, under three different illustrative financing scenarios and using certain assumptions, how long it would take before an individual using a Partnership policy would become eligible for Medicaid and how long—in the absence of a Partnership program—it would take for the same individual to become eligible for Medicaid using the other two financing options depicted in the scenarios. Our financing scenarios indicate that with a Partnership policy, an individual with assets and benefits typical of many policyholders becomes eligible for Medicaid sooner than if the individual financed his or her long-term care with a traditional long-term care policy. Because a Partnership policy, unlike a traditional long-term care insurance policy, exempts the individual in the scenario from spending his or her protected assets on long-term care before the individual becomes eligible for Medicaid, the individual with a Partnership policy becomes eligible for Medicaid sooner than if the individual had a traditional policy, which is likely to increase the amount of time Medicaid finances the individual’s long-term care. The scenarios also suggest that if the individual would have self-financed his or her long-term care in the absence of the Partnership program, the individual would become eligible for Medicaid at about the same time as he or she would have with a Partnership policy. The three financing scenarios we compared were financing using a Partnership policy, financing using a traditional long-term care insurance policy, and self-financing without any long-term care insurance. For illustrative purposes, our scenarios are based on an individual with assets that are typical of many of those who have long-term care insurance—that is, an individual who holds assets of $300,000. In two of our scenarios, the individual holds long-term care insurance benefits of $210,000, which will cover a nursing facility stay of about 3 years—the average nursing facility stay is between 2 and 3 years. We also make several simplifying assumptions, such as that the individual is not overinsured (i.e., does not have insurance that exceeds the value of the individual’s assets) and is unmarried at the time long-term care is required. Specifically, scenario A (see fig. 1) depicts a Partnership policyholder with $300,000 in assets who purchases a policy valued at $210,000 (worth about 3 years of nursing facility coverage), automatically receiving $210,000 in asset protection. When the individual requires long-term care, the Partnership policy will pay for the first $210,000 worth of care—the total amount of his or her insurance benefits. After these Partnership benefits have been exhausted, the individual will have to spend down the $90,000 of unprotected assets on long-term care and then, assuming the individual meets state Medicaid income eligibility requirements, Medicaid will begin to finance the individual’s long-term care. As depicted by scenario B, if this same individual purchases a traditional long-term care insurance policy worth $210,000 instead of the Partnership policy, insurance will pay for the first $210,000, and the individual will then have to spend down the unprotected assets—all $300,000—before he or she is eligible for Medicaid. Scenario C describes how this same individual would finance his or her long-term care without any long-term care insurance. As scenario C shows, if the individual had $300,000 in assets, these would have to be spent before the individual would be eligible for Medicaid. In both this scenario and in the scenario in which the individual owns a Partnership policy, Medicaid begins paying for the individual’s long-term care at about the same time, with the difference being whether long-term care costs prior to Medicaid eligibility are paid by long-term care insurance or by the individual. We found some circumstances when adjusting the assumptions underlying our scenarios resulted in delaying or accelerating Medicaid eligibility, but most did not change the outcomes related to Medicaid savings. For example, to construct our scenarios, we assumed an individual who had $300,000 in assets, $210,000 in insurance coverage, and who used this coverage for long-term care that cost about $70,000 per year. When we changed these amounts—as long as the amount of insurance coverage did not exceed the amount of assets—the scenarios still showed that the individual became eligible for Medicaid sooner with a Partnership policy than with a traditional policy, and became eligible for Medicaid at the same time with a Partnership policy and self-financing. Our scenarios also assumed that the individual with a Partnership policy or a traditional long-term insurance policy was not overinsured—that is, had more insurance coverage than the value of his or her assets. When we modified this assumption, we found that one portion of our finding still held true—the individual in the scenarios using the Partnership policy still became eligible for Medicaid sooner than he or she did using a traditional long-term care insurance policy. However, the individual also became eligible for Medicaid later using the Partnership policy than when the individual self-financed his or her own long-term care. This suggests that if individuals overinsure their assets, those who finance their long-term care using Partnership policies could represent a source of savings for Medicaid when compared with those who self-finance their care. However, the number of policyholders that this applies to is unlikely to be large enough to offset the number of Partnership policyholders who represent a potential source of increased Medicaid spending. While we do not have information about the amount of assets that Partnership policyholders have at the time they use their benefits, survey data from California and Connecticut indicate that when Partnership policyholders purchased their policies, they tended to purchase policies that were equal to or lower than the value of their household assets. This suggests that most individuals are unlikely to overinsure their assets at the time of purchase, though their status could change over time. In California and Connecticut combined, in 2004, 53 percent of Partnership policyholders had at least $350,000 worth of household assets at the time of purchase, while only about 32 percent of these Partnership policyholders have more than 5 years of coverage equal to about $350,000. Our scenarios also depicted an unmarried individual. While most Partnership policyholders are married when they purchase a Partnership policy, by the time most individuals require long-term care services, they are unmarried. Our analysis of 2004 HRS data of individuals entering a nursing facility who are age 65 or older showed that about 66 percent are widowed, and more than 75 percent are not married. However, there are likely some individuals who will be married when they require long-term care services. In general, after applying the Medicaid spousal exemption, if the individual’s assets remain higher than the value of his or her insurance, being married does not change the result that compared with a Partnership policy, the individual’s time to attain Medicaid eligibility is accelerated with a traditional policy and is the same as with self- financing. However, if the amount of the Medicaid spousal exemption brings the individual’s eligible assets below the value of the insurance policy, then the individual would fall into an overinsured category. Being overinsured means the individual would become a source of savings for Medicaid; however, this only applies to the 20 percent of individuals who would have self-financed their care in the absence of a Partnership program. The 80 percent of individuals who would have purchased a traditional policy still represent potential increased spending, whether they are overinsured or not. We also explored what would occur if we modified our assumption that an individual is equally likely to transfer assets in all three of our scenarios. We found that if the individual who would have self-financed care transfers his or her assets, it would likely take less time for the individual to become eligible for Medicaid than it would with a Partnership policy. This could result in some savings to Medicaid for those individuals who purchase Partnership policies instead of transferring assets. We also found that for an individual who would have purchased traditional insurance, the amount of assets transferred would have to be at least as much as the value of the insurance policy purchased in order for the Partnership program to result in Medicaid savings. While we do not know how many individuals would have transferred assets in the absence of the Partnership program, one of our recent reports suggests that asset transfers may not be that prevalent. In March 2007, we reported that few applicants who were approved for Medicaid coverage ultimately transferred assets. In addition, the asset transfer standards established under DRA increased the look-back period to 5 years, which reduces the opportunity for individuals to transfer assets to establish Medicaid eligibility. Overall, our scenarios suggest that in the aggregate the savings potential from the Partnership programs of the 20 percent of individuals who would have self-financed their care is outweighed by the 80 percent of individuals who will likely result in increased Medicaid spending. For more information on our simplifying assumptions and the impact of adjusting these assumptions on our findings, see appendix II. Although our survey data and scenarios show that about 80 percent of Partnership policyholders who become eligible for Medicaid are likely to do so sooner than they otherwise would have without a Partnership program, we also expect that few Partnership policyholders will actually become eligible for Medicaid and turn to the program to finance their long- term care. There are two reasons for this expectation. First, most Partnership policyholders purchase policies that are likely to cover all or most of their long-term care expenses during their lifetimes, thereby reducing the likelihood that the policyholders will require financing from Medicaid for their long-term care. We found that 86 percent of Partnership policyholders had benefits covering 3 or more years, while the average nursing facility stay lasts between 2 and 3 years. One study of traditional long-term care insurance policyholders with lifetime benefits found that only about 14 percent of policyholders used their benefits for more than 3 years, and fewer than 5 percent of all policyholders used their benefits for more than 5 years. These data suggest that if Partnership policyholders continue to purchase policies with benefit periods that cover their long- term care needs, the percentage of Partnership policyholders who exhaust their benefits and then become eligible for Medicaid is likely to be limited. While some experts have reported that there is a recent trend for traditional long-term care insurance policies to be sold with shorter benefit periods, the minimum benefit requirements that applied to Partnership policies could result in Partnership benefits remaining more stable over time. The second reason we estimate that few Partnership policyholders are likely to turn to Medicaid for their long-term care financing is that, in general, Partnership policyholders have incomes that exceed Medicaid income eligibility thresholds. Although Partnership policyholders can purchase varying amounts of asset protection, they must still meet state Medicaid income thresholds in order to become eligible for Medicaid. In 2006, the monthly income eligibility thresholds for all states were required to be no higher than 300 percent of the Supplemental Security Income standard, which was $1,809 in 2006. However, only 1 percent of the Partnership policyholders in California and Connecticut had household incomes less than $1,000 per month at the time they purchased their long- term care insurance policies. Our analysis of HRS data also indicates that wealthy individuals continue to have a high level of assets at the time they are admitted to a nursing facility, which suggests that many Partnership policyholders will continue to be relatively wealthy and unlikely to meet Medicaid eligibility thresholds, even at the time they enter a nursing facility. For example, of all people who entered a nursing facility in 2004, the average asset value for the 25 percent of people with the highest assets was over $334,000 in 1992, and by 2004, 12 years later, their assets had grown to almost $430,000. Similarly, the average monthly income for the 25 percent of people with the highest incomes who were admitted to a nursing facility in 2004 was about $5,600 in 1992, and about $3,700 in 2004—more than double the threshold for Medicaid eligibility in any of the four states with Partnership programs. The income levels of Partnership policyholders may reflect the fact that the cost of purchasing a long-term care insurance policy—including a Partnership policy—may exceed what most elderly households can afford. According to guidelines published by the NAIC, a person should spend no more than 7 percent of his or her income on long-term care insurance. A traditional long-term care insurance policy covering 3 years of care, with inflation protection, a $200 daily benefit allowance, and comprehensive coverage, costs about $3,000. In order to afford such a policy, an individual would need an annual income of about $43,000. However, data from the 2004 HRS show that about half of elderly households nationwide had annual incomes below $43,000. A survey of Connecticut Partnership policyholders suggested that cost was the most important factor in policyholders’ decision to let their policies lapse. Sixty-two percent of surveyed individuals in Connecticut who let their Partnership policy lapse said that they dropped their Partnership policy because it was too costly. As of 2006, few Partnership policyholders in the four states with Partnership programs had accessed Medicaid to finance their long-term care. Of the approximately 218,000 Partnership policies sold since the program was first introduced in the late 1980s, approximately 190,000 were still active as of August 2006. In addition, as of that same date, a total of 3,454 Partnership policyholders—less than 2 percent of all Partnership policyholders—have accessed long-term care benefits since the Partnership programs began. Of that group, 292 Partnership policyholders exhausted their long-term care insurance benefits, and 159 policyholders—approximately 54 percent of those who exhausted their benefits—subsequently went on to access Medicaid benefits. The number of Partnership policyholders who access benefits and also access Medicaid is likely to grow, because people typically use long-term care services 15 to 20 years after they purchase a policy, and the first Partnership policies were established less than 20 years ago. We do not know why some of the 292 individuals who exhausted their long-term care insurance benefits did not access Medicaid. It is possible that their income was higher than Medicaid eligibility thresholds, or they may have had unprotected assets that they had to spend down. Alternatively, they may have preferred to self-finance their care, they may have died, or they may have stopped using long-term care services. With DRA authorizing all states to implement Partnership programs, information on the Partnership policies and policyholders from the four states with Partnership programs may prove useful to other states considering implementing such programs. In particular, states may want to consider the trade-offs that come with implementing a Partnership program. First, a Partnership program’s potential impact on Medicaid expenditures should be considered. Based on our scenario comparison and survey data, we anticipate that Partnership programs in California, Connecticut, Indiana, and New York are unlikely to result in savings for their state Medicaid programs and could result in increased Medicaid expenditures. This is largely due to the modifications of state Medicaid eligibility requirements states have to make in order to offer asset protection to Partnership policyholders and survey data showing that the majority of Partnership policyholders would have purchased traditional long-term care insurance had the Partnership program not existed. However, given the amount of long-term care insurance benefits and income and asset levels of current Partnership policyholders, we also anticipate that relatively few policyholders will access Medicaid in the four states with Partnership programs. Therefore, the impact of Partnership programs on state Medicaid programs will likely be small. While Partnership programs are not likely to reduce states’ Medicaid expenditures, the programs do offer some benefits to some consumers. The asset protection feature, which states require Partnership policies to offer at no additional premium cost, can benefit policyholders who exhaust their Partnership benefits and who access Medicaid. Even if individuals do not end up using their Partnership insurance or Medicaid, the availability of asset protection may provide peace of mind for those who fear the risk of having to spend their assets on their long-term care. However, states that implement Partnership programs should recognize that, because of their cost, Partnership policies generally do not benefit all consumers. The cost of annual premiums for long-term care insurance may not be affordable to individuals with moderate incomes, and as a result long-term care insurance policyholders, including Partnership policyholders, tend to be wealthier than those without such insurance. We received written comments on a draft of this report from HHS (see appendix III) and from the four states with Partnership programs, California, Connecticut, Indiana, and New York (see appendix IV). HHS commented that the results of our study should not be considered conclusive because the results do not adequately account for the effect of estate planning efforts such as asset transfers. Specifically, HHS was concerned that the simplified scenarios were flawed in that they did not account for individuals who engage in estate planning activities prior to expending all of their own funds on long-term care costs. HHS further noted that the data sources used in our report would not likely yield accurate data on asset transfers and criticized the report for not incorporating a review of the literature on this issue and reporting on analyses of the experience of the four states with Partnership programs. The four states with Partnership programs disagreed with our conclusion that the Partnership programs are unlikely to result in Medicaid savings and, like HHS, commented that our scenarios did not adequately account for the impact of asset transfers. California, Connecticut, and New York raised concerns about our methodology for estimating the financial impact of the Partnership program on Medicaid. California and Connecticut noted that we had excluded two Partnership policyholder survey questions from our analysis that they consider in their own analysis of the Partnership program. We maintain that the evidence suggests that the Partnership program is unlikely to result in savings for Medicaid, despite limited data and program experience. We agree with HHS and the four states with Partnership programs that Medicaid savings could result from those individuals who would have transferred assets in the absence of the Partnership program. However, our scenarios suggest that the savings associated with asset transfers are likely to offset the potential costs associated with policyholders who would have purchased traditional long-term care insurance in the absence of the Partnership programs. Further, the assumptions used by California, Connecticut, and Indiana to predict savings could underestimate the percentage of Partnership policyholders that represent a cost to Medicaid and overestimate the percentage that represent savings to Medicaid. We did not provide an overview of the literature on asset transfers in our draft report because, as we noted in our March 2007 report, the evidence on the extent to which individuals transfer assets to become financially eligible for Medicaid coverage for long-term care is generally limited and often based on anecdote. We did not comment on states’ analyses of their experience with the Partnership programs because, according to our analysis, their methodology overstates potential savings and understates potential costs. In appendix II of our draft report we acknowledged that some savings could result for Medicaid if, in the absence of a Partnership program, an individual would have self-financed his or her long-term care and transferred assets. We also acknowledged how a Partnership program can result in Medicaid savings if, in the absence of the Partnership program, an individual would have purchased a traditional long-term care insurance policy and transferred assets that were at least equal to the value of the traditional long-term care insurance policy. However, our analysis suggests that these savings would be limited to those individuals who, prior to requiring long-term care, would have transferred assets to become eligible for Medicaid in the absence of the Partnership program. Further, the larger percentage of policyholders who represent a potential cost to Medicaid are likely to offset savings attributable to asset transfers. While the literature on the extent of asset transfers is generally limited and anecdotal, in March 2007, we published a report that included an analysis of asset transfers by nursing home residents using HRS data. We complemented that analysis by examining a sample of Medicaid applications in three states to identify the extent of asset transfer activity. Both of these analyses suggested that about 10 to 12 percent of individuals transferred assets before applying for Medicaid, and the median amount transferred based on analysis of the HRS data and state Medicaid applications was $1,239 and $15,152, respectively. The relatively low incidence of asset transfers and the small amounts transferred relative to the costs associated with long-term care suggest that the impact of asset transfers on Medicaid may be limited. While the results of this study are not specific to Partnership policyholders, we found no other credible evidence suggesting that Partnership policyholders would transfer sufficient assets to offset the costs to Medicaid associated with the large number of individuals who would have purchased traditional long-term care insurance in the absence of the Partnership program. Also, although the overall impact of DRA on Medicaid eligibility is uncertain, DRA reduces the opportunity for people to transfer assets in order to become Medicaid eligible by increasing the period Medicaid programs can “look- back” at an individual’s assets to 5 years. In response to HHS’ comments about asset transfers, we have amended our draft report to make the discussion of asset transfers more prominent in the body of our report and to include reference to our March 2007 study. California, Connecticut, and New York raised concerns about our methodology for estimating the financial impact of the Partnership program on Medicaid. California and Connecticut noted that we had excluded two Partnership policyholder survey questions from our analysis that they consider in their own analysis of the Partnership program. These questions asked Partnership policyholders whether they would have transferred assets to become eligible for Medicaid in the absence of the program and whether the Partnership program influenced their decision to buy long-term care insurance. We maintain that our methodology is sound and that the methodology California, Connecticut, and Indiana use underestimates the potential for Medicaid costs and overestimates the potential for Medicaid savings. We relied on a question that asked Partnership policyholders whether they would have purchased traditional long-term care insurance in the absence of the Partnership program. We disagree with California, Connecticut, and Indiana regarding the appropriateness of including additional survey information because of concerns about ambiguous wording and these states’ assumption that policyholders’ responses can be used to predict the likelihood of future asset transfers. We did not present the states’ analyses for evaluating Medicaid spending in our draft report because we believe the states’ analyses overstate potential savings and understate potential costs. In our analysis, we estimated that about 80 percent of policyholders would have purchased traditional long-term care insurance in the absence of the program, and we estimated that these individuals generally represented a potential cost to Medicaid. Our 80 percent estimate was based on analysis of the survey question about how Partnership policyholders would have financed their long-term care in the absence of the Partnership program. The methodology that California, Connecticut, and Indiana use to estimate potential costs is based on a policyholders’ response to the following criteria, obtained from three survey questions: 1. The policyholder would have purchased traditional insurance in the absence of the Partnership program; 2. the Partnership program had no influence on the policyholders’ decision to purchase insurance; and 3. the policyholder would not have transferred assets in the absence of the Partnership program. By adding the two additional criteria to determine whether an individual represents a potential cost to Medicaid, the states’ estimate of the percentage of policyholders who fell into this category was more restrictive than ours. We have several concerns with the wording of the survey questions used to define the additional two criteria. In addition, according to our analysis, the criteria that define costs are not correctly specified because there are some circumstances when the second criterion would represent a cost to Medicaid whether or not the Partnership program had an influence on the policyholder’s decision to purchase insurance. The wording of the survey question about whether the Partnership program influenced the policyholder’s decision to purchase insurance was not specific with regard to how the decision was influenced. In particular, the Partnership programs’ influence could have been to influence the policyholder to purchase a different benefit package, to change the timing of the policyholder’s purchase, or to change the policyholder’s decision to purchase at all. Given the ambiguity of the question, it is not clear how a response should be interpreted. Moreover, how this question is interpreted could influence the outcome of an analysis of the likely impact of the Partnership program on Medicaid spending. Our analysis suggests that even if the Partnership program influenced policyholders to purchase enhanced benefits, the Partnership program still represented a potential cost, just a smaller cost. Adding this criterion incorrectly narrows the number of policyholders who represent potential costs to Medicaid. We also disagree with the states’ assumption that policyholders’ responses to the asset transfer question can be used to approximate the extent to which individuals would or would not transfer all of their assets in the future and—in the absence of the program—become eligible for Medicaid. The respondents were asked about events that are unlikely to occur for 15 to 20 years, and to speculate on what their actions would be in the future if there was no Partnership program. California, Connecticut, and New York reported that about 25 percent of respondents said they would have transferred assets to become eligible for Medicaid. All of these individuals are excluded from the pool of policyholders who represent a potential cost to the program in the state cost estimates. The assumption that all of these individuals would have transferred all of their assets is inconsistent with our March 2007 report regarding the incidence of asset transfers and amount of assets transferred for the purposes of becoming eligible for Medicaid. We agree that some individuals would have transferred assets in the absence of the program, but do not agree that this question provides an adequate measure of the extent to which it occurs. Therefore, we believe using the responses to this question may overstate the extent to which respondents would actually transfer all of their assets. We have similar concerns with the methodology California, Connecticut, and Indiana used to estimate savings, because it is based on the same three questions, two of which we view as inadequate. We assumed in our scenarios that individuals who would have self-funded their long-term care without insurance were likely to be budget neutral, but acknowledged there were several circumstances that would cause these individuals to become a potential source of savings. However, we did not attempt to quantify the percentage who would become a source of savings because of data limitations and because the savings were likely to be outweighed by the larger percentage of policyholders who likely represented a cost to the program. In contrast, California, Connecticut, and Indiana consider a policyholder to represent savings if: 1. the policyholder would have purchased a Partnership policy as an alternative to transferring assets; and 2. (a) the Partnership program influenced their decision to purchase insurance, or (b) the policyholder would not have purchased long-term care insurance in the absence of the Partnership program. As we noted in the discussion above regarding the states’ methodology for estimating Medicaid costs, we disagree with the reliance on the asset transfer question as a measure of the extent to which individuals would have transferred assets. We also believe it was incorrect to predict Medicaid savings for those respondents who said the Partnership program influenced their decision to purchase a policy. Even if the Partnership program influenced the policyholder’s decision to purchase enhanced benefits, our analysis suggests the Partnership program would not result in savings but would rather result in a reduction of costs to Medicaid. New York commented that our analysis was not applicable to their state. They cited preliminary results of a 2006 survey that estimated the number of recent Partnership policyholders who would have financed their care with a traditional policy in the absence of the Partnership program. Their estimates were considerably lower than the 80 percent we estimated based on our results from California, Connecticut, and Indiana. New York used different questions in their survey than California, Connecticut, and Indiana. As such, their results were not comparable to those of the other states. We believe New York’s question was less direct for the purposes of our analysis than the question used by California, Connecticut, and Indiana in their survey of Partnership policyholders. New York’s question asked policyholders—using a multiple choice format—how they would pay for long-term care in the future, if they had not purchased a Partnership policy. One of the possible responses was that they would purchase traditional insurance. This required policyholders to speculate about future behavior, and to respond to a more complex question and answer format. California, Connecticut, and Indiana asked directly about decisions made in the past—whether the Partnership policyholder would have purchased long-term care insurance in the absence of the Partnership program, with a simple yes or no response. California, Connecticut, and New York also commented that our finding that Partnership policyholders tended to have more extensive benefits than traditional policyholders was inconsistent with our scenarios that assumed that the policyholder would have purchased comparable benefits in the absence of the Partnership program. Assuming comparable benefits in our scenarios allowed us to assess the impact of the Partnership program on Medicaid savings in a simpler framework. As we explain in appendix II, some Partnership policyholders may have more coverage than if they had purchased a traditional policy. We show that if the value of the insurance policy is less than the amount of assets owned by the policyholder, the person will still take longer to become Medicaid eligible with a traditional long-term care insurance policy with a lesser value than with a Partnership policy. However, the amount of additional time it would take for the individual with a traditional policy to become eligible for Medicaid would be less than if the two policies had the same amount of benefits. HHS, the Indiana Partnership program, and the New York Department of Insurance provided us with technical comments and clarifications, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of Health and Human Services, congressional committees, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have questions about this report, please contact me at (202) 512-7119 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in Appendix IV. In this appendix we describe the data and methods that we used to examine the benefits of Partnership and traditional long-term care insurance policyholders. We also describe the data and methods we used to assess income, assets, age, gender, and the marital status of Partnership program long-term care insurance policyholders, traditional long-term care insurance policyholders, and people without long-term care insurance. We examined the benefits purchased by Partnership long-term care policyholders and the benefits purchased by traditional long-term care policyholders, using 2002 through 2005 data from two sources. Our data source for the benefits purchased by Partnership policyholders was the Uniform Data Set (UDS)—a data set supplied to us by each of the four states with Partnership programs that contained information on all Partnership policyholders who had purchased long-term care Partnership policies. The UDS was developed collaboratively among the four states with Partnership programs, insurers, the National Program Office at the Center on Aging, University of Maryland, and the Program Evaluator, Laguna Research Associates. The UDS contains information submitted by insurers with Partnership policyholders and summarized by each of the states on a quarterly basis. Insurers are required to submit data to the state Partnership program on: (1) newly insured people, (2) people who dropped their policies, (3) applicants for insurance who were assessed for long-term care insurance eligibility, and (4) the amount of payments for services and utilization. We used the data set for newly insured people to analyze the benefits purchased by Partnership policyholders. These data contain information on daily benefit amounts, the length of the benefit period, the length of the elimination period, and the type of coverage, including whether the coverage is comprehensive coverage or for facilities only. To obtain data about the benefit characteristics of insurance policies purchased by traditional long-term care policyholders, we surveyed five large insurance companies selling long-term care insurance. We selected these five insurance companies on the basis of the total number of policies and amount of annualized premiums in effect in the individual market, as of December 31, 2004. The five insurance companies were AEGON USA, Bankers Life and Casualty Company, Genworth Financial, John Hancock Life Insurance Company, and Metropolitan Life Insurance Company. All five insurance companies sold policies in the individual market, and two of the five carriers—John Hancock Life Insurance Company and Metropolitan Life Insurance Company—were also among the five largest carriers that sold products in the group market. We requested data on the number of enrollees in the individual market who chose selected benefit options for new long-term care insurance policies sold from July 1, 2002, to March 31, 2005. We collected data on coverage types, daily benefit amounts, elimination periods, benefit periods, inflation protection options, and optional benefits offered. We used three data sources to examine the income and assets of Partnership policyholders, traditional long-term care insurance policyholders, and people without long-term care insurance: Partnership program surveys of Partnership policyholders; the 2004 American Community Survey (ACS); and the 2004 Health and Retirement Study (HRS). To examine the household income and household assets of Partnership policyholders, we used data from Partnership program surveys of a sample of Partnership policyholders at the time they first purchased insurance coverage. We restricted our analysis of the income and assets of Partnership policyholders to surveys conducted by the California and Connecticut Partnership programs because the Indiana Partnership program’s data were not sufficiently detailed to include in our analysis, and the New York Partnership program was not able to provide us with data from recent years. In addition, because the surveys were of a sample of Partnership policyholders—40 percent of Partnership policyholders in California and 50 percent of Partnership policyholders in Connecticut—we increased the number of observations by analyzing more than 1 year of data. We included data from 2003 and 2004 for California, and data from 2002 through 2005 for Connecticut. To approximate the household income of individuals without long-term care insurance in California and Connecticut, we used the 2004 ACS. Household asset information was not available in these states. The ACS is conducted by the Census Bureau, as a part of the Decennial Census Program, and provides information about the characteristics of local communities. The ACS publishes social, housing, and economic characteristics for demographic groups, including household income and assets, covering a broad spectrum of geographic areas in the United States and Puerto Rico. It is the largest household survey in the United States, with an annual sample size of about 3 million. In order to make appropriate comparisons between the income data from the California and Connecticut Partnership program surveys and the ACS, we restricted our calculations in the income analysis to respondents who were aged 55 and over, when we calculated our household income ranges. In our analysis, we used the ACS state population data as a proxy for people without any long-term care insurance. Approximately 12 percent of people over age 55 have long-term care insurance, so our measure is likely to contain approximately 88 percent of people without long-term care insurance. To examine national-level data on household income and assets of individuals with and without long-term care insurance, we used information from the 2004 HRS, the most recent year available for that survey data set. The HRS is a longitudinal national panel survey of individuals over age 50, and is sponsored by the National Institute on Aging and conducted by the University of Michigan. The HRS includes individuals who were not institutionalized at the time of the initial interview and tracks these individuals over time, regardless of whether they enter an institution. Researchers conducted the initial interviews in 1992 in respondents’ homes and conducted follow-up interviews over the telephone every second year thereafter. HRS questions pertain to physical and mental health status, insurance coverage, financial status (including household income and assets), family support systems, employment status, and retirement planning. We used data from the HRS to calculate the household income distribution nationally for people with long-term care insurance and for people without long-term care insurance. To make our income analysis of HRS data consistent with the income analysis of Partnership policyholders and individuals without long-term care insurance in California and Connecticut, we restricted the HRS income analysis to individuals age 55 and over. The HRS data for people with insurance do not differentiate between Partnership and traditional insurance policyholders and approximately 2 percent of people with long- term care insurance nationwide have Partnership policies. Therefore, although the HRS data may contain a small number of Partnership policyholders, about 98 percent of all long-term care policyholders are likely to have traditional long-term care insurance. To compare the age, gender, and marital status of Partnership policyholders and other populations in Partnership states and nationally, we used data from the UDS from 2002 through 2005 and the HRS data from 2004. The UDS data contain information on Partnership policyholders, while the HRS was used to calculate estimates for traditional policyholders and for those people without long-term care insurance. We took several measures to ensure the reliability of the data used in this report. For the UDS and Partnership policyholder surveys conducted by the states with Partnership programs, we interviewed the officials at the state offices familiar with these data in order to establish whether the data were reliable and suitable for the purposes of our report. For the GAO survey of traditional long-term care insurance carriers, we interviewed each of the carriers about their data to ensure the accuracy and reliability of the data provided. For the ACS and HRS data sets, we collected and examined the data documentation and sought information from the providers of the data. In addition, we took steps to ensure that the data were valid and within reasonable ranges. To do this, where appropriate, we examined the distribution of our key variables, calculating estimates of central tendency, ranges, and frequencies, missing values, and sample size. We determined that these data sets were sufficiently reliable for the purposes of this report. We performed our work from September 2005 through May 2007 in accordance with generally accepted government auditing standards. To analyze the impact of the Partnership programs on Medicaid, we used scenarios that are illustrative of the options individuals have to finance their care. This appendix provides additional information on the construction of the three scenarios and how adjusting the simplifying assumptions affects the length of time it takes for the individual to become eligible for Medicaid in the scenarios. We developed three illustrative scenarios based on the three basic options that are available to an individual for financing his or her long-term care: (1) self-financing without any long-term care insurance, (2) financing using traditional long-term care insurance, and (3) financing using Partnership long-term care insurance. For illustrative purposes, our scenarios are based on an individual who owns assets worth $300,000. If the individual has a long-term care insurance policy, this policy covers 3 years of nursing facility care at a cost of $70,000 per year: that is, the policy covers $210,000 of nursing facility care costs. We then used the scenarios to compare the time it would take for the individual to become eligible for Medicaid using each of the three financing options. Self-financing Without Any Long-term Care Insurance (Scenario C): The calculations underlying the self-financing scenario are the simplest. If the individual self-finances in the absence of the Partnership program, the individual pays for his or her own care, essentially spending his or her assets down to Medicaid eligibility thresholds before becoming eligible for Medicaid. In this case, the number of years it takes for the individual to become eligible for Medicaid equals the total assets divided by the cost of a year of nursing facility care. In our example, this is $300,000 in assets divided by $70,000 in nursing facility costs per year, or about 4.3 years until the individual is eligible for Medicaid. The equation for this calculation can be expressed as Equation 1: Self-financing time to Medicaid = Assets / cost per year Traditional Long-term Care Insurance (Scenario B): Next we calculated the time it would take to become Medicaid eligible if the same individual has a traditional long-term care insurance policy. In this scenario, the insurance policy pays for care up to the limits of the policy. After the insurance policy is exhausted, the individual spends his or her own assets to pay for long-term care. Once the assets are exhausted, the individual is eligible for Medicaid. In our example, the individual has a traditional long-term care insurance policy worth 3 years of care in a nursing facility or $210,000. The time to Medicaid in this example is $210,000 in insurance coverage plus $300,000 in assets, all divided by $70,000 in nursing facility costs per year, or about 7.3 years. The equation for this calculation can be expressed as Equation 2: Traditional insurance time to Medicaid = (Insurance policy value + assets) / cost per year Partnership Long-term Care Insurance (Scenario A): Finally, we calculated the time it would take to become Medicaid eligible if the same individual has a Partnership policy. In this scenario, the insurance pays for care up to the limits of the policy, and then the individual has to self- finance using unprotected assets. Once those assets are exhausted, the individual is eligible for Medicaid because protected assets do not have to be spent on care. In a dollar-for-dollar model, the protected assets are equivalent to the value of the insurance policy. The time to become eligible for Medicaid in this example is $210,000 in insurance coverage plus $90,000 in unprotected assets, all divided by $70,000 in nursing facility costs per year or 4.3 years. The equation for this calculation can be expressed as Equation 3: Partnership insurance time to Medicaid = (Insurance policy value + unprotected assets) / cost per year Under the assumptions of our illustrative scenarios, with a dollar-for- dollar policy, the sum of the insurance policy and the unprotected assets is equal to total assets: the same as for the self-financing scenario. Therefore, the time to Medicaid is the same for the individual in both the Partnership and self-financing scenarios, and it is greater if the individual purchases a traditional policy than if he or she purchases a Partnership policy. These relationships are shown graphically in the report in figure 1. Underlying our illustrative scenarios were several simplifying assumptions. When we adjusted these simplifying assumptions, we found that some resulted in no change, some resulted in accelerated Medicaid eligibility, and some resulted in delayed Medicaid eligibility. Overall, we believe that the survey data showing that 80 percent of Partnership policyholders would have purchased a traditional long-term care insurance policy in the absence of the Partnership program represent compelling evidence that, as currently structured, the Partnership programs are unlikely to result in Medicaid savings. While some of the 20 percent of Partnership policyholders who would have self-financed their care and become eligible for Medicaid may represent a source of savings, others may represent a source of increased spending and still others will result in neither savings nor spending. We believe that in the aggregate the savings potential from the Partnership programs of these 20 percent of individuals is outweighed by the 80 percent of individuals who will likely result in increased Medicaid spending. Specifically, we made the following simplifying assumptions in our scenarios and discuss the effect on our results of adjusting these assumptions: The individual depicted in the scenarios has assets and benefits that are typical of many individuals with long-term care insurance. The individual depicted in the scenarios has $300,000 in assets and 3 years of long-term care insurance—assets and benefits that are typical of many individuals with long-term care insurance. The individual also receives long-term care in a nursing facility with costs for a year of care of $70,000 that are roughly equivalent to average nursing facility costs nationwide in 2004. In our example, the individual has assets of $300,000 and, in two of our scenarios, a long-term care policy worth $210,000. The cost of a year of nursing facility care is $70,000. As long as the individual has assets that are greater than the value of the insurance policy, we can insert any numbers into equations (1), (2), and (3), and the individual becomes eligible for Medicaid at the same time as with a Partnership policy and if he or she self-finances, but it takes longer if the individual has traditional insurance. The individual spends eligible assets to zero as a condition for Medicaid eligibility. While states allow individuals to keep a small amount of assets, these assets are in addition to anything that needs to be spent to become eligible for Medicaid. Including these assets has little impact on the scenarios since the individual can keep the same assets in all three scenarios, and these assets are outside of any spend-down requirement. Using our examples above, we decrease the assets in equations 1 and 2, and decrease the unprotected assets in equation 3 by the amount of assets the individual is allowed to keep. We find that having a traditional policy will still result in more years to Medicaid eligibility than having a Partnership policy or self-financing, and the Partnership and self-financing scenarios still result in the same time to Medicaid eligibility. The individual purchases the same amount of insurance benefits under the Partnership and traditional long-term care insurance scenarios. While this is our simplifying assumption, we recognize that the Partnership policyholder might have more coverage than if he or she had purchased a traditional policy because of the extra benefit requirements of Partnership policies, such as inflation protection, that are not required of traditional policies. Provided the individual has assets that are no less than the value of the insurance policies, the Partnership policyholder will still not take as long to reach Medicaid eligibility as he or she will with a traditional policy, although the difference is narrower than if the benefits are the same. For example, if we change the value of the benefits in the traditional policy to $150,000 (and keep the value of the Partnership policy at $210,000 and the value of assets at $300,000) the equation for the traditional policy becomes ($150,000 + $300,000)/$70,000, which is about 6.4 years and is still longer than the approximate 4.3 years with the Partnership policy but less than the approximate 7.3 years expected if the policies in the traditional and Partnership scenarios were the same. The individual has income below Medicaid eligibility thresholds. We made this assumption because Medicaid income eligibility thresholds vary across states. However, increasing the individual’s income up to Medicaid eligibility thresholds has no impact on the scenarios since the individual can keep the same income in all three scenarios. If the income exceeds Medicaid eligibility thresholds, the individual is ineligible for Medicaid in all three scenarios. The individual’s assets are greater than the value of the insurance policy. We assumed that most individuals would have assets that are worth more than the value of the insurance policy. Individuals have a disincentive to purchase long-term care insurance with a value exceeding their assets because it might increase their premium unnecessarily. While we do not have information about the amount of assets that Partnership policyholders have at the time they use their benefits, available evidence suggests that most individuals do not overinsure the value of their assets at the time of purchase, though their status could change over time. Survey data from California and Connecticut show that while 53 percent of Partnership policyholders have more than $350,000 worth of household assets at the time of purchase, only about 32 percent of these Partnership policyholders have more than 5 years of coverage equal to $350,000. However, it is possible that some policyholders will spend some or all of their assets by the time they require long-term care and will have more insurance than assets. If we modify our example above, and assume the individual’s insurance policy has greater value than the assets in our scenarios, we see that with a Partnership policy, the individual will still become eligible for Medicaid sooner than with a traditional policy, but later than if he or she self-financed. Therefore, for the 20 percent of individuals who would have self-financed their care in the absence of a Partnership program, and who have more insurance than assets, the Partnership program results in savings to Medicaid. Specifically, if we assume the insurance policy is worth $210,000, and the individual has assets equal to $150,000, we obtain the following results from our scenarios: Self-finance: assets / cost per year = $150,000 / $70,000 = 2.1 years Traditional insurance: (insurance + assets) / cost per year = ($210,000 + $150,000) / $70,000 = 5.1 years Partnership insurance: (insurance + unprotected assets) / cost per year = ($210,000 + 0) / $70,000 = 3 years The individual is unmarried. In our illustrative scenarios, we assume the individual is unmarried—the most likely marital status of policyholders at the time nursing home care is required. On the other hand, if the individual is married, Medicaid allows spouses to keep a certain amount of jointly owned assets (i.e., half of the value of the assets up to a maximum amount that was approximately $100,000 in 2007). In general, the spousal exemption that is deducted from assets would be the same across all three scenarios and would not affect the basic relationships among the three scenarios unless the net assets after the spousal exemption are of less value than the insurance policy. If the amount of insurance exceeds the value of assets net of the spousal exemption, there is a potential for Medicaid savings for a Partnership policyholder who would have self-financed. If that individual would have purchased a traditional policy, Medicaid spending would increase. Our scenarios illustrate this point. If we assume the individual is married and the spouse has already taken the spousal exemption such that the individual’s assets are $300,000, the results do not change and our original formulas remain intact. Alternatively, if we assume the individual’s spouse is entitled to half of the household assets of $300,000, up to the maximum of $100,000, then our results do change and the policyholder becomes overinsured. In this instance, if the individual self-finances, the spousal exemption would be $100,000, leaving the individual with $200,000 in assets. If the individual has traditional insurance, the spouse is also entitled to $100,000. However, if the individual has a Partnership policy, $210,000 of the assets are protected, leaving $90,000 in unprotected assets. The spouse would be entitled to half of the $90,000, or $45,000. The formulas are presented below. Self-finance: assets / cost per year = $200,000 / $70,000 = 2.9 years Traditional insurance: (insurance + assets) / cost per year = ($210,000 + $200,000) / $70,000 = 5.9 years Partnership insurance: (insurance + unprotected assets) / cost per year = ($210,000 + $45,000) / $70,000 = 3.6 years The individual uses the same long-term care services in all three scenarios. An individual who self-finances might have an incentive to use fewer or less expensive services than if he or she were insured by either a Partnership or traditional policy because the individual would be paying for services. If the individual uses fewer services when self-financing, the assets last longer, enabling the individual to pay for care longer and postponing Medicaid eligibility. In this situation, the cost per year of self- financing would be smaller than if he or she had either Partnership or traditional insurance. This would result in an increase in the time it takes to become Medicaid eligible for a person who self-finances relative to what it would have taken if he or she had purchased either a Partnership or traditional insurance policy. The individual does not save premiums paid if he or she would have self-financed their care such that assets are equal in all three scenarios. We made this assumption to make our scenarios easier to understand. Premium payments may be substantial—potentially as much as $3,000 per year—so it is possible that if the individual would have saved their premium payments by instead self-financing his or her long-term care, the individual would have more assets than either Partnership or traditional policyholders would when they begin to use their benefits. If this is the case, by self-financing, the individual would have more assets to pay for long-term care before becoming eligible for Medicaid, which would delay the time to Medicaid. Therefore, individuals who purchase Partnership policies would have saved their premium dollars and not purchased long-term care insurance represent a potential cost to the Medicaid program. Using our examples above and assuming 15 years of payments saved at $3,000 per year, by self-financing, the individual would save $45,000 in additional assets that would otherwise have been spent on Partnership premiums. Therefore, the self-financing individual has assets of $345,000. Using our equation we see that the time to Medicaid is delayed ($345,000 / $70,000 = 4.9 years) if the individual self-finances, while relative to this option a Partnership policy would accelerate the individual’s time to Medicaid by 0.6 years. In this case, the Partnership and traditional policy scenarios would not change because premiums are required to be identical for the Partnership and traditional polices. The individual is equally likely to transfer assets in all three scenarios. An individual who self-finances or uses traditional insurance might be more likely to transfer assets to a spouse or other family members than he or she would with a Partnership policy, because assets are protected under Partnership policies. If the individual self-finances and transfers assets, he or she would likely take less time to become eligible for Medicaid than with a Partnership policy (and assuming no transfers with the Partnership policy), resulting in Medicaid savings. If the individual would have purchased traditional insurance, the amount of assets transferred would have to be equal to at least the value of the insurance policy purchased in order for the Partnership program to result in Medicaid savings. If the amount of asset transfer is less than the value of the insurance policy, the increase in Medicaid spending attributable to the Partnership program would be less than without the asset transfer, but would still be an increase. Christine Brudevold, Assistant Director; Krister Friday; Michael Kendix; Julian Klazkin; Elijah Wood; and Suzanne Worth made key contributions to this report. | Partnership programs allow individuals who purchase Partnership long-term care insurance policies to exempt at least some of their personal assets from Medicaid eligibility requirements. In response to a congressional request, GAO examined (1) the benefits and premium requirements of Partnership policies as compared with those of traditional long-term care insurance policies; (2) the demographics of Partnership policyholders, traditional long-term care insurance policyholders, and people without long-term care insurance; and (3) whether the Partnership programs are likely to result in savings for Medicaid. To examine benefits, premiums, and demographics, GAO used 2002 through 2005 data from the four states with Partnership programs--California, Connecticut, Indiana, and New York--and other data sources. To assess the likely impact on Medicaid savings, GAO (1) used data from surveys of Partnership policyholders to estimate how they would have financed their long-term care without the Partnership program, (2) constructed three scenarios illustrative of the options for financing long-term care to compare how long it would take for an individual to spend his or her assets on long-term care and become eligible for Medicaid, and (3) estimated the likelihood that Partnership policyholders would become eligible for Medicaid based on their wealth and insurance benefits. California, Connecticut, Indiana, and New York require Partnership programs to include certain benefits, such as inflation protection and minimum daily benefit amounts. Traditional long-term care insurance policies are generally not required to include these benefits. From 2002 through 2005, Partnership policyholders purchased policies with more extensive coverage than traditional policyholders. According to state officials, insurance companies must charge traditional and Partnership policyholders the same premiums for comparable benefits, and they are not permitted to charge policyholders higher premiums for asset protection. Partnership and traditional long-term care insurance policyholders tend to have higher incomes and more assets at the time they purchase their insurance, compared with those without insurance. In two of the four states, more than half of Partnership policyholders over 55 have a monthly income of at least $5,000 and more than half of all households have assets of at least $350,000 at the time they purchase a Partnership policy. Available survey data and illustrative financing scenarios suggest that the Partnership programs are unlikely to result in savings for Medicaid, and may increase spending. The impact, however, is likely to be small. About 80 percent of surveyed Partnership policyholders would have purchased traditional long-term care insurance policies if Partnership policies were not available, representing a potential cost to Medicaid. About 20 percent of surveyed Partnership policyholders indicate they would have self-financed their care in the absence of the Partnership program, and data are not yet available to directly measure when or if those individuals will access Medicaid had they not purchased a Partnership policy. However, illustrative financing scenarios suggest that an individual could self-finance care--delaying Medicaid eligibility--for about the same amount of time as he or she would have using a Partnership policy, although GAO identified some circumstances that could delay or accelerate Medicaid eligibility. While the majority of policyholders have the potential to increase spending, the impact on Medicaid is likely to be small because few policyholders are likely to exhaust their benefits and become eligible for Medicaid due to their wealth and having policies that will cover most of their long-term care needs. Information from the four states may prove useful to other states considering Partnership programs. States may want to consider the benefits to policyholders, the likely impact on Medicaid expenditures, and the income and assets of those likely to afford long-term care insurance. The Department of Health and Human Services commented on a draft of the report that our study results should not be considered conclusive because they do not adequately account for the effect of estate planning efforts such as asset transfers. While some Medicaid savings could result from people who purchase Partnership policies instead of transferring assets, they are unlikely to offset the costs associated with those who would have otherwise purchased traditional policies. |
Consolidation loans differ from other loans in the FFELP and FDLP programs in that they enable borrowers who have multiple loans— possibly from different lenders, different guarantors, and even from different loan programs—to combine their loans into a single loan and make one monthly payment. By obtaining a consolidation loan, borrowers can lower their monthly payments by extending the repayment period longer than the maximum 10 years generally available on the underlying loans. Maximum repayment periods allowed vary by the amount of the consolidation loan (see table 1). Consolidation loans also provide borrowers with the opportunity to lock in a fixed interest rate on their student loans, based on the weighted average of the interest rates in effect on the loans being consolidated rounded up to the nearest one-eighth of 1 percent, capped at 8.25 percent. Borrowers can qualify for consolidation loans regardless of financial need. Loans eligible for inclusion in a consolidation loan must be comprised of at least one eligible FFELP or FDLP loan, including subsidized and unsubsidized Stafford loans, PLUS loans, and, in some instances, consolidation loans. Both subsidized and unsubsidized Stafford loans, and PLUS loans are variable rate loans. Other types of federal student loans made outside of FFELP and FDLP, which may carry a variable or fixed borrower interest rate, are also eligible for inclusion in a consolidation loan, including Perkins loans, Health Professions Student loans, Nursing Student Loans, and Health Education Assistance loans (HEAL). The Federal Credit Reform Act (FCRA) of 1990 helps define federal costs associated with consolidation loans and was enacted to require agencies, including Education, to more accurately measure federal loan program costs. Under FCRA, Education is required to estimate the long-term cost to the government of a direct loan or a loan guarantee—generally referred to as the subsidy cost. Subsidy cost estimates are calculated based on the present value of estimated net cash flows to and from the government that result from providing loans to borrowers. For FFELP consolidation loans, cash flows include, for example, fees paid by lenders to the government and a special allowance payment by the government to lenders to provide them a guaranteed rate of return on the student loans they make. For FDLP consolidation loans, cash flows include borrowers’ repayment of loan principal and payments of interest to Education, and loan disbursements by the government to borrowers. Unlike FFELP, FDLP involves no guaranteed yields or special allowance payments to lenders because the program is a direct loan program. The subsidy costs of FDLP consolidation loans are also affected by the interest Education must pay to Treasury to finance its lending activities. Another type of cost pertaining to consolidation loans is administration, which includes such items as expenses related to originating and servicing direct loans. In estimating loan subsidy costs, Education first estimates the future economic performance (net cash flows to and from the government) of direct and guaranteed loans when preparing its annual budgets. These first estimates establish the subsidy estimates for the current-year originated loans. The data used for the first estimates are reestimated in later years to reflect any changes in actual loan performance and expected changes in future performance. Reestimates are necessary because projections about interest and default rates and other variables that affect loan program costs change over time. Any increase or decrease in the estimated subsidy cost results in a corresponding increase or decrease in the estimated cost of the loan program for both budgetary and financial statement purposes. Recent years have seen a drop in interest rates for student loan borrowers along with dramatic overall growth in consolidation loan volume. From July 2000 to June 2003, the interest rate for consolidation loans dropped by more than half, with consolidation loan borrowers obtaining rates as low as 3.50 percent as of July 1, 2003. From fiscal year 1998 through fiscal year 2003, the volume of consolidation loans made (or originated) rose from $5.8 billion to over $41 billion. Over four-fifths of the fiscal year 2003 loan volume is in FFELP. While overall volume rose in 2003, the trends differed by program. FDLP consolidation loan volume for fiscal year 2003 decreased, but loan volume in the larger FFELP increased, resulting in total consolidation loan volume of well over $41 billion. The dramatic growth in consolidation loan volume in recent years is due in part to declining interest rates that have made it attractive for many borrowers to consolidate their variable rate student loans at a low, fixed rate. Figure 1 shows the relationship between these two factors. When interest rates are low, some borrowers may find it in their economic self- interest to consolidate their loans so that they can lock in a low fixed interest rate for the life of the loan, as opposed to paying variable rates on their existing loans, regardless of whether they need a consolidation loan to avoid difficulty in making loan repayments and avert default. Underscoring the potential attractiveness of these loans to potential borrowers, many lenders, including newer loan companies that are specializing in consolidation loans, have aggressively marketed consolidation loans to compete for consolidation loan business as well as to retain the loans of their current customers. Their marketing techniques have included mass mailings, telemarketing, and Internet pop-ups to encourage borrowers to consolidate their loans. This increased marketing effort has likely contributed to the record level of consolidation loan volume. While the estimated future costs for consolidation loans can vary greatly from year to year, low interest rates and recent loan volume changes have resulted in substantial increases in overall costs to the federal government. However, in light of the differences between how FFELP and FDLP operate, the subsidy costs within these two programs were affected in very different ways. For FFELP, the result was a substantial increase. For FDLP, the result was a narrowing of the net difference between the estimated interest payments paid by consolidated loan borrowers to Education and the costs paid by Education to Treasury to finance direct loans. Estimated subsidy costs for FFELP consolidation loans rose from $0.651 billion for loans made in fiscal year 2002 to $2.135 billion for loans made in fiscal year 2003. The increase is largely due to the higher interest subsidies the government is expected to pay to lenders to ensure they receive a guaranteed rate of return on student loans and the result of greater loan volume. The interest subsidy, which is called a special allowance payment (SAP), is based on a formula specified in law and paid by Education to lenders on a quarterly basis when the “guaranteed lender yield” exceeds the borrower rate. This guaranteed lender yield is currently based on the average 3-month commercial paper interest rate plus an additional 2.64 percent. When this guaranteed yield is higher than the amount of interest being paid by borrowers, Education makes up the difference. If the borrower’s interest rate exceeds the guaranteed lender yield, Education does not pay a SAP, and the lender receives the borrower rate. Education’s estimate of $2.135 billion in subsidy costs for FFELP consolidation loans made in fiscal year 2003 is based on the assumption that the guaranteed lender yield will rise over the next several years, reflecting Education’s assumption that market interest rates are likely to rise from the historically low levels experienced in fiscal year 2003. The effect of this rise is shown in figure 2, where the bottom line shows the fixed borrower rate for a FFELP consolidation loan made in the first 9 months of fiscal year 2003, and the top line shows Education’s estimated values for the guaranteed lender yield over time. In fiscal year 2003, market interest rates were such that the guaranteed lender yield established under the SAP formula was actually below the borrower rate. Lenders, therefore, received only the rate paid by borrowers; no SAP was paid. However, in future years, when the guaranteed lender yield is expected to increase and be above the borrower rate, Education would have to make up the difference in the form of a SAP. As figure 2 shows, Education’s assumptions would call for lenders to receive a SAP over most of the life of the consolidation loans made in fiscal year 2003. An increase in loan volume also played a role in the subsidy cost increase from fiscal years 2002 to 2003. However, the effect of the increased loan volume was not as large as that of the higher interest subsidies the government is expected to pay to lenders in the future. Subsidy costs can occur within FDLP as well, but in a different way. FDLP’s consolidation program is a direct loan program and, therefore, involves no guaranteed yields to private lenders. Still, the program has potential subsidy costs if the government’s cost of borrowing is higher than the interest rate borrowers are paying. The government’s cost of borrowing is determined by the interest rate Education pays Treasury to finance direct student loans, which is equivalent to the discount rate. The difference between borrowers’ rates and the discount rate—called the interest rate spread—is a key driver of subsidy estimates for FDLP loans. When the borrower rate is greater than the discount rate, Education will receive more interest from borrowers than it will pay in interest to Treasury to finance its loans, resulting in a positive interest rate spread— or a gain (excluding administrative costs) to the government. Conversely, when the borrower rate is less than the discount rate, Education will pay more in interest to Treasury than it will receive from borrowers, which will result in a negative interest rate spread—or a cost to the government. For FDLP consolidation loans made in fiscal years 2002 and 2003, no such negative interest rate spreads were incurred in either year, based on the methodology Education uses to determine these costs. In both years, borrower interest rates for FDLP consolidation loans were somewhat higher than the discount rate, resulting in a net gain to the government. However, while Education continued to benefit from lending at interest rates higher than its cost of borrowing for FDLP consolidation loans made in fiscal year 2003, the size of this benefit declines from $571 million in fiscal year 2002 to $543 million in fiscal year 2003. The smaller net gain that occurred in fiscal year 2003 reflects both a decrease in the loan volume and a narrowed difference between the discount rate and the borrower rate. Loan volume in fiscal year 2003 was $6.7 billion, a decrease from $8.8 billion in fiscal year 2002. In fiscal year 2003, this difference narrowed in part because borrower rates dropped more than the discount rate. The borrower rates for FDLP consolidation loans dropped 1.2 percentage points, from 6.3 percent in fiscal year 2002 to 5.1 percent in fiscal year 2003. The discount rate, on the other hand, dropped by only 0.88 percentage points, from 4.72 percent in fiscal year 2002 to 3.84 percent in fiscal year 2003. The resulting interest rate spread decreased from 1.59 percent to 1.22 percent (see table 2). In other words, each $100 of consolidated FDLP loans made in fiscal year 2002, will result in $1.59 more in interest received by Education than it will pay out in interest to the Treasury. A similar loan originated in fiscal year 2003, however, will generate only $1.22 more in interest for the government. Loan volume affects administrative costs, in that cost is in part a function of the number of loans originated and serviced during the year. As a result, when loan volume increases, administration costs also increase. Education’s current cost accounting system does not specifically track administration costs incurred by each of the student loan programs. Consequently, we were unable to determine the total administration costs incurred by consolidation loan programs or any off-setting administrative cost reductions associated with the prepayment of loans underlying consolidation loans. However, based on available Education data, we were able to determine some of the direct costs associated with the origination, servicing, and collection of FDLP consolidation loans. For fiscal year 2002, these costs totaled roughly $52.3 million. This does not include overhead costs, which include costs incurred for personnel, rent, travel, training, and other activities related to maintaining program operations. For fiscal year 2003, the estimated costs for the origination, servicing, and collection of FDLP consolidation loans is projected to increase to $59.5 million. While we similarly were unable to determine Education’s administration costs directly related to FFELP consolidation loans, they are likely to be smaller than for FDLP consolidation loans. This is because a large portion of FFELP administration cost is borne directly by lenders, who make and service the loans. The special allowance payments to lenders, which rise and fall as interest rates change, are designed to ensure that lenders are compensated for administration and other costs and provided with a reasonable return on their investment so that they will continue to participate in the program. As the discussion of both FFELP and FDLP loans shows, interest rates have a strong effect on whether subsidy costs occur and how large they are. The movement of subsidy costs for consolidation loans made in future years will depend heavily on what happens to interest rates. As we have shown, subsidy cost estimates for FFELP consolidation loans can increase substantially, depending on how much the guaranteed lender yield rises above the fixed rate paid by borrowers, which, in turn, requires the federal government to pay subsidies to lenders. Conversely, if borrowers obtained consolidation loans with a fixed interest rate at a time when rates were expected to decrease in the future, federal subsidy costs could be lower, than is currently the case, because the borrower rate could exceed the rate guaranteed to lenders, and the federal government might not be required to pay lender subsidies. For FDLP consolidation loans, allowing borrowers to lock in a low fixed rate might result in decreased federal revenues if the variable interest rates on those loans borrowers converted to a consolidation loan would have otherwise increased in the future. The exact effects of FDLP consolidation loans, however, depend on a number of factors, including the length of loan repayment periods, borrower interest rates, and discount rates. We noted in our prior report that borrowers’ choices between obtaining a fixed rate consolidation loan or retaining their variable rate loans can significantly affect federal costs. While consolidation loans may be an important tool to help borrowers manage their educational debt and thus reduce the cost of student loan defaults, the surge in the number of borrowers consolidating their loans suggests that many borrowers who face little risk of default are choosing consolidation as a way of obtaining low fixed interest rates—an economically rational choice on the part of borrowers. If borrowers continue to consolidate their loans in the current low interest rate environment, and interest rates rise, the government assumes the cost of larger interest subsidies. Providing for these larger interest subsidies on behalf of a broad spectrum of borrowers may outweigh any government savings associated with the reduced costs of loan defaults for the smaller number of borrowers who might default in the absence of the repayment flexibility offered by consolidation loans. In our October 2003 report, we also discussed the extent to which repayment options other than consolidation loans allow borrowers to simplify loan repayment and reduce repayment amounts. We found that other repayment options that allow borrowers to make a single payment to cover multiple loans and smaller monthly payments are now available for some borrowers under both FFELP and FDLP, but these alternatives are not available to all borrowers. In that report, we concluded that restructuring the consolidation loan program to specifically target borrowers who are experiencing difficulty in managing their student loan debt and at risk of default, and/or who are unable to simplify and reduce repayment amounts by using existing alternatives, might reduce overall federal costs by reducing the volume of consolidation loans made. In addition, making the other nonconsolidation options more readily available to borrowers might be a more cost-effective way for the federal government to provide borrowers with repayment flexibility while reducing federal costs. An assessment of the advantages of consolidation loans for borrowers and the government, taking into account program costs and the availability of, and potential change to, existing alternatives to consolidation, and how consolidation loan costs could be distributed among borrowers, lenders, and the taxpayers, would be useful in making decisions about how best to manage the consolidation loan program and whether any changes are warranted. In our October 2003 report, we recommended that the Secretary of Education assess the advantages of consolidation loans for borrowers and the government in light of program costs and identify options for reducing federal costs. We suggested options that could include targeting the program to borrowers at risk of default, extending existing consolidation alternatives to more borrowers, and changing from a fixed to a variable rate the interest charged to borrowers on consolidation loans. We also noted that, in conducting such an assessment, Education should also consider how best to distribute program costs among borrowers, lenders, and the taxpayers and any tradeoffs involved in the distribution of these costs. Furthermore, if Education determines that statutory changes are needed to implement more cost-effective repayment options, we believe it should seek such changes from Congress. Education agreed with our recommendation. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the Committee may have. For further contacts regarding this testimony, please call Cornelia M. Ashby at (202) 512-8403. Individuals making key contributions to this testimony include Jeff Appel, Susan Chin, Cindy Decker, and Julianne Hartman-Cutts. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Consolidation loans, available under the Department of Education's (Education) two major student loan programs--the Federal Family Education Loan Program (FFELP) and the William D. Ford Direct Loan Program (FDLP)--help borrowers manage their student loan debt. By combining multiple loans into one loan and extending the repayment period, a consolidation loan reduces monthly repayments, which may lower default risk and, thereby, reduce federal costs of loan defaults. Consolidation loans also allow borrowers to lock in a fixed interest rate, an option not available for other student loans. Consolidation loans under FFELP and FDLP accounted for about 48 percent of the $87.4 billion in total new student loan dollars that originated during fiscal year 2003. Two main types of federal cost pertain to consolidation loans. One is "subsidy"--the net present value of cash flows to and from the government that result from providing these loans to borrowers. For FFELP consolidation loans, cash flows include, for example, fees paid by lenders to the government and a special allowance payment by the government to lenders to provide them a guaranteed rate of return on the student loans they make. For FDLP consolidation loans, cash flows include borrowers' repayment of loan principal and payments of interest to Education, and loan disbursements by the government to borrowers. The subsidy costs of FDLP consolidation loans are also affected by the interest Education must pay to the Department of Treasury (Treasury) to finance its lending activities. The second type of cost is administration, which includes such items as expenses related to originating and servicing direct loans. This testimony focuses on two key issues: (1) recent changes in interest rates and consolidation loan volume and (2) how these changes have affected federal costs for FFELP and FDLP consolidation loans. Recent years have seen a drop in interest rates for student loan borrowers along with dramatic overall growth in consolidation loan volume. From July 2000 to June 2003, the interest rate for consolidation loans dropped by more than half, with consolidation loan borrowers obtaining rates as low as 3.50 percent as of July 1, 2003. From fiscal year 1998 through fiscal year 2003, the volume of consolidation loans made (or "originated") rose from $5.8 billion to over $41 billion. The dramatic growth in consolidation loan volume in recent years is due in part to declining interest rates that have made it attractive for many borrowers to consolidate their variable rate student loans at a low, fixed rate. Recent trends in interest rates and consolidation loan volume have affected the cost of the FFELP and FDLP consolidation loan programs in different ways, but in the aggregate, estimated subsidy and administration costs have increased. For FFELP consolidation loans, subsidy costs grew from $0.651 billion for loans made in fiscal year 2002 to $2.135 billion for loans made in fiscal year 2003. Both higher loan volumes and lower interest rates available to borrowers in fiscal year 2003 increased these costs. Lower interest rates increase these costs because FFELP consolidation loans carry a government-guaranteed rate of return to lenders that is projected to be higher than the fixed interest rate paid by consolidation loan borrowers. When the interest rate paid by borrowers does not provide the full guaranteed rate to lenders, the federal government must pay lenders the difference. FDLP consolidation loans are made by the government and thus carry no interest rate guarantee to lenders, but changing interest rates and loan volumes affected costs in this program as well. In both fiscal years 2002 and 2003, there was no net subsidy cost to the government because the interest rate paid by borrowers who consolidated their loans was greater than the interest rate Education must pay to the Treasury to finance its lending. However, the drop in loan volume and interest rates that occurred in fiscal year 2003, contributed to cutting the government's estimated net gain from $570 million in fiscal year 2002 to $543 million for loans made in fiscal year 2003. Administration costs are not specifically tracked for either consolidation loan program, but available evidence indicates that these costs have risen, primarily reflecting increased overall loan volumes. |
The enactment of the Personal Responsibility and Work Opportunity Reconciliation Act of 1996 (P.L. 104-193) dramatically altered the nation’s system to provide assistance to the poor. Among many changes, title I of the act replaced the existing entitlement program for poor families (Aid to Families With Dependent Children) with fixed block grants to the states to provide Temporary Assistance for Needy Families (TANF). TANF provides about $16.5 billion annually for the states to use in helping families become self-sufficient. TANF imposes work requirements for adults and establishes time limits on the receipt of federal assistance. In addition, other federal programs are designed to help individuals move from welfare to work. For example, the Department of Labor (DOL) has a 2-year, $3 billion grant program, the Welfare-to-Work program, to help people with poor work histories, little or no education, or substance abuse problems obtain jobs. Transportation and welfare studies show that without adequate transportation, welfare recipients face significant barriers in trying to move from welfare to work. Existing public transportation systems cannot always bridge the gap between where the poor live and where jobs are located. These existing systems were originally established to transport inner-city residents to city locations and bring suburban residents to central-city work locations. However, many of the entry-level jobs that welfare recipients and low-income individuals would likely fill are located in suburbs that have limited or no access to existing public transportation systems. Furthermore, many entry-level jobs require shift work in the evenings or on weekends, when public transit services are either unavailable or limited. With the enactment of TEA-21, which established the Access to Jobs and Reverse Commute program, DOT became an important sponsor of welfare-to-work initiatives. In general, this program will provide grants to local agencies and authorities, nonprofit organizations, and transit authorities, among others, to improve mobility for low-income individuals seeking employment. TEA-21 authorized up to $750 million from fiscal year 1999 through fiscal year 2003 for the Access to Jobs program. Some of the funds are “guaranteed,” that is, subject to a procedural mechanism designed to ensure that minimum amounts of funding are provided each year. The amount of funds subject to the “guarantee” increases each year so that by fiscal year 2003, the authorized funds are all “guaranteed.” The Department of Transportation and Related Agencies Appropriations Act for fiscal year 1999 provided $75 million for the program rather than the $50 million subject to the “guarantee” and the maximum $150 million authorized. TEA-21 limits funding to 50 percent of each grantee’s project. The remaining 50 percent can be obtained from a variety of sources, including some welfare programs administered by other federal agencies. Since TEA-21 established the Access to Jobs program in June 1998, DOT has begun establishing the program’s basic structure and operating procedures. In May 1998, DOT established a task force of DOT officials to address several issues needing resolution before the program’s implementation. The task force was divided into four working groups focusing on the (1) distribution of funds, (2) criteria for selecting grantees and administrative requirements, (3) coordination among federal agencies and public outreach, and (4) program’s evaluation. Each working group was assigned several subsidiary issues. For example, the group working on the distribution of funds was tasked with determining the size of the program’s grants. On October 22, 1998, DOT officially released guidance detailing how potential grant applicants can request Access to Jobs funds. According to the guidance, grant applications are to be submitted by December 31, 1998. DOT plans to evaluate the applications and notify the successful applicants in February 1999. Although TEA-21 established a framework for allocating Access to Jobs funds to applicants, it gave DOT the discretion to decide how best to distribute the funds each year. Since the program began in June 1998, the Department has made preliminary decisions to maximize the number of first-year grants by setting suggested limits on the amount of grants available to areas with different population levels, such as areas with over 1 million people. TEA-21 requires DOT to allocate the available funding between urban and rural areas. Specifically, the act requires DOT to allocate 60 percent of the program’s funds each year to projects in urban areas with populations of at least 200,000; 20 percent of the program’s funds to projects in urban areas with populations of less than 200,000; and 20 percent of the program’s funds to projects in areas other than urban. In addition, the conference report on the Department of Transportation and Related Agencies Appropriations Act for fiscal year 1999 directed DOT to give high priority to rural counties that are not served or are underserved by public transportation. The Department of Transportation and Related Agencies Appropriations Act for fiscal year 1999 provided DOT with $75 million for its Access to Jobs program. To maximize the number of grants awarded, DOT is asking areas with specified populations to apply for grants limited to specified funding targets. DOT suggests that urban areas with populations of over 1 million should generally limit their requests to about $1 million, while rural areas with populations of less than 50,000 should request about $150,000. DOT also suggests average grant sizes for areas with populations ranging from 1 million to 200,000 and from 200,000 to 50,000. According to information from DOT, these recommended grant amounts would permit the Access to Jobs program to award grants to about 74 percent of the largest metropolitan areas in the country (about 25 locations), about 38 percent of the areas with populations from 200,000 to 1 million (about 35 locations), about 21 percent of the areas with populations from 50,000 to 200,000 (about 60 locations), and about 3 percent of small rural areas (about 99 locations). According to DOT officials, this approach for distributing the program’s funding may discourage the legislative designation, or earmarking, of funds for specific projects, as is done for some other DOT programs, such as the Federal Transit Administration’s (FTA) New Starts program for fixed guideway systems. In addition, DOT officials noted that an average of $150,000 for each rural applicant is in line with the potential need of these areas. For example, the Community Transportation Association of America, a nonprofit organization, told DOT that Access to Jobs grants of $150,000 would be adequate for many smaller rural areas. Finally, a group of rural counties in southern Illinois told DOT that $127,000 would be adequate to extend bus service on all their existing lines on evenings and weekends, thereby greatly benefiting welfare-to-work programs in the area. Grants of $1 million for large urban areas are smaller than those awarded by other federal agencies, such as DOL. For example, three Chicago-area grantees received DOL grants totaling almost $11 million, including a $3 million grant focusing on welfare-to-work transit services. Under DOT’s suggested funding levels, the Chicago area may receive only $1 million in Access to Jobs funds. But if an Access to Jobs grant is combined with other welfare reform funding for projects supporting transportation, the combined funding may help to address welfare-to-work transportation needs in urban areas. For example, the Chicago area has received federal grants that support transportation for welfare recipients and low-income individuals from both DOL’s $3 million competitive Welfare-to-Work grant program and the Department of Housing and Urban Development’s (HUD) Bridges to Work program. Finally, DOT’s guidance acknowledges that some potential grantees may have developed plans for job access activities whose implementation costs exceed the grant sizes suggested for fiscal year 1999. Such grantees may choose to fund their high-priority activities in the first year and use subsequent grants to fund additional elements of their plans. Applicants may also elect to use their grants for fiscal year 1999 to cover the initial costs of job access activities and use subsequent grants for carry-on activities. According to DOT’s guidance, a multiyear approach will be subject to an annual review of the grantee’s progress as well as the annual budget and appropriations process, among other things. According to DOT officials, potential grantees have expressed an interest in a multiyear approach because they need several years to fully develop, implement, and see results from their welfare-to-work projects. For example, several years may be needed to incorporate new transit service into communities’ existing transportation systems. TEA-21 specifies several factors that the Secretary must consider when evaluating applications for Access to Jobs grants and making final selections. In implementing TEA-21, DOT has synthesized these factors into four essential elements that an application must address: a project’s effectiveness, an area’s need for services, the degree of local coordination, and the project’s financial sustainability. In addition, DOT will give bonus points for other program elements, such as innovation. While the Department announced final guidance on the selection process in October 1998, it is not clear whether these criteria will allow DOT to differentiate sufficiently among the many applications it may receive. DOT’s guidance indicates that in addition to the specified weighted criteria, the Department may consider other factors, such as the geographic distribution of grantees, in awarding the grants. The weighted, merit-based factors may be sufficient to rank projects according to their relative merits; however, if the additional factors are needed, their use may imply that the merit-based criteria are less important than other factors, such as a project’s location, that are not based on merit. TEA-21 requires the Secretary to conduct a national solicitation for grant applications and competitively select grant recipients. For areas with populations of at least 200,000, each area’s metropolitan planning organization will screen the applications. States will perform the same function for areas with populations of less than 200,000. TEA-21 specified eight factors for the Secretary of Transportation to consider when awarding Access to Jobs grants. These factors are the percentage of welfare recipients in the population of the area to be served; the need for transportation services; the extent of coordination with, and the financial commitment of, existing transportation service providers and the state welfare agency; the extent of coordination with the community to be served; the use of existing transportation services; the use of innovative approaches; the existence of regional transportation plans; and the existence of long-term financing strategies. After internal and external discussions, DOT arrived at four “essential” criteria for evaluating and scoring applications: (1) a project’s effectiveness, (2) an area’s need for services, (3) the degree of local coordination, and (4) the project’s financial sustainability. Table 1 shows the weight DOT has assigned to each criterion. In applying the criterion for the project’s effectiveness, DOT officials will attempt to ensure that the approach described in the grant application addresses the transportation problem the grant is trying to alleviate. Similarly, the criterion for need, measured by things such as the number of low-income individuals to be helped and the types of transportation services to be added, is intended to ensure that the application identifies the need for a DOT grant. DOT also believes that its criterion on local coordination will help providers of transportation and human services understand the importance of local coordination to a project’s success. DOT officials noted that it may still be difficult to determine if there is “real,” or merely perfunctory, coordination among these groups. DOT also included a criterion to evaluate an applicant’s ability to obtain sustained funding for a project after the grant funds have been expended. Finally, DOT will give bonus points for applications that use, among other things, innovative approaches, links to employment support services, and employer-based strategies (such as employer-run shuttles). According to DOT officials, because DOT will give bonus points to projects that address how their proposed transportation services will be supported by employment and human services, these points will encourage local coordination. DOT officials developed these criteria by combining legislative criteria and adding other specific components. For example, DOT combined the two legislative criteria for coordination with the one criterion for regional plans to develop one criterion for a coordinated human services/transportation planning process and plan. DOT also added a criterion for employers’ involvement. Finally, DOT added weights to the revised list of criteria and discussed this list with leaders of other federal agencies, including the Department of Health and Human Services (HHS) and DOL. After their discussions, DOT reduced the criteria to the four listed in table 1. DOT staff believe that their weighted evaluation criteria will provide clear breaks among application scores if, because of limited funds, the Department is required to choose among eligible projects. However, DOT’s guidance also indicates that, in addition to the weighted criteria, the Department will consider other factors in selecting grantees—(1) the schedule for implementing the project, (2) the availability of funds, and (3) the geographic distribution of grants throughout the country. When DOL evaluated applications for grants during the first year of its Welfare-to-Work program, it had more applications that were deemed “competitive” (scoring over 80 points) than available funds. Even after using bonus points, DOL had more applications than available money. Accordingly, DOL used additional factors, such as geographic location and rural/urban representation, to help make the final selection. Until DOT receives and begins scoring Access to Jobs grant applications, it will not know if its weighted criteria will be sufficient to distinguish among applications or if it will need to rely on the additional factors it identified, such as geographic dispersion. The Congress recognized the importance of coordinating welfare-to-work activities to help ensure the success of welfare reform. DOT has taken a number of steps to coordinate its Access to Jobs program with the welfare activities of HHS, DOL, and HUD. DOT invited executive-level representatives from these departments to join a policy council to provide a forum for discussing Access to Jobs implementation issues. In addition, before the Access to Jobs program was authorized, the Secretaries of Transportation, HHS, and Labor issued joint guidance to states and localities describing how each department’s programs could be used together to implement transportation services under welfare reform. DOT plans to sustain its working relationship with federal social service agencies by using their expertise to help select grants that will support welfare reform’s goals. Finally, DOT addressed the need for local coordination by requiring grant applicants to submit projects that are the result of a regional planning process that includes representatives from both transit and social service providers. TEA-21 requires DOT to coordinate its Access to Jobs activities with other federal agencies’ welfare-to-work programs. In May 1998, we reported on the role of transportation in welfare reform and recommended that DOT work with other federal agencies, such as HHS, DOL, and HUD, to coordinate all of their welfare-to-work activities. DOT agreed with our recommendation, noting that coordination is important to ensure the success of welfare-to-work programs. First, federal agencies can encourage state and local transportation and human service agencies and other local organizations to combine their expertise to develop comprehensive welfare-to-work projects that include a transportation component. Second, federal agencies need to work together to ensure that their funds for welfare-to-work programs are used to complement, rather than duplicate, one another. Such coordination is particularly important for the recipients of Access to Jobs grants because these grants fund only 50 percent of a project’s total costs. Grantees can use federal funds such as HHS’ TANF funds or DOL’s Welfare-to-Work grants to fund the remaining 50 percent. To facilitate coordination among federal welfare-to-work programs, FTA initiated a policy council in July 1998 and invited representatives from DOL, HHS, HUD, the Office of Management and Budget, and the White House to join. (App. I lists the council’s membership). According to DOT, the council was established to advise the Department on implementing the Access to Jobs program, as well as to keep other agencies apprised of DOT’s actions. Members of the council have worked on a number of issues associated with implementing the Access to Jobs program and have reviewed the program’s draft guidance prior to issuance. In addition, DOT and DOL, according to DOT officials, are working together to ensure that Access to Jobs grantees adhere to statutory labor protection requirements. The Secretaries of Transportation, HHS, and Labor have also worked to coordinate their welfare-to-work programs. In May 1998, the Secretaries issued joint guidance explaining how human service organizations can use HHS’ TANF funds and DOL’s Welfare-to-Work grants to provide transportation services for people moving from welfare to work. For example, the guidance notes that state human service organizations can use TANF funds to provide transit passes for welfare recipients or reimburse TANF recipients for work-related transportation expenses. The guidance also encourages local transportation, workforce development, and social service providers to coordinate their activities to ensure the most efficient use of federal funds. Now that Access to Jobs funds are available, DOT officials said, HHS, DOL, and DOT will issue updated guidance explaining how their welfare-to-work programs can be coordinated. In addition, DOT’s guidance states that the Department will establish an interagency work group to help it review applications for Access to Jobs grants. These applications should include information on how transportation services will be coordinated with social services, such as the job placement activities that DOL provides for TANF recipients. DOT officials expect that staff from other federal agencies like DOL and HHS will be able to help DOT assess the viability of the proposed coordination efforts. In this way, DOT will be able to take advantage of the other agencies’ experience with welfare reform projects to help determine which transportation projects will benefit welfare recipients seeking jobs. Finally, the Congress and DOT believe local coordination among social service and transportation organizations is important for a project’s success. Both the metropolitan planning provisions and the Access to Jobs provisions of TEA-21 emphasize the importance of involving a wide variety of local groups in the coordination of transportation services. For example, TEA-21 states that each Access to Jobs grant project shall be part of a coordinated transportation planning process, involving both public transit and human service agencies. DOT’s Access to Jobs guidance also states that grantees must include transportation and human service groups in their planning process. DOT’s published grant award criteria encourage local coordination by providing 25 points for a coordinated human services/transportation planning process and regional job access transportation plan, as well as bonus points for grant projects linked to employment-related support services. Finally, DOT officials said that they have sought to encourage local coordination through their outreach efforts, including presentations and meetings on TEA-21 and the Access to Jobs program held throughout the country. Evaluation is important because the Congress, program officials, the business community, advocacy groups, and taxpayers need to know if newly designed welfare reform programs, such as the Access to Jobs program, are working. When it announced the program’s guidance in October 1998, DOT provided information on how it would monitor projects funded through the program. Specifically, DOT said that it expects grantees to monitor the performance of their projects and provide DOT with data on four project outputs. However, the data collected by the grantees may not measure the program’s overall performance until DOT establishes goals or benchmarks to evaluate the information it receives from the grantees. Experts say that evaluation is critical in determining the effect of welfare reform. However, an early look at welfare reform initiatives suggests that such evaluations are not routinely done. Transportation experts at the University of California are assessing how public agencies in California charged with developing and/or implementing transportation policies and programs are evaluating transportation efforts in welfare reform. In their project proposal, the experts stated that evaluation was a critical component of welfare-to-work programs; however, few welfare-to-work programs contained an evaluation component. Consequently, the experts concluded that administrators have implemented some welfare-to-work transportation policies and programs without plans to evaluate their effectiveness. Other experts expressed concern about evaluating welfare reform programs before the Subcommittee on Human Resources, House Committee on Ways and Means, in a March 1998 hearing. The hearing focused on how policymakers could be informed of the effects of welfare reform, given the wide variation in program design and the growing number of agencies involved. The Director of the Research Forum on Children, Families, and the New Federalism—an initiative of the National Center for Children in Poverty—was a witness at this hearing. According to the Forum, as new welfare programs are implemented across the country, the conceptual framework and methods must change and adapt; research must be flexible to study diverse combinations of programs, policies, and funding. Since policy and program changes occur frequently, the Forum concluded that research must provide information quickly to be most useful, particularly so that practitioners can identify and address problems early in the process. TEA-21 requires DOT to evaluate the program 2 years after the act’s enactment. In May 1998, we recommended that DOT establish specific objectives, performance criteria, and measurable goals for the Access to Jobs program. DOT concurred with our recommendation. In addition, the Government Performance and Results Act of 1993 (Results Act), enacted to improve the effectiveness of and accountability for federal programs, requires agencies to identify annual performance goals and measures for their program activities. In announcing the Access to Jobs program in October 1998, DOT established two major goals for it—(1) to provide transportation services to assist welfare recipients and low-income persons in gaining access to employment opportunities and (2) to increase collaboration among transportation providers, human service agencies, employers, metropolitan planning organizations, states, and affected communities and individuals. DOT expects grantees to monitor the performance of their Access to Jobs project and to provide the Department with data on (1) how many transportation services the project added (service frequency, hours, and miles); (2) how the target area’s accessibility to jobs and support services improved (i.e., how the percentage of available jobs accessible to the target population by public transportation increased with the program); (3) how many people are using these expanded services; and (4) how the project’s sponsors collaborated. These measures relate specifically to transportation services—not to other related services, such as those matching people to available jobs—and reflect DOT’s philosophy that transportation alone will not ensure successful employment for the target population. However, these steps set up a data collection plan without establishing how the program’s success will be evaluated. DOT’s guidance does not specify key measurable goals for the program, such as increasing by an appropriate percentage the number of jobs accessible by public transportation. As a result, once the data are collected, DOT has no standard for measuring success and no method for determining whether the data are indicative of the program’s success. In responding to our May 1998 report, DOT agreed to revisit and refine its strategic plan as it applies to the Access to Jobs program and to develop performance goals and performance measures for incorporation into the Department’s fiscal year 2000 Performance Plan. While DOT’s activities mark progress towards an evaluation process, DOT has begun to implement the Access to Jobs program without plans for evaluating its effectiveness. According to DOT’s Access to Jobs coordinator, DOT recognizes that evaluation is important to the Access to Jobs program. DOT had included a specific provision on evaluation in its program proposal. But because DOT wanted to distribute the money to start projects as quickly as possible, it chose to save evaluation issues until later. However, DOT is not currently certain how it will analyze the collected data to evaluate the nationwide success of the Access to Jobs program or what additional information it may request from grantees for this purpose. While the program’s guidance is essentially complete for fiscal year 1999, the Department may add further details on performance measurement when it awards funds to the fiscal year 1999 grantees. Department officials said they plan to provide additional guidance on performance indicators for future applicants. Since TEA-21 established the Access to Jobs program in June 1998, DOT has made important strides in developing an overall framework for implementing this new program. The Department has resolved many of the program implementation challenges we cited in our May 1998 report. Specifically, it has made some important decisions about how it will distribute the program’s funds, what criteria it will use to review grant applications, and how it will coordinate the program with other federal agencies’ efforts. However, the Department has not yet fully set forth the methods it will use to evaluate the program’s success, as we recommended in our earlier report. Establishing performance measures for the Access to Jobs program is important because doing so will enable the Department to have benchmarks for evaluating the data it will receive from Access to Jobs grantees. Establishing performance measures will also enable the Department to begin its own legislatively required evaluation of the program’s success. If the Department implements our recommendation, it will establish specific objectives, performance criteria, and measurable goals for this new program and include them in its fiscal year 2000 Performance Plan. Since this plan will be submitted to the Congress in connection with the fiscal year 2000 budget in the spring of 1999, Access to Jobs grantees would be aware of these objectives, criteria, and goals as they began to implement their projects. We provided a draft of this report to DOT for review and comment. We met with DOT officials—including the Acting Director of the Office of Policy, Office of the Secretary, and the coordinator for the Access to Jobs program, Federal Transit Administration—to discuss the Department’s comments on the draft report. Overall, DOT agreed with our findings. However, the officials stated that while the report accurately describes the decisions the Department has made since the program’s inception, it does not sufficiently describe the program’s rapid development. They noted that the program was recently authorized, in June 1998, and they have rapidly made important decisions to ensure that fiscal year 1999 grants are awarded quickly. They also provided the following points to clarify certain aspects of the new program. First, they said that they had conducted extensive outreach efforts intended to provide the public with information on the program’s implementation and to involve nontraditional groups, such as human service organizations and community-based organizations, in the process. Second, DOT officials noted that in addition to coordinating the program at the federal level, they have stressed local coordination as an equally important component of the Access to Jobs program. Officials noted that the program’s guidance should encourage localities to build upon local transportation planning processes as well as increase opportunities to incorporate new players in the planning process. Finally, the officials acknowledged the importance of further developing DOT’s plans to evaluate the program and affirmed that the Department will include performance measures for the program in its fiscal year 2000 Performance Plan. On the basis of DOT’s comments, we included additional information in the report on the Department’s efforts to encourage local coordination and to obtain guidance from transportation and nontraditional partners. DOT had additional technical comments that we incorporated throughout the report, where appropriate. For its review and comment, we also provided DOL with sections of the draft report that specifically dealt with issues pertaining to it. Overall, officials agreed with the information. We incorporated DOL’s technical comments throughout the report, where appropriate. To obtain information on the steps DOT has taken to implement the Access to Jobs program—specifically, to distribute funds and select criteria for awarding grants—we interviewed DOT officials; examined program documentation, preliminary reports, and other descriptive materials; and attended the October 22, 1998, conference in which DOT announced the Access to Jobs program, as well as a September 23, 1998, listening session on TEA-21, sponsored by FTA. To identify the efforts DOT has made to coordinate its work with that of other federal agencies, we interviewed key officials in FTA and DOL and kept abreast of efforts by members of our staff working on related projects. To address the evaluation issue, we interviewed DOT, FTA, and DOL officials; reviewed relevant program documentation; and gathered opinions from selected outside organizations and universities. In addition, we visited the Metropolitan Area Planning Council in Boston, a DOL Welfare-to-Work program grantee, to obtain its views on implementing the Welfare-to-Work program and evaluating its results. We performed our review from June 1998 through November 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to interested congressional committees, the Secretary of Transportation, the Secretary of Labor, and the Administrator of FTA. We will also make copies available to others on request. If you have any questions about this report, please call me at (202) 512-2834. Major contributors to this report were Ruthann Balciunas, Joseph Christoff, Catherine Colwell, and Phyllis Scheinberg. Cynthia Rice, Domestic Policy Council, White House Andrea Kane, Domestic Policy Council, White House Emil Parker, National Economic Council, White House Barbara Chow, Associate Director, Office of Management and Budget Michael Deich, Associate Director, Office of Management and Budget John Monahan, Principal Deputy Assistant Secretary for Children and Families, Department of Health and Human Services Jill Khadduri, Acting Assistant Secretary for Policy Development and Research, Department of Housing and Urban Development Ray Uhalde, Acting Assistant Secretary for Employment and Training, Department of Labor The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO reviewed the Department of Transportation's (DOT) efforts to implement the Access to Jobs program, focusing on DOT's: (1) overall plan to distribute Access to Jobs funds among grantees in urban and rural areas; (2) criteria to award specific Access to Jobs grants to states, localities, and other organizations; (3) efforts to coordinate the Access to Jobs program with other welfare-to-work programs; and (4) proposals to evaluate the program's success. GAO noted that: (1) DOT has decided it will distribute the $75 million available for the program in fiscal year 1999 to as many people as possible by setting suggested limits on the amount areas can receive on the basis of their population levels; (2) under this approach, DOT intends to provide first-year grants that average $1 million for large urban areas and $150,000 for rural areas; (3) DOT will use four key criteria for evaluating grant applications on the basis of their merits; (4) DOT will assess each grant application and assign points on the basis of these criteria, as well as bonus program components such as particularly innovative transportation approaches; (5) whether these criteria will enable DOT to make sufficient distinctions among the many applications it expects is unclear; (6) accordingly, DOT may use other factors; (7) however, DOT may unintentionally suggest that merit-based criteria used to score applications are less important than other factors that are not based on merit; (8) DOT has made efforts to coordinate its Access to Jobs program with other welfare-to-work programs; (9) DOT established a policy council of representatives from four other federal agencies and the White House and it met with local human service organizations; (10) because grantees can use other federal funds to match the DOT's grants, sustained coordination between DOT and other federal agencies, as well as sustained collaboration among local agencies, is critical for ensuring the effective use of federal welfare-to-work programs; (11) as part of its evaluation effort, DOT will require Access to Jobs grantees to collect data on four important program outputs: (a) the number of new and expand transportation services; (b) the number of jobs made accessible by public transportation to the targeted riders; (c) the number of people using the new transportation services; and (d) the level of collaboration achieved; and (12) however, the data alone will not be sufficient to measure the program's overall success because DOT has yet to establish goals or benchmarks against which the cumulative data on new routes, new system users, and newly accessible jobs can be compared. |
Under the authority of the Arms Export Control Act, State regulates and controls arms exports by U.S. companies to help ensure that those exports are consistent with national security and foreign policy interests. This function has been delegated to DDTC within the Bureau of Political- Military Affairs. DDTC’s staffing levels are allocated and funded by State. Funding for other DDTC activities and operations comes from two main sources: (1) appropriated funds that State then allocates to DDTC through the Bureau of Political-Military Affairs, and (2) registration fees, which DDTC is authorized to retain to help fund certain activities related to licensing, enforcement, and compliance. Exporters submit arms export cases via paper or electronically through D- Trade, DDTC’s Web-based electronic processing system. Cases include permanent arms export licenses, temporary arms exports or imports, agreements between U.S. industry and foreign entities to provide technical assistance or manufacturing capability, requests for amendments to existing licenses or agreements, and requests to determine commodity jurisdiction. Cases vary in terms of complexity and time to process. For example, agreements generally take longer than other cases because they are complex, require substantial work by licensing officers, and often require interagency review. Once cases are received, DDTC assigns them to one of five teams, based on commodity categories: firearms, aircraft, missile and spacecraft, military electronics, and military vehicles and naval vessels. Team leaders, in turn, assign cases to a licensing officer, who conducts an initial review to determine whether the case needs a referral to an agency, such as DOD’s DTSA, and/or another State bureau for additional review—or whether the case can be reviewed and analyzed internally. Either way, the licensing officer conducts the final review and determines the final action. Final action on cases can only be taken by licensing officers with designated signature authority, which DDTC officials stated takes an average of 18 months of training and experience to obtain. Prior to approving cases that involve exports meeting statutory dollar thresholds and involving selected countries, State must notify Congress. Figure 1 depicts DDTC’s licensing review process. In addition to reviewing arms export cases, DDTC conducts outreach to educate industry about export controls and promote compliance with laws and regulations. Our analysis shows several trends have emerged in the processing of arms export cases, which indicate the system is under stress. First, the number of arms export cases processed by DDTC has increased since fiscal year 2003. Most of the increase was for licenses for permanent export. Second, processing times almost doubled from fiscal year 2003 to 2006. Third, the number of open arms cases has increased since fiscal year 2003. While extraordinary actions taken by DDTC to address the mounting number of open cases achieved short-term gains, these actions are not sustainable because they strained personnel and involved deferring other mission- related activities. Between fiscal years 2003 and 2006, the arms export caseload processed by DDTC has increased 20 percent, from about 55,000 to 65,000. DDTC officials attributed this growth to several possible factors, including increased globalization of the defense industry and an overall increase in arms exports. In addition, our analysis of the cases processed by DDTC shows that permanent export licenses constituted about two-thirds of all cases, thereby accounting for the major part of DDTC’s caseload activity. For these cases, the greatest increase occurred in aircraft and related components among the various types of controlled commodities. Our analysis also showed a high concentration of cases by country of destination—almost half consisted of seven countries, with 25 percent involving Japan and the United Kingdom. In contrast, we found cases are not concentrated by major defense arms exporting companies. In fiscal year 2006, only 21 percent of cases processed involved the top 10 arms exporting firms. (For additional analyses of cases, including type of case, commodities, countries, and expedited cases, see app. II.) Overall, processing times for all types of cases have increased. Between fiscal years 2003 and 2006, median processing times nearly doubled, from 14 days to 26 days. Some types of cases take longer to process than others, in part because of their complexity. For example, in fiscal year 2006, technical assistance agreements took a median of 94 days to process. However, these agreements made up less than 9 percent of the cases processed for that year, and therefore may not be a significant driver of overall increased processing times. Permanent exports, which constituted the majority of cases, took a median of 25 days to process in fiscal year 2006. For nonreferred cases, which made up about two-thirds of all cases, DDTC’s in-house processing times increased significantly. For example, between fiscal years 2003 and 2006, median processing times for nonreferred cases increased from 8 to 19 days. For the first 7 months of fiscal year 2007, the median processing time was 17 days. Moreover, the number of nonreferred permanent export license cases taking longer than 2 weeks to process increased from 26 percent in fiscal year 2003 to 72 percent in fiscal year 2006. The increase in the percentage of nonreferred agreements taking longer than 2 weeks was even more dramatic—increasing from about 13 percent to 87 percent (see fig. 2). Processing times for cases referred outside of DDTC for review, which made up about one-third of all cases, have also increased. For example, between fiscal years 2003 and 2006, median processing times increased from 49 to 61 days. For the first 7 months of fiscal year 2007, the median processing time was 50 days. Moreover, in fiscal year 2006, 70 percent of referred agreement cases, which tend to take longer to process than other cases, took longer than 12 weeks to process, compared to 11 percent in fiscal year 2003. In contrast, processing times for permanent export license cases referred outside of DDTC have held relatively steady for the past several years (see fig. 3). The number of open arms export cases has also increased because DDTC has received cases at a higher rate than it processed them. Open cases increased from about 5,000 in October 2002 to about 7,500 in April 2007, reaching a high of more than 10,000 open cases in September 2006 (see fig. 4). At the beginning of fiscal year 2007, DDTC launched its “winter offensive,” a campaign to reduce the growing number of open cases. Through extraordinary measures—such as extending work hours; canceling staff training, meetings, and industry outreach; and pulling available staff from other duties to process cases—DDTC was able to reduce the number of open cases by 40 percent in 3 months. However, DDTC officials told us that these measures were not sustainable for the long term because they put a strain on personnel and deferred mission-related activities. Not only are these short-term measures unsustainable, they may have unintended adverse consequences. A DDTC official stated the short-term emphasis during the winter offensive was necessary to reduce the number of open cases but may have the unanticipated effect of shifting the focus from the mission of protecting U.S. national security and promoting foreign policy interests to simply closing cases to reduce the queue of open cases. While some blips in the trends can be attributed to onetime events or efforts, such as the winter offensive, the overall trends of increased processing times and open cases are affected by several factors, including procedural inefficiencies, electronic processing system shortcomings, and human capital challenges. DDTC does not perform systematic assessments to identify overall trends and root causes, which could lead to sustainable solutions. While DDTC has established a time frame goal in its guidelines for referring cases outside of DDTC, it has not met this goal. Specifically, the guidelines indicate that DDTC licensing officers should refer cases to other agencies or State bureaus within 10 days of receipt by the licensing officer. Our analysis shows that DDTC has taken increasingly longer to refer cases. As shown in table 1, the median days from when the case was received to outside referral increased from 7 days in fiscal year 2003 to 20 days during the first 7 months of fiscal year 2007. In contrast, the median number of days cases spent outside of DDTC for referral has decreased over the same period from 31 to 18 days. DDTC has not established procedures to promptly screen most cases to identify those that need outside referral. As a result, cases often languish in a team leader’s or licensing officer’s queue awaiting assignment or initial review. In contrast, DOD’s DTSA—which receives the majority of cases referred by DDTC—uses a team to screen cases daily to determine if cases should be reviewed solely at DTSA or whether they should be referred to military services or other DOD components for further review. In making the decision to refer cases, the team considers such factors as the existence of precedent cases, the level of technology, and the circumstances of the transaction. According to DTSA officials, this process allows them to expedite certain cases and to focus efforts on more complicated cases involving commodities or capabilities not previously exported or presenting special concerns. For referred cases, DTSA officials told us the daily screening process allows them to make the referral in less than 2 days on average. According to DDTC officials, they have recently established a process for promptly referring technical assistance agreements outside DDTC but have not done so for other types of cases. Until recently, DDTC lacked procedures for expediting certain cases. Specifically, the Ronald W. Reagan National Defense Authorization Act for Fiscal Year 2005, enacted in 2004, requires the expeditious processing of arms export cases for the United Kingdom and Australia by State, in consultation with DOD. Although the legislation does not specify a processing time frame goal, in fiscal year 2006, the processing times for United Kingdom and Australia cases was 21 days, which did not differ significantly from the processing times for other allied countries. (For additional analysis of processing times by country, see app. II.) DDTC officials told us they have been working with DOD on developing procedures to expedite processing for United Kingdom and Australia cases, and recently established a process for doing so. The establishment of a new automated system for processing cases had been cited by State officials as its most significant effort to improve efficiency. However, the anticipated efficiencies have not been realized. Our analysis of processing times shows no significant difference between like types of cases submitted electronically versus paper submissions. For example, in fiscal year 2006, median processing time for permanent export cases submitted through D-Trade was 23 days versus 25 for paper submissions. Although 77 percent of cases are now received electronically through D-Trade, its implementation has been problematic and electronic processing has not been the promised panacea for improving processing times. According to DDTC officials, poorly defined system requirements and a rush to production led to technical glitches and performance problems. For example, in January 2007, DDTC released a new version of D-Trade, but because of software problems, cases received could not be processed. As a result, the new version was shut down after 3 days, requiring DDTC to revert to the previous version. The 1,300 cases received during the 3-day period had to be resubmitted by exporters, resulting in some rework and an increase in the number of open cases. DDTC has relied on an information technology solution without reengineering the underlying processes or without developing tools to facilitate the licensing officer’s job. In 2001, we reported information systems that simply use technology to do the same work, the same way, but only faster typically fail or reach only a fraction of their potential. While defense industry officials told us that D-Trade simplifies the process for submitting cases and receiving final authorizations, the system lacks tools to aid licensing officers to process cases more efficiently. For example, the system has limited capabilities to reference precedent cases that would allow licensing officers to leverage work previously done on similar cases. The system also lacks other tools, such as automated access to regulations, guidance, or other information that may facilitate processing. DDTC officials said they expect future versions of D-Trade will incorporate tools to help licensing officers process cases more efficiently. The fundamental work of reviewing and analyzing arms export cases requires an adequate number of personnel with the right skills and knowledge—especially given the continued rise in caseload. However, ensuring a sufficient workforce with the needed skills and knowledge has been a challenge for DDTC because of staffing instabilities. For example, the number of licensing officers on board has fluctuated over recent years and was at the same level in fiscal years 2003 and 2006, yet the number of cases processed increased about 20 percent during the same period (see table 2). DDTC officials have acknowledged that more work is falling on fewer experienced staff. According to these officials, in the summer of 2006, about one-half of licensing officers had less than 1 year of experience, and many did not have the signature authority needed to take final action on cases. For example, early in 2007, one team had three licensing officers but only the team leader had the authority to approve or deny cases. Although the staff could perform research, the team leader had to review all cases before final action could be taken. Staffing instabilities have also been affected by fluctuating levels of military officers detailed to DDTC from DOD, who are generally assigned to review agreements. The Foreign Relations Authorization Act for Fiscal Year 2003 states the Secretary of Defense should ensure that 10 military officers are continuously detailed to DDTC. However, the number of officers DOD detailed to DDTC has fluctuated over recent years. In fiscal year 2006, the number of military officers detailed to DDTC ranged from 3 to 7. From fiscal year 2005 to 2006, processing times for agreements nearly doubled from 48 days to 94 days. In fiscal year 2007, the number of military officers increased to 8, and by April 2007, processing times for agreements was 72 days. To help address the potential adverse effect of insufficient numbers of military officers, DDTC began assigning additional civilian licensing officers to process agreements in 2006. DDTC management does not systematically assess licensing data to identify inefficiencies. Analysis of these data could allow DDTC to more effectively structure its workforce and manage workload. Instead, DDTC management reviews reports consisting of aggregate information on received, processed, and open cases to determine the status of cases and licensing officer productivity. However, DDTC cannot identify the drivers of the workload or bottlenecks in the process from these status reports. Using DDTC’s data, we conducted analyses of factors that can drive workload, such as type of cases, commodities, countries, and profiles of the exporter base (see app. II). Such analyses could provide insights to managers on ways to reduce workload, structure the workforce, target outreach with industry, and reengineer processes. For example: By examining caseload by type of commodity, DDTC could assess the impact on workload of potential changes to licensing requirements such as application of or modification to exemptions—if such changes are warranted given the national security risk and foreign policy interests. Given DDTC’s current organizational structure of teams associated with particular commodities, DDTC could examine its licensing data to determine if there is a concentration of cases by factors other than commodity, such as country. Such analyses could permit DDTC to consider possible efficiencies related to aligning its workforce to where its workload is concentrated. Also, by monitoring processing times for factors driving the workload, DDTC could take corrective actions and reallocate resources before processing times for some types of cases become a problem. By assessing the volume and type of case submissions by exporters, DDTC could better target its industry education and outreach activities to help ensure the quality of submissions and compliance with export control law and regulations. DDTC could analyze the processing times associated with steps in the licensing process—such as time it takes to refer cases—to assess the flow of cases through the review process and identify possible bottlenecks or inefficiencies in the process. While DDTC has taken actions to achieve some short-term gains to growing problems in its processing of cases, DDTC managers lack systematic analyses to identify root causes and develop sustainable solutions. Federal managers, including those at DDTC, need to monitor and assess their systems to ensure that they are well designed and efficiently operated, are appropriately updated to meet changing conditions, and provide reasonable assurance that the objectives of the agency are being achieved. The licensing of arms exports is a key component of the U.S. export control system to help ensure arms do not fall into the wrong hands. Licensing officers are challenged to weigh national security and foreign policy interests on thousands of cases a year while allowing legitimate defense trade to occur in an efficient manner. However, systemic inefficiencies in arms export licensing are straining the system and may be diminishing licensing officers’ capacity to process cases efficiently and effectively. To date, DDTC has not comprehensively analyzed its export processing system to identify causes of inefficiencies and needed actions to address them. Unless DDTC systematically analyzes its licensing data in terms of drivers of workload and steps in the process, it will continue to ineffectively and inefficiently manage its processes, workload, and resources. To improve the efficiency of processing arms export cases, we recommend that the Secretary of State direct the Deputy Assistant Secretary of the Directorate of Defense Trade Controls to conduct systematic analyses of licensing data to assess root causes of inefficiencies and to identify and implement actions to better manage workload, reexamine its processes, determine the most effective workforce structure, and target industry outreach. We provided a draft of this report to the Departments of State and Defense and for their review and comment. DOD did not comment on our draft. State provided written comments that are reprinted in appendix III. In commenting on the draft, State concurred with our recommendation and recognized the need for additional systematic analyses of data to achieve greater efficiencies. State noted that the report does not reflect the impact of three recent initiatives, which according to State resulted in a 30 percent reduction of open cases from April to October 2007. Because our analysis was through April 2007, we are not able to verify what effects—both short- and long-term—the initiatives have had on the number of open cases. Until State engages in a continual process of systematically analyzing its licensing data, it will have no assurance that current or future initiatives will address the underlying causes and achieve sustainable improvements to the processing of arms export cases. As agreed with your office, unless you publicly release its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees, as well as the Secretaries of State and Defense; the Director, Office of Management and Budget; and the Assistant to the President for National Security Affairs. In addition, this report will be made available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 or [email protected] if you or your staff have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Others making key contributions to this report are listed in appendix IV. To determine trends in arms export case processing by State’s Directorate of Defense Trade Controls (DDTC), we obtained State’s arms export case data for fiscal year 2003 through April 30, 2007. We obtained data from State’s paper-based “legacy” system and its D-Trade system—a Web-based electronic processing system. We merged the data from these two systems and created a single Microsoft Access database to determine trends in caseload, cases processed, open cases, and processing times. Our analysis did not include cases that were approved and then subsequently suspended or revoked because this action takes place after the original cases were closed, and including these cases would thus skew the results. Processing time represents the median number of calendar days between receipt of a case and the final action. Open cases are those cases that were received by DDTC but on which no final action has been taken. To obtain an overview of the data systems used to accept and process license cases at DDTC, we interviewed State officials responsible for information technology management. We assessed data reliability by obtaining and reviewing system documentation and performing electronic testing of data, and determined the data to be sufficiently reliable for our intended purposes. We also analyzed the data by type of license, commodities, countries, cases referred, cases in support of ongoing war efforts, exporters, and case final actions. To identify factors contributing to trends in processing times and open cases, we interviewed officials from DDTC, State bureaus to which cases are most frequently referred, the Department of Defense’s (DOD) Defense Technology Security Administration (DTSA), and selected arms exporters. To understand the process of reviewing arms export cases referred from DDTC, we obtained and reviewed DDTC case review guidelines, applicable regulations, and laws. We compared DDTC procedures with DTSA case processing procedures. To determine the status of D-Trade, we obtained briefings and systems documentation and discussed problems with implementing the electronic processing system and future development plans with cognizant officials. We also compared processing times for D-Trade and paper processing by calculating processing times for permanent exports, which are processed through both systems. We obtained and analyzed data on DDTC funding and staffing levels. We also obtained and reviewed DDTC status reports used to monitor workload, processing times, and open cases. This appendix provides additional analyses of licensing data related to the composition of cases closed and case outcomes. Specifically, we analyzed the data in terms of types of cases, commodities, countries of destination, cases in support of ongoing war efforts, exporters, and case final actions. Of the 14 case types processed by DDTC, licenses for permanent exports made up the majority of cases. From fiscal year 2003 to 2006, the percentage of licenses for permanent exports increased from about 62 percent to over 66 percent of all cases, as shown in table 3. Processing times varied by type of case, as shown in table 4. For example, in fiscal year 2006, technical assistance agreements took a median of 94 days to process, while licenses for permanent exports, the most common case type, took 25 days, and amendments to existing licenses took 13 days to process. For cases involving permanent export licenses, aircraft and related components were the primary driver of increased cases, increasing about 44 percent, from about 9,800 in fiscal year 2003 to over 14,000 in fiscal year 2006, as shown in table 5. Processing times for permanent export licenses also varied by type of commodity group and were increasing for most commodities from fiscal years 2003 through 2006, with missile and spacecraft taking the longest to process. Several commodity groups saw reductions in processing times during the first 7 months of fiscal year 2007, including a significant reduction in missile and spacecraft. Processing times for aircraft increased during each period. Arms export cases are relatively concentrated by country of destination. As shown in table 6, in fiscal year 2006, cases identifying Japan and the United Kingdom as destination countries represented about 25 percent of all cases. Processing times, with the exception of those for Israel, are similar for the top countries of destination. DDTC has procedures to expedite cases submitted in support of ongoing war efforts including Operation Enduring Freedom (OEF) or Operation Iraqi Freedom (OIF). These cases did not represent a significant caseload—-ranging from 0.8 percent to 1.5 percent from fiscal year 2003 through 2006. Median processing times for these cases ranged from 8 to 11 days, as shown in table 7. The number of exporters registered with DDTC that submitted cases increased about 13 percent, from almost 2,500 in fiscal year 2003 to almost 2,800 in fiscal year 2006. However, most exporters submitted relatively few applications, as shown in table 8. In contrast, some exporters submit thousands of applications in a given year. In terms of all cases received, the percentage of cases received from the top 10 exporters in terms of cases submitted ranged from about 19 to 26 percent, as shown in table 9. As shown in table 10, most cases processed by DDTC are approved or approved with condition, known as a proviso. Very few cases are denied. The number of cases returned without action increased from about 13 percent in fiscal year 2003 to over 17 percent in the first 7 months of fiscal year 2007. In addition to the contact named above, Anne-Marie Lasowski, Assistant Director; Bradley Terry; Peter Zwanzig; Jacqueline Wade; Arthur James, Jr.; Julia Kennon; Karen Sloan; and Alyssa Weir made key contributions to this report. Export Controls: Vulnerabilities and Inefficiencies Undermine System’s Ability to Protect U.S. Interests. GAO-07-1135T. Washington, D.C.: July 26, 2007. High Risk Series: An Update. GAO-07-310. Washington, D.C.: January, 2007. Export Controls: Challenges Exist in Enforcement of an Inherently Complex System. GAO-07-265. Washington, D.C.: December 20, 2006. Defense Technologies: DOD’s Critical Technologies Lists Rarely Inform Export Control and Other Policy Decisions. GAO-06-793. Washington, D.C.: July 28, 2006. Export Controls: Improvements to Commerce’s Dual-Use System Needed to Ensure Protection of U.S. Interests in the Post-9/11 Environment. GAO-06-638. Washington, D.C.: June 26, 2006. Defense Trade: Arms Export Control Vulnerabilities and Inefficiencies in the Post-9/11 Security Environment. GAO-05-468R. Washington, D.C.: April 7, 2005. Defense Trade: Arms Export Control System in the Post-9/11 Environment. GAO-05-234. Washington, D.C.: February 16, 2005. Export Controls: Processes for Determining Proper Control of Defense- Related Items Need Improvement. GAO-02-996. Washington, D.C.: September 20, 2002. Export Controls: Department of Commerce Controls over Transfers of Technology to Foreign Nationals Need Improvement. GAO-02-972. Washington, D.C.: September 6, 2002. Export Controls: More Thorough Analysis Needed to Justify Changes in High Performance Computer Controls. GAO-02-892. Washington, D.C.: August 2, 2002. Defense Trade: Lessons to Be Learned from the Country Export Exemption. GAO-02-63. Washington, D.C.: March 29, 2002. Export Controls: Issues to Consider in Authorizing a New Export Administration Act. GAO-02-468T. Washington, D.C.: February 28, 2002. Export Controls: State and Commerce Department License Review Times Are Similar. GAO-01-528. Washington, D.C.: June 1, 2001. Export Controls: Reengineering Business Processes Can Improve Efficiency of State Department License Reviews. GAO-02-203. Washington, D.C.: December 31, 2001. Export Controls: System for Controlling Exports of High Performance Computing Is Ineffective. GAO-01-10. Washington, D.C.: December 18, 2000. Defense Trade: Analysis of Support for Recent Initiatives. GAO/NSIAD-00-191. Washington, D.C.: August 31, 2000. Defense Trade: Status of the Department of Defense’s Initiatives on Defense Cooperation. GAO/NSIAD-00-190R. Washington, D.C.: July 19, 2000. Export Controls: Better Interagency Coordination Needed on Satellite Exports. GAO/NSIAD-99-182. Washington, D.C.: September 17, 1999. Export Controls: Some Controls over Missile-Related Technology Exports to China Are Weak. GAO/NSIAD-95-82. Washington, D.C.: April 17, 1995. | To regulate the export of billions of dollars worth of arms to foreign governments and companies, the Department of State's (State) Directorate of Defense Trade Controls (DDTC) reviews and authorizes export licenses and other arms export cases. While such reviews require time to consider national security and foreign policy interests, the U.S. defense industry and some foreign government purchasers have expressed concern that the U.S. export control process is unnecessarily time-consuming. In 2005, GAO reported that processing times for arms export cases had increased despite State efforts to streamline its process. GAO was asked to (1) describe recent trends in the processing of arms export cases and (2) identify factors that have contributed to these trends. To conduct its work, GAO obtained and analyzed State arms export case data for fiscal year 2003 through April 30, 2007; reviewed relevant laws, regulations, and guidelines, as well as DDTC funding and staffing information; and interviewed State and Department of Defense officials and selected arms exporters. Three key trends indicate that DDTC's arms export licensing process is under stress. First, the number of arms export cases processed by DDTC increased 20 percent between fiscal years 2003 and 2006. Most of this increase was for licenses for permanent export. Second, during the same period, median processing times almost doubled. Third, the number of open arms export cases increased 50 percent from about 5,000 in October 2002 to about 7,500 in April 2007, with a high of more than 10,000 cases in September 2006. At the beginning of fiscal year 2007, DDTC launched a campaign to reduce the growing number of open cases. Through extraordinary measures--such as canceling staff training, meetings, and industry outreach, and pulling available staff from other duties to process cases--DDTC was able to cut the number of open cases by 40 percent in 3 months. However, such measures are not sustainable in the long term, do not address underlying inefficiencies and problems, and may have negative unintended consequences for the mission. While some blips in the trends can be attributed to onetime events or efforts--such as DDTC's campaign to reduce open cases--procedural inefficiencies, electronic processing system shortcomings, and human capital challenges underlie the overall trends. For example, GAO's analysis shows that DDTC is taking increasingly longer to refer cases to other agencies or State bureaus for additional review--from 7 days in fiscal year 2003 to 20 days during the first 7 months of fiscal year 2007. In addition, implementation of DDTC's electronic system for submitting applications has been problematic, and electronic processing has not been the promised panacea for improving processing times. DDTC does not perform systematic assessments to identify root causes of increased workload, processing times, and open cases and, in turn, develop sustainable solutions. |
An EHR is a digital version of a patient’s paper medical record or chart. EHRs ideally make information available instantly and securely to authorized users. An EHR can contain the medical and treatment history of a patient, diagnoses, medications, treatment plans, immunization dates, allergies, radiology images, and laboratory and test results. An EHR can also give a provider access to evidence-based tools for making decisions about a patient’s care and can automate certain workflows. EHR system software is typically purchased by providers (such as physicians, hospitals, and health systems) from vendors that develop the systems. When EHR systems are interoperable, information can be exchanged—sent from one provider to another—and then seamlessly integrated into the receiving provider’s EHR system, allowing the provider to use that health information to inform clinical care. HHS and others view EHR system interoperability as a necessary step toward transforming health care into a system that can achieve goals of improved quality, efficiency, and patient safety. For example, use of interoperable EHR systems could better enable health care providers to view results from diagnostic procedures conducted by other providers to avoid duplication; evaluate test results and treatment outcomes over time regardless of where the care was provided to better understand a patient’s medical history; share a basic set of patient information with specialists during referrals and receive updated information after the patient’s visit with the specialist to improve care coordination; view complete medication lists to reduce the chance of duplicate therapy, drug interactions, medication abuse, and other adverse drug events; and identify important information, such as allergies or preexisting conditions, for unfamiliar patients during emergency treatment to reduce the risk of adverse events. Health data standards are technical requirements used to, among other things, facilitate health information exchange and interoperability of systems, including EHR systems. Such standards consist of terminology and technical specifications that, when adopted by multiple entities, facilitate the exchange and interoperability of health information. Health data standards include, for example, standardized language for prescriptions and laboratory testing. Standards define how information is packaged and communicated from one entity to another, setting the language, structure, and data types required for integration between the systems. Standards generally have been developed by nonfederal standard development organizations and are accompanied by implementation guides, which can help ensure that standards are implemented uniformly. Consistent implementation of the standards by the vendors that build and sell EHR systems and by providers who use these systems is necessary for interoperability. The Medicare and Medicaid EHR Incentive Programs are intended to help increase the adoption and meaningful use of EHRs by providing incentive payments for providers—that is, certain hospitals and health care professionals such as physicians—who participate in Medicare and Medicaid, and later imposing payment adjustments, also referred to as penalties, on those Medicare providers that do not meet meaningful use requirements for a program year. Within HHS, ONC and the Centers for Medicare & Medicaid Services (CMS) develop the programs’ requirements. CMS establishes specific requirements providers must meet to qualify for incentive payments. Some of these requirements include the exchange of health information, which is a component of interoperability. ONC identifies health data standards and technical specifications for EHR systems and certifies EHR systems used by providers in the program to help ensure that providers implement a system that offers a minimum level of technological capability, functionality, and security. In order for an EHR system to be certified, it must adhere to requirements related to health information exchange, among other capabilities. The Health Insurance Portability and Accountability Act (HIPAA) of 1996 and its implementing regulations, the Privacy Rule, regulate covered providers’ use and disclosure of personal health information. Providers may also be subject to additional state privacy rules, which can be more stringent than HIPAA requirements or standards. For example, states can set requirements around default practices for health information exchange. Specifically, states that require patients to “opt-in” to health information exchange do not allow the sharing of health information unless patients affirmatively consent to share health information. States with “opt-out” policies around health information exchange permit, by default, the automatic sharing of patient health information, and patients must affirmatively express their preference to not have information shared if they do not want it exchanged. The initiatives we reviewed vary in their efforts to achieve or facilitate interoperability, including (1) the primary products or services they offer (e.g., a network or guidance for implementing standards), (2) the types of electronic systems the initiatives are working to make interoperable, (3) the cost of the initiatives’ products or services, (4) the geographic areas served by the initiatives, (5) the extent to which initiatives facilitate patient access to their health information, (6) the stakeholder groups that are members of the initiatives, and (7) the sources of funding for the initiatives. The majority of the initiatives we selected are works in progress, meaning that they are relatively new and therefore still in the process of developing, or encouraging others to adopt, their products or services. Of the 18 initiatives we selected, 10 began after January 2013. Representatives from 6 of the initiatives said that their primary products or services were available in some areas or available on a limited scale; however, according to the representatives, none of their products or services were widely available or widely used at the time of our review. For example, representatives from the 4 initiatives associated with HIE organizations said that they are actively facilitating interoperability, but this interoperability is confined to a single state or region. The 2 other initiatives have products available, but according to representatives, the initiatives are in the very early stages of deploying those products and anticipate that use of their products will increase by 2016. Representatives from 7 of the initiatives stated that their products or services are currently being developed and would not be available until the end of 2015 or sometime in 2016. Stakeholders and initiative representatives we interviewed described five key challenges to EHR interoperability, and initiative representatives described how they are working to address these challenges using different approaches. Initiative representatives also identified other issues beyond the scope of their initiatives that they say need to be addressed in order to move nationwide EHR interoperability forward. Stakeholders and representatives from the selected EHR initiatives described five key challenges to achieving EHR interoperability: (1) insufficiencies in standards for EHR interoperability, (2) variation in state privacy rules, (3) accurately matching patients’ health records, (4) costs associated with interoperability, and (5) need for governance and trust among entities. While standards for electronically exchanging information among EHR systems exist, stakeholders and initiative representatives said that these standards are not sufficient for achieving EHR interoperability. This challenge stems from the fact that some standards are not specific enough and, as a result, the systems that implement these standards may not be interoperable. According to some stakeholders, some standards allow EHR systems to use different formats and terminology when exchanging data. However, this resulting variability prevents the receiving system from processing the information and properly integrating it into the patient record; in other words, the systems are not interoperable. Information that is electronically exchanged from one provider to another must adhere to the same standards, and these standards must be implemented uniformly, in order for the information to be interpreted and used in EHRs, thereby enabling interoperability. Stakeholders and initiative representatives said that exchanging health information with providers in other states, which is necessary for nationwide EHR interoperability, can be difficult. This challenge exists because of variations in privacy rules from state to state, especially variation in laws pertaining to patient consent for sharing health information. According to a representative from one initiative, providers in opt-in states may be hesitant to exchange health information with providers in opt-out states if the providers lack assurance that the patients have explicitly consented to the exchange. This challenge may be more pronounced when exchanging certain types of sensitive information, such as mental health information or HIV status, among providers in different states. Some states require additional patient consent when exchanging such information. A representative from one initiative explained that current digital methods for exchange do not provide assurance that sensitive information is protected in accordance with privacy rules. According to this initiative representative, the sensitive information that is subject to more stringent privacy rules could be inadvertently aggregated with other health information and exchanged without the patient’s consent, thereby violating privacy rules. Representatives from one initiative noted that they specifically do not include any mental health information in electronic health information exchange, even with patient consent, because of concerns about inadvertently violating privacy rules. Stakeholders and initiative representatives said that another key challenge to EHR interoperability is accurately matching patients’ health records that are stored in different systems. This challenge exists because many EHR systems use demographic information, such as a patient’s name and date of birth, to match different health records for a given patient held by different providers. As we previously reported, demographic variables do not always yield accurate results because, for example, there could be more than one patient with the same information. In addition, providers may not collect and use the same demographic variables for matching. For example, one initiative representative explained that a recent effort to achieve interoperability with another organization stalled because the other organization relies on a patient’s social security number for patient matching, but the initiative does not collect social security numbers for its patients. In addition, some methods to match records for the same patient across providers can fail because of differences across EHR systems in data formats or because of missing data from or inaccurate data in some health records. Stakeholders and initiative representatives said that the costs associated with achieving interoperability can be prohibitive for providers. This challenge exists in part because of the high cost of EHR customization and legal fees associated with interoperability. One stakeholder said that many EHR systems require multiple customized interfaces—which are specially designed connections to other health IT systems—in order to facilitate interoperability with other providers and organizations. The costs associated with these customized interfaces are typically paid by the EHR buyers (i.e., providers). Representatives from some initiatives added that the legal fees associated with establishing EHR interoperability can also be significant. For example, as the next section describes, certain agreements may need to be established as a precondition to interoperability. Stakeholders and initiative representatives said that it can be challenging to establish the governance and trust among entities that are needed to achieve interoperability. These governance practices can include organizational policies related to privacy, information security, data use, technical standards, and other issues that affect the exchange of information across organizational boundaries. One stakeholder noted that it is important to establish agreements to ensure that entities share information openly with all other participants in a network. However, representatives from one initiative noted that there is some risk that the various agreements developed by different EHR initiatives could result in conflicting organizational policies. For example, the representative explained that participants in one initiative cannot participate in another initiative because the initiatives’ organizational privacy policies do not align. Representatives from all 18 of the initiatives we reviewed said they are working to address these key challenges using different approaches (see table 1). Fifteen of the 18 initiatives are working to address insufficient standards needed to achieve EHR interoperability. Representatives from 7 of the 15 initiatives told us that they are developing instructions for implementing standards in ways that enhance interoperability. For example, 1 initiative provides precise definitions of how different standards can be implemented to meet specific clinical needs, such as locating information about a patient that is contained in other organizations’ EHR systems. This initiative also provides an opportunity for vendors to test that they have successfully incorporated these instructions into their products. Four of these 7 initiatives are working to develop instructions for implementing existing standards, and 3 are working to develop instructions for implementing a new standard that representatives said will improve systems’ ability to interoperate. Representatives from 8 of the 15 initiatives told us that they require organizations to adopt common technical requirements as a condition of participation in the initiative. For example, representatives from 1 initiative said that it requires participants to adopt specific implementations of standards that enable functions like sharing health care information between entities. Representatives from 5 of the 8 initiatives told us that they also require participants to test their systems to confirm that the systems are able to interoperate with the systems of other initiative participants. For example, 1 initiative provides an online testing tool that vendors and providers must use to assess and demonstrate interoperability before joining the initiative. In addition to requiring agreement on technical requirements, 2 of the 8 initiatives said that they provide semantic normalization—that is, translation of data between different formats and terminology—in order to accommodate variation between organizations exchanging information and enable interoperability. One initiative representative predicted that there will always be a need for some semantic normalization as part of interoperability because it is unlikely that all organizations will adopt the same standards in exactly the same way. Representatives from initiatives expressed differing opinions on additional actions that are needed to fully address the challenge of insufficient standards, including the role of the federal government in addressing the issue. Representatives from three initiatives said that there is a need for federal leadership on standards and their implementation. Conversely, representatives from two initiatives said that current federal work on standards duplicates existing private sector efforts, and representatives from a third initiative expressed concern that the government is not flexible enough to account for changing technologies and should therefore leave this issue to the private sector. Representatives from three initiatives we spoke with said that standards should be tested through pilots before they are incorporated into national requirements, and suggested that this testing of standards could be an appropriate role for the federal government. Eleven of the 18 initiatives we selected are working to address the challenges encountered because of variation in state privacy rules. Representatives from 6 of these 11 initiatives said that their initiatives are working to improve providers’ ability to obtain and track patient consent and other patient preferences electronically. This is important because some state privacy rules require affirmative patient consent to enable exchange. Three of these 6 initiatives are focused on improving patients’ ability to document their consent to exchange and grant access to their personal health information. For example, 1 initiative is developing a framework that allows patients to document digitally whether they consent to information sharing and to incorporate this documentation in providers’ health IT systems. Another initiative is working to enable patient control of their information through patient-mediated exchange, which allows patients to aggregate their health records into a PHR and electronically grant providers access to these records according to the patient’s preferences. Three other initiatives told us that they are using or plan to develop technology that allows providers to share only portions of a patient’s health record, which would allow providers to ensure that they send only information that they are authorized to share. Representatives from 5 of the 11 initiatives told us that their initiative incorporated specific privacy policies into agreements signed by participants, including policies governing patient consent and access to their health records. For example, 1 nationwide initiative requires participants to obtain affirmative consent from patients before their information can be exchanged using the initiative’s product. Representatives from several initiatives identified additional actions that are needed to fully address this challenge. Specifically, six representatives said that education on or federal guidance about the application of privacy laws and liability issues would reduce confusion and increase willingness to exchange information across state lines. Representatives from one initiative noted that the difference between states that require patients to affirmatively consent to sharing some or all of their medical information and states that do not have this requirement is a significant barrier to interoperability, though representatives from another initiative said that this difference is less of an issue if providers are educated in the laws of their state. Thirteen of the 18 initiatives are working to address the challenge of accurately matching patients’ health records. Representatives from 4 of the 13 initiatives said that their initiatives are working to improve the quality of the data or types of information used for matching patients’ health records. For example, 2 initiatives are working to establish standard data formats for health IT systems, which may reduce differences in demographic data for the same patient, thus improving the accuracy of matching. Representatives from 2 other initiatives told us that their initiative is working to create a list of patient attributes (e.g., telephone number and address) that can be combined to establish a patient’s identity with high success and enable providers and others to match patient records as accurately as possible. Representatives from 7 of the 13 initiatives told us that they require their participants to use a standardized method for patient matching or are working to develop standardized methods. For example, 1 initiative requires that all participants incorporate the same patient-matching method into their EHR systems. Representatives from 2 other initiatives said that their initiative is working to reconcile variations in the data elements and formats used for patient matching by network participants, with the goal of adopting a single shared method among all participants. Representatives from another initiative told us that the initiative is working to develop a tool for matching patients to their records that can be incorporated directly into EHR systems. Notably, 2 of the initiatives that are working on patient-matching methods said that they rely on patients to confirm that the match is accurate at the site-of-care. Representatives from 1 of these initiatives noted that this approach may not be practical in circumstances or settings in which information is required immediately or the patient is unresponsive. Representatives from 2 of the 13 initiatives said that they are working to enable patient-mediated exchange, which involves allowing patients to aggregate their health information in a PHR. One representative noted that patients are likely to notice if their PHR contains information that is incorrectly matched and to correct the error. Representatives from five initiatives noted that a national patient identifier, which HHS identifies as currently prohibited under law, is needed to fully address this challenge. Sixteen of the 18 initiatives are working to address the challenge of the reported high costs associated with interoperability. Some of these initiatives are working to address this challenge using multiple approaches. Representatives from 10 initiatives that said they are addressing this challenge by reducing the need to customize EHR systems to connect with other systems. For example, representatives from 1 initiative explained that participants must adopt standard features that should reduce the amount of customization needed to connect with other systems. Representatives from 3 initiatives explained that they give participants the opportunity to reduce the cost of interoperability by paying for only one interface to connect with all the entities participating in the initiative, instead of paying for individual connections to each entity. Officials from 3 other initiatives told us that they are focused on creating APIs—programming instructions that allow systems to extract data from other systems that adopt the same API—that they said would nearly eliminate the need to customize systems that adopt the API, or are working to leverage APIs to create applications that can be easily added to EHR systems to exchange and analyze interoperable data. Representatives from 12 initiatives said that their initiatives’ products are or will be available at no cost or at a reasonable cost to providers or vendors. For example, representatives from 4 initiatives told us that the profiles and specifications they are developing will be available free of charge for vendors and providers to incorporate into EHR systems. Representatives from 6 other initiatives said that they are attempting to keep the cost of participation in the initiative reasonable. For example, representatives from 1 initiative said that they adjust their fees for different provider types to accommodate differences in the providers’ data exchange needs, thus increasing the likelihood that providers can afford to participate. Representatives from three initiatives explained that they are working to address the cost issue by creating standardized legal agreements to govern information sharing, which can be easily adapted by initiative participants and reduce the need for legal services and the accompanying legal fees. Eleven of the 18 initiatives are working to establish governance and trust among the entities that seek to exchange interoperable health information. Representatives from 7 of the 11 initiatives are fulfilling the need for governance and trust among entities by establishing standard legal agreements that their participants adopt and use to govern relationships within the initiative. For example, 1 initiative crafted a publically available agreement that includes provisions related to security and authentication policies, as well as a requirement that all participants share patient health information openly with all other participants that are authorized to receive this information. Another initiative has created a committee to evaluate specific ways that the data contained in the network may be used and incorporates these decisions into its agreement. Another initiative deliberately designed its agreement so that participants can also adopt existing national agreements; a representative from this initiative noted that if there was a situation in which their agreement conflicted with another initiative’s requirements, the initiative would work to reconcile the conflicting requirements so its participants could participate in both initiatives whenever possible. Representatives from 4 of the 11 initiatives told us that they are working to address this challenge by fostering consensus and harmonization of policies and business practices across entities and organizations. For example, 1 initiative facilitates consensus among different stakeholders about methods to enable interoperability for certain uses, and releases the results of these discussions publically for other entities to incorporate into their agreements, policies, and practices. In addition to the five challenges identified by stakeholders and initiative representatives, representatives identified two other issues that need to be addressed in order to move nationwide interoperability forward. EHR interoperability would move forward once providers saw a value in their systems becoming interoperable. Six initiative representatives said that improvements to EHR systems—such as enhancements that improve providers’ workflow or clinical decision-making—are needed to increase the extent to which an EHR system, and the information contained within it, is a valuable tool for health care providers. Six initiative representatives noted that reforms that tie payment to quality of care rather than number of services provided will incentivize sharing of information across providers to improve efficiency. Changes to CMS’s Medicare and Medicaid EHR Incentive Programs would also help move nationwide interoperability forward. While 8 initiative representatives we spoke with told us that the EHR Incentive Programs have increased adoption of EHRs, representatives from 5 initiatives suggested pausing or stopping the programs. Representatives from 10 of the initiatives noted that efforts to meet the programs’ requirements divert resources and attention from other efforts to enable interoperability. For example, some initiative representatives explained that the EHR programs’ criteria require EHR vendors to incorporate messaging capabilities into EHR systems, but this capability generally does not enable interoperability at this time. Representatives from 10 of the initiatives said that the criteria currently used to certify EHR systems under the EHR Incentive Programs are not sufficient for achieving interoperability, and representatives from 3 initiatives suggested amending the criteria to focus on testing systems’ ability to interoperate. We provided a draft of this report to HHS for comment. HHS provided technical comments, which we incorporated as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Health and Human Services, the Administrator of CMS, the National Coordinator for Health Information Technology, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7114 or at [email protected]. Contact points for our Office of Congressional Relations and Office of Public Affairs can be found on the last page of this report. Other major contributors to this report are listed in appendix II. We identified nonfederal organizations that have ongoing initiatives that are working to facilitate electronic health record (EHR) interoperability. The 18 initiatives we selected for our work are listed below. California Association of Health Information Exchanges (CAHIE) Center for Medical Interoperability (C4MI) ConCert by Healthcare Information and Management Systems Society (HIMSS) eHealth Initiative (eHI) Electronic Healthcare Network Accreditation Commission (EHNAC) Healthcare Services Platform Consortium (HSPC) Identity Ecosystem Steering Group (IDESG) Healthcare Committee Integrating the Healthcare Enterprise (IHE) USA Kansas Health Information Network (KHIN) National Association for Trusted Exchange (NATE) Open ID Health Relationship Trust (HEART) Working Group Statewide Health Information Network of New York (SHIN-NY) Substitutable Medical Applications and Reusable Technologies (SMART) on Fast Healthcare Interoperability Resources (FHIR) In addition to the contact named above, Tom Conahan, Assistant Director; A. Elizabeth Dobrenz; Krister Friday; Monica Perez-Nelson; and Andrea E. Richardson made key contributions to this report. | EHR interoperability is viewed by many health care stakeholders as a necessary step toward improving health care. However, interoperability has remained limited. Although the federal government plays a key role in guiding movement toward interoperability, many of the actions are to be completed by nonfederal stakeholders. GAO was asked to review the status of efforts by entities other than the federal government to develop infrastructure that could lead to nationwide interoperability of health information. This report describes the (1) characteristics of selected nonfederal initiatives intended to facilitate EHR interoperability, and (2) key challenges related to EHR interoperability and the extent to which selected nonfederal initiatives are addressing these challenges. GAO interviewed representatives from 18 selected nonfederal initiatives that were frequently mentioned by stakeholders GAO interviewed, and reflected a range of approaches. GAO reviewed documents from these initiatives as well as other published research. Representatives from the 18 nonfederal initiatives GAO reviewed described a variety of efforts they are undertaking to achieve or facilitate electronic health record (EHR) interoperability, but most of these initiatives remain works in progress. EHR interoperability is the ability of systems to exchange electronic health information with other systems and process the information without special effort by the user, such as a health care provider. These initiatives' efforts include creating guidance related to health data standards, encouraging the adoption of certain health data standards or policies that facilitate interoperability, and operating networks that connect EHR systems to enable interoperability. The initiatives varied in a number of other ways, including the types of electronic systems the initiatives are working to make interoperable, the cost of their products or services, the geographic area served, patient use of the products or services, and their organizational structures. For example, GAO found that while some initiatives are making their products or services available at no cost, others are charging a fee for their products or services based on the type of entity using the product or service (e.g., individual physician or hospital) or the amount of data exchanged. Similarly, over half of the initiatives were using varying approaches to facilitate patient access to and control over their health information. The majority of the initiatives GAO selected are still in the process of developing, or encouraging others to adopt, their products or services. Most of the initiatives' products or services were not widely available at the time of GAO's review, but initiative representatives anticipated greater availability of their products or services in the next 2 years. Stakeholders and initiative representatives GAO interviewed described five key challenges to achieving EHR interoperability, which are consistent with challenges described in past GAO work. Specifically, the challenges they described are (1) insufficiencies in health data standards, (2) variation in state privacy rules, (3) accurately matching patients' health records, (4) costs associated with interoperability, and (5) the need for governance and trust among entities, such as agreements to facilitate the sharing of information among all participants in an initiative. Representatives from the 18 initiatives GAO reviewed said they are working to address these key challenges using different approaches. Each key challenge is in the process of being addressed by some initiatives. To move interoperability forward, initiative representatives noted, among other issues, that providers need to see an EHR system as a valuable tool for improving clinical care. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate. |
LPTV stations, as indicated by their name, operate at lower power levels and transmit over smaller areas than full-power television stations. FCC established a licensing process for LPTV stations in 1982 to add to programming diversity and provide opportunities for locally oriented television service in small communities. LPTV stations may originate programming and, according to FCC, have created opportunities for new entry into television broadcasting, provided a means of local self- expression, and permitted fuller use of the broadcast spectrum. Translator stations retransmit programming from another station—such as a major network (ABC, CBS, FOX, or NBC)—to audiences unable to receive signals directly, usually because of distance or terrain barriers, such as mountains, that limit the signal’s ability to travel long distances. FCC rules prohibit translator stations from originating any programming. As shown in figure 1, some translator stations are part of a “daisy chain” in which multiple translator stations relay signals from one translator station to another, allowing the originating station’s signal to be received a few hundred miles away despite distance or other terrain obstacles. LPTV and translator service is secondary, meaning these stations may not cause interference to, and must accept interference from, primary services including primary television stations, which are full-power and Class A television stations. When interference with a full-power station cannot be remedied by adjusting an antenna or other technological methods, LPTV and translator stations must vacate the channel either by requesting FCC’s permission to move to another channel or by requesting permission to turn off their broadcast signal while searching for another channel. LPTV stations generally do not have “must-carry” rights—that is, cable and satellite providers are generally not required to carry signals from LPTV stations, but cable and satellite providers may agree to do so. The 2012 act authorized FCC to conduct an incentive auction for broadcast television spectrum. This auction comprises two separate but interdependent auctions—a “reverse auction” to determine the amount of compensation that each broadcast television licensee would accept in return for voluntarily relinquishing some or all its spectrum rights; and a “forward auction” to determine the price companies are willing to pay for the relinquished spectrum. The spectrum being auctioned is in the UHF range, which currently consists of channels 14 through 51, except for channel 37. According to FCC, the spectrum being auctioned has excellent propagation characteristics that allow signals to cover large geographic areas and penetrate walls and other structures. As shown in figure 2, at the time of this report, the incentive auction was ongoing and FCC expected it to conclude at the earliest in late 2016. After the auction concludes, FCC reported it intends to reorganize the television broadcast band on a smaller range of channels to free up a portion of the spectrum; FCC refers to this reorganization as “repacking.” Relocating the remaining stations on lower channels allows for new, flexible-use spectrum licenses suitable for providing mobile broadband services. In April 2016, FCC announced an initial spectrum clearing target—the amount of spectrum FCC aimed to clear and repurpose in the auction and repack—of 126 MHz. In November 2016, after the first and second stages of the forward auction concluded without meeting the reserve price, FCC announced a new clearing target of 108 MHz, requiring television stations to use channels 2 through 32. As shown in figure 3, the number of channels available for both television stations and spectrum available for mobile broadband services varies depending on the clearing target. The 2012 act authorized FCC to repack the remaining eligible stations and directed FCC to make all reasonable efforts to preserve the coverage area and population served of each eligible broadcast television licensee when making channel reassignments or reallocations following the incentive auction. In June 2014, FCC released the incentive auction report and order adopting rules to implement the incentive auction and subsequent repacking process. In the report and order, FCC stated that, as required by Congress in the 2012 act, FCC will preserve or protect the coverage area and population served by eligible broadcast television licensees. Further, FCC concluded that protecting other categories of facilities, including LPTV and translator stations, which are—secondary in nature and not entitled to protection from primary services under FCC’s current rule—would unduly constrain FCC’s flexibility in the repacking process and undermine the likelihood of meeting FCC’s objectives for the incentive auction. FCC recognized the decision not to extend repacking protection and not to guarantee channels for LPTV and translator stations will result in some viewers losing service, may negatively affect the investments displaced LPTV and translator licensees have made in their existing facilities, and may cause displaced licensees that choose to move to a new channel to incur the cost of doing so. Although FCC does not know the number of affected LPTV and translator stations, FCC concluded that these concerns are outweighed by the detrimental impact that protecting LPTV and translator stations would have on the repacking process and on the success of the incentive auction. In two separate cases in December 2015, LPTV licensees and an individual party brought suit against FCC over the incentive auction and its potential impact, claiming, among other things, that FCC denied protections to LPTV stations in the auction and repacking process and that FCC’s actions violated the 2012 act. In 2016, the U.S. Court of Appeals for the District of Columbia Circuit dismissed the petition for review in one case and sustained FCC’s orders in the other case. At the time of our review a separate, late-filed lawsuit raising similar concerns was ongoing. In addition to adopting rules related to the incentive auction and subsequent repacking process, the incentive auction report and order announced a number of actions intended to make a significant amount of spectrum available for unlicensed use, including permitting unlicensed operations (1) on channel 37 in locations sufficiently removed from incumbent users to protect from harmful interference and (2) in the spectrum guard bands. Additionally, FCC indicated in the incentive auction report and order that it anticipated there would be at least one channel in all areas throughout the country not assigned to a television station that could be used by unlicensed devices. In June 2015, FCC issued an NPRM to this effect, proposing to preserve at least one vacant channel in the UHF television band throughout the country. The NPRM proposes that the channel preserved would be a UHF channel above channel 20, and the specific vacant channel preserved could vary depending on the particular area. This proposal, known as the vacant channel proposal, would require LPTV and translator stations displaced by the repacking process to demonstrate that any new or modified facilities needed for a station to relocate to another channel would not eliminate the last remaining vacant channel in an area. FCC tentatively concluded that the vacant channel proposal would ensure the public continues to have access to the significant benefits provided by unlicensed devices and wireless microphones across the country. According to FCC officials at the time of our review, it had not taken further action on the vacant channel NPRM and those matters were still under consideration. Unlicensed devices that operate in the television spectrum band are sometimes referred to as white space devices because they operate in spectrum “white spaces”—buffer zones FCC established to mitigate unwanted interference between adjacent stations. According to FCC, unlicensed devices are an important part of the nation’s communications capabilities, serve to augment the operations of licensed services, and meet the needs of a wide range of wireless applications including Wi-Fi, Bluetooth, baby monitors, and garage door openers. The Consumer Electronics Association reported in 2014 that devices using unlicensed spectrum generate approximately $62 billion annually in retail-level sales and that further estimated growth in the market for devices that rely on unlicensed spectrum was “extremely strong.” Through analysis of FCC data, our survey of LPTV and translator station representatives, and meetings with stakeholders as discussed below, we obtained information on LPTV and translator stations, including (1) the number of such stations and their communities of license, (2) types of programming and hours of broadcasting, and (3) ownership. Information obtained through our survey is non-generalizable. According to our analysis of FCC data, there were 2,063 LPTV stations and 3,660 translator stations in the U.S. and its territories as of May 25, 2016. LPTV stations’ communities of license are shown in figure 4. According to one broadcast industry association we interviewed, LPTV stations serve a wide range of diverse audiences, including those in both rural counties with limited access to full-power stations and in large urban areas. According to our analysis of FCC data, translator stations’ communities of license are shown in figure 5. Translator stations tend to be concentrated in both rural and mountainous areas where they serve communities that cannot receive signals from full-power stations because they are too far away or because terrain blocks the signals. According to FCC officials, pursuant to the First Amendment, FCC does not generally monitor broadcast stations’ content and programming choices and because the few public service obligations LPTV stations have do not pertain to programming provided. Therefore FCC does not collect information on the programming provided by LPTV stations or their hours of broadcasting, and we did not identify other sources of such data. In our non-generalizable survey of LPTV and translator station representatives, respondents representing 535 of the 2,063 LPTV stations in the U.S. and its territories provided information about the types of programming broadcast by the stations they represent (see fig. 6). Survey respondents indicated that most of these stations broadcast locally produced programming, and almost half of the stations represented by survey respondents broadcast at least 18 hours per day and an average of 3 hours per week of locally produced content, two factors similar to requirements for Class A status under the Community Broadcaster Protection Act of 1999. The locally produced programming broadcast by LPTV stations may be diverse and is broadcast in a variety of languages. Through our survey we identified examples of such content, including: programming in languages such as Bosnian, Hmong, Italian, Polish, Spanish, and various Native American languages; local news, weather, and traffic; local information, including community events, political debates, and volunteer opportunities; local recreational and tourism information such as skiing, fishing, and hunting reports; public health programming; arts and special interest programming such as art and cooking shows; children’s programming. Additionally, survey respondents provided information about programming broadcast by the stations they represent that is not locally produced. As shown in figure 7, the most common type of non-locally produced programming broadcast by LPTV stations represented by survey respondents is general entertainment. Table 1 provides examples of these different types of programming that is not locally produced. These examples are from our survey, comments to FCC, and interviews. Moreover, LPTV stations that broadcast digitally may simultaneously transmit multiple signals and therefore can broadcast different content on multiple sub-channels. For example, representatives of a station ownership group told us about programming they broadcast on digital sub-channels in the Los Angeles area. On one digital sub-channel, they broadcast programming imported from Central America that is the primary news source for many of the about 2 million immigrants from Central America living in the area, according to these representatives. On another digital sub-channel, they broadcast programming imported from Cambodia, which is the only Cambodian station in the U.S. and reaches between 50,000 and 70,000 Cambodian speakers in the area, according to these representatives. FCC collects information biennially on racial and ethnic minority and female broadcast ownership for certain commercial stations. FCC’s reports based on this data collection do not present data on the number of stations owned by different types of entities such as for-profit, not-for- profit, and governmental. Further, while full-power, Class A, and LPTV stations are required to provide this information, FCC officials told us that translator stations are not required to submit this information and that, according to the most recent report based on these filings, about one third of LPTV stations did not file the required reports. Our survey collected information on the types of entities that own the LPTV and translator stations represented by respondents. As shown in figure 8, most of the 535 LPTV stations represented by survey respondents are owned by for-profit entities, while more than a third of the 1,515 translator stations represented by survey respondents are owned by governmental entities. Ownership of translator stations tends to vary depending on factors such as the direct market size of full-power stations and geography, according to representatives we interviewed from a broadcast industry association. For example, in New Mexico and Oregon, where the direct market for full-power stations is less populous, full-power stations may own and operate translator stations to extend the reach of their programming. In mountainous areas where geography may limit the reach of full-power stations, translator stations tend to be locally owned by governmental entities or other community organizations, according to a broadcast industry association we interviewed. Ownership type and structure may affect stations’ vulnerability in the auction even in areas where spectrum is available following the auction, according to various stakeholders as discussed below. Government- and community-owned stations typically rely on municipal budgets and tax revenues to operate, and in some cases the community served would have to raise taxes or dues to obtain the capital necessary to relocate, according to representatives from two broadcast industry associations we interviewed and three survey respondents. Stations owned by for-profit, not-for-profit, and educational entities may not be able to afford the capital costs required to relocate, particularly when the entity operates on a small budget, according to two broadcast industry associations we interviewed and two survey respondents. For example, while some translator stations may be owned by station ownership groups that own a portfolio of stations— including full-power stations, Class A stations, or both—of the 115 station representatives who completed our survey, more than two- thirds (81) represent 10 stations or fewer, and 33 respondents represent a single station. Further, according to a station ownership group we interviewed securing financing to fund relocation costs is difficult because investors are unwilling to invest in LPTV and translator stations because of their uncertain future. Some station owners, regardless of the type of ownership entity, use revenue from stations in more populated areas to supplement funding for the operation of stations in less populated areas. For example, station representatives who operate three LPTV stations serving Native American communities told us that the stations serving less populated areas would not be able to operate without supplemental revenue from the stations serving more populated areas. According to these representatives, these stations provide diverse programming such as locally produced Native American cultural programming, educational programming, information on tribal affairs, and programming in multiple Native American languages. We found LPTV and translator station viewers may lose access to programming or emergency alert information through several possible ways, including the following: Alternatives to broadcast programming are cost-prohibitive or unavailable: Many LPTV and translator station viewers are economically or geographically disadvantaged and may not be able to afford other options for accessing programming such as for satellite television or broadband Internet, according to two broadcast industry associations we interviewed and six survey respondents, among others. For example, one survey respondent, a county treasurer/recorder in a rural area, described the situation for viewers of the county’s translator stations. The county charges each household $30 per year for television service. The survey respondent said that there are many county residents who are elderly, on fixed incomes, or otherwise low-income and cannot afford to pay a higher monthly television subscription fee, such as satellite service. Further, some viewers live in areas where paid television service or broadband service, or both are unavailable, according to one broadcast industry association we interviewed, a station ownership group, and one survey respondent. Niche programming: Viewers of locally produced programming and niche programming, such as the programming described above, may lose access to this programming, and similar programming may not be available through the remaining over-the-air broadcast channels according to three broadcast industry associations and a station ownership group we interviewed. For example, if an LPTV station broadcasting non-English-language programming in a city is displaced in the incentive auction and cannot find an available channel in the repack, its viewers may have no other options for similar programming. Moreover, LPTV stations that provide niche programming to a particular audience in a particular area could be forced out of business following the incentive auction and repack even if they are able to find available spectrum in the repack. For example, a non-English language channel may exist to serve a segment of the population that resides in a small pocket of an urban area. If displaced, that channel may be unable to relocate to a replacement channel that would reach its primary viewers, as shown in figure 9. Without access to its primary viewers, the station may not be able to raise the funds necessary to continue operation. Televised emergency alerts: Some viewers in geographically remote areas receive broadcast television signals only from a station or stations that are not protected in the incentive auction and repack, meaning the station might be unable to relocate and thus cease broadcasting. Viewers in these areas may no longer have access to televised emergency alerts. Of the 2,050 LPTV and translator stations represented by survey respondents, more than 10 percent (211) serve areas that receive no service from full-power or Class A stations, according to survey respondents. Moreover, of the 1,515 translator stations represented by survey respondents, 433 rebroadcast signals received from another translator station and 212 send signals to another translator station. This interconnectedness among translator stations could compound these stations’ vulnerability in the auction, according to representatives of a broadcast industry association that represents translator stations. Although it is possible for LPTV or translator stations to serve as the only source of televised emergency alerts, FCC considered whether such stations should have special priority in the repacking process and declined to adopt any such measures. In particular, in a 2012 NPRM FCC sought comment on whether the public interest would be served by establishing a set of selection priorities to choose among applications of displaced LPTV and translator stations and on the types of selection priorities to adopt. In the incentive auction report and order, FCC declined to adopt the particular selection priorities suggested by commenters in the NPRM, including providing priority for stations that are primary Emergency Alert System providers. As noted previously, FCC has acknowledged that the incentive auction will potentially displace some LPTV and translator stations. FCC officials told us they have not systematically analyzed the potential displacement impact on LPTV or translator stations because of Congress’s determination not to include these stations in the auction or protect them in the repacking process. As discussed below, FCC has taken some actions to try to mitigate the auction’s effects on these stations. According to FCC officials, FCC’s actions to mitigate the effects of the incentive auction include: (1) channel sharing, (2) the digital transition deadline, (3) FCC’s optimization software, and (4) cross-border coordination. While broadcast industry associations generally expressed support for these measures in comments to FCC, some representatives of these groups told us and stated in comments to FCC that the actions will not do much to mitigate the effects of the incentive auction on LPTV and translator stations. Moreover, we asked the 115 representatives of 535 LPTV and 1,515 translator stations who responded to our survey to rate the usefulness of these four measures, and, in all but one case, the number of both LPTV and translator stations represented by respondents was greater for those who rated the action as not useful. Furthermore, those who rated these measures as useful often did so with caveats. In the LPTV and translator report and order, FCC announced that it will allow channel sharing among LPTV and translator stations and proposed allowing channel sharing between LPTV and translator stations and full- power and Class A stations. Stations that enter into such agreements may divide the capacity of the shared channel however they would like, as long as each station retains spectrum usage rights sufficient to transmit at least one standard definition programming stream at all times, but will continue to be licensed separately and will separately be subject to FCC’s obligations, rules, and policies. According to FCC, these measures have the potential to be beneficial to LPTV and translator stations, and some broadcast industry associations expressed support of these measures in comments to FCC. However, all of the broadcast industry associations with whom we discussed the issue stated that allowing LPTV and translator stations to enter into channel-sharing agreements will not be helpful in a meaningful way. For example, a representative from one broadcast industry association told us that channel sharing would likely require stations to degrade their signal, which may inhibit multicasting and the use of high-definition signals, and another broadcast industry association told us that stations will use channel sharing only as a last resort. Additionally, as shown in table 2 below, survey respondents representing more stations rated channel sharing as not useful, than useful. In the LPTV and translator report and order, FCC announced it will use its incentive auction and repacking optimization software to identify channels that will be available for displaced stations. FCC plans to publish a list of available channels 60 days prior to the beginning of the LPTV and translator displacement window, and displaced stations will be able to use this information when applying for replacement channels. While FCC stated in the LPTV and translator report and order that this proposal garnered considerable support from broadcast industry associations, representatives from the four broadcast industry associations that mentioned this measure to us said that it will be minimally helpful. Specifically, one broadcast industry association told us that it will provide almost no help to LPTV stations, and another stated that the measure is hollow and will have limited effect, if any. Additionally, as shown in table 3 below, survey respondents representing more stations rated this measure as not useful, than rated it as useful. In the LPTV and translator report and order, FCC extended the deadline by which analog LPTV and translator stations must complete the transition to digital so that stations would not have to make significant capital investments to meet the digital transition deadline, only to face possible displacement in the auction and repack process. According to FCC, the September 2015 deadline had been established in anticipation of the auction being conducted in 2014. While FCC cited broad support from the LPTV and translator industry for this measure, two broadcast industry associations stated in comments to FCC that this action was more a common sense policy change than an action to mitigate the effects of the auction. These commenters said it was only fair for FCC to extend the date given the cost associated with transitioning to digital and then potentially relocating after the auction. As shown in table 4 below, survey respondents representing more stations rated extending the digital transition deadline as not useful, than useful. In the LPTV and translator report and order, FCC addressed commenters’ suggestions that FCC develop a streamlined approach to coordinating with foreign governments on the interference and application approval process to address situations where stations’ signals may cross an international border, such as into Canada or Mexico. FCC stated that the cross-border coordination process is continual and that FCC has used its existing processes to keep Canada and Mexico fully informed on the incentive auction coordination issues. FCC further stated that it intends to make efforts to streamline the cross-border coordination processes so that it will not delay the post-auction displacement application process for LPTV and translator stations. As shown in table 5 below, a greater portion of LPTV stations were represented by survey respondents that rated this measure as useful than not useful, whereas the opposite is true for translator stations. However, regarding cross-border coordination, survey respondents provided similar responses regardless of the rating they provided. In addition to the measures discussed above, the broadcast industry associations and station ownership groups we interviewed and the station representatives who responded to our survey identified other actions they believe FCC or Congress could take that could help mitigate the effects of the incentive auction on LPTV and translator stations. The proposals that arose the most frequently in the interviews and survey were: (1) reconsidering various aspects of the auction, (2) providing funding for relocation costs incurred by LPTV and translator stations displaced in the auction, (3) allowing LPTV and translator stations to operate with alternative technical standards, and (4) providing LPTV and translator stations an opportunity to obtain primary interference protection status, which would protect these stations from future displacement by primary services. The suggestions that arose most frequently related to FCC reconsidering various aspects of the incentive auction. For example, 15 survey respondents suggested that FCC protect LPTV and translator stations in the incentive auction and repack; 12 survey respondents suggested that FCC or Congress provide compensation for lost spectrum rights to displaced LPTV and translator stations; 7 survey respondents suggested that FCC provide protection in the auction and repack for certain types of stations such as rural translator stations, tribally owned stations, and stations broadcasting locally produced content; 6 survey respondents suggested that FCC or Congress cancel the auction; and 5 survey respondents suggested that FCC provide LPTV and translator stations more time to move channels. Regarding these and similar suggestions raised in the incentive auction proceeding, FCC stated in the LPTV and translator report and order that the proposed measures were fully considered in the incentive auction rulemaking proceeding and subsequent orders and FCC declined to revisit them. The second most frequent suggestion related to FCC or Congress providing funding for relocation costs incurred by LPTV and translator stations that are displaced in the auction, either through a grant program or through reimbursement of expenses. While FCC has studied the costs associated with relocating eligible full-power and Class A stations that are reassigned to new channels during the repack process, FCC officials told us that because Congress did not make LPTV or translator stations eligible to be reimbursed for certain relocation costs, the officials have not studied the costs associated with relocating LPTV and translator stations. A broadcast industry association we interviewed indicated that the costs for relocating LPTV and translator stations vary widely depending on a number of factors such as the distance of the move; whether a new tower will be required; and the availability of engineers, tower crews, and equipment. Of the 83 survey respondents that represent LPTV stations, 28 respondents reported estimated relocation costs ranging from $25,000 to over $600,000 per station. Of the 50 survey respondents that represent translator stations, 15 respondents reported estimated relocation costs for their stations ranging from approximately $8,500 to approximately $37,500, with an additional $100,000 per site if microwave equipment were required. FCC addressed similar suggestions in the LPTV and translator report and order and in previous orders related to the incentive auction and stated that the decision whether to authorize such funding is Congress’s prerogative and that the 2012 act limits reimbursement to full- power and Class A stations. Half of the broadcast industry associations we interviewed, all of the station ownership groups we interviewed, and 13 survey respondents proposed various measures by which FCC would allow LPTV and translator stations to operate with different technical standards or network architectures. Proposals include enabling broadcasters to seek innovative ways to use their spectrum and adopting Advanced Television Systems Committee (ATSC) 3.0. ATSC 3.0 is an alternative technical standard for digital broadcast television that, according to proponents, has the potential to enhance the viewing experience, provide for more robust signaling, expand diverse programming opportunities, enhance emergency alert capabilities, and provide for new service offerings. Additionally, some broadcast industry association representatives we interviewed stated that timely adoption of ATSC 3.0 or other alternative technical standards for digital broadcast television would enable many LPTV and translator stations to survive the auction because stations would be more efficient in their use of spectrum, freeing more spectrum for broadcast use in the repack. In the LPTV and translator report and order, FCC stated that consideration of alternative technical standards, including ATSC 3.0, is outside of the scope of the incentive auction proceeding and is better left for future proceedings. In April 2016, several broadcast industry stakeholders filed a joint petition for rulemaking asking FCC to amend its rules to allow broadcasters to use ATSC 3.0, and later that month FCC issued a public notice seeking comment on the petition, with comments due in June 2016. According to FCC officials, these comments are under consideration and FCC could decide to issue an NPRM; however, as of September 2016, FCC has not announced a timeline for doing so. Two broadcast industry associations and a station ownership group we interviewed as well as some survey respondents suggested that FCC provide an opportunity for LPTV and/or translator stations to obtain primary interference protection status, such as Class A status or some other designation, to avoid future displacement by primary users. Some proponents stated that such a measure would provide more certainty for the industry going forward, which in turn would enable investment in the industry. In the LPTV and translator report and order, FCC declined all proposals that would allow LPTV and/or translator stations to obtain primary interference protection status before the completion of the post- auction transition period, but stated that FCC may consider at a later date whether to allow LPTV and/or translator stations to obtain primary status after the completion of this period. Through our interviews with selected stakeholders—including six broadcast industry associations, three station ownership groups, two technology companies, a technology industry association, and a public interest group—and analyzing comments filed with FCC, we identified four primary expected outcomes of preserving a vacant television channel: (1) loss of existing broadcast service, (2) development of new technologies and innovation, (3) improvement of Wi-Fi Internet, and (4) improvement of rural broadband service. FCC officials told us these outcomes are the main outcomes stakeholders discuss in comments submitted to FCC. The broadcast industry associations and station ownership groups generally opposed the proposal, while the technology companies, the technology industry association, and the public interest group were proponents of the proposal. As discussed below, stakeholders expressed varying views about the expected outcomes. Representatives from all the broadcast industry associations told us that preserving a vacant channel will result in a loss of existing broadcast television service for viewers. For example, a representative from one broadcast industry association told us the vacant channel proposal will force existing LPTV and translator stations off the air because there will be one less channel where a displaced LPTV or translator station can relocate and that many rural and underserved communities will likely lose access to the broadcast stations on which they rely. Additionally, representatives of the three station ownership groups we interviewed also expressed concern that the vacant channel proposal would result in a loss of existing broadcast service. A representative from one of these groups told us the vacant channel proposal will exacerbate the challenges faced by LPTV stations by taking at least one more channel and preventing them from relocating there following a stations displacement after the incentive auction. In the vacant channel NPRM, FCC stated a tentative conclusion that the proposal, if adopted, would not be a significant burden in terms of the availability of channels for future use for broadcasters, including LPTV and translator stations. The NPRM further stated that the impact will be limited because multiple vacant channels will still exist in all or most areas after the channel repack. FCC officials told us they have not conducted a systematic analysis on the expected effects of the vacant channel proposal on LPTV and translator stations, but noted they proposed preserving a vacant channel because of the overall potential public- interest benefits expected from doing so. The officials noted that FCC used available information including comments filed with FCC to inform the proposal and that they sought additional comment on the proposals and tentative conclusions contained in the NPRM. The officials told us that the National Association of Broadcasters (NAB) and Google had each submitted filings to FCC that included analysis on the expected loss of service effects of preserving a vacant channel and that the studies reached very different conclusions. According to NAB’s analysis, the number of LPTV and translator stations that would go off the air if the vacant channel proposal were adopted ranged from 347 stations to 433 stations, depending on the amount of spectrum that FCC ultimately clears in the auction. The analysis concluded that FCC’s proposal would have a devastating impact on LPTV and translator stations and the viewers who rely on those stations to receive over-the-air signals. On the other hand, Google’s analysis found that FCC’s vacant channel proposal would have minimal impact on LPTV and translator stations. Google analyzed five markets selected for a variety of reasons including, to represent areas with large numbers of LPTV and translator stations, mountainous terrain, large rural areas, and urban areas to identify which LPTV and translator stations, if any, would be unable to continue operations as a result of FCC’s proposed rule. Google concluded that for the typical viewer, in the majority of scenarios, no LPTV or translator station will be affected. The analysis also indicated that in 72 percent of the nearly 400 counties included in the analysis, not a single station would be affected, and that even in the specific counties likely to be the most affected, the preservation of a vacant channel will have only a small impact. Both NAB and Google have submitted comments to FCC critiquing the other’s conclusions. Proponents of FCC’s vacant channel proposal whom we interviewed and who commented on the proposal generally expect it will contribute to innovation and the development of new technologies. In our analysis of comments filed with FCC by proponents of the vacant channel proposal, at least five groups expressed the idea that preserving vacant channels would help the development of new technologies. For example, one of these commenters noted that ensuring unlicensed devices have nationwide access to spectrum in the reallocated television spectrum band will promote investment and innovation in these technologies. In comments filed by another proponent of the proposal, the group stated reserving at least one vacant television channel in every market nationwide for public use on an unlicensed basis is essential to spurring investment and achieving the enormous public interest benefits of developing new personal portable devices. The commenter went on to state that ensuring a substantial amount of unlicensed spectrum on a nationwide basis is critical for developing markets for new, innovative, and affordable chips, devices, applications, and services. Three of the four proponents of the proposal to preserve a vacant channel whom we interviewed told us that three channels for unlicensed use are needed to develop new technology and that preserving a vacant television channel would contribute to this needed amount of spectrum. As discussed previously, FCC’s incentive auction report and order announced a number of actions intended to make more spectrum available for unlicensed use, including permitting unlicensed operations on channel 37 (in locations sufficiently removed from incumbent users to protect from harmful interference) and in the spectrum guard bands. Taken together, these measures will provide two of the three channels that, according to proponents of the vacant channel proposal, are needed to develop new technologies. For example, one of the proposal’s proponents told us that unless FCC guarantees there will be three channels available nationwide for unlicensed use, it is very unlikely that new mobile uses will move forward into production. This proponent explained that for companies to invest the money needed to develop new unlicensed technologies and innovate, companies need certainty that sufficient spectrum will be available to invest the tens of millions of dollars needed for development. This proponent also commented that this is particularly important because insufficient spectrum (i.e., less than three channels) in even a single major market, such as Los Angeles, would result in companies not investing money to develop new technologies. This proponent said that FCC’s adopting the vacant channel proposal would help provide this certainty by providing a third channel for nationwide unlicensed use. All representatives from the four organizations we interviewed who are proponents of the vacant channel proposal expect the proposal could result in improving Wi-Fi Internet. Specifically, they told us that the proposal could improve Wi-Fi because of the characteristics associated with the UHF television spectrum band. They noted that while traditional Wi-Fi has a relatively limited range and can be blocked by walls or other environmental barriers, Wi-Fi operating in the UHF television spectrum band can travel much farther and penetrate obstacles such as buildings and hills. Representatives of two groups supporting the vacant channel proposal told us that because of the long-range characteristics and ability to travel farther through obstructions, Wi-Fi could be expanded more thoroughly throughout homes and businesses giving people greater connectivity. One of these proponents also added that this could help extend coverage to people who might not have affordable access to the Internet. Stakeholders we interviewed supporting FCC’s vacant channel proposal generally expect the proposal could result in improved and expanded broadband Internet service in rural areas. Specifically, three of the four proponents of the proposal we interviewed told us that preserving a vacant channel could contribute to improved and expanded broadband in rural areas by allowing people to connect their homes and businesses wirelessly to the Internet. One proponent told us that in rural areas, unlicensed spectrum use allows consumers to connect to the Internet wirelessly from their home or business. They noted that this use of spectrum is currently occurring and that preserving a vacant channel could help lower costs and improve the technology, thus improving and expanding broadband in rural areas. We provided a draft of this report to FCC for review and comment. FCC provided technical comments, which we incorporated into the report as appropriate. We are sending copies of this report to the Chairman of FCC and appropriate congressional committees. In addition, the report is available at no charge on GAO’s website at http://www.gao.gov. If you or members of your staff have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are listed in appendix III. This report focuses on the possible effects of the Federal Communication Commission’s (FCC) spectrum incentive auction on low power television (LPTV) and translator stations and their viewers. Specifically, our objectives were to examine (1) what is known about LPTV and translator stations and how FCC’s spectrum incentive auction might affect viewers’ access to the stations’ services, (2) selected stakeholder views on actions has proposed or taken to mitigate the possible effects of the incentive auction on LPTV and translator stations, and additional stakeholder proposals for doing so, and (3) selected stakeholder views on the expected outcomes of preserving a vacant channel for unlicensed use of the television broadcast spectrum. To determine what is known about LPTV and translator stations and how FCC’s spectrum incentive auction might affect viewers’ access to these services, we reviewed FCC documents related to the incentive auction, including FCC’s June 2014 incentive auction report and order and FCC’s December 2015 LPTV and translator report and order. We obtained data from FCC’s Consolidated Database System (CDBS) as of May 25, 2016, to determine the number of LPTV and translator stations in the U.S. and its territories along with the communities of license. We determined the data were reliable for our purposes after reviewing FCC user guides and forms for CDBS and interviewing knowledgeable FCC officials regarding data entry and analysis procedures. We also conducted a web-based survey of LPTV and translator stations to obtain information on LPTV station programming, ownership of LPTV and translator stations, and station representatives’ views on actions that FCC has proposed or taken and actions Congress or others could take to mitigate the effects of the incentive auction on LPTV and translator stations. For the web-based survey, we obtained LPTV’s and translator station representatives’ e-mail addresses from CDBS; however, because CDBS did not include e-mail addresses for representatives of all of the 2,063 LPTV and 3,660 translator stations, we sent survey invitations for all LPTV and translator station representatives for whom we could obtain e-mail addresses. We supplemented the e-mail addresses obtained from CDBS with addresses obtained from station representatives and in total identified 330 valid e- mail addresses for LPTV and translator station representatives. Because the e-mail addresses do not represent all LPTV and translator stations, the results of our survey are not generalizable and are only used for descriptive purposes. After preparing draft survey questions and response categories, we spoke with representatives from three broadcast industry associations and a translator station representative chosen for their broad industry perspective and expertise in particular segments of the industry to determine whether selected questions were answerable by station representatives and whether the response categories provided were appropriate, and updated our survey accordingly. We then pre- tested our survey with four representatives of LPTV and/or translator stations—selected to provide for variety in type of station (LPTV and translator), number of stations represented, and geography—to ensure that our survey questions and skip pattern were clear and logical and that respondents could answer the questions without undue burden. In the course of pre-testing our survey, we also obtained information that we present in this report. We administered the survey from June 2016 through August 2016 and received 115 responses. These responses represent 535 of the 2,063 LPTV stations, and 1,515 of the 3,660 translator stations in the U.S. and its territories. In our report, we provide survey results based on the number of respondents to each question. Because not all respondents answered every question of the survey, the total number of respondents may be fewer than 115 for some results. The results of our survey are not generalizable, and we did not verify respondents’ responses. We also interviewed officials from FCC to determine what information they had regarding LPTV and translator stations and how the incentive auction might affect viewers’ access to these services. To determine stakeholder views on actions FCC has proposed or taken to mitigate the possible effects of the incentive auction on LPTV and translator stations, and additional stakeholder proposals for doing so, we reviewed selected comments and other filings associated with the incentive auction proceeding. We selected the comments for review by performing keyword searches on filings submitted between October 9, 2014, (when FCC sought comment on a number of issues related to LPTV and translator stations, including additional means to mitigate the potential impact of the incentive auction and repacking process on these stations) and April 1, 2016, to allow additional time to include comments filed after end of the formal comment process. We reviewed filings from entities that filed more than one comment, reply to comment, letter, or notice of ex parte in this time period. We also interviewed broadcast industry associations and station ownership groups that own LPTV and/or translator stations, as shown in table 6. We selected stakeholders to represent a range of views from various types of organizations based on our review of comments filed in FCC’s incentive auction proceeding, as well as based on recommendations from other organizations we interviewed. We chose three station ownership groups that own LPTV and/or translator stations and that broadcast a variety of programming types. Through our web-based survey, we also obtained station representatives’ views on actions that FCC has proposed or taken and that Congress or others could take to mitigate the effects of the incentive auction on LPTV and translator stations. In our report, we use “some” when three or more stakeholder sources combined supported a particular idea or statement. To identify selected stakeholder views on the expected outcomes of preserving a vacant channel for unlicensed use of the television broadcast spectrum, we reviewed FCC’s June 2015 notice of proposed rulemaking where FCC proposes to preserve one vacant channel in the ultra high frequency television band for use by white space devices and wireless microphones, and we reviewed selected comments and other filings association with this proceeding. We selected comments and other filings for review, by performing keyword searches on filings submitted between October 9, 2014, and April 1, 2016, and we reviewed filings from entities that filed more than one comment, reply to comment, letter, or notice of ex parte in this time period. We also interviewed stakeholders, as shown in table 6 above. We also reviewed relevant statutes and regulations, including the Middle Class Tax Relief and Job Creation Act of 2012, which authorized FCC to conduct the spectrum incentive auction. We searched various web-based databases to identify existing articles, peer-reviewed journals, trade and industry articles, government reports, and conference papers related to these topics. We identified articles from 2010 to 2016 and examined summary-level information that we believed to be germane to our report. It is possible that we may not have identified all of the reports with findings relevant to our objectives. The questions we asked in our survey of low power television (LPTV) and translator stations are shown below. In this appendix, we include all the survey questions and aggregate results of responses to the closed-ended questions; we do not provide information on responses provided to the open-ended questions. However, all respondents did not have the opportunity to answer each question because of skip patterns. Furthermore, some respondents may have decided not to respond to a particular question. For a more detailed discussion of our survey methodology see appendix I. In addition to the individual named above, Sally Moino (Assistant Director), Aaron Kaminsky, (Analyst in Charge), David Hooper, John Mingus, Josh Ormond, Rebecca Rygg, Kelly Rubin, Andrew Stavisky, and Michelle Weathers made key contributions to this report. | In 2012, Congress authorized FCC to conduct an incentive auction of broadcast television spectrum whereby eligible broadcasters can voluntarily relinquish their spectrum usage rights in return for compensation. This auction will make spectrum available for new uses such as mobile broadband and will also potentially affect LPTV and translator stations. In addition to conducting the auction, FCC proposed preserving at least one vacant television channel in all areas that could be used by unlicensed devices to ensure the public continues to have access to the benefits associated with these devices. GAO was asked to review the possible effects of the auction on LPTV and translator stations and their viewers. This report examines: (1) LPTV and translator stations and how FCC's incentive auction might affect their viewers, (2) selected stakeholders' views on actions FCC has proposed to mitigate the possible effects of the auction on such stations, and (3) selected stakeholders' views on the expected outcomes of preserving a vacant television channel for unlicensed use. GAO reviewed relevant FCC proceedings and comments associated with those proceedings; surveyed a non-generalizable sample of 330 LPTV and translator station representatives with available e-mail addresses; and interviewed officials from FCC and industry stakeholders selected to represent various types of organizations, such as broadcast industry associations and technology companies. GAO provided FCC with a draft of this report. FCC's technical comments have been incorporated. As of May 2016, there were 2,063 low power television (LPTV) stations and 3,660 translator stations in the United States and its territories, serving diverse communities. However, some LPTV and translator stations may be displaced and need to find a new channel or discontinue operation after the Federal Communications Commission's (FCC) ongoing incentive auction of broadcast television spectrum. By statute, these stations were not designated as eligible to participate in the auction; consequently, they cannot voluntarily relinquish their spectrum usage rights in return for compensation. LPTV stations may serve rural communities with limited access to full-power stations and niche communities in urban areas, whereas translator stations retransmit the programming of other stations, mostly to viewers in rural areas who cannot otherwise receive television signals. After the auction, FCC intends to reorganize the television stations remaining on the air so that they will occupy a smaller range of channels, thus freeing up spectrum for other uses. LPTV and translator stations are not guaranteed a channel during the reorganization. FCC has acknowledged that the auction and channel reorganization may negatively affect an unknown number of LPTV and translator stations and that some viewers will lose service, and concluded the success of the auction outweighs these concerns. Broadcast industry associations and others have raised concerns about viewers' losing access to programming and emergency alert information these stations provide. Selected stakeholders viewed FCC's actions to mitigate the effects of the incentive auction on LPTV and translator stations as helpful in some circumstances, but overall as insufficient. FCC's actions include using its software to identify channels that will be available for displaced stations following the auction and allowing channel sharing. While broadcast industry associations generally supported these measures in comments to FCC, some representatives told GAO that the actions will not do much to mitigate the effects of the incentive auction on LPTV and translator stations. Moreover, in response to GAO's non-generalizable survey, representatives of LPTV and translator stations generally indicated FCC's actions have limited usefulness. According to selected stakeholders, FCC's proposal to preserve a vacant television channel in all areas throughout the country for unlicensed use, such as Wi-Fi Internet, could result in the loss of some existing broadcast service, but could have various benefits. Of the stakeholders GAO contacted, the broadcast industry associations generally opposed the proposal, while the technology companies supported it. According to a broadcast industry association, the proposal will force some LPTV and translator stations off the air because there will be one less channel where a displaced station can relocate, and many rural and underserved communities will likely lose access to the broadcast stations on which they rely. On the other hand, technology companies and other supporters of the vacant channel proposal maintain that preserving at least one vacant channel for unlicensed use will contribute to innovation and the development of new technologies. Proponents also said that preserving a vacant channel could help expand Wi-Fi more thoroughly giving people and businesses greater connectivity and could help extend coverage to people who might not have affordable access to the Internet. |
Intellectual property is an important component of the U.S. economy, and the United States is an acknowledged global leader in the creation of intellectual property. However, industries estimate that annual losses stemming from violations of intellectual property rights overseas are substantial. Further, counterfeiting of products such as pharmaceuticals and food items fuels public health and safety concerns. USTR’s Special 301 reports on the adequacy and effectiveness of intellectual property protection around the world demonstrate that, from a U.S. perspective, intellectual property protection is weak in developed as well as developing countries and that the willingness of countries to address intellectual property issues varies greatly. Eight federal agencies, as well as the Federal Bureau of Investigation (FBI) and the U.S. Patent and Trademark Office (USPTO), undertake the primary U.S. government activities to protect and enforce U.S. intellectual property rights overseas. The agencies are the Departments of Commerce, State, Justice, and Homeland Security; USTR; the Copyright Office; the U.S. Agency for International Development (USAID); and the U.S. International Trade Commission. The efforts of U.S. agencies to protect U.S. intellectual property overseas fall into three general categories—policy initiatives, training and technical assistance, and U.S. law enforcement actions. U.S. policy initiatives to increase intellectual property protection around the world are primarily led by USTR, in coordination with the Departments of State and Commerce, USPTO, and the Copyright Office, among other agencies. A centerpiece of policy activities is the annual Special 301 process. “Special 301” refers to certain provisions of the Trade Act of 1974, as amended, that require USTR to annually identify foreign countries that deny adequate and effective protection of intellectual property rights or fair and equitable market access for U.S. persons who rely on intellectual property protection. USTR identifies these countries with substantial assistance from industry and U.S. agencies and publishes the results of its reviews in an annual report. Once a pool of such countries has been determined, the USTR, in coordination with other agencies, is required to decide which, if any, of these countries should be designated as a Priority Foreign Country (PFC). If a trading partner is identified as a PFC, USTR must decide within 30 days whether to initiate an investigation of those acts, policies, and practices that were the basis for identifying the country as a PFC. Such an investigation can lead to actions such as negotiating separate intellectual property understandings or agreements between the United States and the PFC or implementing trade sanctions against the PFC if no satisfactory outcome is reached. Between 1994 and 2004, the U.S. government designated three countries as PFCs—China, Paraguay, and Ukraine—as a result of intellectual property reviews. The U.S. government negotiated separate bilateral intellectual property agreements with China and Paraguay to address IPR problems. These agreements are subject to annual monitoring, with progress cited in each year’s Special 301 report. Ukraine, where optical media piracy was prevalent, was designated a PFC in 2001. The United States and Ukraine found no mutual solution to the IPR problems, and in January 2002, the U.S. government imposed trade sanctions in the form of prohibitive tariffs (100 percent) aimed at stopping $75 million worth of certain imports from Ukraine over time. In addition, most of the agencies involved in efforts to promote or protect IPR overseas engage in some training or technical assistance activities. Key activities to develop and promote enhanced IPR protection in foreign countries are undertaken by the Departments of Commerce, Homeland Security, Justice, and State; the FBI; USPTO; the Copyright Office; and USAID. Training events sponsored by U.S. agencies to promote the enforcement of intellectual property rights have included enforcement programs for foreign police and customs officials, workshops on legal reform, and joint government-industry events. According to a State Department official, U.S. government agencies have conducted intellectual property training for a number of countries concerning bilateral and multilateral intellectual property commitments, including enforcement, during the past few years. For example, intellectual property training was conducted by numerous agencies over the last year in Poland, China, Morocco, Italy, Jordan, Turkey, and Mexico. A small number of agencies are involved in enforcing U.S. intellectual property laws, and the nature of these activities differs from other U.S. government actions related to intellectual property protection. Working in an environment where counterterrorism is the central priority, the FBI and the Departments of Justice and Homeland Security take actions that include engaging in multicountry investigations involving intellectual property violations and seizing goods that violate intellectual property rights at U.S. ports of entry. For example, the Department of Justice has an office that directly addresses international IPR problems. Justice has been involved with international investigation and prosecution efforts and, according to a Justice official, has become more aggressive in recent years. For instance, Justice and the FBI recently coordinated an undercover IPR investigation, with the involvement of several foreign law enforcement agencies. The investigation focused on individuals and organizations, known as “warez” release groups, which specialize in the Internet distribution of pirated materials. In April 2004, these investigations resulted in 120 simultaneous searches worldwide (80 in the United States) by law enforcement entities from 10 foreign countries and the United States in an effort known as “Operation Fastlink.” Although investigations can result in international actions such as those cited above, FBI officials told us that they cannot determine the number of past or present IPR cases with an international component because they do not track or categorize cases according to this factor. Department of Homeland Security (DHS) officials emphasized that their investigations include an international component when counterfeit goods are brought into the United States. However, DHS does not track cases by a specific foreign connection. The overall number of IPR-oriented investigations that have been pursued by foreign authorities as a result of DHS efforts is unknown. DHS does track seizures of goods that violate IPR and reports seizures that totaled more than $90 million in fiscal year 2003. Seizures of IPR-infringing goods have involved imports primarily from Asia. In fiscal year 2003, goods from China accounted for about two-thirds of the value of all IPR seizures, many of which were shipments of cigarettes. Other seized goods from Asia that year originated in Hong Kong and Korea. A DHS official pointed out that providing protection against IPR-infringing imported goods for some U.S. companies—particularly entertainment companies— can be difficult, because companies often fail to record their trademarks and copyrights with DHS. Several interagency mechanisms exist to coordinate overseas intellectual property policy initiatives, development and assistance activities, and law enforcement efforts, although these mechanisms’ level of activity and usefulness varies. According to government and industry officials, an interagency trade policy mechanism established by the Congress in 1962 to assist USTR has operated effectively in reviewing IPR issues. The mechanism, which consists of tiers of committees as well as numerous subcommittees, constitutes the principle means for developing and coordinating U.S. government positions on international trade, including IPR. A specialized subcommittee is central to conducting the Special 301 review and determining the results of the review. This interagency process is rigorous and effective, according to U.S. government and industry officials. A Commerce official told us that the Special 301 review is one of the best tools for interagency coordination in the government, while a Copyright Office official noted that coordination during the review is frequent and effective. A representative for copyright industries also told us that the process works well and is a solid interagency effort. The National Intellectual Property Law Enforcement Coordination Council (NIPLECC), created by the Congress in 1999 to coordinate domestic and international intellectual property law enforcement among U.S. federal and foreign entities, seems to have had little impact. NIPLECC consists of (1) the Under Secretary of Commerce for Intellectual Property and Director of the United States Patent and Trademark Office; (2) the Assistant Attorney General, Criminal Division; (3) the Under Secretary of State for Economic and Agricultural Affairs; (4) the Deputy United States Trade Representative; (5) the Commissioner of Customs; and (6) the Under Secretary of Commerce for International Trade. NIPLECC’s authorizing legislation did not include the FBI as a member of NIPLECC, despite its pivotal role in law enforcement. However, according to representatives of the FBI, USPTO, and Justice, the FBI should be a member. USPTO and Justice cochair NIPLECC, which has no independent staff or budget. In the council’s nearly 4 years of existence, its primary output has been three annual reports to the Congress, which are required by statute. According to interviews with industry officials and officials from its member agencies, and as evidenced by its own legislation and reports, NIPLECC continues to struggle to define its purpose and has had little discernable impact. Indeed, officials from more than half of the member agencies offered criticisms of NIPLECC, remarking that it is unfocused, ineffective, and “unwieldy.” In official comments to the council’s 2003 annual report, major IPR industry associations expressed a sense that NIPLECC is not undertaking any independent activities or effecting any impact. One industry association representative stated that law enforcement needs to be made more central to U.S. IPR efforts and said that although he believes the council was created to deal with this issue, it has “totally failed.” The lack of communication regarding enforcement results in part from complications such as concerns regarding the sharing of sensitive law enforcement information and from the different missions of the various agencies involved in intellectual property actions overseas. According to an official from USPTO, NIPLECC is hampered primarily by its lack of independent staff and funding. According to a USTR official, NIPLECC needs to define a clear role in coordinating government policy. A Justice official stressed that, when considering coordination, it is important to avoid creating an additional layer of bureaucracy that may detract from efforts devoted to each agency’s primary mission. Despite its difficulties thus far, we heard some positive comments regarding NIPLECC. For example, an official from USPTO noted that the IPR training database Web site resulted from NIPLECC efforts. Further, an official from the State Department commented that NIPLECC has had some “trickle-down” effects, such as helping to prioritize the funding and development of the intellectual property database at the State Department. Although the agency officials that constitute NIPLECC’s membership meet infrequently and NIPLECC has undertaken few concrete activities, this official noted that NIPLECC provides the only forum for bringing enforcement, policy, and foreign affairs agencies together at a high level to discuss intellectual property issues. A USPTO official stated that NIPLECC has potential but needs to be “energized.” Other coordination mechanisms include the National International Property Rights Coordination Center (IPR Center) and informal coordination. The IPR Center in Washington, D.C., a joint effort between DHS and the FBI, began limited operations in 2000. According to a DHS official, the coordination between DHS, the FBI, and industry and trade associations makes the IPR Center unique. The IPR Center is intended to serve as a focal point for the collection of intelligence involving copyright and trademark infringement, signal theft, and theft of trade secrets. However, the center is not widely used by industry. An FBI official associated with the IPR Center estimated that about 10 percent of all FBI industry referrals come through the center rather than going directly to FBI field offices. DHS officials noted that “industry is not knocking the door down” and that the IPR Center is perceived as underutilized. Policy agency officials noted the importance of informal but regular communication among staff at the various agencies involved in the promotion or protection of intellectual property overseas. Several officials at various policy-oriented agencies, such as USTR and the Department of Commerce, noted that the intellectual property community was small and that all involved were very familiar with the relevant policy officials at other agencies in Washington, D.C. Further, State Department officials at U.S. embassies regularly communicate with agencies in Washington, D.C., regarding IPR matters and U.S. government actions. Agency officials noted that this type of coordination is central to pursuing U.S. intellectual property goals overseas. Although communication between policy and law enforcement agencies can occur through forums such as the NIPLECC, these agencies do not systematically share specific information about law enforcement activities. According to an FBI official, once a criminal investigation begins, case information stays within the law enforcement agencies and is not shared. A Justice official emphasized that criminal law enforcement is fundamentally different from the activities of policy agencies and that restrictions exist on Justice’s ability to share investigative information, even with other U.S. agencies. U.S. efforts have contributed to strengthened foreign IPR laws, but enforcement overseas remains weak. The impact of U.S. activities is challenged by numerous factors. Industry representatives report that the situation may be worsening overall for some intellectual property sectors. The efforts of U.S. agencies have contributed to the establishment of strengthened intellectual property legislation in many foreign countries, however, the enforcement of intellectual property rights remains weak in many countries, and U.S. government and industry sources note that improving enforcement overseas is now a key priority. USTR’s most recent Special 301 report states that “although several countries have taken positive steps to improve their IPR regimes, the lack of IPR protection and enforcement continues to be a global problem.” For example, although the Chinese government has improved its statutory IPR regime, USTR remains concerned about enforcement in that country. According to USTR, counterfeiting and piracy remain rampant in China and increasing amounts of counterfeit and pirated products are being exported from China. Although U.S. law enforcement does undertake international cooperative activities to enforce intellectual property rights overseas, executing these efforts can prove difficult. For example, according to DHS and Justice officials, U.S. efforts to investigate IPR violations overseas are complicated by a lack of jurisdiction as well as by the fact that U.S. officials must convince foreign officials to take action. Further, a DHS official noted that in some cases, activities defined as criminal in the United States are not viewed as an infringement by other countries and that U.S. law enforcement agencies can therefore do nothing. In addition, U.S. efforts confront numerous challenges. Because intellectual property protection is one of many U.S. government objectives pursued overseas, it is viewed internally in the context of broader U.S. foreign policy objectives that may receive higher priority at certain times in certain countries. Industry officials with whom we met noted, for example, their belief that policy priorities related to national security were limiting the extent to which the United States undertook activities or applied diplomatic pressure related to IPR issues in some countries. Further, the impact of U.S. activities is affected by a country’s own domestic policy objectives and economic interests, which may complement or conflict with U.S. objectives. U.S. efforts are more likely to be effective in encouraging government action or achieving impact in a foreign country where support for intellectual property protection exists. It is difficult for the U.S. government to achieve impact in locations where foreign governments lack the “political will” to enact IPR protections. Many economic factors complicate and challenge U.S. and foreign governments’ efforts, even in countries with the political will to protect intellectual property. These factors include low barriers to entering the counterfeiting and piracy business and potentially high profits for producers. In addition, the low prices of counterfeit products are attractive to consumers. The economic incentives can be especially acute in countries where people have limited income. Technological advances allowing for high-quality inexpensive and accessible reproduction and distribution in some industries have exacerbated the problem. Moreover, many government and industry officials believe that the chances of getting caught for counterfeiting and piracy, as well as the penalties when caught, are too low. The increasing involvement of organized crime in the production and distribution of pirated products further complicates enforcement efforts. Federal and foreign law enforcement officials have linked intellectual property crime to national and transnational organized criminal operations. Further, like other criminals, terrorists can trade any commodity in an illegal fashion, as evidenced by their reported involvement in trading a variety of counterfeit and other goods. Many of these challenges are evident in the optical media industry, which includes music, movies, software, and games. Even in countries where interests exist to protect domestic industries, such as the domestic music industry in Brazil or the domestic movie industry in China, economic and law enforcement challenges can be difficult to overcome. For example, the cost of reproduction technology and copying digital media is low, making piracy an attractive employment opportunity, especially in a country where formal employment is hard to obtain. The huge price differentials between pirated CDs and legitimate copies also create incentives on the consumer side. For example, when we visited a market in Brazil, we observed that the price for a legitimate DVD was approximately ten times the price for a pirated DVD. Even if consumers are willing to pay extra to purchase the legitimate product, they may not do so if the price differences are too great for similar products. Further, the potentially high profit makes optical media piracy an attractive venture for organized criminal groups. Industry and government officials have noted criminal involvement in optical media piracy and the resulting law enforcement challenges. Recent technological advances have also exacerbated optical media piracy. The mobility of the equipment makes it easy to transport it to another location, further complicating enforcement efforts. Likewise, the Internet provides a means to transmit and sell illegal software or music on a global scale. According to an industry representative, the ability of Internet pirates to hide their identities or operate from remote jurisdictions often makes it difficult for IPR holders to find them and hold them accountable. Despite improvements such as strengthened foreign IPR legislation, international IPR protection may be worsening overall for some intellectual property sectors. For example, according to copyright industry estimates, losses due to piracy grew markedly in recent years. The entertainment and business software sectors, for example, which are very supportive of USTR and other agencies, face an environment in which their optical media products are increasingly easy to reproduce, and digitized products can be distributed around the world quickly and easily via the Internet. According to an intellectual property association representative, counterfeiting trademarks has also become more pervasive in recent years. Counterfeiting affects more than just luxury goods; it also affects various industrial goods. The U.S. government has demonstrated a commitment to addressing IPR issues in foreign countries using multiple agencies. However, law enforcement actions are more restricted than other U.S. activities, owing to factors such as a lack of jurisdiction overseas to enforce U.S. law. Several IPR coordination mechanisms exist, with the interagency coordination that occurs during the Special 301 process standing out as the most significant and active. Conversely, the mechanism for coordinating intellectual property law enforcement, NIPLECC, has accomplished little that is concrete. Currently, there is a lack of compelling information to demonstrate a unique role for this group, bringing into question its effectiveness. In addition, it does not include the FBI, a primary law enforcement agency. Members, including NIPLECC leadership, have repeatedly acknowledged that the group continues to struggle to find an appropriate mission. The effects of U.S. actions are most evident in strengthened foreign IPR legislation. U.S. efforts are now focused on enforcement, since effective enforcement is often the weak link in intellectual property protection overseas and the situation may be deteriorating for some industries. As agencies continue to pursue IPR improvements overseas, they will face daunting challenges. These challenges include the need to create political will overseas, recent technological advancements that facilitate the production and distribution of counterfeit and pirated goods, and powerful economic incentives for both producers and consumers, particularly in developing countries. Further, as the U.S. government focuses increasingly on enforcement, it will face different and complex factors, such as organized crime, that may prove quite difficult to address. With a broad mandate under its authorizing legislation, NIPLECC has struggled to establish its purpose and unique role. If the Congress wishes to maintain NIPLECC and take action to increase its effectiveness, the Congress may wish to consider reviewing the council’s authority, operating structure, membership, and mission. Such considerations could help NIPLECC identify appropriate activities and operate more effectively to coordinate intellectual property law enforcement issues. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions that you or other members of the committee may have at this time. Should you have any questions about this testimony, please contact me by e-mail at [email protected] or Emil Friberg at [email protected]. We can also be reached at (202) 512-4128 and (202) 512-8990, respectively. Other major contributors to this testimony were Leslie Holen, Ming Chen, and Sharla Draemel. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Although the U.S. government provides broad protection for intellectual property, intellectual property protection in parts of the world is inadequate. As a result, U.S. goods are subject to piracy and counterfeiting in many countries. A number of U.S. agencies are engaged in efforts to improve protection of U.S. intellectual property abroad. This testimony, based on a recent GAO report, describes U.S agencies' efforts, the mechanisms used to coordinate these efforts, and the impact of these efforts and the challenges they face. U.S. agencies undertake policy initiatives, training and assistance activities, and law enforcement actions in an effort to improve protection of U.S. intellectual property abroad. Policy initiatives include assessing global intellectual property challenges and identifying countries with the most significant problems--an annual interagency process known as the "Special 301" review--and negotiating agreements that address intellectual property. In addition, many agencies engage in training and assistance activities, such as providing training for foreign officials. Finally, a small number of agencies carry out law enforcement actions, such as criminal investigations involving foreign parties and seizures of counterfeit merchandise. Agencies use several mechanisms to coordinate their efforts, although the mechanisms' usefulness varies. Formal interagency meetings--part of the U.S. government's annual Special 301 review--allow agencies to discuss intellectual property policy concerns and are seen by government and industry sources as rigorous and effective. However, the National Intellectual Property Law Enforcement Coordination Council, established to coordinate domestic and international intellectual property law enforcement, has struggled to find a clear mission, has undertaken few activities, and is generally viewed as having little impact. U.S. efforts have contributed to strengthened intellectual property legislation overseas, but enforcement in many countries remains weak, and further U.S. efforts face significant challenges. For example, competing U.S. policy objectives take precedence over protecting intellectual property in certain regions. Further, other countries' domestic policy objectives can affect their "political will" to address U.S. concerns. Finally, many economic factors, as well as the involvement of organized crime, hinder U.S. and foreign governments' efforts to protect U.S. intellectual property abroad. |
According to GSA, its Federal Technology Service, in conjunction with the IMC, is responsible for ensuring that federal agencies have access to the telecommunications services and solutions needed to meet mission requirements. Its current program to provide long- distance telecommunications services—FTS2001—has two goals: to ensure the best service and price for the government, and to maximize competition for services. In implementing this program strategy, GSA awarded two contracts for long-distance services—one to Sprint in December 1998 and one to MCI WorldCom in January 1999. Under the terms of these contracts, each firm was guaranteed minimum revenues of $750 million over the life of the contracts, which run for four base years and have four 1-year-extension options. If all contract options are exercised, those contracts will expire in December 2006 and January 2007, respectively. According to GSA, federal agencies spent approximately $614 million on FTS2001 services during fiscal year 2003 alone. Related governmentwide telecommunications services are provided by other GSA contracts: the Federal Wireless Telecommunications Service contract and the FTS Satellite Service contracts. The wireless contract was awarded in 1996 to provide wireless telecommunications products and services to all federal agencies, authorized federal contractors, and other users. The satellite services contracts are a series of contracts for a variety of commercial off-the-shelf satellite communications products and services, including mobile, fixed, and broadcast services. According to GSA, these contracts will expire in late 2004 and in 2007, respectively. We have periodically reviewed the development and implementation of the FTS2001 program and assessed its progress. In March 2001 we reported to you on the delays encountered during the government’s efforts to transition from the previous FTS 2000 to the FTS2001 contracts, the reasons for those delays, and the effects of the delays on meeting FTS2001 program goals of maximizing competition for services and ensuring best service and price. We recommended that GSA take numerous actions to facilitate those transition efforts. In April 2001 in testimony before you, we reiterated those recommendations and noted that the process of planning and managing future telecommunications service acquisition would benefit from an accurate and robust inventory of existing telecommunications services. Ultimately, GSA acted on our recommendations and the transitions were successfully completed. GSA is now planning its FTS Networx acquisition program, including the awarding of new governmentwide contracts for a broad range of long distance and international voice and data communications services, wireless services, and satellite telecommunications services. These contracts are intended to replace the existing FTS2001, Federal Wireless Telecommunications Service, and FTS Satellite Service contracts. GSA and the IMC has identified five goals for the Networx acquisition program: Meet agency needs for a comprehensive acquisition that provides continuity of current telecommunications services and solutions. Obtain best value (lowest prices while maintaining quality of service levels) for all services and solutions. Encourage strong competition for the initial contract award(s), and ensure continuous competition throughout the life of the program. Respond to the changing marketplace by providing agency access to a broad range of services and service providers. Provide expanded opportunities for small businesses. To achieve those goals, the program calls for two acquisitions—Networx Universal and Networx Select. The Networx Universal contracts are expected to satisfy requirements for a full range of national and international network services. According to GSA, Networx Universal seeks to ensure the continuity of services and prices found under expiring contracts that provide broad-ranging service with global geographic coverage. GSA expects all Networx Universal offerors to provide a full range of voice and data network services, managed networking services and solutions, and network access, wireless, and satellite communications services. This acquisition is expected to result in multiple contract awards to relatively few offerors because few are expected to be able to satisfy the geographic coverage and comprehensive service requirements. GSA also intends to apply competitive incentives to obtain best value for its customer agencies, although those incentives are not yet defined. Further, GSA expects to establish minimum revenue guarantees for these contracts. In contrast, GSA plans to award multiple contracts for a more geographically limited set of services under Network Select. GSA generally describes these Select contracts as providing agencies with leading edge services and solutions with less extensive geographic and service coverage than that required by Networx Universal; specific Networx Select service requirements have not yet, however, been defined. Details of pricing structures and Select service delivery mechanisms are planned to be provided in the Networx Select request for proposals, which GSA intends to release in the summer of 2005. GSA anticipates awarding both the Networx Universal and the Networx Select contracts well before the expiration of the FTS2001 contracts. Notwithstanding the acquisition planning activities completed by GSA and the IMC to date, these entities face significant challenges in finalizing their program strategy to ensure that Networx is appropriately defined, structured, and managed to deliver those telecommunications services and solutions that will enable federal agencies to most efficiently and effectively meet their mission needs. Specifically, these challenges include: Ensuring that adequate inventory information is available to planners to provide an informed understanding of governmentwide requirements. Establishing measures of success to aid acquisition decision-making and enable effective program management. Structuring and scheduling the Networx contracts to ensure that federal agencies have available to them the competitively priced telecommunications services they need to support their mission objectives. Initiating the implementation planning actions needed to ensure a smooth transition from current contracts to Networx. It is important that GSA and its customer agencies have a clear understanding of agency service requirements in order to make properly informed acquisition planning decisions. According to our ongoing research on best practices in telecommunications acquisition and management, clear understanding comes at least in part from having an accurate baseline inventory of existing services and assets. More specifically, an inventory allows planners to make informed judgments based on an accurate analysis of current requirements and capabilities, emerging needs that must be considered, and the current cost of services. Although leading organizations acknowledge that establishing and maintaining such an inventory may be difficult, they view this baseline as an essential first step to high-quality telecommunications requirements analysis, and subsequent sourcing decisions associated with meeting those requirements. Despite this importance, it is not clear whether GSA and federal agencies have yet established the comprehensive, accurate inventories needed to support Networx planning. Mr. Chairman, you followed up on this issue in your December 17, 2003, letter to GSA asking to what extent such detailed inventories were currently being maintained and kept accurate and up-to- date for use both in acquisition planning and future contract transitions. In his response, the Administrator of General Services identified sources of information provided by GSA and the FTS2001 vendors—for example, monthly billing information—that would be helpful to agencies in developing inventories of existing services. In addition, the Administrator noted that GSA is examining methods of incorporating better billing and inventory data into the Networx program where practical. However, the Administrator did not provide specific information on the extent to which these inventories exist, or whether agencies are periodically validating that information to ensure that it is accurate and complete. Further, the Administrator acknowledged that the accuracy and completeness of telecommunications service inventories varies among agencies. As a result, without a clear understanding by GSA and its customer agencies of the FTS2001 services used today and the applications they support, it is unclear how properly informed Networx acquisition planning decisions can be made. Our research into recommended program and project measurement practices, which we affirmed in discussions with private-sector telecommunications managers, highlights the importance of establishing clear measures of success to aid acquisition decision making as well as to provide the foundation for accountable program management. Such measures define what must be done for a project to be acceptable to the stakeholders and users affected by it, and in so doing enables measurement of progress and effectiveness in meeting objectives. Although GSA has established program goals, it has not yet defined a comprehensive set of corresponding performance measures for the Networx acquisition program. According to GSA’s Assistant Commissioner for Service Delivery/Development, one of the criteria for measuring Networx success will be identical to that used for FTS2001—that is, savings as measured by contract service costs compared with best commercial pricing. Further, according to this official, this was the sole measure reported to the Office of Management and Budget for FTS2001. While low pricing is an important criterion reflected in program goals, GSA has not yet defined measures about how well its final acquisition plan will deliver the value (service plus price) that agencies need to improve their operations and meet their mission needs. For example, GSA’s Networx environmental assessment indicates that agencies want this program to support network planning and optimization, include simple and understandable fees, provide management of contracts and contractors on the agencies’ behalf, and include other elements of value. GSA’s Assistant Commissioner for Service Delivery/Development recognizes the importance of having such measures, and told us that GSA would be establishing such measures coincident with its actions to finalize the Networx Universal RFP in the coming months. It will be important that GSA follow through on this commitment to establish that appropriate set of measures to evaluate the intended business value of the Networx program and enable the effective management of this significant program over time. Once agency requirements are adequately understood and measures of success defined, structuring and scheduling the Networx contracts to successfully encourage industry competition to obtain low prices and high-quality, innovative services becomes the next challenge. The varying views of industry representatives commenting on the request for information raised fundamental questions about the soundness of the proposed acquisition approach for accomplishing this. For example, large, interexchange carriers, like those that hold the current FTS2001 contracts, generally agreed with the broad scope of the Universal contracts. They further suggested that services offered under Networx Select and Universal should be mutually exclusive, and that all carriers should be allowed to compete for both. In contrast, other carriers criticized the approach. These carriers asserted that some major telecommunications providers might be precluded from bidding on the Networx Universal contracts because of the broad service and ubiquitous geographic coverage requirements described in the request for information. For example, one vendor stated that it was quite possible that only traditional long distance carriers could effectively bid for Universal, thus denying many players in the industry a realistic chance to compete for major portions of the federal long distance business. One carrier noted that, based on the procurement timetable, the timing of the award for the Select contracts would minimize the opportunity to compete for long-distance telecommunications services. Because of the 9-month lag between the Universal and Select acquisitions indicated in the proposed acquisition schedule, agencies could be asked to make decisions regarding their use of awarded Universal service contracts before information is available regarding Select leading edge services and solutions that may be more suitable for their needs. Defining an acquisition strategy that appropriately balances the need to ensure the continuation of existing telecommunications services in all current government locations with encouraging strong competition to obtain best value is a daunting challenge. However, proceeding from a clear understanding of requirements and measures of success—as I previously discussed—should aid in meeting this challenge by providing guideposts for a decision that strikes an appropriate balance on contract scope, program structure, and acquisition schedules that can deliver to agencies competitively priced solutions that meet their mission needs. Further, continuing to solicit and effectively implement feedback from stakeholders should help GSA achieve this goal. As we reported to you in March 2001, the current FTS2001 contracts got off to a rocky start as significant delays in transitioning to the new contracts hindered timely achievement of program goals. Factors contributing to those delays included a lack of data needed to accurately measure and effectively manage the transitions, inadequate resources, and other process and procedural issues. Ultimately, GSA did take action on all of our recommendations and the transition to the FTS2001 contracts was finally completed. In subsequent testimony before you in April 2001 we noted the importance of incorporating the lessons learned from this transition into future procurements. Specifically, we stated that “the process of planning and managing future telecommunications service acquisitions—both by GSA and by the agencies themselves—will benefit from an accurate and robust inventory of current telecommunications services. Further, the value of this critical program to customer agencies will be improved through the application of lessons learned in streamlining and prioritizing the contract modification process, in effectively and expeditiously resolving billing problems, and in holding contractors accountable for meeting agency requirements in a timely manner.” Those in industry who commented on the Networx request for information also noted the need for strong and comprehensive program management to ensure successful transition, including not only the availability of accurate inventories but also defined contractor and government responsibilities. While GSA recognizes the importance of transition planning, it has not yet fully addressed these issues. GSA has emphasized that its development of the Networx program included an analysis of lessons learned from existing programs and previous acquisitions. Further, in his February 11 letter in response to your inquiry about agency inventories, the Administrator outlined the proactive steps GSA plans to take, including actions to establish a working group and to improve the availability of accurate inventory information to support the transition. According to the GSA’s Associate Commissioner Service Delivery/Development, these actions will also include developing processes and procedures, identifying funding needs, and training agency personnel in order to support a smooth contract transition. As acquisition plans are finalized in the coming months, it will be important that GSA follow through on these initial steps to ensure that the transition to the new contracts proceeds efficiently and seamlessly, and that a repeat of the FTS2001 transition difficulties is avoided. In summary, Mr. Chairman, Networx represents a critical opportunity to leverage the strength and creativity of the telecommunications marketplace to make the vision of delivering to agencies the telecommunications business solutions they need to perform their missions better and more cost-effectively a reality, and in so doing to carry the federal government forward well into the 21st century. To accomplish this, however, GSA will need to overcome significant challenges and demonstrate solid leadership. Likewise critical will be stakeholder commitment. Actions taken and decisions reached in the coming months to more fully define the Networx program and finalize an appropriate acquisition strategy will significantly influence the telecommunications choices federal agencies will have for the next several years. Unless GSA follows through to resolve the challenges outlined today, the potential of Networx may well not be realized. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or other members of the Committee may have at this time. Should you have any questions about this testimony, please contact me by e-mail at [email protected] or Kevin Conway, Assistant Director, at [email protected]. We can also be reached at (202) 512-6240 and (202) 512-6340, respectively. Another major contributor to this testimony was Michael P. Fruitman. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Genera1 Services Administration (GSA) has initiated planning for its next-generation telecommunications acquisition program, known as Networx, which will replace the current Federal Telecommunications System (FTS) 2001 for longdistance and international services. It will also replace contracts for wireless and satellite communications products and services. Planning for this acquisition is occurring within an environment of tremendous change--in the industry, in underlying services and technology, and potentially in the regulatory environment. In this context, Networx can offer a significant opportunity for the federal government to flexibly acquire telecommunications services at competitive rates and apply innovative solutions to improving agency operations. At the request of the Chairman of the House Committee on Government Reform, GAO is providing an overview of acquisition planning steps completed to date, along with its assessment of challenges facing GSA and federal agencies as this acquisition proceeds. Over the past year, GSA has acted to ensure that all interested parties-- including industry and agency users--have had a chance to comment on the development of the successor to FTS2001 and associated contracts. In its planning for the Networx acquisition, GSA cited five goals for the program: (1) continuity of telecommunications services, (2) best value, (3) strong competition, (4) a broad range of services and providers in a changing marketplace, and (5) expanded opportunities for small businesses. To achieve this, GSA plans two acquisitions: Networx Universal--broadranging services with global coverage, and Networx Select--leading-edge services but more geographically limited. To take full advantage of the opportunities offered in these new contracts, GSA will need to address four key challenges: (1) ensuring that an adequate inventory of information about existing telecommunications services and assets is available, to give planners an informed understanding of governmentwide requirements; (2) establishing specific measures of success to aid acquisition decision making and effective program management; (3) structuring and scheduling the contracts to ensure timely delivery of competitively priced telecommunications services that meet agency mission needs; and (4) ensuring a smooth transition from the current contracts by initiating appropriate implementation planning actions. Both leadership from GSA and commitment from stakeholders in resolving these issues will be essential to establishing efficient, cost-effective, and secure telecommunications services. If this can be achieved, the Networx contracts will be optimally positioned to leverage the power and creativity of today's telecommunications marketplace to carry the federal government forward well into the 21st century. |
In our reports and testimonies, we suggested actions that if taken could improve compliance with the tax laws, assist taxpayers, enhance the effectiveness of tax incentives, improve Internal Revenue Service (IRS) management, and improve the processing of returns and receipts. The associated reports and testimonies are summarized in the appendixes. The following pages highlight notable reports and testimonies from fiscal year 1995. One of IRS’ goals is to increase voluntary compliance. We issued several reports and testimonies in fiscal year 1995 dealing with IRS’ primary compliance measurement program and IRS’ efforts to reduce noncompliance. Status of Tax Year 1994 Compliance Measurement Program. IRS’ Taxpayer Compliance Measurement Program (TCMP) plays an important role in national tax policy and administration decisions. IRS collects TCMP data by doing extensive audits on a random sample of tax returns. IRS uses the sample data to measure compliance levels, estimate the tax gap, develop formulas for selecting returns to audit, identify compliance issues, and allocate its resources. Because of TCMP’s importance, we monitored IRS’ plans to develop and implement the tax year 1994 TCMP for which audits were slated to begin in October 1995. We concluded that (1) IRS’ 1994 TCMP would be the most comprehensive TCMP effort ever undertaken, (2) its larger sample compared with past TCMP efforts would allow for more sophisticated and powerful analyses, (3) new audit techniques and more information should help IRS auditors do higher quality audits, and (4) the many changes and added complexity would increase the importance of adequate training of the auditors and supervisory review of their work. We continue to believe that TCMP is a good investment because it is IRS’ tool for objectively measuring compliance with tax laws. The 1994 TCMP was delayed indefinitely, however, because of congressional concerns about both the cost and taxpayer burden associated with the TCMP and budget cuts. IRS is considering several alternatives, but as of December 31, 1995, no alternative had been selected (GAO/GGD-95-39, Dec. 30, 1994; GAO/T-GGD-95-207, July 18, 1995). (See p. 20.) Reducing the Income Tax Gap. One of the greatest challenges facing IRS is finding ways to reduce the gross income tax gap—the difference between income taxes owed and those voluntarily paid. IRS estimates that more than $100 billion in income from legal sources is at stake annually. IRS attributes about three-fourths of the tax gap to individuals and about one-fourth to corporations. To explore innovative and practical ways to reduce the tax gap, we sponsored a symposium on January 12, 1995, that brought together well-known tax authorities with congressional, IRS, and our staff. In general, the panelists identified several objectives that, if met, could help improve compliance: (1) reduce tax law ambiguity and complexity; (2) extend the reach of tax requirements, such as income tax withholding, that tend to promote taxpayer compliance; (3) expand compliance techniques such as information sharing with states and enhanced penalties; (4) more aggressively focus on unreported income; (5) improve IRS’ compliance data; and (6) improve IRS’ ability to resolve compliance problems quickly. The panelists also cautioned against excessive intrusions into taxpayers’ affairs, which could defeat IRS’ objectives. In June 1995, we testified that (1) compliance varies across groups of taxpayers and is lowest where there is neither withholding nor information reporting and (2) some of the tax gap may not be collectible at an acceptable cost, making it important that IRS measure compliance and use that information to effectively focus its resources. In a December 1994 report, we discussed the tax gap for one group of taxpayers— self-employed persons who provide services (GAO/GGD-95-59, Dec. 28, 1994; GAO/GGD-95-157, June 2, 1995; GAO/T-GGD-95-176, June 6, 1995). (See pp. 19, 26, and 27.) Tax Compliance Burden Facing Business Taxpayers. As business taxpayers strive to comply with federal, state, and local tax requirements, they expend time, incur costs, and experience frustrations. We define this effort as “taxpayer compliance burden.” Using available studies on federal compliance burden, supplemented with interviews of business taxpayers, we found that the complexity of the Internal Revenue Code, compounded by the frequent changes made to the code, is the source of most business taxpayer burden. Determining a reliable estimate of the cost of such burden would be costly and in itself burdensome on businesses. In testimony, we provided examples of code provisions and of IRS’ administration of the code that are most problematic to business. We also provided some of the businesses’ suggestions for simplification (GAO/T-GGD-95-42, Dec. 9, 1994). (See p. 18.) Pricing of Intercompany Transactions (Transfer Pricing). Transfer pricing affects the distribution of profits and therefore taxable income among related companies and sometimes across tax jurisdictions. Abusive transfer pricing occurs when income and expenses are improperly allocated among related companies to reduce certain companies’ taxable income. Section 482 of the Internal Revenue Code allows IRS to reallocate income among related parties if it finds violations. In an April 1995 report, we (1) provided information on IRS’ recent experiences in dealing with transfer pricing issues and its use of available regulatory and procedural tools and (2) updated earlier analyses showing how many U.S.-controlled corporations and foreign-controlled corporations paid no U.S. income tax. In 1993 and 1994, IRS examiners found, as they had in previous years, many section 482 violations. Also, as in past years, IRS sustained less than 30 percent of the proposed adjustments. According to IRS officials, certain procedural tools, such as measures to obtain information and stronger penalties, had served mostly as deterrents. It was too soon to assess the success of transfer pricing regulations issued in July 1994 (GAO/GGD-95-101, Apr. 13, 1995). (See p. 22.) California’s Experiences in Taxing Multinational Corporations. A worldwide formulary apportionment system has been proposed by some state tax officials and other tax experts as an alternative to the existing tax system. In a July 1995 report, we discussed the issues to be considered before a federal formulary apportionment could be adopted. Also, we discussed California’s experience with its own version of the advocated federal system in which multinational enterprises apportion a share of their worldwide income to California. The California formulary approach can be applied to income from a single corporation or from a group of affiliated corporations (GAO/GGD-95-171, July 11, 1995). (See p. 30.) To ease taxpayer frustration and increase the likelihood of voluntary compliance with the tax laws, IRS must (1) treat taxpayers fairly, (2) provide timely and accurate assistance, and (3) communicate clearly. Several of our fiscal year 1995 products dealt with those issues. Treating Taxpayers Fairly. Several initiatives have been undertaken in recent years to better protect taxpayers, including enactment of the Taxpayer Bill of Rights in 1988 and internal IRS efforts to treat taxpayers as customers and to improve its operations. IRS has a wide range of controls, processes, and oversight offices to govern the behavior of its employees in dealing with taxpayers. Despite the many controls intended to protect taxpayers, we found examples that fell within our definition of taxpayer abuse. We concluded that IRS needs to specifically define taxpayer abuse and develop management information about it to identify and rectify future instances of abuse. We recommended that IRS strengthen its controls in several areas and provide additional information to taxpayers that will increase their ability to protect their rights. Such steps would enable IRS and Congress to better evaluate IRS’ performance in protecting taxpayers’ rights (GAO/GGD-95-14, Oct. 26, 1994). (See p. 34.) Telephone Assistance. Many taxpayers who seek help through IRS’ telephone assistance program are not getting it. Even with increased productivity, IRS has not kept pace with the significant growth in the number of calls received. IRS employees answered about one out of two calls in fiscal year 1989 but only one out of four calls in fiscal year 1994. Even with new technology, IRS has been unable to provide the level of telephone service provided by the Social Security Administration (SSA) and four private sector companies we contacted. We recommended that IRS improve its technology to include real-time call traffic monitoring and management, using the routing capability of its telecommunications vendor and fully implementing the features of call routing technology already available (GAO/GGD-95-86, Apr. 12, 1995). (See p. 41.) Improving IRS Notices. Each year IRS sends millions of notices to taxpayers concerning the status of their tax accounts. We reviewed 47 of the most commonly used notices and identified clarity concerns with 31 of them. We also found that IRS’ ability to improve its notices is adversely affected by limited computer programming resources and higher priority programming requests. Further, the lack of a system to track the progress of proposed notice language changes limits IRS’ ability to oversee notice clarity improvements. We recommended changes to its current notice generation process and a new system to monitor proposed notice text revisions (GAO/GGD-95-6, Dec. 7, 1994). (See p. 37.) Improving Forms and Publications. Providing taxpayers with easy-to-read tax forms and publications is a difficult task for several reasons. The tax code is frequently revised, consequently many publications must also be revised annually under short time constraints. In addition, taxpayers’ comprehension levels vary. Generally, we found IRS’ process for developing and revising tax forms and publications reasonable. IRS maintains a dialogue with tax professionals and attempts to generate as much feedback as possible from taxpayers. We recommended that IRS take additional steps to identify the specific concerns of individual taxpayers. Specifically, gathering information on the nature of taxpayer questions through its toll-free telephone system and making greater use of IRS field personnel who have more contact with taxpayers should generate additional useful feedback to IRS (GAO/GGD-95-34, Dec. 7, 1994). (See p. 39.) Congress continues to seek equitable ways to reform the current tax system. At the same time, it adopts tax incentives and preferences to promote certain social policy goals. The result is often foregone revenues to the federal treasury. In response to congressional requests, we provided information on two such incentives, the Earned Income Credit (EIC) and the research tax credit. Earned Income Credit. The EIC is a major federal effort to assist the working poor. Established in 1975, Congress intended that the EIC (1) offset the impact of Social Security taxes on low-income workers and (2) encourage low-income individuals to seek employment rather than welfare. Congress and IRS have long been concerned about EIC noncompliance. In 1988, according to IRS, about 42 percent of the EIC recipients received too large a credit and about 34 percent of total EIC paid out may have been awarded erroneously. Limited studies since then by IRS suggest that noncompliance is still a problem. Further, some EIC recipients are illegal aliens who may receive the EIC if they meet the credit’s eligibility rules. Awarding the EIC to illegal aliens, however, works at cross-purposes with federal policies that prohibit illegal aliens from legally working in the United States. An IRS analysis of some tax returns filed in 1993 provided enough information to convince IRS officials that about 160,000 EIC recipients probably were illegal aliens at that time. To better target the EIC to the working poor, IRS needs to change some of the definitions used to determine eligibility and develop better measures of EIC filers’ resources to determine their eligibility (GAO/GGD-95-27, Oct. 25, 1994; GAO/GGD-95-122BR, Mar. 31, 1995; GAO/T-GGD-95-136, Apr. 4, 1995; GAO/T-GGD-95-179, June 8, 1995). (See p. 45.) Benefits from the Research Tax Credit. In 1981, Congress created the research tax credit to enhance the competitive position of the United States in the world economy by encouraging the business community to do more research. The credit has been extended six times and modified four times since its inception. It expired in June 1995. Legislation to extend the credit was introduced but had not been enacted as of December 31, 1995. We took no position on whether the research credit should be made a permanent part of the tax code or allowed to expire given the lack of empirical data for evaluating the credit’s net benefit to society. We said that the credit’s net benefit to society would ideally be evaluated in terms of the ultimate benefits derived from the additional research that it stimulated and not just on the basis of how much research spending it stimulates for a given revenue cost. We suggested that Congress review the base of the credit periodically and adjust it as needed because the credit can become too generous or too restrictive over time. We presented evidence from corporate tax returns indicating that the accuracy of the credit’s base had eroded significantly since 1989 (GAO/T-GGD-95-140, Apr. 3, 1995; GAO/T-GGD-95-161, May 10, 1995). (See p. 46.) Although IRS has implemented many changes we recommended, pervasive management problems remain. These management problems are further complicated by aging information systems in a period of declining federal budgets. Management of Tax Systems Modernization (TSM) Program. In testimony and a companion report to the Commissioner of Internal Revenue, we discussed IRS’ progress in implementing its $8 billion modernization program and described serious management and technical weaknesses that must be corrected if TSM is to succeed. We made numerous recommendations for improving IRS’ business management and information systems management and development capabilities so that TSM is better focused to meet IRS’ mission needs. IRS has several efforts under way to deal with our concerns and has developed an action plan for implementing our recommendations (GAO/T-AIMD-95-86, Feb. 16, 1995; GAO/AIMD-95-156, July 26, 1995). (See p. 51.) IRS’ Fiscal Year 1994 Financial Statements. In accordance with the Chief Financial Officer Act of 1990, we reported the results of our efforts to audit IRS’ Principal Financial Statements for the fiscal year ending September 30, 1994. The report included an assessment of IRS’ internal controls and its compliance with laws and regulations. As in prior years, we were unable to express an opinion on the reliability of the financial statements. Our report discussed the scope and severity of financial management and control problems and IRS’ actions to remedy them and updated the status of recommendations from our audits of fiscal years 1992 and 1993. Overcoming these problems will be difficult because of the long-standing nature and depth of IRS’ financial management problems and the antiquated state of its information systems (GAO/AIMD-95-141, Aug. 4, 1995). (See p. 54.) IRS Receivables—A High-Risk Area. We issued a series of reports on federal program areas considered to be high risk because they are especially vulnerable to waste, fraud, abuse, and mismanagement. This report discussed one such area, IRS’ management of its accounts receivable. IRS’ failure to resolve nearly $156 billion in outstanding tax delinquencies has not only lessened the revenues immediately available to support government operations but could also jeopardize future taxpayer compliance by giving the impression that IRS is neither fair nor serious about collecting overdue taxes. In spite of several initiatives to solve this problem, IRS has been unable to significantly improve the accuracy of its delinquent accounts inventory, slow the growth in accounts receivable, or accelerate and increase the collection of overdue taxes. IRS still lacks needed information to guide collection efforts, its collection process is outdated and inefficient, and its decentralized organizational structure makes dealing with problems that cut across the agency difficult (GAO/HR-95-6, Feb. 1995). (See p. 49.) IRS’ most basic function is to receive and process tax returns and tax payments. We issued several reports relating to those activities in fiscal year 1995, including the two discussed below. Improving IRS’ Installment Agreement Program. Since 1991, taxpayer use of installment agreements has grown considerably, and such agreements have accounted for a growing portion of IRS’ collection activity. Much of the growth occurred after April 1992 when IRS streamlined the installment agreement approval process. IRS internal auditors reported that some taxpayers were using installment agreements when they were able to fully pay taxes. This practice conflicts with IRS’ intent to encourage installment agreements for taxpayers who cannot otherwise pay their taxes in full when they are due. In addition, the auditors were concerned about the ease with which taxpayers could accumulate additional tax debt by adding new income tax liabilities to existing installment agreements. We raised concerns about certain administrative aspects of the program and recommended changes whereby IRS would (1) provide taxpayers more information about the terms, conditions, and costs of installment agreements and (2) experiment with several methods for reducing installment agreement servicing costs (GAO/GGD-95-137, May 2, 1995). (See p. 60.) Verifying Taxpayer Identities. This report discussed IRS’ procedures for processing and posting tax returns in which the primary filer does not provide a Social Security Number (SSN) or provides a name and SSN that do not match SSA records. Returns that can be corrected along with those that match SSA records are posted to the “valid segment” of the Individual Master File (IMF) while those that cannot be corrected are posted to the “invalid segment” of the IMF. From 1986 through 1994, the average annual growth rate of accounts on the invalid segment of the IMF was more than twice the growth rate for accounts on the valid segment. IRS paid $1.4 billion in refunds on returns that were posted to the invalid segment of the IMF for tax year 1993. No one knows how much, if any, of this amount was erroneously paid; however, the risk of error was higher because IRS was less certain of these filers’ identities. We recommended ways IRS could improve the processing of returns with missing or incorrect SSNs and clean up IMF accounts which could adversely affect IRS’ tax modernization plans (GAO/GGD-95-148, Aug. 30, 1995). (See p. 56.) We did our work on tax policy and administration matters pursuant to 31 U.S.C. 713, which authorizes the Comptroller General to audit IRS and the Bureau of Alcohol, Tobacco, and Firearms. GAO Order 0135.1, as amended, prescribes the procedures and requirements that must be followed in protecting the confidentiality of tax returns and return information made available to us when doing tax-related work. This order is available upon request. Copies of this report are being sent to the Director of the Office of Management and Budget, the Secretary of the Treasury, and the Commissioner of Internal Revenue. Copies will be sent to interested congressional committees and to others upon request. Major contributors to this report are listed in appendix VII. If you or your colleagues would like to discuss any of the matters in this report, please call me on (202) 512-9110. In testimony before the Subcommittee on Oversight, House Committee on Ways and Means, we observed that as business taxpayers strive to comply with federal, state, and local tax requirements they expend time, incur costs, and experience frustrations. We refer to this time, cost, and frustration collectively as “taxpayer compliance burden.” We were asked by the Ranking Minority Member to identify the sources of the burden and determine the reliability of taxpayer burden cost estimates appearing in compliance cost and tax simplification literature. We collected information on compliance burden from the management and tax staffs of selected businesses, tax accountants, tax lawyers, representatives of tax associations, and IRS officials. Additionally, we reviewed academic research and other studies on compliance burden and tax simplification. The focus of our efforts was the federal tax system. We testified that (1) according to those business officials interviewed, the complexity of the Internal Revenue Code was the driving force behind federal tax compliance burden; (2) a reliable estimate of the overall costs of tax compliance was not available and would be costly and burdensome on businesses to obtain; (3) reducing compliance burden would be a difficult undertaking because of the various policy trade-offs, such as revenue and taxpayer equity, that must be made; and (4) while business officials and tax experts acknowledged the legitimate purposes of the federal tax system, they believed that several code provisions are problematic and need simplification. While we were unable to identify reliable tax burden cost estimates, there was consensus among the business respondents, tax experts, and the literature that tax compliance burden is significant and that it can be reduced. Although some gains can be made by reducing administrative burden imposed by IRS, the greatest potential for reducing taxpayer compliance burden is by dealing with the complexity of the tax code. One approach to reducing burden would be to tackle particularly burdensome provisions individually. Provisions identified as especially burdensome include Alternative Minimum Tax (AMT), uniform capitalization, pension and payroll provisions, and the foreign tax credit. We believe that simplification of any of these provisions has the potential for reducing the tax burden of many businesses. In a report to the Chairman of the Joint Committee on Taxation, we provided information about the tax gap for sole proprietors, i.e., self-employed individuals. We presented estimates of the tax year 1992 gross income tax gap for nonfarm sole proprietors who provided services and estimates of the tax gap attributable to service providers who may have been employees rather than self-employed. The gross income tax gap is the difference between the amount of income taxes owed and the amount voluntarily paid. Tax-gap estimates are important because they can be used to measure IRS’ progress in confronting noncompliance and to help IRS allocate its compliance resources. We estimated that between 9.2 million and 11.5 million of the 13 million nonfarm sole proprietors might be considered service providers. IRS estimated that the 1992 tax gap among these service providers ranged from $21 billion to $30.3 billion—that is, from 56 to 81 percent of IRS’ estimated tax gap of $37.2 billion for all nonfarm sole proprietors who filed a return. We estimated that between 0.2 million and 1.6 million of the 11.5 million service providers may be misclassified as service providers by their employers. IRS estimated that between $2 billion and $3.5 billion of the $30.3 billion tax gap was associated with these potentially misclassified workers. This tax gap estimate included only service providers who received all their self-employment income from one business. The $2 billion estimate included only those receiving $20,000 or more in income from one business. The $3.5 billion estimate included all such service providers regardless of the amount. We believe that if these workers had been classified correctly as employees, a significant amount of the taxes owed would likely have been withheld by their employer. In a report to the Joint Committee on Taxation and in subsequent testimony before the Subcommittee on Oversight, House Committee on Way and Means, we commented on the status of IRS’ planning efforts for the 1994 Taxpayer Compliance Measurement Program (TCMP). We analyzed IRS’ available plans and commented on potential strengths and weaknesses of the program. We said that the 1994 TCMP survey may have been the most comprehensive TCMP effort ever undertaken. Planned to include over 150,000 tax returns, it was designed to obtain compliance information for individuals, small corporations, partnerships, and S corporations—further disaggregated into 24 types of businesses and 3 types of individual taxpayers. IRS planned for most sample results to be usable at the national level as well as at smaller geographic areas across the country. IRS planned to implement several changes from past TCMP surveys. IRS planned to have auditors use computers to capture audit adjustments. For each adjustment, IRS planned to (1) instruct auditors to determine the tax issue involved and the reason for the taxpayer error; (2) provide auditors with tax return data for 1994 and the prior 2 years as well as other tax information on each taxpayer; and (3) help uncover erroneous tax-return information using an “economic reality” audit technique, which surveys the taxpayer’s lifestyle relative to the information reported on the tax return. We supported these planned changes and said that they offered promise for improving the value of TCMP results. We also expressed some concerns about the 1994 TCMP. We were concerned that IRS might not meet scheduled milestones so that TCMP audits could begin as planned in October 1995 and that IRS’ plans had some missing pieces. We reported that IRS was working to address these concerns: No research plan that specifically defined the research questions to be answered and how the data to be collected would be used to answer the questions. No plans to collect information on all income and deduction items for partnership and S corporation returns or plans to determine the tax impact of changes to these returns. No plans to collect information on potentially misclassified workers. No plans to collect information on other known compliance issues such as those dealing with the earned income credit and wage reporting. No plans for developing a mechanism that would electronically retrieve TCMP audit workpapers for IRS and other researchers. We raised these concerns so that IRS could consider them and make necessary changes in an informed manner rather than waiting until the last minute. We favored this approach so that IRS, as well as others, had more confidence that the TCMP audits would not only start in October 1995 but also produce more useful data. IRS took appropriate action on the concerns we raised in this report and testimony that dealt with meeting milestones for starting TCMP audits and collecting and analyzing data. However, the 1995 TCMP has been delayed indefinitely because of congressional concerns about the cost of TCMP, its burden on taxpayers, and budget cuts. IRS is considering several alternatives, but as of December 31, 1995, no firm alternative had been selected. In testimony before the Subcommittee on Treasury, Postal Service, and General Government, House Committee on Appropriations, we noted that IRS faces some formidable enforcement challenges, such as closing a tax gap that was last estimated at $127 billion in tax year 1992 and collecting tens of billions of dollars in tax debt. Past Congresses recognized the need to expand IRS’ enforcement presence by funding compliance initiatives that would add staff with the intent of increasing compliance and producing more revenue. IRS had not fully implemented past compliance initiatives partly because of circumstances, such as underfunded pay raises, beyond its control. As a result, although the intent of the various initiatives was to increase IRS’ enforcement presence, staffing levels in three of IRS’ major enforcement programs actually declined between 1989 and 1994. We testified that some of the additional compliance staffing for 1995 was to be used to collect delinquent tax debts. However, increased staffing is not the only answer to IRS’ accounts receivable problem. IRS’ problems in this area are more fundamental. First, IRS must improve the accuracy of its delinquent accounts inventory. Second, it needs to slow the growth of the inventory of tax debt. Finally, it needs to accelerate and increase the collection of overdue taxes. Since 1990, IRS has undertaken many efforts toward these objectives; however, it has not made much headway. We identified five underlying causes that tend to perpetuate IRS’ accounts receivable problems: (1) a lack of accurate and reliable information, (2) an outdated and inefficient collection process, (3) difficulty in balancing collection efforts with taxpayer protections, (4) a decentralized organizational structure, and (5) uneven staffing. IRS needs to demonstrate that its efforts will effectively deal with these causes—causes that cut across the agency and across lines of managerial authority and responsibility. IRS also needs to reengineer its outdated collection process and take greater advantage of private sector practices. In a report to Senator Byron L. Dorgan and Congressman Paul E. Kanjorski, we updated our 1993 work and provided recent data on transfer pricing issues and on tax compliance of foreign-controlled corporations (FCC) and U.S.-controlled corporations (USCC). Transfer pricing is governed by section 482 of the Internal Revenue Code. IRS’ recent experiences with examinations, appeals, and litigation relating to section 482 issues were mixed. For instance, in 1993 and 1994, IRS examiners found, as they had in previous years, large section 482 violations. The outcomes of the appeals and legal processes in 1993 and 1994 were similar to those in 1987 and 1988, with IRS sustaining less than 30 percent of the proposed section 482 adjustment amounts. In 1993 and the first part of 1994, IRS had somewhat better success litigating large transfer pricing cases than in 1990 through 1992. According to IRS officials, certain enforcement tools available to IRS in transfer pricing situations, such as measures to obtain information and stronger penalties, served mostly as deterrents that altered taxpayer behavior. Alternatives to traditional examinations, appeals, and litigation, such as simultaneous examinations, arbitration, and advance pricing agreements, were used infrequently or were expected to grow in number in the future. How successful the new transfer pricing regulatory regime will be remains to be seen. The flexibility that new regulations allow taxpayers in applying the arm’s length standard must be weighed against the flexibility given IRS and the increased documentation required of taxpayers under threat of penalty. A majority of all FCCs and USCCs paid no U.S. income tax in each year from 1987 through 1991, and the percentages of each—nearly three-quarters of FCCs and about 60 percent of USCCs—remained largely unchanged over the 5-year period. Although taxpaying corporations were a minority of all FCCs and USCCs, they owned the majority of corporate assets and generated most of the receipts. Furthermore, the largest nontaxpaying corporations—those with assets of $100 million or more—were relatively few in number but accounted for relatively large proportions of all FCCs’ and all USCCs’ total assets and receipts. In a letter to Representative Bob Franks, we provided information about reporting options transactions to IRS. (An option is a contract that gives the purchaser the right, in exchange for a premium, to buy or sell a specific amount of a property at an agreed upon price by a specified date.) The member wanted to know why information returns are not filed on options and how information reporting could work. The Secretary of the Treasury, under section 6045 of the Internal Revenue Code, has broad authority to subject investment payments to information reporting. Using this authority, the Secretary has required information reporting on transactions such as securities and commodities; however, this information reporting excludes options. IRS officials said the exclusion arose from both the complexity of options transactions and from the high administrative burden associated with reporting and using such information. In 1990, IRS Chief Counsel started a project to establish regulations for information reporting on options, but reporting barriers and lack of compliance data slowed the project. The project is now inactive. Industry representatives told us of similar complexities in reporting options transactions. Most brokers, however, are required by federal regulators and industry associations to annually report options transactions to clients. IRS attempts to identify unreported income from options trading. It computer matches data received from existing information returns with tax returns to identify discrepancies. IRS officials have not determined the cost-effectiveness of a more elaborate system for reporting and computer-matching options data. Another issue involves the exemption in section 6045 of the Internal Revenue Code granted corporate, financial, and other institutions. An industry official estimated that over half of its options transactions involved institutions instead of individuals. Before requiring information reporting for options, IRS officials believe IRS needs to determine (1) whether a compliance problem exists and (2) how the obstacles discussed above can be resolved. Money laundering involves disguising or concealing illicit income to make it appear legitimate. Banks, savings and loans, and credit unions are in a unique position to help identify money launderers by reporting suspicious transactions to law enforcement officials. Financial institutions report tens of thousands of suspicious transactions each year, which have led to many investigations of criminal activities. Because there is no overall control or coordination of these reports, there is no way to ensure that the information is used to its full potential. Financial institutions report suspicious transactions on various forms that provide different types of information and that are filed with different law enforcement and regulatory agencies. While the form that is filed most frequently with the IRS is contained in a centralized database, it does not contain any additional information describing the suspicious activity that would be useful as an intelligence source for initiating an investigation. Other forms used to report suspicious transactions, which describe the activity so that the information can be evaluated, are not contained in a centralized database but are filed with six different federal financial regulatory agencies, with copies forwarded to the local IRS district office. The use of these forms has varied among IRS’ 35 districts. At the time of our audit, there were no IRS procedures or policies as to how information contained in these suspicious transaction reports should be managed as an intelligence resource. Thus, IRS did not know how many reports had been received nationwide, and IRS could not assess the management of the reports from an agencywide perspective. The Department of the Treasury, the financial regulatory agencies, and IRS have agreed to substantial changes in how suspicious transactions are to be reported and how the information is to be used. Because of the steps they have taken, we did not make recommendations. IRS is developing new national guidelines that are to mandate consistent evaluation and processing of all reports of suspicious currency transactions. Changes are being made to a management information system to better ensure the proper use of these reports and to track accomplishments. Available IRS data indicate that taxpayers do not pay (either voluntarily or after IRS compliance efforts) about 13 percent of the federal income taxes due on their income from legal sources. Such an estimated shortfall in tax revenue has been a long-standing and seemingly intractable problem. To explore innovative and practical means for increasing taxpayer compliance, we sought the views of experts in the field. On January 12, 1995, we sponsored a symposium that brought together well-known tax authorities with congressional, IRS, and our staff. The starting point for discussions was our May 1994 overview report, which highlighted the changes that IRS and Congress needed to consider, given the body of work we had already completed. The panelists concluded that major modifications in the current tax system would be required to substantially improve taxpayer compliance with the nation’s tax laws. They identified a number of objectives that, if met, could help to bring about such change: (1) reduce tax law complexity and make results more certain; (2) extend the reach of tax requirements, such as income tax withholding, that promote taxpayer compliance; (3) expand the compliance techniques available to IRS; (4) adjust the focus of IRS’ compliance efforts to address more aggressively the largest aspect of noncompliance, i.e., unreported income; (5) improve the utility of IRS’ compliance data; and (6) improve IRS’ ability to resolve taxpayer compliance problems quickly, before the problems become serious. But, as the panelists recognized, any change that extends the reach of the tax system also increases the extent to which the tax system intrudes into taxpayers’ affairs and needs to be carefully considered. Thus, the bottom-line decision on whether to extend the reach of the tax system to recover additional revenues due the government under current law involves determining the right mix between (1) the acceptable level of compliance for each type of taxpayer and (2) the acceptable level of tax system intrusiveness to promote compliance within each category of taxpayer. One of the biggest challenges facing IRS is finding ways to reduce the gross income tax gap—the difference between income taxes owed and those voluntarily paid. IRS has estimated that taxpayers do not voluntarily pay more than $100 billion annually in taxes due on income from legal sources. While such a tax-gap estimate is necessarily imprecise, it does indicate the size of the challenge confronting tax administration. In testimony before the House Committee on Ways and Means, we made the following points on meeting this challenge: IRS information suggests that U.S. taxpayers voluntarily pay 83 percent of the income taxes they owe. Although this compliance level may be relatively high by world standards, it translates into large sums of tax-gap dollars because of the size of our economy. Compliance is not uniform across groups of taxpayers. IRS estimates that wage earners report 97 percent of their wages; the self-employed report 36 percent of their income; and “informal suppliers”—self-employed individuals who operate on a cash basis—report just 11 percent of theirs. The IRS data show that compliance is highest where there is tax withholding, a little lower where there is information reporting to IRS, and much lower where there is neither. In addition to the relative visibility of the income to tax administrators, the complexity of tax rules, together with a number of other factors, also influence the level of tax compliance. Some of the tax gap may not be collectible at an acceptable cost. Collection, in some instances, could require either more recordkeeping or reporting than the public may be willing to accept or too costly an effort for IRS. Thus, it is important that IRS invest agency resources to measure noncompliance and use that information to balance efforts among the competing goals of (1) maximizing tax revenues, (2) promoting uniform compliance, and (3) minimizing taxpayer burden. In a report to the Joint Committee on Taxation, we reviewed IRS’ strategy for addressing partnership compliance. IRS’ most current partnership compliance data were collected under its tax year 1982 partnership TCMP. These data showed that partnerships underreported their net income by $13 billion in 1982, which we estimated resulted in an underpayment of taxes by partners approaching $3.6 billion. Even when partnerships reported all their income, partners sometimes failed to include it in their own tax returns. Thus, IRS estimated that individual partners owed an additional $2.4 billion in taxes in 1982. Significant tax law changes in the intervening years make these data unreliable indicators of the present situation. IRS’ strategy for addressing partnership compliance relied almost exclusively on audits to detect noncompliance. The strategy did not include either a nonfiler or computer document-matching component. IRS, however, had a limited document-matching program to identify partners who do not report partnership income on their individual income tax returns. We made several observations concerning IRS’ partnership audit program: In recent years, relatively few partnership returns were audited because IRS focused its business audit resources on taxable entities such as corporations. Partnership audits were not as productive as other types of business returns when measured by the percent of returns audited that resulted in audit adjustments. This may be because the formula used to select partnership returns for audit was developed from 1982 TCMP data, while the formula used to select corporations for audit was developed from 1987 TCMP data. IRS’ primary measure of audit productivity—the amount of net taxes assessed per hour of audit time—could not be used for partnership audits because IRS did not have data on the additional taxes partners were assessed or refunded as a result of partnership audit adjustments. IRS could analyze current partnership audit results for leads to the types of partnership returns that are more likely to be adjusted during audits. IRS did not have an active program to detect partnerships that stopped filing required returns, having discontinued this program in 1989 to concentrate its nonfiler efforts on taxable business returns and employment tax returns. In its 1991 individual document-matching program, IRS processed about 12 percent of the Schedules K-1 it received and matched them against partners’ income tax returns. The match resulted in additional tax assessments of $6.3 million. We estimated that at an additional cost of $18.6 million to IRS, about $219.5 million in additional taxes may have been assessed if IRS had matched all the schedules. Recommendation(s) to IRS We recommended that as IRS moves forward with its modernization efforts, the Commissioner of Internal Revenue develop plans to modify audit management information systems to more fully reflect the results of partnership audits by including information on the (1) tax assessments on partners’ income tax returns and (2) changes in allocations of profits and losses among partners, analyze computer partnership files to develop audit leads and select reinstitute the delinquency check program for partnerships to identify partnerships that do not file required tax returns, develop plans for a document-matching program using information returns to verify partnership income, and devise ways to enter all Schedules K-1 onto the computer so they can be used in the individual computer document-matching program and for other compliance purposes. IRS officials generally agreed with our recommendations and are taking actions that we believe will be responsive to them. Specifically, IRS is to address the need for expanded data on partnerships and partners in its plans to modernize information systems, has begun using partnership computer files to develop leads and select returns for audit through its newly created District Office Research and Analysis sites, is to reinstate the partnership delinquency check program for tax year 1994 in calendar year 1996, is to test the feasibility of a document-matching program for certain partnerships, and is to attempt to more fully utilize available Schedules K-1 data. In a report to Senator Byron L. Dorgan, we provided information on (1) California’s experience in doing formulary apportionment audits of multinational corporations and (2) issues that would have to be considered before adopting a formulary system at the federal level. For tax purposes, states generally can use a formula to apportion the income of corporations among the states in which they do business. Through much of the 1980s, California applied its formula for apportioning income on a worldwide basis. This required multinational enterprises to apportion a share of their worldwide income to California, including the income of foreign parent and subsidiary corporations if their operations were closely integrated or unitary with California business activity. Under worldwide formulary apportionment, a key issue that California auditors had to determine was whether California corporations that were part of a multinational enterprise were engaged in a unitary business with affiliated U.S. and foreign corporations. This determination was based on a complex analysis of the enterprise’s ownership and business operations. Auditors then used the parent corporation’s audited financial statements, federal tax returns, and other records to ensure that state tax was based on the income and the apportionment factors for all corporations comprising the unitary business. In the audits of FCCs that we reviewed, state auditors adjusted income and other apportionment data to account for differences between U.S. and foreign accounting standards and recordkeeping. The auditors focused on differences that they considered to have a material impact. They made six adjustments in the five audits that we studied in depth. State auditors reviewed annual audited financial statements of the foreign parent corporation and requested, but did not always obtain, additional data from taxpayers that were needed to determine the effects of different accounting standards and recordkeeping. As a result, auditors sometimes made determinations on the basis of available data and used estimates and assumptions in making adjustments. Although we did not discuss whether formulary apportionment should be adopted at the federal level, we did describe matters needing attention before the practice could be adopted. These matters include the design and administration of a federal unitary system. For example, unitary business and apportionment factors would have to be defined and the international feasibility of formulary apportionment, a system opposed by other countries, would have to be considered. We further explained that tax experts disagree on whether the problems associated with such issues could be resolved in a federal system. In correspondence to the Commissioner of Internal Revenue, we discussed concerns identified during our analysis of the “Other Income” line of the Individual Income Tax Return as it related to IRS’ planned 1994 TCMP. Specifically, we raised concerns about adjustments to the Other Income line and the difficulty associated with using the causal codes planned for the 1994 TCMP. We reported that auditors sometimes used the Other Income line inappropriately. In some cases, auditors made adjustments to the Other Income line, which should have been shown on another line of the Form 1040. In other cases, taxpayers incorrectly entered income amounts on tax return lines that should have been reported on the Other Income line and IRS auditors reclassified this income, even though TCMP instructions clearly stated that income was not supposed to be reclassified. As a result of these errors, TCMP showed misleading data on compliance for the Other Income line. We also reported that even though IRS planned to identify causes of noncompliance during the 1994 TCMP, the coding used to identify these causes would be difficult to use. We reported that the codes lacked specificity and that IRS had not developed guidance or criteria on how each type of causal code should be applied. As a result, the usefulness of causal codes may be limited. Although we made no recommendations, IRS staff agreed to work on improving the areas discussed. Businesses, to determine their tax liability (e.g., employer portion of Social Security and unemployment taxes on employee wages) and meet the requirements of other laws, need to classify their workers as either “employees” or “independent contractors.” But, as described in our testimony before the Subcommittee on Taxation and Finance, Committee on Small Business, the common-law rules for classifying workers remain as unclear and subject to conflicting interpretations as we found them in 1977. Thus, businesses continue to be at risk of large retroactive tax assessments for improperly treating workers as independent contractors. Accordingly, we still believe that the classification rules need to be clarified. But, changes to the classification rules need to be cognizant of the body of laws that create a safety net for American workers. Many laws apply only to employees but do not protect workers classified as independent contractors. Because a by-product of classification rule clarification is the potential for changing the number of workers treated as independent contractors, we believe the current deliberations should also focus on potential impacts on the social safety net established for American workers. We also believe that there are two approaches that could help improve independent contractor compliance—(1) require businesses to withhold taxes from payments to independent contractors and (2) improve business compliance with the requirements to file information returns on payments to independent contractors. IRS data suggest that although independent contractors have represented only a small proportion of taxpayers, they have accounted for as much as $21 billion to $30 billion of income taxes owed the federal government by individuals but not paid for tax year 1992. In a report to the Chairman, Subcommittee on Oversight, House Committee on Ways and Means, we identified the issues that caused the most frequent disputes between IRS and taxpayers in connection with section 162 of the tax code. Section 162 allows taxpayers to deduct from income “ordinary and necessary” expenses related to trade or business. We had previously reported that section 162 was the tax code section most commonly cited in large tax cases at IRS’ Office of Appeals. To do the work, we reviewed 185 tax court petitions filed in 1993, mostly by sole proprietors and small- and medium-sized corporations as well as partnerships, individual shareholders, and individuals claiming employee business expenses. We also reviewed 117 Office of Appeals cases filed by large corporations included in IRS’ Coordinated Examination Program. In the 185 tax court petitions, we found that sole proprietors, small- and medium-sized corporations, and individuals claiming employee business expenses disagreed with IRS most frequently over the adequacy of documentation for a given expense deduction. About 47 percent of all the issues in the petitions we reviewed involved questions of proper documentation. These disputes were especially frequent in cases where the documentation requirements were the most rigorous—entertainment, travel, meals, and automobile expenses. While documentation was the issue sole proprietors disputed most frequently, small- and medium-sized corporations contested IRS’ decisions on the reasonableness of executive salaries as frequently as they did documentation. Overall, the frequency of disputes over unreasonable executive compensation was far less than disputes involving documentation of business expenses—14 percent versus 47 percent. However, executive compensation accounted for about 50 percent of the total proposed tax adjustments—$24.5 million of $48.8 million—in the petitions we reviewed. Adequacy of documentation was the second largest category, at $9.3 million. In the 117 Office of Appeals cases, we reported that large corporate taxpayers disagreed with IRS most frequently over the issue of capital expenditures, which accounted for about 42 percent of the issues they contested. It was also the issue with the most dollars at stake in the 117 cases, accounting for $1.1 billion of the total $1.9 billion in proposed tax adjustments. In these cases, the corporations argued for immediate deduction of large expenses related to events such as corporate mergers, reorganizations, or environmental cleanups. IRS contended that such expenditures had future benefits and should therefore be treated as capital expenditures, not immediately deductible in the current year. All of the other issues the large corporations disputed were contested far less frequently than the issue of capital expenditures. For example, documentation questions accounted for only 8 percent of the issues contested, while unreasonable executive compensation accounted for 3 percent. At the request of the Chairman and Ranking Minority Member, Subcommittee on Treasury, Postal Service and General Government, House Committee on Appropriations, we reported on how IRS can strengthen its controls in several specific areas and provide taxpayers with additional information that will protect taxpayers from abuse. IRS has a wide range of controls, processes, and oversight offices designed to govern how its employees interact with taxpayers. While this system of controls has many elements designed to protect taxpayers from abuse, it lacks the key element of timely and accurate information about when, where, how often, and under what circumstances taxpayer abuse occurs. This information would greatly enhance IRS’ ability to pull together its various efforts to deal with abuse into a more effective system for minimizing it. The information would also be valuable to Congress in assessing IRS’ progress in treating taxpayers as customers—an often cited IRS goal—and to taxpayers to increase their ability to protect their rights. We also discussed the need for legislation to provide IRS with authorization to disclose information to all responsible officers involved in IRS efforts to collect a trust fund recovery penalty. A trust fund recovery penalty is assessed against the responsible officers and employees of businesses when they fail to collect or pay withheld income, employment, or excise taxes. Relatively large trust fund recovery penalties have caused financial hardships for the individuals involved, particularly for those who were unaware of the legal and financial ramifications of the penalty. To better enable taxpayers and IRS to resolve trust fund liabilities, we recommended that Congress amend the Internal Revenue Code to allow IRS to provide information to all responsible officers regarding its efforts to collect the trust fund recovery penalty from other responsible officers. To improve IRS’ ability to manage its interactions with taxpayers, we recommended that the Commissioner of Internal Revenue establish a service-wide definition of taxpayer abuse or mistreatment and identify and gather the management information needed to systematically track its nature and extent. To strengthen controls for preventing taxpayer abuse within certain areas of IRS operations, we recommended that the Commissioner of Internal Revenue ensure that IRS’ systems modernization effort provides the capability to minimize unauthorized employee access to taxpayer information in the computer system that eventually replaces the Integrated Data Retrieval System; revise the guidelines for Information Gathering Projects to require that specific criteria be established for selecting taxpayers’ returns to be examined during each project and to require a separation of duties between staff who identify returns with potential for tax changes and staff who select the returns to be examined; reconcile outstanding cash receipts more often than once a year, and stress in forms, notices, and publications that taxpayers should use checks or money orders whenever possible to pay their tax bills, rather than cash; better inform taxpayers about their responsibility and potential liability for the trust fund recovery penalty by providing taxpayers with special information packets; seek ways to alleviate taxpayers’ frustration in the short term by analyzing the most prevalent kinds of information-handling problems and ensuring that requirements now being developed for new information systems provide for long-term solutions to those problems; and provide specific guidance for IRS employees on how they should handle White House contacts other than those that involve checking taxes of potential appointees or routine administrative matters. IRS supported our recommendation to Congress. Legislation has been introduced in the 104th Congress (H.R. 661 and S. 258) that, if enacted, would require IRS to disclose to a responsible person who requested in writing, the results of its efforts to collect the trust fund recovery penalty from other responsible persons. IRS disagreed with our recommendation that it establish a definition of taxpayer abuse and identify and gather the information needed to systematically track the nature and extent of such incidents. IRS said that the problem of taxpayer abuse, to the extent that it exists, is best defined, monitored, and corrected within the context of its definitions and current management information systems. Consequently, IRS planned no action on our recommendation. IRS identified several safeguards that are to be incorporated into systems being developed as part of its systems-modernization effort as well as some recent safeguards that have been incorporated into its existing computer systems. These safeguards include issuing transcripts for account adjustments considered “high risk/high dollar,” development of supplemental audit trails, and the generation of locally developed diagnostic transcripts. The Commissioner suggested imposing criminal sanctions on IRS employees who violate privacy policies and Senator John Glenn introduced a bill (S. 670) that would impose up to a $1,000 fine and up to 1 year in jail for unauthorized employee access to taxpayers’ accounts. In February 1995, IRS issued an updated memorandum to the field, stressing the sensitive nature of information-gathering projects and the need for management to closely monitor how these projects are carried out. IRS plans to amend the Collection Group Managers Handbook to include random unannounced cash reconciliations throughout the year. IRS also has added a statement to Publication 594, “Understanding the Collection Process,” encouraging taxpayers to pay by check or money order. IRS is to include Notice 784, “Could you be personally liable for certain unpaid Federal taxes?,” with the first balance due notice for business taxes. IRS currently sends taxpayer education material, including trust fund recovery penalty information, when taxpayers who file an application for an employer identification number indicate they will be liable for trust fund taxes. IRS stated that through its Quality Review Program and the Problem Resolution Program, it is alleviating information-handling problems that frustrated taxpayers. Finally, IRS said that its current procedures regarding third-party contacts who provide information that could lead to an audit or investigation are adequate to cover any contacts from the White House. Those procedures essentially call for IRS field office personnel to evaluate the information provided and decide if an audit or investigation is warranted. Each year, IRS sends millions of notices to taxpayers on the status of their tax accounts. In 1993, IRS sent more than 60 million such notices affecting about $190 billion of taxpayer transactions. As requested by the Subcommittee on Oversight, House Committee on Way and Means, we reviewed 47 commonly used notices for clarity, and we examined IRS’ processes for ensuring that the notices it issues convey essential information to taxpayers as clearly as possible. We identified clarity concerns with 31 of the notices. In reviewing these notices for clarity, understandability, and usefulness, we considered if more specific language, clearer references, and consistent use of terminology would enhance these documents. We assessed whether the material was logically presented, whether sufficient information was provided so taxpayers could evaluate their situations, and whether the taxpayer could resolve the matter without additional guidance. Further, we considered the notice’s format, the suitability of the notice’s title, the directions or guidance provided in enclosures or remittance forms, and whether IRS provided the taxpayers with all pertinent information in a single notice or whether additional notices were needed. It appears that taxpayers with multiple or interrelated tax problems would be better served by receiving a single, comprehensive notice summarizing the status of their accounts, rather than the stream of multiple notices that IRS now sends them. Despite IRS’ process and commitment of resources to improve notice clarity, in some cases, taxpayers continue to receive notices that IRS’ Notice Clarity Unit said were problematic. Many of the notice revisions recommended by that unit were delayed or never made because of IRS’ limited computer-programming resources and higher priority programming demands, such as those implementing tax law changes and essential preparation for processing tax returns during the next tax season. Consequently, even revisions with strong organizational support may be significantly delayed. We found that improvements could be gained from the transfer of notices to Correspondex, a more modern computer system that produces other IRS correspondence. IRS is testing a group of collection notices on this system. Recommendation(s) to IRS We recommended that the Commissioner of Internal Revenue test the feasibility of using its Correspondex computer system to produce Individual Master File (IMF) and Business Master File (BMF) notices and, if possible, transfer as many IMF and BMF notices as practical to the Correspondex system. To help the transition to Correspondex, we recommended that notices be transferred in stages and that a mechanism be established or an existing body, such as the National Automation Advisory Group, establish the order in which notices would be transferred. The ease of the transition, the costs of the transfer, and the benefits of making these transfers should all be considered in establishing the order. We also recommended that the Commissioner establish a system to monitor proposed notice text revisions to oversee progress or problems encountered in improving notice clarity. Employing this system should enable IRS to identify when a revision was proposed and the revision status at all times until it is implemented. The Commissioner should include in the monitoring system a threshold beyond which delays must be appropriately followed up and resolved. IRS was considering the use of a computerized bulletin board to track proposed notice revisions but tabled that approach because of budget constraints. As of December 31, 1995, IRS officials were exploring other alternatives. At the request of the Subcommittee on Oversight, House Committee on Ways and Means, we examined IRS’ efforts to improve its forms and publications to ensure accuracy and clarity. Providing taxpayers with easy-to-read tax forms and publications is one way of promoting voluntary compliance; however, it is a difficult task. IRS must strike a balance between the need for tax documents that accurately reflect a highly complex tax code and the need to make these documents understandable and easy to read. Finding this balance is an ongoing process, as the tax code is frequently revised—necessitating corresponding changes in forms and publications. Other factors, such as the wide range of taxpayers’ reading abilities, further complicate IRS’ task. IRS’ process for developing and revising its forms and publications appears reasonable in that it provides for clear lines of responsibility and accountability, specific time frames, adequate management oversight, sufficient opportunities to evaluate suggestions from internal and external sources, and appropriate strategies for coping with sudden tax law changes. Despite IRS’ process for developing forms and publications and its stated commitment to improvement, IRS recognizes that it has no systematic way to determine what individual taxpayers specifically find confusing about forms and publications. IRS has established a dialogue with professional organizations to obtain their concerns but not with individual taxpayers. IRS may already have data that could help it identify areas that are difficult for individual taxpayers. These potential sources of data include information from its toll-free telephone assistance program and field personnel, such as auditors and customer-service representatives, who have contact with individual taxpayers. Recommendation(s) to IRS We recommended that the Commissioner direct agency staff to make additional efforts to identify the specific concerns of individual taxpayers. Identifying these concerns may be accomplished in a variety of ways, including (1) soliciting information from IRS field personnel (e.g., auditors, examiners, and customer-service representatives) for the purpose of identifying common errors made by taxpayers, which may be related to confusing passages in forms and publications and (2) gathering information concerning the nature of taxpayer questions received through its toll-free telephone system. During 1995, IRS personnel attended town meetings in several cities and provided the Tax Forms and Publications Division information on taxpayers’ problems with forms and publications. Division representatives planned to meet with IRS assistors who answer taxpayers’ calls for assistance to obtain suggestions for improving the forms and publications, on the basis of the assistors’ experience in dealings with taxpayers. At the request of Senator Jesse Helms, we researched several issues raised by a constituent. We provided in some detail information about tax liens imposed by IRS and how such liens might be removed. A general tax lien arises when a tax assessment has been made and the taxpayer has been given notice and demand for payment but has failed to pay. A notice of tax lien provides public notice that a taxpayer owes the government money. Once a lien is imposed, however, it cannot be removed except under one of the circumstances discussed below. As a result of the Taxpayer Bill of Rights, for example, any person whose property is encumbered by a tax lien is permitted to administratively appeal the filing of the lien on the ground that it was filed erroneously. Using this procedure, the taxpayer can apply for a special certificate of release of lien that indicates that the filing of the lien was a mistake. This certificate is intended to ensure that the public record shows that the filing of the notice of lien was not the result of the taxpayer’s actions and to help repair the taxpayer’s credit record. In addition, there are four other possible avenues of relief from a tax lien. They are (1) a certificate of nonattachment, (2) a certificate of release of lien, (3) a certificate of discharge, and (4) a certificate of subordination. IRS believes, and we agree, that the Internal Revenue Code seems to prohibit IRS from withdrawing the notice of lien in instances where the notice of lien is on the public record, which might deprive the taxpayer of an opportunity to obtain the funds needed to pay taxes. Therefore, we suggested in a report that Congress amend the code to provide IRS with specific authority to withdraw a notice of lien in situations where such action would be advantageous to IRS and the taxpayer. In 1992, Congress twice approved taxpayer rights measures that included provisions that would have given IRS increased flexibility in providing relief from lien filings, including withdrawing notices of lien in situations where withdrawal of the notice would be in the best interest of the taxpayer and the government. However, for reasons having nothing to do with the lien provisions, both measures were vetoed by then President Bush. More recently, on January 23, 1995, proposed legislation was again introduced in Congress—S. 258 in the Senate and H.R. 661 in the House of Representatives—that includes a lien provision similar to the provisions in the 1992 legislation discussed above. As of December 31, 1995, no action had been taken on those proposals. Many taxpayers who seek help through IRS’ telephone assistance program are not getting it. Even with increased productivity, IRS has not kept pace with the significant growth in the number of calls received over fiscal years 1989 to 1994. IRS’ assistors answered about the same number of calls each year (about 36 million) even though the staff available to answer calls declined. IRS answered about one out of two calls in fiscal year 1989 but only one out of four calls in fiscal year 1994. In a report to the Chairman, Subcommittee on Oversight, House Committee on Ways and Means, we examined IRS’ telephone assistance program to (1) determine the extent and nature of the accessibility problem, (2) compare IRS’ practices with those of other organizations that provide telephone assistance to identify ways IRS might improve access with existing staff resources, and (3) identify the reasons IRS has been unable to answer more calls. IRS has improved its telephone assistance program, particularly its capability to route calls among call sites and provide assistors with taxpayers’ account information. However, IRS’ telephone management practices, including the ability to apply modern information technology, have not kept up with those commonly used to enhance call answering by the Social Security Administration (SSA) and four private sector companies we contacted. It is unlikely that IRS could answer all taxpayers’ calls with current staff and technology resources. However, we believe that IRS could apply additional management practices used by other organizations to answer more calls with existing resources. IRS does not use several of the practices commonly used by the other organizations we contacted, and some of those IRS uses are not as rigorous or advanced as the practices these organizations employed. For example, in fiscal year 1995, for the first time, IRS provided all taxpayers access to telephone assistors for a total of 10 hours a day. In contrast, SSA offered access to assistors 12 hours a day, and all of the companies we contacted routinely provided access to a customer-service representative 24 hours a day. IRS has fallen behind the other telephone assistance programs in some areas primarily because IRS’ senior management has not aggressively and consistently pursued the implementation of commonly used practices. In part, these attempts failed because IRS did not have a strategy for working with the National Treasury Employees Union (NTEU), which represents most IRS telephone assistance employees, to implement systemwide operating practices and standards. IRS and NTEU have recently reached an agreement to work together to implement IRS’ future Customer Service Vision. We believe that IRS could use this framework now to put in place telephone assistance program practices used by others to optimize the number of taxpayers’ calls it can answer. IRS has a model for the type of aggressive management attention we believe is necessary. IRS created the model in its successful effort to improve the accuracy of the answers it provides to taxpayers’ tax law questions. IRS could use this model as the basis for identifying and applying appropriate telephone management practices to increase the number of taxpayers’ calls IRS answers. Recommendation(s) to IRS We recommended that the Commissioner of Internal Revenue direct the Chief of Taxpayer Services, in coordination with other appropriate IRS officials, to lead an aggressive effort to (1) identify and define the appropriate telephone assistance program operating practices for IRS that would allow it to optimize the number of calls it can answer within current budget constraints and (2) work with the leadership of NTEU to reach agreement on implementing those practices on a nationwide basis. Those practices should include, although not be limited to, challenging program goals for increasing the number of calls answered that are based, at least in part, on taxpayers’ needs; standards for the amount of time assistors should be available to answer hours of operation that offer taxpayers greater opportunity to reach IRS uniform reporting definitions for the number of calls answered and other performance measures. We also recommended that the Commissioner of Internal Revenue direct the Chief of Taxpayer Services to quickly take the steps necessary to effectively route taxpayers’ calls nationwide using real-time information. These steps may include a combination of (1) acquiring technology for real-time traffic monitoring and management, (2) utilizing the routing capability of IRS’ telecommunications vendor, and (3) fully implementing the features of IRS’ existing call routing technology. IRS agreed that more progress can be made in implementing industry best practices. IRS plans to provide, before the 1996 filing season, servicewide standards pertaining to the amount of time assistors should be available to answer taxpayers’ calls. IRS is also pilot testing three interactive telephone applications at one call site that require no IRS employee involvement and will therefore free telephone assistors to answer other inquiries. IRS plans to offer Saturday service on six peak Saturdays and on President’s Day during the 1996 filing season. This is an increase from three Saturdays in 1995. In addition, IRS plans to continue offering service 10 hours daily to callers. IRS reported that during the 1995 filing season, it took a more aggressive approach to routing traffic to equalize access that resulted in over 500 traffic shifts. Additionally, it sought assistance from its telecommunications vendor to delineate the full range of call routing technologies that it plans to implement for the 1996 filing season. Internal Revenue Code section 501(c) establishes 25 categories of tax-exempt organizations that enjoy many benefits that for-profit companies do not. In particular, tax-exempt organizations are required to pay federal income taxes only on unrelated business income. They are also exempt from many state and local taxes. In addition, contributions to tax-exempt charities are deductible from donors’ federal income taxes. IRS is responsible for monitoring the activities of tax-exempt organizations through examinations of their annual returns. IRS’ interest is in determining whether the organizations are operating in accordance with the basis for their exemptions and whether they are liable for income taxes from unrelated trades or various excise taxes. We received three requests to provide information for congressional deliberations on the growth of these organizations, their activities, and IRS oversight. We found that, overall, tax-exempt organizations have grown in number and size since the mid-1970s, from 806,375 to over 1 million in 1990 (about 27 percent). Between 1975 and 1990, their assets have grown in real terms over 150 percent to more than $1 trillion, and their revenues have grown over 225 percent to about $560 billion. Charities represented about 48 percent of the total tax-exempt organizations; social welfare organizations, about 14 percent; labor and agricultural organizations, about 7 percent; and business leagues, about 6 percent. The other 25 percent were scattered among the remaining 21 categories. We also discussed complex tax code provisions, which can cause compliance and administrative difficulties resulting in numerous IRS rulings and court cases and sometimes the revocation of an organization’s tax-exempt status. The Earned Income Credit (EIC) is a major federal effort to assist the working poor. Congress established the EIC in 1975 to (1) offset the impact of Social Security taxes on low-income workers and (2) encourage low-income individuals to seek employment rather than welfare. IRS reported that, as of May 26, 1995, about 17.3 million returns claimed nearly $20 billion in EIC for tax year 1994. However, there have long been concerns in Congress and IRS about noncompliance with EIC requirements and whether those eligible for the EIC are receiving it. At the request of Senator William V. Roth, Jr., we presented information about EIC noncompliance and IRS’ steps to control it. We also reviewed the impact on the amount of EIC paid and administrative issues that might result from potential changes to the EIC eligibility criteria that would reflect taxpayer wealth and additional sources of income. Further, we provided information about illegal aliens receiving the EIC. We reported that a reliable overall measurement of noncompliance with EIC provisions has not been made since 1988. IRS did a 2-week study in January 1994 and found that 39 percent of persons who filed returns electronically claimed an EIC that they were not entitled to receive, and 26 percent of the refund amounts sought were overclaims. Noncompliance on EIC paper returns is also a concern. IRS took several steps during the 1995 filing season to combat fraudulent or erroneous returns, especially EIC returns. IRS also undertook a study to determine the overall level of EIC compliance—on paper and electronically filed returns throughout the 1995 filing season. We reported that EIC eligibility criteria had not considered all of the resources recipients may have to support themselves and their families. We provided analyses related to using both an EIC wealth test and an expanded definition of taxpayers’ adjusted gross incomes when making EIC awards. The Joint Committee on Taxation estimated that denying the EIC to taxpayers who have some wealth, as indirectly measured by their asset-derived income, could yield $318 to $971 million in revenue savings in fiscal year 1997, depending on the wealth test design. These revenue savings represent potential reductions in EIC program costs resulting from changing EIC eligibility criteria. We cautioned that these changes would make the EIC more complex and add to the burden on taxpayers and IRS. We also reported that no one knows how many illegal aliens receive the EIC. If the EIC criteria were revised to require that all EIC recipients have valid SSNs for work purposes, which illegal aliens are not eligible to receive, then illegal aliens would no longer qualify for the EIC. The Self-Employed Health Insurance Act of 1995 included a proxy measure of taxpayers’ wealth to be used in determining EIC awards. Effective in 1996, EIC claimants who have income that exceeds $2,350 from certain types of assets will be ineligible for the EIC. Congressional proposals are being considered that would add certain income items to taxpayers’ adjusted gross income when determining their EIC awards. In testimony before the Subcommittee on Taxation and Internal Revenue Service Oversight of the Senate Committee on Finance and in testimony before the Subcommittee on Oversight of the House Committee on Ways and Means, we provided information on the research tax credit. Congress created the research tax credit in 1981 to encourage the business community to do more research. The credit applies to qualified research spending that exceeds a base amount. The credit’s availability expired in June 1995. In tax year 1992, corporations earned more than $1.5 billion worth of research credits, most of which was earned by large corporations in the manufacturing sector, particularly those producing chemicals (including drugs), electronic machinery, motor vehicles, and nonelectronic machinery. The research credit has been difficult for IRS to administer, primarily because the definition of spending that qualifies for the credit was unclear. In 1994, the Department of the Treasury issued final regulations that may resolve this uncertainty. We noted in our testimony that the credit’s net benefit to society would ideally be evaluated in terms of the ultimate benefits derived from the additional research that it stimulates and not just on the basis of how much research spending it stimulates for a given revenue cost. However, no one has been able to estimate the credit’s net benefit to society. Given the absence of empirical data, we have not taken a position on whether the credit should be made a permanent part of the tax code. Congress made revisions to the credit in 1989 that should have increased the amount of spending stimulated per dollar of revenue cost. But, over time, the fixed base of the revised credit has the potential to become too generous for some taxpayers, resulting in undue revenue losses and too restrictive for others, resulting in less overall research stimulated by the credit. We presented evidence from corporate tax returns indicating that the accuracy of the credit’s base has eroded significantly since 1989. Given that the base of the credit may become too generous or too restrictive over time, we suggested that Congress may want to provide for reviewing this base periodically and adjusting it as needed. In the Budget Reconciliation Bill (H.R. 2491), Congress proposed to extend the credit for the period July 1, 1995, through December 31, 1997. This bill also provided taxpayers the option to elect an alternative calculation of the credit that provides lower base amounts and lower rates of credit. This alternative calculation may have eased the restrictiveness of the credit for some taxpayers. However, the President vetoed this legislation. In 1992, people who were not entitled to welfare benefits, or not entitled to the level of benefits provided, received an estimated $4.7 billion in benefit payments by three of the nation’s largest welfare programs—Aid to Families With Dependent Children (AFDC), Food Stamps, and Medicaid. These overpayments represent about 4 percent of the total benefits paid in these programs. Nationwide state recovery of the overpayments, about $333 million, was relatively low. We were asked by the Ranking Minority Member, Subcommittee on Oversight of Government Management, Senate Committee on Governmental Affairs, to determine what the states were doing to recover benefit overpayments and what the federal government could do to help states recover more overpayments. We found that states with the highest recovery rates were establishing claims for a greater portion of their overpayments and used certain practices, and more of them, than did states with lower recovery rates. These practices included more timely efforts to verify potential overpayments and establishing claims for overpayments on more difficult cases. We also reported that, while temporarily reducing benefits to recover overpayments is an effective collection method in the AFDC program, by law, it cannot be used in the Food Stamp Program to collect overpayments caused by agency error unless the client consents. In 1985, a legislative proposal to require recoupment of Food Stamp benefits, without client consent, for agency error overpayments was introduced but not enacted. Subsequently, in 1993, the U.S. Department of Agriculture proposed legislation that recommended recoupment of agency error claims, but the Congress did not act on the recommendation. In addition, we reported that extending the use of federal income tax refund intercept—an effective overpayment collection tool in the Food Stamp Program—to AFDC and Medicaid could potentially increase recoveries. Legislation to extend federal income tax refund intercept to the AFDC program had been introduced in 1994 but did not pass. The legislation, part of a welfare reform proposal introduced in the 103rd Congress, would have authorized an intercept program for AFDC overpayments. Commenting on this proposal, officials from Treasury’s Financial Management Service cited the need to revise the proposal’s language so that the Health and Human Services’ Administration for Children and Families would be the focal point for working with the IRS. This would lessen the administrative burden on IRS because it could deal with one entity rather than the 50 states and the District of Columbia. This approach would more closely resemble the Food Stamp intercept program, which uses Agriculture’s Food and Consumer Service as its focal point. We suggested that Congress consider amending federal legislation to (1) authorize states to offset current recipients’ benefits without client consent to recover Food Stamp overpayments caused by agency error and (2) extend the authority for states to intercept federal income tax refunds to include the recovery of AFDC and Medicaid overpayments. IRS comments were not received in time to be incorporated into our report. Legislative provisions in the Personal Responsibility and Work Opportunity Act of 1995 (H.R. 4), approved by both houses of the 104th Congress, address both of our matters for congressional consideration. As of December 31, 1995, this bill had not been signed. We identified IRS’ management of accounts receivable as an area of high risk vulnerable to waste, fraud, abuse, and mismanagement. This report was 1 of a series of 18 reports identifying weaknesses in agencies’ internal controls or financial management systems. The 1995 series of high-risk reports was an update to the original series issued in December 1992. IRS’ management of accounts receivable also has been recognized by the Office of Management and Budget (OMB) and IRS management as a high-risk area. IRS’ poor performance in resolving tens of billions of dollars in outstanding tax delinquencies has not only lessened the revenues immediately available to support government operations but could also jeopardize future taxpayer compliance by leaving the impression that IRS is neither fair nor serious about collecting overdue taxes. We reported that despite many IRS initiatives to “fix” the accounts receivable problem, negligible progress has been made. For example, IRS has not yet developed an accounting system that identifies valid and collectible receivables and those that are not, thereby complicating the job of collection personnel trying to resolve individual accounts. Also, from 1990 through 1994, the gross inventory of tax debt, which includes accounts receivable, grew about 80 percent—from $87 billion to $156 billion. During the same period, annual collections of delinquent taxes declined from $25.5 billion to $23.5 billion—a decline of about 8 percent. We noted that these disappointing results are indicative of the (1) pervasiveness of problems throughout IRS’ processes that cumulate in the inventory and (2) difficulty in coming to grips with the interrelationship of several underlying causes. These include the lack of accurate and reliable management information for determining the validity and makeup of the inventory of tax debt and evaluating the effectiveness of individual collection activities; IRS’ lengthy, antiquated, rigid, and inefficient collection process; difficulty in balancing collection efforts with the need to protect taxpayer rights; and a decentralized organization that blurs responsibility and accountability. In our view, IRS’ primary task is twofold: collect more delinquent taxes and stem the growth in outstanding debts. The first part of the task requires greater efficiency and productivity in the collection process. The second requires changes in other IRS components to prevent delinquencies and minimize cluttering up the collection process with invalid and uncollectible accounts. The lack of accurate and reliable information continues to be IRS’ foremost problem and hinders most of its efforts to effectively deal with tax debts. Priority must be given to this area because so many of IRS’ modernization efforts rely heavily on accurate and reliable information. IRS also needs to clearly demonstrate the institutional focus necessary to effectively deal with the underlying causes of the problem—causes that cut across the agency and across lines of managerial authority and responsibility. Equally important is that the strategy address ways to best reengineer IRS’ outmoded tax collection processes, which were designed decades ago and have not kept pace with advances in technology or communications. Since 1986, IRS has invested $2.5 billion in Tax Systems Modernization (TSM). In addition, it requested another $1.1 billion for fiscal year 1996 for this effort and, through 2001, expected to spend over $8 billion on TSM. TSM is the centerpiece of IRS’ vision of virtually paperless tax processing to optimize operations and serve taxpayers better. This report and testimony critique the effectiveness of IRS’ efforts to modernize tax processing. We discuss IRS’ progress to implement its modernization and describe serious remaining management and technical weaknesses that must be corrected if tax systems modernization is to succeed. We found that IRS recognizes the criticality to future efficient and effective operations of attaining its vision of modernized tax processing and has worked for almost a decade, with substantial investment, to reach this goal. However, its efforts to modernize tax processing are at serious risk because of remaining pervasive management and technical weaknesses that impede modernization efforts. Specifically, we found the following: IRS does not have a comprehensive business strategy to cost-effectively reduce paper submissions. IRS’ business strategy primarily targets taxpayers who use a third party to prepare and/or transmit simple returns, are willing to pay a fee to file their returns electronically, and are expecting refunds. Focusing on this limited taxpaying population overlooks most taxpayers, including those who prepare their own tax returns using personal computers. Strategic information management practices are not fully in place to guide systems modernization. Software development capability is immature and weak. Using the Capability Maturity Model (CMM) developed by the Software Engineering Institute at Carnegie Mellon University, IRS rated itself at the lowest level (i.e., CMM level 1). Systems architectures (including its security architecture and data architecture), integration planning, and system testing and test planning were incomplete. An effective organizational structure to consistently manage and control systems modernization organizationwide was not established. To overcome the management and technical weaknesses impeding successful modernization efforts, we recommended that IRS’ electronic filing business strategy focus on a wider population of taxpayers, including taxpayers who can benefit from filing electronically. In addition, we recommended the following improvements to IRS’ strategic information management, software development capability, and technical activities. Take immediate action to improve IRS’ strategic information management by implementing a process for selecting, prioritizing, controlling, and evaluating the progress and performance of all major information systems investments, both new and ongoing, including explicit decision criteria. Using the best available information, IRS needs to develop quantifiable decision criteria that consider such factors as cost, mission benefits, and technical risk. Immediately require IRS’ future software development contractors to have CMM level 2 maturity and by December 31, 1995, take measures that will improve IRS’ software development capability. The specific measures recommended are intended to move IRS to CMM level 2 and include implementing consistent procedures for software requirements management, quality assurance, configuration management, and project planning and tracking. Take several actions by December 31, 1995, to improve key system development technical activities. These specific actions include (1) completing an integrated systems architecture and security and data architectures, (2) institutionalizing formal configuration management for all new systems development projects and upgrades and developing a plan to bring ongoing projects under formal configuration management, and (3) developing security concept of operations, disaster recovery, and contingency plans. Assign the Associate Commissioner responsibility for managing and controlling all systems development activities, including the research and development division’s systems development efforts. IRS officials agreed with our recommendations for improving TSM in areas such as electronic filing, strategic information management, software development, technical infrastructure, and accountability and responsibility. IRS officials are currently drafting a legislatively mandated report, which is required to include a schedule for successfully mitigating the deficiencies we reported. At the request of the Chairman, Subcommittee on Oversight, House Committee on Ways and Means, we testified on the administration’s fiscal year 1996 budget request for IRS and on the interim results of our assessment of the 1995 tax filing season. IRS’ fiscal year 1996 budget request was for about $8.2 billion and 114,885 staff, an increase of about $739 million and 922 staff over IRS’ expected fiscal year 1995 operating level. Most of the increase was for TSM. Other increases were to help IRS deal with two important filing season issues—the need to better control refund fraud and the difficulties taxpayers experience in trying to reach IRS by telephone. We made the following points in our testimony: To focus the TSM effort, IRS should direct its attention to a small number of projects that address critical gaps in mission performance and are part of the TSM vision. In light of the need to refocus TSM, IRS might not be in a position, in fiscal year 1996, to effectively use all of the funding for TSM that it had requested. IRS took several steps in 1995 in an attempt to better control refund fraud. As one result of these changes, IRS was delaying the refunds of many taxpayers whose eligibility for the EIC was problematic or who were not using valid SSNs. We expressed the belief that these actions, if effectively implemented, should help reduce refund fraud. Refundable credits, like the EIC, pose a challenge for tax administrators. In addition to the concerns about fraud, there are equally important concerns that not all taxpayers who are eligible are receiving the credit. We made several recommendations in past reports that could help make the EIC less of a problem. Taxpayers were continuing to have problems reaching IRS by telephone. Of the 1,166 calls we made to IRS’ toll-free assistance number between January 30 and February 10, 1995, we reached an IRS assistor 13 percent of the time. IRS’ budget included a request for additional staff to answer the telephones. Although the requested increase would help, it would not make an appreciable difference in the large gap between the number of calls coming into IRS and the number it answers. Most taxpayers might be able to get through to IRS if IRS adopted some of the practices used by other large organizations that provide similar telephone assistance. This report presented the results of our attempt to audit IRS’ financial statements for fiscal year 1994. It also assessed IRS’ internal controls and compliance with laws and regulations. The report further discussed the scope and severity of IRS’ financial management and control problems and the effect these problems have had on IRS’ ability to carry out its mission and remedy these problems. IRS continues to face major challenges in developing meaningful and reliable financial management information and in providing adequate internal controls that are essential to effectively manage and report on its operations. Overcoming these challenges is difficult because of the long-standing nature and depth of IRS’ financial management problems and the antiquated state of its information systems. We were unable to express an opinion on the reliability of IRS’ financial statements for fiscal year 1994, as in other years. We found that (1) critical supporting information for IRS financial statements was not available; (2) the available information was generally unreliable due to ineffective internal controls; and (3) IRS internal controls did not effectively safeguard assets, provide a reasonable basis for determining material compliance with laws and regulations, or ensure that there were no material misstatements in the financial statements. IRS, however, has made progress in responding to our previously identified problems and in improving accounting for federal revenues. Recommendation(s) to IRS We recommended that the Commissioner of Internal Revenue direct the implement the software, hardware, and procedural changes needed to create reliable subsidiary accounts receivable and revenue records that are fully integrated with the general ledger; change the current federal tax deposit coupon reporting requirements to include detailed reporting for all excise taxes, Federal Insurance Contribution Act (FICA) taxes, and employee withheld income taxes; and implement software changes that will allow the detailed taxes reported to be separately maintained in the master file, other related revenue accounting feeder systems, and the general ledger. IRS is working with us to implement these recommendations as well as those from our prior financial audits. Some progress has been made in responding to problems we identified in previous reports. IRS officials reaffirmed their commitment to the goals of the Chief Financial Officer Act to improve financial management and to provide stakeholders and managers with accurate and timely financial information. At the request of the Chairman, Subcommittee on Oversight, House Committee on Ways and Means, we assessed various aspects of IRS’ performance during the 1994 tax filing season. Specifically, we looked into the processing of individual income tax returns and related refunds and the ability of taxpayers to reach IRS by telephone. The 1994 filing season was successful in many respects. The number of returns filed increased after an unexpected decline in 1993, and more taxpayers used alternatives to the traditional paper filing method. According to IRS data and our review at one of IRS’ 10 service centers, tax refunds were generally processed accurately and issued in a timely manner, and IRS improved the accuracy of its returns processing, thus reducing the amount of rework. IRS’ computers generally worked well with minimal downtime. On the basis of tests done by us and IRS, taxpayers looking for tax forms and publications at IRS walk-in sites could reasonably expect to find them, and taxpayers calling IRS’ toll-free telephone assistance with tax law questions could generally expect to get accurate answers. However, there were some significant problems. The number of IRS-detected fraudulent refund claims continued the steady increase that has plagued IRS for the past several years. Through the first 6 months of 1994, IRS identified twice as many fraudulent claims as it had during the same period in 1993. What remained unclear was (1) how much of that growth was due to increased fraudulent activity versus improved IRS monitoring and (2) how much additional fraud might be going undetected. The ability of taxpayers to reach IRS by telephone has been a problem for several years and degraded even further in 1994. Using IRS data, we determined that (1) only about 20 percent of the calls to IRS’ toll-free telephone assistance and 50 percent of the calls to IRS’ forms distribution centers were being answered and (2) only 13 percent of the calls to IRS’ TeleFile system were getting through during the peak period. Under TeleFile, certain taxpayers who are eligible to file a Form 1040EZ are allowed to file using a toll-free number on touch-tone telephones. The EIC was the source of many errors by taxpayers and tax practitioners in preparing returns. Those errors, along with errors by IRS staff in following IRS procedures for handling EIC claims, increased IRS’ error resolution workload and delayed taxpayers’ receipt of benefits. We did not make any recommendations to address these significant problems because (1) there were several efforts already under way and planned that we expected would have a positive effect on these issues, such as a review of refund fraud being done by Treasury’s Fraud Task Force and IRS’ plans to increase the number of telephone lines for TeleFile and (2) we had other work under way, which was specifically targeted at those issues and might help us better identify root causes. In a report to the Chairman, Subcommittee on Oversight, House Committee on Ways and Means, we presented the results of our review of IRS’ processes for handling undeliverable mail. Our work focused on notices IRS sent to taxpayers involving the assessment and collection of taxes. We reported that IRS sends out millions of pieces of mail each year to taxpayers and that during fiscal year 1992, about 15 million pieces were undeliverable. According to IRS, mail is undeliverable because (1) taxpayers move and leave no forwarding addresses with the U.S. Postal Service or IRS, (2) the Postal Service may not deliver or forward mail, and (3) IRS may incorrectly record taxpayers’ addresses in its files. While the exact costs are not determinable, IRS estimated that it loses millions of dollars annually in revenues and incurs increased operations costs from undelivered mail. One projection indicated that a minimum of $100 million in lost revenue per year may be attributable to undeliverable mail addressed to business taxpayers alone. IRS estimates also showed that the volume of undeliverable mail rose from 6.5 million pieces in 1986 to about 15 million pieces in 1992. We noted that it is unlikely that IRS can totally eliminate undeliverable mail because two of its three principal causes are external to IRS. However, IRS needs to give this type of mail more attention because it adversely affects taxpayers and IRS. When IRS sends mail that is undelivered and subsequent attempts to contact the taxpayers are unsuccessful, the consequences for taxpayers can be quite severe. For example, the amount of taxes owed can grow, as interest and penalties mount, and liquid assets such as bank accounts may eventually be levied to satisfy the debt. Recommendation(s) to IRS We recommended that the Commissioner of Internal Revenue encourage taxpayers to make address changes by (1) accepting changes of address over the telephone; (2) making Form 8822, Change of Address, more conveniently available; and (3) emphasizing to taxpayers the importance of keeping their addresses current with IRS. We also recommended that IRS proceed with plans to establish a centralized unit within each of its service centers to process all service center undeliverable mail. IRS agreed with our recommendations and is working with its Chief Counsel to revise a procedure to allow accepting general address changes over the telephone. IRS is also conducting several tests to make address changing easier. For example, IRS is including change of address forms in Postal Service change of address kits. Efforts are also under way to update taxpayer education materials regarding IRS’ need for current addresses and the procedures for changing addresses. IRS is examining various alternatives for standardizing undeliverable mail procedures, including the establishment of centralized units. In addition, IRS is planning to establish locator service procedures and locator service units at all service centers. In July 1990, we reported that the rules for depositing employment taxes were complex and resulted in nearly one-third of all employers being penalized in 1988 for failing to make timely deposits. We recommended that IRS simplify the employment tax deposit rules by making the deposit date more certain and by exempting significant numbers of small employers from frequent deposit requirements. At the request of Senator Herbert Kohl, we reviewed the development of the revised federal employment tax deposit regulations issued by the Department of the Treasury and IRS. We reported that the final regulations, issued in September 1992, launched a new payroll tax deposit process that was widely considered to be significantly simpler and easier for stakeholders to understand and comply with. The regulations provided all but the largest employers with a fixed-deposit rule that they can follow for an entire calendar year. IRS obtained stakeholders’ input, either oral or written, throughout the process. Although stakeholders were generally satisfied with the outcome, they differed in their satisfaction with the process used in developing them. Some concerned stakeholders did not believe that an adequate dialogue had been established with Treasury or IRS officials and that Treasury and IRS officials did not follow statutory or executive branch guidance that either appeared to be applicable or that the stakeholders thought would have been appropriate to follow, i.e., the Regulatory Flexibility Act or Executive Order 12291. We concluded that given such things as the diversity of interests among the stakeholders who may be affected by tax regulations, the time constraints under which Treasury and IRS officials often must operate, and the sometimes conflicting goals that must be reconciled when tax regulations are written, complete stakeholder satisfaction is unlikely. Nevertheless, the employment tax deposit regulation experience suggests that Treasury and IRS officials could modify their practices to improve communications with stakeholders and provide greater assurance that stakeholders’ views will be obtained and considered. To help forestall stakeholder confusion and frustration regarding the applicability of statutory and executive guidance to tax-related regulations, we recommended that the Secretary of the Treasury direct that—when such guidance is not applicable—the text accompanying the publication of proposed and final regulations should contain a complete explanation of why this is so. We also recommended that the Secretary require that regulation drafters document internally, when time constraints permit, their consideration of the factors provided in such statutory and executive guidance to better ensure that tax regulations reflect stakeholders’ needs. To maximize the value of informal communications with stakeholders, we recommended that the Secretary encourage regulation drafters to meet with selected stakeholders to work through implementation issues associated with draft-tax regulations before publishing the regulations for notice and comment. To better ensure that a well-informed basis exists for Treasury and IRS officials to make judgments concerning whether simple, yet effective, regulations have been designed, we recommended that the Secretary of the Treasury require regulation drafters to develop key measures of simplicity for tax regulations. Officials should use these measures to help judge whether existing regulations are too complex and whether regulations under development are sufficiently simple. In response to our recommendations, IRS reported in March 1995 that it was (1) considering revising the statements contained in the preamble of IRS regulations to more explicitly state its assessment of the applicability of statutory and executive guidance, (2) considering revising procedures for internal documentation to better ensure that tax regulations reflect both the policy choices of Congress and IRS stakeholders’ needs, and (3) reviewing its attempts to measure simplicity in conjunction with other significant policy concerns in the promulgation of regulations. IRS also identified three potential opportunities for further improvement: (1) where time and circumstances permit, it will provide a 90-day period for the submission of public comments, and it will consider comments received even after that date, when time permits; (2) it intends to implement a policy of issuing a “plain language” summary of the regulation together with the formal notice of proposed rulemaking and make the summary available through a broader range of media; and (3) it is considering the feasibility of holding public hearings on certain regulations outside Washington, D.C. As of December 31, 1995, IRS had taken no further action on these recommendations, according to an IRS official. At the request of the Chairman, Subcommittee on Oversight, House Committee on Ways and Means, we reviewed IRS’ use of installment agreements as a means for individual taxpayers to pay their tax debts. IRS changed the guidelines for installment agreements in April 1992 to streamline the process for taxpayers to request installment agreements and for IRS to approve them. We reported that participation in IRS’ installment agreement program grew rapidly after the guidelines were revised—from 1.1 million new agreements for individual taxpayers in fiscal year 1991 to 2.6 million new agreements in fiscal year 1994, an increase of 136 percent. Also, during fiscal years 1991 through 1994, the amount of taxes being paid in new installment agreements increased 135 percent—from $4.0 billion to $9.4 billion. And, installment agreements accounted for 33 percent ($4.5 billion) of IRS’ delinquent tax collections from individual taxpayers in fiscal year 1994 compared with 14 percent ($1.9 billion) in fiscal year 1991. The changes IRS made to its installment agreement procedures affected its collection activities in several ways. First, IRS service center collection and district office taxpayer service staff approved more agreements than in the past. Staff at IRS’ Automated Collection System call sites, who previously approved the majority of installment agreements, are now assigned higher-dollar cases. Second, more past due taxes are being paid off in installments without going through IRS’ routine collection process. This is due in part because, under IRS’ revised procedures, taxpayers can request an installment agreement when they file a balance due tax return. IRS’ internal auditors raised concerns in September 1994 about the ease with which taxpayers can enter into installment agreements. The auditors reported that IRS’ new installment agreement procedures may be allowing taxpayers to (1) choose installment agreements to pay their taxes when they could have fully paid their taxes on time and (2) accumulate tax debt because it is easy to add subsequent income taxes to an existing installment agreement. An IRS task group, established in response to the auditors’ concerns, made recommendations aimed at reducing the use of installment agreements to accumulate debt that could be paid through other methods. IRS also agreed to test an internal audit recommendation to obtain selected information from program participants on the circumstances causing their tax debt situation. We reported that IRS informs taxpayers that applicable penalties and interest charges will be added to their installment agreements; however, taxpayers are not given dollar estimates for these penalties and interest. This contrasts with installment agreements made in the private sector, such as those for automobile loans, which typically disclose information regarding terms, conditions, and costs. Further, mailing costs could be reduced if IRS used regular mail instead of certified mail for routine defaulted installment agreements, which are not subject to levy action. Such agreements are usually placed in deferred status where future collection action is generally limited to periodic notices and offsets against future refunds. To improve the information provided to taxpayers and the administration of the installment agreement program, we recommended that the Commissioner of Internal Revenue (1) notify taxpayers about projected total costs and payoff periods when setting up agreements with taxpayers and when mailing monthly reminder notices, (2) experiment with Form 9465, Installment Agreement Request, to test whether having space for taxpayers to authorize direct debit installment payments increases the frequency with which this option is used, and (3) send agreement default notices to taxpayers by regular mail instead of certified mail unless an account is being referred for levy action. IRS agreed to study the feasibility of notifying taxpayers about total costs and payoff periods of installment agreements. If the notification is not feasible under existing computer systems, IRS said it would pursue changes as part of its TSM program. As an interim step, IRS is planning to break out penalty and interest costs on monthly reminder notices to taxpayers beginning in 1996. IRS also agreed to make the necessary changes to Form 9465 and to determine the requirements for OMB approval of the new form. Once approved, IRS will test the revised form for increased direct debit usage. IRS agreed with the recommendation concerning the use of regular mail for default notices and will identify the program changes necessary for implementation. This report, prepared under our basic legislative authority, discusses IRS’ procedures for processing and posting tax returns in which the primary filer did not provide an SSN or provided a name and SSN that did not match Social Security Administration (SSA) records. This report discusses (1) the growth in accounts with missing or incorrect SSNs on IRS’ IMF, (2) IRS’ procedures for verifying the identities of tax return filers, and (3) the potential effects of the procedures on IRS’ plans to modernize the tax system and on IRS’ income-matching program. IRS relies on data from SSA to determine the accuracy of SSNs and names recorded on tax documents submitted by individual taxpayers. IRS uses this information to establish the identity of each taxpayer and to ensure that each transaction is posted to the correct account on the IMF. When processing paper tax returns with missing or incorrect SSNs, IRS service centers first try to make corrections by researching IRS files or other documents (for example, Form W-2 wage and tax statements) that accompany a tax return. Returns that can be corrected, along with those that match SSA records, are posted to the “valid” segment of the IMF. Returns that cannot be corrected are posted to the “invalid” segment of the IMF, using either the incorrect SSN on the tax return or a temporary number assigned by IRS. As of January 1, 1995, 4.3 million accounts were posted on the invalid segment of the IMF, and 153.3 million accounts were posted on the valid segment. As part of its efforts to combat potential refund fraud, IRS revised its procedures in 1995 to require that taxpayers who file returns with (1) missing or incorrect SSNs or (2) temporary numbers provide documentation to verify their identities. The notice IRS was sending to filers in 1995 (known as the CP54B notice), however, did not clearly convey that they were required to provide documentation to verify their identities. At the time of our review, IRS was not planning to apply the revised documentation requirements to filers with prior accounts on the IMF invalid segment who file again using the same name and SSN combination. The accounts of these filers, whose identities IRS verified using pre-1995 procedures, were coded to automatically issue a refund when one is requested on a return. As of January 1, 1995, at least 3.2 million accounts on the IMF invalid segment were so coded. We analyzed 58 returns that were posted to the IMF invalid segment in the first 6 months of 1994 and that had accounts coded for automatic refund issuance. Our results suggested that IRS should subject these filers to the revised documentation requirements; 27 of the returns were filed by persons who either used SSNs not issued by SSA or used another individual’s SSN, including the SSNs of children or deceased persons. Developing complete and accurate account information on every taxpayer and being able to respond accurately to taxpayer account inquiries are goals IRS hopes to achieve in its tax system modernization efforts. Achieving these goals is jeopardized by the current master file structure, which allows two or more taxpayers to have accounts under the same number or one taxpayer to have several accounts under different numbers. IRS’ income-matching program is also hampered by posting returns to the IMF invalid segment. IRS matches the income claimed by taxpayers with the income reported by third parties on information returns. Discrepancies are used by IRS to detect underreported income or nonfiling of tax returns. To improve the processing of returns with missing or incorrect SSNs and help clean up accounts currently posted on the IMF invalid segment, we recommended that the Commissioner of Internal Revenue finalize the CP54B notice in time for use during the 1996 tax filing season and apply the revised documentation requirements to taxpayers who filed tax returns that were posted to the IMF invalid segment before 1995 and whose accounts had a permanent refund release code. IRS officials agreed that a revised CP54B notice was needed and assured us that revised notices would be available for use during the 1996 filing season. With respect to our second recommendation, IRS officials said that a task force was determining the best way to verify accounts placed on the IMF invalid segment before 1995. The task force was also working to reverse the permanent refund release code on the IMF invalid segment accounts that were established before 1995. Further, IRS officials plan to remove IMF invalid segment accounts that have been inactive for a certain period, similar to the treatment of accounts on the valid segment. Taxpayers are required to have identification numbers so that IRS can establish accounts for them and record transactions such as the payment of taxes. Most taxpayers are required to have only one identification number. However, individuals who are self-employed (i.e, sole proprietors) are sometimes required to have two identification numbers, an SSN for their individual income tax returns and an Employer Identification Number (EIN) for their business returns. This report, to the Joint Committee on Taxation, discussed whether IRS (1) accurately cross-referenced the two identification numbers that self-employed individuals report and (2) needed to take any actions to improve the accuracy of its cross-reference files. IRS records a sole proprietor’s identification numbers on three computer files. It uses the SSN to establish an account on the IMF and includes the EIN in the account for cross-referencing purposes. It uses the EIN to establish an account on the BMF and adds the SSN as a cross-reference. It uses cross-referenced SSNs and EINs from the two master files to build the Cross-Reference Entity File (CREF), which is a file IRS created expressly to consolidate income information on sole proprietors for use in its underreporter program. We concluded that IRS had not screened out all erroneous identification numbers, which meant that numbers posted to sole proprietors’ records as cross-references may identify someone other than the intended taxpayer. From work at the Fresno Service Center, we made the following estimates: About 20 percent of the EINs posted to tax year 1991 records on the IMF from Schedule C returns filed at the Fresno Service Center were erroneous. About 3 percent of the BMF records of sole proprietors who filed 1991 Schedule C returns with the Fresno Service Center contained inappropriate SSNs as cross-references. About 10 percent of the accounts on the CREF that related to 1991 returns filed with Fresno contained erroneous cross-referenced taxpayer identification numbers. We believe that before posting, IRS did not screen EINs to detect those incorrectly reported on Schedule C. No data were available to discern the total effects of such misposting; however, several false underreporter cases were created at the Fresno Service Center because of erroneous cross-references. More screening is also needed if IRS is to properly integrate a taxpayer’s various records under its TSM program. We found that IRS’ difficulties in cross-referencing a sole proprietor’s two identification numbers would be eliminated if sole proprietors used a single identification number for all tax information. In addition to aiding IRS, the use of a single identification number would lessen the compliance burden that sole proprietors shoulder, which would be in keeping with IRS authority to require taxpayer identification numbers. Recommendation(s) to IRS We recommended that the Commissioner of Internal Revenue (1) establish returns-processing and compliance-screening procedures to help remove erroneous cross-referenced taxpayer identification numbers from sole proprietors’ tax records and (2) evaluate the feasibility of eliminating the requirement that sole proprietors use EINs for filing business returns. IRS officials generally agreed that data on the CREF should be perfected and said that IRS would begin evaluating how to do this. They also said that a single taxpayer identification number such as the SSN would facilitate reporting compliance by sole proprietors. IRS officials, however, said that IRS would not pursue such a change because of major implementation obstacles, such as (1) the necessity of extensive reprogramming of IRS, SSA, and private record systems; (2) imposing the added burden on the majority of sole proprietors who now report correctly of changing their reporting responsibilities; (3) requiring sole proprietors to disclose their SSNs on Forms W-2, which raises privacy concerns; and (4) allocating significant IRS resources to educate taxpayers in the new requirement. We believe that eliminating the EIN requirement for sole proprietors is worthy of further evaluation before a decision is made on its feasibility and cost-effectiveness, especially since in the past IRS allowed sole proprietors to use their SSNs as EINs. A similar policy for those cases where IRS had not assigned an EIN with the same digits as the sole proprietor’s SSN should not involve major BMF reprogramming and reconfiguration. IRS is proposing to do a study on the extent of the problems with the CREF and ways to address them. This study could also include an evaluation of the feasibility of sole proprietors using their SSN rather than an EIN. Pursuant to a request from Senators Thad Cochran, James M. Jeffords, and Nancy Landon Kassebaum, we reported on ways the federal government can encourage families to save money for their children’s college educations. Specifically, we examined (1) whether series EE savings bonds encourage net savings for college and (2) the nonrepayment rate for federal employees who have borrowed from the Thrift Savings Plan (TSP) for education expenses. With the Technical and Miscellaneous Revenue Act of 1988, Congress created a new federal income tax advantage for using EE savings bonds to pay for certain higher education expenses. For savings bonds purchased in 1990 or later, taxpayers may deduct from their gross income the interest earned on bonds used to pay for tuition and required fees, net of scholarships, at accredited colleges and universities. Few people have used the education expenses provision of series EE savings bonds to pay for college costs. The limited response may be attributable to (1) the fact that investors hold savings bonds generally for an average of 10 years before redeeming them and (2) a 1992 national market survey done for the Department of the Treasury found 77 percent of the respondents had never heard of these special education savings bonds. Since 1988, federal employees have been able to borrow from their TSP accounts to pay for certain educational expenses. If active federal employees fail to repay their loans on time, a taxable distribution is declared, that is, the amount of unpaid principal and interest is reported to IRS as taxable income received by the borrower. Very few TSP education loans issued from 1988 to 1993 have resulted in taxable distributions—less than 1 percent for active federal employees. For federal employees terminating employment early, regardless of the reason, less than 8 percent had taxable distributions for the period 1988 and 1989. Overall, for this period, over 90 percent of the education loans were repaid in full. Pursuant to a legislative directive, we reviewed the fee structure and methodology used by IRS in developing user fees to ensure that the proposed fees reflected no more than actual costs. At the time of our review, IRS had increased an existing fee—for copying taxpayers’ tax records—and proposed three new ones—one related to the electronic tax filing program and two related to the installment agreement program. We reported that IRS does not presently have a cost-accounting system, and IRS officials told us that the proposed user fees were based on their best estimates of full costs as required by the prevailing OMB guidance. Further, given the limited cost data available to IRS, we could not validate that the proposed fees reflected no more than actual costs. We noted that IRS is developing an activity-based costing system, which should give it the capability to develop more comprehensive cost information for all activities. The lack of specific data available to IRS in developing the proposed user fees underscores the need for the timely completion of IRS’ cost system. In anticipation of possible new tax and welfare initiatives, the Subcommittee on Native American and Insular Affairs, House Committee on Resources, asked us to provide information on the various fiscal arrangements between the United States and five insular areas: American Samoa, Guam, the Commonwealth of the Northern Mariana Islands, Puerto Rico, and the U.S. Virgin Islands. We provided information on (1) income and other tax rules and revenues that apply to these areas, (2) current federal expenditures, and (3) the extent to which they receive major federal social programs. We testified that individuals who are residents of a territory and who earn income only from sources within the territory owe no federal tax on this income. U.S.-source income is treated differently for federal tax purposes, depending on the territory in which the individual resides. Corporations organized in the territories are generally treated as foreign corporations for U.S. tax purposes and are taxed on their U.S. earnings but not their territorial income. U.S. corporations with subsidiaries in the territories can receive significant tax benefits through the possession’s tax credit if certain qualifications are met. The Department of the Treasury estimated these benefits to be about $3 billion annually. Other federal taxes include payroll taxes to fund Social Security and Medicare and excise taxes. In fiscal year 1993, federal expenditures in the five territories totaled $10.3 billion. The largest expenditure category was “direct payments to individuals.” These expenditures were made mostly through Social Security benefits, Medicare benefits, unemployment compensation, and student education grants. Major federal social programs, such as Food Stamps and AFDC, also have been extended in varying degrees to the territories. About 86 percent of the $10.3 billion went to Puerto Rico, which is, by far, the largest possession. This summary, prepared in compliance with a legislative requirement, 26 U.S.C. 6103(i)(7)(A), contained information on our tax policy and administration-related work during fiscal year 1994. It included (1) summaries of tax-related products issued in fiscal year 1994; (2) summaries of tax-related products issued before fiscal year 1994 with open recommendations to Congress; (3) descriptions of legislative actions taken in fiscal year 1994 in response to our recommendations; (4) a listing of recommendations to Congress that were open as of December 31, 1994; (5) a listing of recommendations we made in fiscal year 1994 to the Commissioner of Internal Revenue; and (6) brief descriptions of assignments for which we were authorized access to tax data in fiscal year 1994 under the above citation. In a report to Congress, we stressed the urgent need for deficit reduction. This report identified the budgetary implications of selected policy changes and program reforms discussed in our work but were not yet implemented or enacted. The report presented 120 options of which 14 fell under “receipts” and were thus tax related. The options were presented in narrative descriptions. They presented ways to address, in a budgetary context, some of the significant problems identified in our evaluations of federal policies and programs. We also presented an analytical framework to provide a structure for congressional consideration of individual options. In some discussions, we provided recommendations. The 14 tax-related options were tax treatment of health insurance premiums, information reporting on forgiven debts, administration of the tax deduction for real estate taxes, corporate tax document matching, tax treatment of interest earned on life insurance policies and deferred annuities, federal agency reporting to the IRS, independent contractor tax compliance, deductibility of home equity loan interest, collecting gasoline excise taxes, computing excise tax bases, small-issue industrial development bonds and qualified mortgage bonds, improving compliance of sole proprietors, and increasing highway user fees on heavy trucks. In a report to Congressman William J. Coyne, we discussed the number, size, and industry class of corporations that paid the corporate AMT over the period 1987 through 1992; why they were liable for it; whether AMT achieved its purpose; and how AMT might affect corporate investment. AMT was substantially revised by Congress in 1986 to ensure that corporations with substantial economic income could not avoid significant tax liability by using exclusions, deductions, and credits. In addition, Congress made changes so that corporations that reported significant income on their financial statements would pay some tax in that year. Many of the tax preferences that AMT is designed to limit defer tax liability rather than permanently reduce tax. For this reason, AMT is designed to result in the prepayment of tax rather than cause a permanent increase in tax liability. To achieve this, corporations that pay AMT in a particular year may be able to recoup this amount in later years through AMT credit. AMT accelerated tax payments of $27.4 billion over the 1987 through 1992 tax years. Over the same period, corporations used AMT credits totaling $5.8 billion. Most AMT revenues came from relatively few corporations, but many more corporations bear some burden in complying with AMT provisions. For example, of the universe of 2.1 million corporations subject to AMT, just 2,000 large corporations (or 0.1 percent) paid 85 percent of AMT payments in 1992, and only 28,000 (or 1.3 percent) paid any AMT at all. However, 400,000 corporations filed AMT forms. AMT most affected corporations and industries that use the exclusions, deductions, and credits that AMT was designed to offset. Of the many rules that make up the AMT, two provisions clearly led to the largest increase in corporations’ taxable incomes. These were the provision related to the amount corporations could deduct for the depreciation of assets and the provision that reflects the difference between the amount of income corporations report for tax purposes and the amount they report to shareholders on financial statements. AMT partially achieved its objective of making corporations with positive economic income pay tax. AMT achieved its second objective by causing corporations that reported positive amounts of book income in a particular year to pay some tax in that year. In every year in the 1987 through 1992 period, at least 6,000 corporations with positive book income that paid no regular tax paid some AMT. The effects of AMT on corporate investment are not clear. The economic literature that we reviewed indicates that under some circumstances AMT can reduce the incentive for corporations to invest, but under other circumstances, the incentive to invest may be greater under the AMT. Furthermore, there is not a consensus on the extent that changes in the incentive to invest lead to changes in actual investment. To date, no study has directly tested the extent to which AMT actually affected investments. In a letter to the Commissioner of Internal Revenue, we shared the results from a limited study of IRS’ oversight of both paid preparers of tax returns and software for preparing returns. We found that although paid preparers and tax software may affect tax compliance, IRS lacks data on their compliance impacts. Paid preparers did about half of the 1992 individual income tax returns. However, IRS does not know the extent to which paid preparers as a whole or by component group caused noncompliance or improved compliance on the returns. IRS’ most recent compliance data indicated that in 1988 individual returns done by paid preparers had more noncompliance than all other returns. IRS found noncompliance on about 55 percent of the returns done by paid preparers, compared with about 40 percent on other returns. Knowing the impacts of paid preparers on compliance, particularly by type of paid preparer, can be important given the difference in IRS’ oversight. Specifically, IRS imposes more requirements and can impose more sanctions against preparers such as attorneys and certified public accountants who maintain certain professional standards and are qualified to represent clients before IRS, than against unenrolled preparers such as commercial preparers who are not subject to the same professional standards and are not qualified to practice before IRS. IRS also has limited information on the extent to which taxpayers and preparers use software packages for substitute returns or to which these packages generate accurate returns. The use of tax software in preparing returns is growing. Members of the preparer community have estimated that 80 percent or more of the paid preparers also used tax software. Three basic software options are available: (1) 1040PC software, generating a machine readable return; (2) electronic filing (ELF) software; and (3) other tax software, generating a substitute Form 1040. About 18 million of 116 million returns filed in 1994 used ELF and 1040PC software. IRS checked all three software options for conformity to specifications and did additional testing on the ELF and 1040PC software. However, IRS did not test whether the software consistently calculated the correct tax liability. Knowing the accuracy of returns prepared using any computer software could be important as IRS strives for 90-percent tax compliance by 2001. Pursuant to a request from Senators Thad Cochran, James M. Jeffords, and Nancy Landon Kassebaum, we provided information on state tuition prepayment programs, focusing on (1) how these programs operate and the participation rates they have achieved, (2) participants’ income levels and options for increasing the participation of lower-income families, and (3) the key issues surrounding these programs. Several states, following Michigan’s lead, have authorized tuition prepayment programs, that allow parents to pay in advance for tuition at participating colleges on behalf of a designated child and guaranteeing to cover the child’s future tuition bill at one of these colleges, no matter how much costs rise. By allowing purchasers to “lock in” today’s prices, these programs are intended to ease families’ concerns about whether they will have enough money in the future to pay for their children’s college expenses. We reported that (1) while none of the seven implemented state programs has achieved an average annual participation rate that seems very high, the programs vary widely among the states; (2) program officials identified several factors as important for maximizing participation—advertising and marketing, a positive public perception of the program, program simplicity and flexibility, and affordably priced benefits; (3) most participants in state tuition prepayment programs come from middle- and upper-income families; (4) program officials considered sliding-scale fees and tax credits poor options for increasing lower-income participation; and (5) some of the major issues concerning the state tuition prepayment programs are the potential effects they may have on students’ educational choices, their appeal to middle- and upper-income families, their value as an investment for purchasers, and the degree of risk they pose for states. The most significant issue facing states in establishing and operating a tuition prepayment program, however, is the possible applicability of federal tax provisions to purchasers, beneficiaries, and the programs themselves. This is important because certain tax consequences could make it more difficult for programs to survive. Concerns about taxation have led some states to defer implementation of their programs. Officials are most concerned about two potential consequences. First, officials hope these programs are exempt from federal taxes on their investment earnings because paying such taxes makes it more difficult to meet future liabilities. What it takes to qualify as exempt, however, is somewhat unclear, in part because IRS and a federal appeals court have disagreed on the tax status of Michigan’s program and also because other existing programs have not received IRS guidance. Second, program officials are concerned that IRS may decide that purchasers or beneficiaries are liable for federal income taxes annually on the imputed interest earned from their investments in prepaid tuition benefits. Officials have been following guidance IRS issued for Michigan’s program, which said that beneficiaries are liable for taxes on the increased value of their prepaid benefits at the time of redemption. Officials are concerned that changing from a deferred to an annual tax would create an administrative burden for their programs and perhaps a disincentive for potential purchasers. Congressional tax-writing committees should explore, within the existing framework, opportunities to exercise more scrutiny over indirect spending through tax expenditures. Congress could also consider integrating tax expenditures into current budget processes so that congressional consideration of a savings target is part of the annual budget process and to ensure that Congress addresses tax expenditures periodically. Congress should consider amending section 7122 of the Internal Revenue Code to remove the requirement that the Treasury General Counsel or his delegate review all offers in compromise of $500 or more and widen IRS’ discretionary authority to decide which offers require review. Congress may wish to consider revising current tax law to allow IRS to use collection performance in determining compensation and rewards for its collection staff as long as other criteria, such as fair and courteous treatment of taxpayers, are also considered. Congress should consider enacting legislation that would substitute a residency test for the dependent support test if the dependent lives with the taxpayer; if enacted, Congress also should consider eliminating the household maintenance test for filing as head of household status. Congress may want to consider legislation that would require states to send IRS and taxpayers an annual information return on any cash rebates for real estate tax payments. Congress needs to (1) clarify the rules for classifying workers by amending the law to exclude from the common-law definition of “employee” certain classes of workers and (2) consider legislation to improve independent contractor compliance through withholding and/or improved information reporting. The tax-writing committees should explore, within the existing framework, opportunities to exercise more scrutiny over indirect spending through tax expenditures. Congress could also consider integrating tax expenditures into current budget processes so that congressional consideration of a savings target is part of the annual budget process and to ensure that Congress addresses tax expenditures periodically (GAO/GGD/AIMD-94-122, 06/03/94). We recommended that the tax-writing committees explore, within the existing framework, opportunities to exercise more scrutiny over indirect “spending” through tax expenditures. If Congress wishes to consider tax expenditure efforts in a broader context of the allocation of federal resources, it could consider further integrating tax expenditures into current budget processes. Providing for congressional consideration of a savings target as part of the annual budget process could ensure that Congress addresses tax expenditures periodically. Alternatively, options that integrate consideration of related outlay and tax expenditure efforts could promote a more thorough review by the legislative and executive branches of possible trade-offs. Once tax expenditure performance data are developed, we recommended that OMB consult with the Treasury in considering how to portray tax expenditure performance information in the budget. The tax expenditure performance information should be combined with related outlay information to demonstrate the relative efficiency, effectiveness, and equity of federal outlay and tax expenditure efforts within a functional area. Such a presentation could be used to show the relative effectiveness of federal spending programs funded through outlays and tax expenditures. As a result of our work, examinations of tax expenditures were made part of agency performance plans. Such plans are required by the Government Performance and Results Act. Furthermore, tax expenditures were made part of the congressional budget process when they were incorporated into the 1995 Congressional Budget Resolution as a nonbinding agreement. Congress has given considerable attention to tax expenditures during the past year. Presidential line-item veto power over selected tax expenditures is included in budget legislation pending as of December 31, 1995. This legislation would permit the President to veto certain targeted tax benefits, including any revenue-losing provision that provides a federal income tax deduction, credit, exclusion, or preference to 100 or fewer tax payers, or certain transition rules that provide a tax benefit to five or fewer taxpayers. The same pending legislation would also create some new tax preferences and expand others, while scaling back, phasing out, or sunsetting others. Congress should consider amending section 7122 of the Internal Revenue Code to remove the requirement that the Treasury General Counsel or his delegate review all offers in compromise of $500 or more and widen IRS’ discretionary authority to decide which offers require review (GAO/GGD-94-47, 12/23/93). We suggested that Congress consider amending section 7122 of the Internal Revenue Code to remove the requirement that the Treasury General Counsel or his delegate review all offers of $500 or more and widen IRS’ discretionary authority to decide which offers require review. Recommendation(s) to IRS We recommended that the Commissioner of Internal Revenue develop the indicators necessary to evaluate the Offer-in-Compromise Program as a collection and compliance tool. The indicators should be based on accurate data and include (1) the yield of the program in terms of costs expended and amounts collected, (2) the amount of revenues collected that would not have been collected through other collection means, (3) a measure of noncompliant taxpayers who returned to the tax system, and (4) a measure of participating taxpayers who remained compliant in future years. We also recommended that the Commissioner determine the causes of variability in district office acceptance rates and, where appropriate, take steps to mitigate any inconsistent treatment of taxpayers. As of December 31, 1995, Congress had taken no action to remove the requirement that the Treasury General Counsel review all offers of $500 or more and to widen IRS’ discretionary authority to decide which offers require review. IRS has begun making changes necessary to gather data to determine program costs. Measuring such costs and yields requires two separate computer programming efforts—one has been completed and the other is part of a broader ongoing effort. IRS has also established a group that will visit selected district offices to conduct interviews and collect data to assist in identifying inconsistencies in the treatment of taxpayers receiving offers in compromise. Congress may wish to consider revising current tax law to allow IRS to use collection performance in determining compensation and rewards for its collection staff as long as other criteria, such as fair and courteous treatment of taxpayers, are also considered (GAO/GGD-93-67, 05/11/93). We continue to believe that Congress may wish to consider revising current tax law to allow IRS to use collection performance in determining compensation and rewards for its collection staff as long as other criteria, such as fair and courteous treatment of taxpayers, are also considered. Recommendation(s) to IRS We recommended that the Commissioner of Internal Revenue (1) restructure IRS’ collection organization to support earlier telephone contact with delinquent taxpayers and determine how to use current collection staff in earlier, more productive phases of the collection cycle; (2) develop detailed information on delinquent taxpayers and use it to customize collection procedures; and (3) identify and implement ways to increase cooperation with state governments in collecting delinquent taxes. We also recommended that the Commissioner allow the Assistant Commissioner (Collection) to use private collection companies, on a test basis, to support IRS’ collection efforts as permitted by current law. In January 1995, IRS implemented a nationwide early intervention collection program to send delinquent taxpayers fewer notices and make telephone contact sooner. The program, involving several hundred employees at multiple locations, aims at sending delinquent individual taxpayers three notices rather than the normal five notices and attempting telephone contact after 2 to 3 months instead of after 6 months. While specific performance data are not yet available, IRS officials contend that the program has been successful. IRS plans other enhancements to its collection process, including using characteristics of the delinquency case to determine the most appropriate collection enforcement action to be pursued to resolve the case. Also, a provision in IRS’ fiscal year 1996 appropriations bill directs IRS to devote $13 million to test the use of private collection agencies to locate and contact delinquent taxpayers. Congress should consider enacting legislation that would substitute a residency test for the dependent support test if the dependent lives with the taxpayer. If enacted, Congress also should consider eliminating the household maintenance test for filing as head of household status (GAO/GGD-93-60, 03/19/93). We continue to believe that Congress should consider enacting legislation that would substitute a residency test for the dependent support test if the dependent lives with the taxpayer. If this legislation is enacted, Congress also should consider eliminating the household maintenance test for filing as head of household status. Recommendation(s) to IRS We recommended that the Commissioner of Internal Revenue correct the operational problems in IRS’ limited computer-matching program and implement a 100-percent computer-matching program to identify erroneous dependent claims. Congress considered such legislation in 1993, but not recently. IRS, in response to our recommendation, is doing a 100-percent computer match for the 1995 filing season. IRS will code and transcribe SSNs for up to four dependents per return. Dependent SSNs not matching the SSA file will “fall out” in the Error Resolution System for further action. Congress may want to consider legislation that would require states to send IRS and taxpayers an annual information return on any cash rebates for real estate tax payments (GAO/GGD-93-43, 01/19/93 and GAO/T-GGD-93-46, 09/21/93). We continue to believe that Congress may want to consider legislation that would require states to send IRS and taxpayers an annual information return on any cash rebates for real estate tax payments. Recommendation(s) to IRS We recommended that the Commissioner of Internal Revenue (1) include rules on the tax deductibility of user fees and rebates in tax return instructions and consider ways, such as an optional worksheet, to help taxpayers calculate the real estate tax deduction; (2) work cooperatively with local governments to revise their real estate tax bills to identify user fees, label these charges as not tax deductible, and notify taxpayers that the local government may report the deductible tax to IRS; (3) notify examiners to check local records on user fees and state records on rebates to verify real estate tax deductions; and (4) negotiate agreements with local governments on sharing data on real estate tax payments made by individuals and use the data in IRS’ enforcement programs. Regarding the first recommendation to IRS, IRS published an explanation in the 1994 filing year Form 1040 instructions that deductions cannot be taken for itemized charges for services, charges for improvements that increase property value, and refunds or rebates of real estate taxes. IRS also has notified its examiners to better check support for the deduction and has been working with local governments on revisions to their bills. Congress is awaiting the outcome of IRS’ work with the local governments before considering the need for any legislation. Congress needs to (1) clarify the rules for classifying workers by amending the law to exclude from the common-law definition of “employee” certain classes of workers and (2) consider legislation to improve independent contractor compliance through withholding and/or improved information reporting (GAO/GGD-92-108, 07/23/92 and GAO/T-GGD-92-63, 07/23/92). We recommended that Congress clarify the rules for classifying workers along the lines that we recommended in our 1977 report by amending the law to exclude certain classes of workers from the common-law definition of “employee.” We also recommended that Congress consider legislation to improve independent contractor compliance through withholding and/or improved information reporting. As of December 31, 1995, Congress had considered but had not enacted either of our recommendations. Tax-writing committees are expected to resume debate on this issue in 1996. Congress should amend the Internal Revenue Code to allow IRS to provide information to all responsible officers regarding its efforts to collect the trust fund recovery penalty from other responsible officers. Congress may want to provide for reviewing the fixed base of the revised research tax credit periodically and adjusting it as needed to prevent it from becoming too generous or too restrictive over time. Congress may want to consider amending federal legislation to (1) authorize states to offset current recipients’ benefits without client consent to recover Food Stamp overpayments caused by agency error and (2) extend the authority for states to intercept federal income tax refunds to include the recovery of AFDC and Medicaid overpayments. Congressional tax-writing committees should explore, within the existing framework, opportunities to exercise more scrutiny over indirect spending through tax expenditures. Congress could also consider integrating tax expenditures into current budget processes so that congressional consideration of a savings target is part of the annual budget process and to ensure that Congress addresses tax expenditures periodically. Congress should consider amending section 7122 of the Internal Revenue Code to remove the requirement that the Treasury General Counsel or his delegate review all offers in compromise of $500 or more and widen IRS’ discretionary authority to decide which offers require review. Congress may wish to consider revising current tax law to allow IRS to use collection performance in determining compensation and rewards for its collection staff as long as other criteria, such as fair and courteous treatment of taxpayers, are also considered. Congress should consider enacting legislation that would substitute a residency test for the dependent support test if the dependent lives with the taxpayer; if enacted, Congress also should consider eliminating the household maintenance test for filing as head of household status. Congress may want to consider legislation that would require states to send IRS and taxpayers an annual information return on any cash rebates for real estate tax payments. Congress needs to (1) clarify the rules for classifying workers by amending the law to exclude from the common-law definition of “employee” certain classes of workers and (2) consider legislation to improve independent contractor compliance through withholding and/or improved information reporting. (1) Develop plans to modify audit management information systems to more fully reflect the results of partnership audits by including information on tax assessments on partners’ income tax returns and changes in allocations of profits/losses among partners; (2) analyze computer partnership files to develop audit leads and select returns for audit; (3) reinstate the delinquency check program for partnerships to identify other partnerships that do not file required tax returns; (4) develop plans for a document-matching program using information returns to verify partnership income; and (5) devise ways to enter all Schedules K-1 onto the computer, so they can be used in the individual computer document-matching program and for other compliance purposes. Establish a service-wide definition of taxpayer abuse or mistreatment and identify and gather the management information needed to systematically track its nature and extent. Ensure that IRS’ systems modernization effort provides the capability to minimize unauthorized employee access to taxpayer information in the computer system that will replace the Integrated Data Retrieval System. Revise the guidelines for Information Gathering Projects to require that specific criteria be established for selecting taxpayers’ returns to be examined during each project and to require a separation of duties between those staff members who identify returns with potential for tax changes and those who select the returns to be examined. Reconcile outstanding cash receipts more often than once a year, and stress in forms, notices, and publications that taxpayers should use checks or money orders rather than cash to pay their tax bills. Except where stated otherwise, these recommendations were made to the Commissioner of Internal Revenue. Better inform taxpayers about their responsibility and potential liability for the trust fund recovery penalty by providing them with special information packets. Seek ways to alleviate taxpayers’ frustration in the short term by analyzing the most prevalent kinds of information-handling problems and ensuring that requirements now being developed for new information systems provide for long-term solutions to those problems. Provide specific guidance for IRS employees on how they should handle White House contacts other than those that involve checking taxes of potential appointees or routine administrative matters. Test the feasibility of using IRS’ Correspondex computer system to produce Individual Master File (IMF) and Business Master File (BMF) notices and, if possible, transfer as many IMF and BMF notices as practical to the Correspondex system. The notices should be transferred in stages, and the ease of the transition, its costs, and the benefits of making these transfers should all be considered in establishing the order of the transfers. Establish a system to monitor proposed notice text revisions to oversee progress or problems encountered in improving notice clarity. This system should be able to identify when a revision was proposed and its status at all times, and it should contain a threshold beyond which delays must be appropriately followed up and resolved. Help improve forms and publications by making additional efforts to identify the specific concerns of individual taxpayers. Some ways available include (1) soliciting information from IRS field personnel (including auditors, examiners, and customer-service representatives) to identify common errors made by taxpayers that may be related to confusing passages in forms and publications, and (2) gathering information concerning the nature of taxpayer questions received through IRS’ toll-free telephone system. Undertake an aggressive effort to (1) identify and define the appropriate telephone assistance program operating practices for IRS that would allow it to optimize the number of calls it can answer within current budget constraints and (2) work with leadership of the employees’ union to reach agreement on implementing those practices on a nationwide basis. Take steps to effectively route taxpayers’ calls nationwide, using real-time information. These steps could include a combination of acquiring technology for real-time traffic monitoring and management, utilizing the routing capability of IRS’ telecommunications vendor, and fully implementing the features of IRS’ existing call routing technology. Focus the electronic filing business strategy on a wider population of taxpayers, including taxpayers who can benefit from filing electronically. Implement a process for selecting, prioritizing, controlling, and evaluating the progress and performance of all major information systems investments, including explicit decision criteria. Require that future contractors who develop software for IRS have a software development capability rating of at least Capability Maturity Model-level 2. Address technical infrastructure weaknesses by (1) completing an integrated systems architecture; (2) institutionalizing formal configuration management for all new systems development projects and upgrades and developing a plan to bring ongoing projects under formal configuration management; and (3) developing security concepts of operations, disaster recovery, and contingency plans. Give the Associate Commissioner management and control responsibility for all systems development activities, including those of the IRS research and development division. Implement the software, hardware, and procedural changes needed to create reliable subsidiary accounts receivable and revenue records that are fully integrated with the general ledger. Change the current federal tax-deposit coupon reporting requirements to include detailed reporting for all excise taxes, FICA taxes, and employee withheld income taxes. Implement software changes that will allow detailed taxes reported to be separately maintained in the master file, other related revenue accounting feeder systems, and the general ledger. Encourage taxpayers to make address changes by (1) accepting changes of address over the telephone; (2) making Form 8822, Change of Address, more conveniently available; and (3) emphasizing to taxpayers the importance of keeping their addresses current with IRS. Establish a centralized unit within each of IRS’ service centers to process all service center undeliverable mail. The Secretary of the Treasury should forestall stakeholder confusion and frustration regarding the applicability of statutory and executive guidance to tax-related regulations by directing that, when such guidance is not applicable, the text accompanying the publication of proposed and final regulations contain a complete explanation of why this is so. The Secretary of the Treasury should require that regulation drafters document internally, when time permits, their consideration of the factors provided in statutory and executive guidance to better ensure that tax regulations reflect stakeholders’ needs. The Secretary of the Treasury should encourage regulation drafters to meet with selected stakeholders to work through implementation issues associated with draft-tax regulations before publishing the regulations for notice and comment. The Secretary of the Treasury should require regulation drafters to develop key measures of simplicity for tax regulations that can be used to help judge whether existing or proposed regulations are too complex. Improve the information provided to taxpayers and the administration of the installment agreement program by (1) notifying taxpayers about projected total costs and payoff periods when setting up agreements with taxpayers and when mailing monthly reminder notices; (2) experimenting with Form 9465, Installment Agreement Request, to test whether providing space for taxpayer authorization of direct debit installment payments increases the use of this option; and (3) sending agreement default notices to taxpayers by regular mail instead of certified mail unless an account is being referred for levy action. Improve the processing of returns with missing or incorrect SSNs and help clean up accounts currently posted on the IMF invalid segment by (1) finalizing the CP54B notice for use in the 1996 tax filing season and (2) applying the revised documentation requirements to taxpayers who filed tax returns that were posted to the IMF invalid segment before 1995 and whose accounts had a permanent refund release code. Establish returns-processing and compliance-screening procedures to help remove erroneous cross-referenced taxpayer identification numbers from sole proprietors’ tax records. Evaluate the feasibility of eliminating the requirement that sole proprietors use EINs for filing business returns. Tax Administration: Continuing Problems Affect Otherwise Successful 1994 Filing Season (GAO/GGD-95-5) Tax Administration: Earned Income Credit-Data on Noncompliance and Illegal Alien Recipients (GAO/GGD-95-27) Tax Administration: IRS Can Strengthen Its Efforts to See That Taxpayers Are Treated Properly (GAO/GGD-95-14) College Savings: Using EE Savings Bonds and Loans From Thrift Savings Plan to Pay for College (GAO/HEHS-95-16R) Tax Administration: IRS Efforts to Improve Forms and Publications (GAO/GGD-95-34) Tax Administration: Changes Needed to Reduce Volume and Improve Processing of Undeliverable Mail (GAO/GGD-95-44) Tax Administration: IRS Notices Can Be Improved (GAO/GGD-95-6) Tax System Burden: Tax Compliance Burden Faced by Business Taxpayers (GAO/T-GGD-95-42) Tax Administration: Estimates of the Tax Gap for Service Providers (GAO/GGD-95-59) Tax Administration: Process Used to Revise the Federal Employment Tax Deposit Regulations (GAO/GGD-95-8) Tax Compliance: Status of the Tax Year 1994 Compliance Measurement Program (GAO/GGD-95-39) U.S. Insular Areas: Information on Fiscal Relations With the Federal Government (GAO/T-GGD-95-71) Tax Administration: Tax Compliance Initiatives and Delinquent Taxes (GAO/T-GGD-95-74) Tax Policy and Administration: 1994 Annual Report on GAO’s Tax-Related Work (GAO/GGD-95-66) Tax Systems Modernization: Unmanaged Risks Threaten Success (GAO/T-AIMD-95-86) Tax Administration: IRS’ Fiscal Year 1996 Budget Request and the 1995 Filing Season (GAO/T-GGD-95-97) Tax-Exempt Organizations: Information on Selected Types of Organizations (GAO/GGD-95-84BR) High-Risk Series: Internal Revenue Service Receivables (GAO/HR-95-6) Information on Tax Liens Imposed by IRS (GAO/GGD-95-87R) Addressing the Deficit: Budgetary Implications of Selected GAO Work for Fiscal Year 1996 (GAO/OCG-95-02) Earned Income Credit: Targeting to the Working Poor (GAO/GGD-95-122BR) Tax Policy: Information on the Research Tax Credit (GAO/T-GGD-95-140) Tax Policy: Experience With the Corporate Alternative Minimum Tax (GAO/GGD-95-88) Earned Income Credit: Targeting to the Working Poor (GAO/T-GGD-95-136) Telephone Assistance: Adopting Practices Used by Others Would Help IRS Serve More Taxpayers (GAO/GGD-95-86) International Taxation: Transfer Pricing and Information on Nonpayment of Tax (GAO/GGD-95-101) Paid Tax Preparers and Tax Software (GAO/GGD-95-125R) Tax Administration: Administrative Improvements Possible in IRS’ Installment Agreement Program (GAO/GGD-95-137) Options Reporting to IRS (GAO/GGD-95-145R) Tax Policy: Additional Information on the Research Tax Credit (GAO/T-GGD-95-161) Money Laundering: Needed Improvements for Reporting Suspicious Transactions Are Planned (GAO/GGD-95-156) Reducing the Tax Gap: Results of a GAO-Sponsored Symposium (GAO/GGD-95-157) Taxpayer Compliance: Reducing the Income Tax Gap (GAO/T-GGD-95-176) Earned Income Credit: Noncompliance and Potential Eligibility Revisions (GAO/T-GGD-95-179) (continued) Tax-Exempt Organizations: Activities and IRS Oversight (GAO/T-GGD-95-183) Tax Administration: IRS’ Partnership Compliance Activities Could Be Improved (GAO/GGD-95-151) Welfare Benefits: Potential to Recover Hundreds of Millions More in Overpayments (GAO/HEHS-95-111) Tax-Exempt Organizations: Additional Information on Activities and IRS Oversight (GAO/T-GGD-95-198) Tax Policy and Administration: California Taxes on Multinational Corporations and Related Federal Issues (GAO/GGD-95-171) Tax Compliance: 1994 Taxpayer Compliance Measurement Program (GAO/T-GGD-95-207) Other Income Reporting (GAO/GGD-95-199R) Tax Systems Modernization: Management and Technical Weaknesses Must Be Corrected If Modernization Is to Succeed (GAO/AIMD-95-156) Tax Administration: Issues Involving Worker Classification (GAO/T-GGD-95-224) College Savings: Information on State Tuition Prepayment Programs (GAO/HEHS-95-131) Financial Audit: Examination of IRS’ Fiscal Year 1994 Financial Statements (GAO/AIMD-95-141) Tax Administration: IRS Could Do More to Verify Taxpayer Identities (GAO/GGD-95-148) Tax Administration: Sole Proprietor Identification Numbers Can Be Improved (GAO/GGD-95-160) Tax Administration: Recurring Issues in Tax Disputes Over Business Expense Deductions (GAO/GGD-95-232) compliance rate for each type of reported income and, if possible, determine the reasons for the noncompliance. To determine (1) why the assessment processes currently take so long, (2) what IRS is doing to speed up the assessment processes, and (3) what additional actions IRS can take to further speed up the processes. To determine (1) how efficiently IRS is administering and monitoring LIHTC, (2) what controls are in place at the state level to ensure that the credit is applied as intended and costs are reasonable, (3) what controls exist to ensure that states do not certify buildings as eligible for the credit beyond the amount allocated by state housing authorities, (4) the characteristics of the individuals residing in the units produced by the credits, and (5) such other issues as may arise during the course of examination. To (1) monitor testing of IRS’ computerized data capture mechanism, (2) evaluate auditor training, (3) review quality review procedures, (4) evaluate the case building techniques and (5) assess IRS’ ability to make use of interim data from program audits. To (1) assess IRS’ performance during the 1995 tax return filing season and (2) review the administration’s FY 1996 budget for IRS. To update our 1987 study relating to the competition between tax-related organizations and taxable businesses. To (1) review the filing patterns and sources of income of nonwage earners, (2) develop profiles of the taxpayers, (3) provide taxpayer-specific case studies of nonwage earners, (4) review the adequacy of IRS requirements, (5) analyze the accounts receivable inventory attributable to these taxpayers, and (6) develop recommendations to improve tax compliance and collection programs related to nonwage earners. To determine (1) the impact of field collection staff, particularly revenue officers, and (2) whether revenue officers’ duties were done efficiently and economically. To determine how IRS’ delinquent tax collection process can be reengineered or restructured. To determine how IRS selected, managed, and captured results for Compliance 2000 initiatives and coordinated the initiatives with other enforcement activities. To determine what factors affect the rate at which taxes recommended by revenue agents get assessed. To determine (1) how IRS restricts access to computer data, systems, and facilities; (2) manages changes to IRS’ computer systems software; (3) prepares for disasters and contingencies; and (4) safeguards its communications network against unauthorized access. David J. Attianese, Assistant Director, Tax Policy and Administration Issues Rodney F. Hobbs, Evaluator-in-Charge Carrie Watkins, Evaluator Judy Lanham, Secretary The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO summarized its work on tax policy and administration during fiscal year (FY) 1995, including: (1) actions federal agencies took in response to its recommendations as of December 31, 1995; (2) recommendations made to Congress before and during FY 1995 that remain open; and (3) assignments for which it received authorized access to tax information. GAO noted that its recommendations addressed specific actions that Congress and the administration could take to: (1) improve compliance with tax laws; (2) assist taxpayers; (3) enhance the effectiveness of tax incentives; (4) improve Internal Revenue Service management; and (5) improve the processing of returns and receipts. |
The U.S. Army has traditionally employed civilian contractors in noncombat roles to augment military forces. For example, civilian contractors were used extensively in the Korean and Vietnam Wars to augment logistical support provided to U.S. forces. LOGCAP was established by the Army in 1985 as a means to (1) preplan for the use of contractor support in contingencies or crises and (2) take advantage of existing civilian resources in the United States and overseas to augment active and reserve forces. Initially, the program concept was that each Army component of a unified command would individually plan and contract for its own logistics and engineering services. In 1992, the concept was changed to provide a single, centrally managed worldwide planning and services contract. Although it originated as an Army program, LOGCAP is available to the other services. Since 1992, the U.S. Army Corps of Engineers has been responsible for the program’s management and contract administration. When LOGCAP is used in support of a mission, the operational commander becomes responsible for defining services to be provided by the contractor, integrating contractor personnel into the mission, and ensuring that funding is provided. The contractor is paid from the operational command’s operations and maintenance appropriation account. On October 1, 1996, LOGCAP management transferred to the U.S. Army Materiel Command (AMC). However, the Corps of Engineers will remain responsible for LOGCAP management in Bosnia for the duration of that mission. The original LOGCAP contractor, Brown and Root Services Corporation of Houston, Texas, was competitively awarded a cost-plus-award-feecontract for 1 year with 4 option years on August 3, 1992. According to Army documents, a notice regarding the contract in the Commerce Business Daily elicited 37 requests for copies of the solicitation. Four companies competed for the contract. The 1992 LOGCAP contract required the contractor to (1) develop a worldwide management plan and 13 regional plans, (2) participate in planning and exercises, and (3) be prepared to execute the plans upon notification. The worldwide management plan is a general description of the equipment, personnel, and supporting services required to support a force of up to 20,000 troops in 5 base camps for up to 180 days and up to 50,000 troops beyond 180 days. The regional plans use the worldwide management plan as a baseline to provide detailed logistics and engineering support plans for a geographic region based on a specific planning scenario prescribed by the requiring commander. The Army decided to use the LOGCAP contract in December 1995 to augment its forces that are part of the Bosnian peacekeeping mission. The United States provides a major portion of the mission’s implementing force as set forth in the Dayton Peace Accords and occupies key leadership positions responsible for the mission. The U.S. Army, Europe provides most of the U.S. force and is the major command responsible for the mission’s logistics planning and funding. U.S. forces deployed in support of the implementation force were located in 4 countries and numbered approximately 22,200: about 16,200 in Bosnia, about 1,400 in Croatia, and about 4,600 in Hungary and Italy. Several factors created unique challenges for the Army as it implemented LOGCAP during the Bosnian mission. These factors related to the uncertainty of the U.S. role, the need for rapid deployment once the role was defined, and the harsh weather environment. (See app. II for more detail on these matters.) U.S. Army, Europe is using LOGCAP to provide a range of logistics and engineering services, including troop housing and facilities, food service, and laundry operations, as well as base camp and equipment maintenance, shuttle bus services within camps, and cargo handling services throughout the area of operations. The Army’s December 1995 estimate of the cost to provide these services for 1 year, which was developed by the contractor based on the Army’s tasking, was $350.2 million. However, when the Department of Defense submitted its estimate of incremental costs for the Bosnia peacekeeping mission to Congress on February 23, 1996, it reduced the estimate to $191.6 million. The estimate was reduced because officials in the Office of the Secretary of Defense believed there was duplication between the services the contractor would provide and the services military personnel would provide. However, Defense Department officials had no documentation supporting the $191.6 million estimate. Thus, we used the Army’s estimate of $350.2 million as the basis for analyzing LOGCAP cost increases in Bosnia. As shown in table 1, since 1992, the Army has used a contractor instead of force structure to meet some of its combat support and combat service support needs in six major peacekeeping and humanitarian assistance missions. Although using LOGCAP is the choice of last resort, Army officials stated it is often necessary to use LOGCAP in these missions because of planning considerations such as the ability to respond to a major regional conflict, the political sensitivity of activating guard and reserve forces, the lack of host nation support agreements in undeveloped countries, and the desire to maintain a relatively low U.S. presence. The use of the contract by far has been the most extensive for the Bosnian mission and that mission provides a good illustration of how the factors come into play in deciding whether to use the contract. The Army has established a decision-making process for determining when it will use LOGCAP. The following discussion describes the decision-making process and illustrates how it worked in the Bosnian mission. The Army’s LOGCAP regulation states that LOGCAP is one of several options available to commanders for meeting combat support and combat service support shortfalls in their operational plans. It is intended to be the option of last resort, and it was primarily designed to be used in areas where host nation support agreements do not exist. Other options to be considered by commanders before selecting LOGCAP include the other military services, allied support, and local contracting. In addition, commanders must consider other factors such as risk to personnel, lift availability, quality of life, and mission duration. The key planning and resource considerations that led to the Army’s decision to use LOGCAP were (1) troop ceilings for active and reserve forces, (2) engineering resources available in the Army force structure, (3) host nation support agreements, and (4) quality of life issues. According to U.S. Army, Europe officials responsible for planning the Bosnian mission, they initially identified a need for a force of 38,000 troops, including 20,000 combat troops. This number of combat troops was considered necessary because U.S. forces had to patrol a 1,200-mile zone between the formerly warring factions. Also, the Joint Chiefs of Staff told U.S. Army, Europe not to expect authorization for more than 25,000 troops: 20,000 in Bosnia and 5,000 in Croatia. U.S. Army, Europe also had a ceiling on the reserve forces it could use. For Bosnia, the President authorized the call-up of 4,300 reservists for all the services, 3,888 of which the Defense Department allocated to the Army. The Army used its allocation to activate key support capabilities such as civil affairs and psychological operations units that existed primarily in the reserve forces and could not be contracted. Once these units were activated, most of the 3,888-reserve ceiling had been used, leaving little opportunity to call up other types of support units. Many of the Army’s combat support and combat service support units were in the guard and reserve. An Army planner told us they could have asked the national command authority to increase the force ceiling and reserve call-up authority; however, because they had LOGCAP as an option, it was not necessary to seek these increases to meet support needs. The Army also used some units from the other services. According to U.S. Army, Europe officials, the Army did not have enough engineering resources available for deployment to build all the required base camps in the time allotted and received assistance from Air Force and Navy engineering units. By managing the flow of forces into the theater to remain below the 25,000-force ceiling, they were able to use these units and Army engineer units to construct 15 of the base camps. When the initial construction was completed, these units left the area of operations and the remainder of the Army’s force deployed. U.S. Army, Europe officials also told us that because the former Yugoslav Republic was not a part of the North Atlantic Treaty Organization, U.S. Army, Europe had no preexisting support agreements in the region. Therefore, little consideration was given to obtaining host nation support to meet the requirements in excess of force ceilings. Army officials further stated that quality of life considerations and the fact that the Army lacked the capability to provide some services also favored the use of LOGCAP. For example, the Army’s Deputy Commander for Support in Bosnia cited food and laundry services as areas where the contractor is able to provide a higher standard of service than Army units typically provide during deployments. LOGCAP also was able to provide services, such as sewage and solid waste disposal and janitorial services, that the Army routinely contracts for because the capability is not in the force structure. The estimated costs for LOGCAP implementation in Bosnia have increased substantially. The Army’s latest revised estimate of $461.5 million exceeds its initial estimate of $350.2 million by $111.3 million, or 32 percent. Our review shows that the difference in the Army’s estimates was largely driven by changes in operational requirements once the forces arrived in Bosnia. Specifically, the Commander in Chief of U.S. Army, Europe decided to increase the number of base camps from 14 large camps to 34 smaller ones and to accelerate the schedule for upgrading troop housing. Associated management and administrative costs and an unanticipated value added tax imposed on the contractor by the Hungarian government also contributed significantly to the difference. Table 2 presents a comparison by seven broad functional areas of the estimated costs for LOGCAP in Bosnia as of December 1995 and December 1996. A direct comparison of the two estimates was not possible because of significant differences in (1) the scope of work covered by the estimates and (2) the way costs are reported. For example, in the December 1995 estimate, the contractor estimated the cost to establish and operate an intermediate staging base. This estimate included costs for building the camp; providing laundry, food, and bus service; and operating a construction supply storage yard, a retail fuel section, and an aviation fuel section. The estimate also included costs for mobilizing and demobilizing personnel, material, and equipment and recurring maintenance costs. However, later estimates use 52 separate work categories that do not directly link to the requirements in the original estimate. Consequently, we reviewed available cost data and discussed the differences with contractor and Army officials to determine the primary reasons for the increases in estimated costs. We did not attempt to determine whether the estimated costs were reasonable. This function covers costs for preparing lodging, offices, and dining facilities for troops. The work consisted of repairing designated government acquired facilities, as well as new tent or modular unit construction. Basic facilities included billeting, shower/latrine, dining, office, and recreation areas. Estimated costs for troop housing and facilities rose from an original estimate of $56.5 million to $150.4 million. Our analysis of available data, discussions with Army and contractor officials, and observations of facilities indicated that costs increased largely because the scope of work performed by the contractor increased. The number of camps and facilities increased from the 14 large base camps originally planned to 34 smaller camps. In the original plan, the contractor was to build six base camps, one in Hungary and five in Bosnia, and upgrade the eight remaining camps. However, given the change in operational requirements, the contractor built 19 of the 34 camps and upgraded all 34 camps. Our discussions with the Commander in Chief of U.S. Army, Europe and his staff revealed that the commander decided to increase the number of camps required because of several factors. Two factors were the size of the U.S. area of responsibility (the United States had to patrol a 1,200-mile zone of separation between the warring factions), and the condition of the soil and limited infrastructure (a very wet and mine-filled terrain and devastated power, water, and communication systems). Other factors were the (1) need to balance force presence in each former warring factor’s sector, (2) condition of the roads leading to potential base camp sites (the construction of new and long roads to potential sites was considered too expensive and raw materials were not available in sufficient quantities at the time), and (3) challenge of relocating former U.N. forces from fixed facilities and into their new areas of operation. A U.S. Army, Europe planner told us that conditions on the ground were not well known prior to deployment because U.S. personnel were not allowed into Bosnia until shortly before the operation started. The harsh weather conditions under which the construction took place and the increased requirement for equipment to provide services at the additional camps also increased cost. (See fig. 1 for U.S. base camps in the Balkan peninsula.) Estimated troop housing costs also increased because some services were not considered in the original estimate. For example, the contractor’s initial cost estimate assumed that some of the camp sites selected by the Army would need only minimal site preparation. At one site alone, however, approximately 200 railcars of crushed rock were needed to prepare the ground before construction could begin. Many other sites also required significant engineering preparation. (See fig. 2.) Additionally, the initial estimate did not include all costs for the contractor to upgrade camps built by military engineer units. The contractor upgraded 15 of these camps. The decision to accelerate the schedule for improving the camps also increased estimated costs. The Army’s December 1995 cost estimate was based on a plan in which both the contractor and the military engineer units would initially erect tents and construct rudimentary support facilities. The camps would then be upgraded by the contractor in two follow-on efforts. (See fig. 3.) In the first effort, the contractor would add wooden floors to the tents; provide lighting, heating, latrines, showers, electric power, and water; and build kitchen and dining facilities. In the second effort, the contractor would provide for level tent pads and tent frames with insulated walls and ceilings. However, a U.S. Army, Europe official told us that because of the harsh weather conditions, which included flooding and mud, the Commander in Chief decided to have the contractor go straight to the end-state standard for all camps and to increase the standard to modular housing units at several camps where conditions were particularly harsh. Because the contractor was not given additional time to meet the higher standards, significantly more equipment and material had to be commercially air transported into the area of operations. The contractor also had to hire additional workers and purchase and transport modular units. The management and administration function provides for centralized project management, contract administration, project controls and reporting, procurement and subcontracting, financial management, personnel and payroll activities, property management, and life support for contractor personnel engaged in mission support. It also includes the contractor’s overhead costs, general and administrative costs, and award fees. Costs for this function increased from $85.4 million to $154.2 million. This cost function increases as estimated contract costs increase. For example, a $100-million increase in the estimated cost of services adds about $14.7 million to cover overhead, general and administration costs, and potential award fees. According to a U.S. Army, Europe official, the increase in the amount of services required and greater involvement by the contractor’s home office in procuring and shipping material and equipment, also contributed to the increase. This function also covers taxes, duties, and fees paid by the contractor. The contractor prepared the original estimate with the expectation that it would be included in any Status of Forces Agreements covering the mission. It was not included in the agreement with Hungary, however, and the U.S. government paid approximately $18 million in value added tax to the Hungarian government that is included in this function. Transportation covers costs for providing (1) transportation services throughout the area of operations and (2) providing railhead and container handling services in Hungary, Croatia, and Bosnia. It also includes airfreight charges for equipment and material brought in from Europe and the United States. Estimated costs for this function increased from $9.8 million to $48.4 million. Our analysis and discussions with Army officials indicated that these estimated costs increased because the Army expanded the amount of contract service it wanted and airfreight charges were much higher than anticipated. In the original estimate, the contractor’s cost to provide container handling services was included, but the estimate did not include costs for other transportation services. From January through March 1996, however, contractor trucks logged over 55,000 miles and moved over 9,800 tons of material and equipment. Estimated airfreight costs increased from $5 million to $25.1 million because winter conditions made it difficult to transport supplies and equipment by road, and accelerating the camp construction schedule required the contractor to fly in more supplies and equipment. Maintenance covers the cost of providing mechanical service and maintenance for dedicated government equipment such as generators, refrigerators, and all contractor procured vehicles in the area of operation. According to the Army’s schedule, these estimated costs increased from $200 thousand to $11 million. Part of the increase is due to differences in how equipment maintenance costs were reported in the two estimates. In the original estimate, maintenance costs were included as part of the estimate for an associated piece of equipment or vehicle. For example, the estimate for a generator reflected both the acquisition and maintenance costs. In the later estimate, the estimated cost for maintenance of equipment and vehicles was reported separately. Laundry covers the cost associated with providing personal and medical laundry service and clothing repair to soldiers and Defense Department civilians on a daily basis. Estimated costs for this function decreased from $10.1 million to $6.6 million. Contractor officials told us the original estimate was based on a “worst case scenario” that did not develop. Food service covers costs for providing meals to the troops and Defense Department civilians. According to the original cost estimate, the contractor was to supply, prepare, serve, and distribute food. Estimated costs for this function decreased from an estimated $64.1 million to $22.8 million. U.S. Army, Europe officials told us they believed that the contractor’s estimate for food supply and distribution services was too high and they contracted elsewhere for these services at a lower price. Additionally, the contractor operated fewer dining facilities because more Army cooks were used than originally planned, further reducing estimated contract costs for this service. Base camp maintenance covers costs for maintaining troop housing and facilities, latrine/shower units, kitchen and dining facilities, and utility systems at the 34 camps. It also includes road repair and maintenance, water production, storage and distribution, fire protection, and hazardous waste management. The original estimate included $30 million for minefield clearing, as well as costs for the other services. Estimated costs for this function decreased from $124.1 million to $65.2 million. Our analysis and discussions with Army and contractor officials indicated that costs for this function decreased largely because the Army did not use the contractor for minefield clearing, saving $30 million. Also, part of the decrease was due to differences in how equipment maintenance costs were reported in the two estimates. A U.S. Army, Europe official attributes the remaining decrease in estimated costs to their efforts to reduce contractor services and to a lower requirement for some services, such as snow removal. Our review of the Bosnian operation shows that there are opportunities to improve the program’s effectiveness. Areas that need improvement include doctrine and guidance, cost reporting, and contract monitoring. At the start of the Bosnia mission, little written doctrine and guidancewas available for planners on how to effectively use LOGCAP. The Army’s Office of the Deputy Chief of Staff for Logistics had prepared a desk guide to provide background and direction in the use of LOGCAP, but the guide lacked detail, and several key U.S. Army, Europe planners were unaware of its existence. As a result, U.S. Army, Europe officials had to develop ad hoc procedures and systems to ensure they were effectively managing LOGCAP. The desk guide discusses the decision-making process for LOGCAP and states the need to make the contractor part of the logistics support team and include it in staff meetings and other activities related to a mission. However, the guide provides little information on the type of management structure to establish, financial control and oversight requirements, and mission planning considerations. For example, even though a combat support or combat service support function may be replaced by LOGCAP, the Army still has a need for staff supervision of the function. According to Army officials, doctrine and guidance on the use of LOGCAP are critical because using a contractor to support a deploying force represents a significant change from the experiences of most Army personnel. Typically, Army practice has been to make the force self-sustaining for the first 30 days in a contingency theater. In this environment, troops live under field conditions. Housing might consist of multiperson tents, toilets are primitive and shared, shower facilities are often nonexistent, and food is often a prepackaged ration. One official likened the employment of LOGCAP without doctrine and guidance to giving the Army a new weapon system without instructions on how to use it. Directly related to the doctrine and guidance problem was the lack of LOGCAP training and experience among U.S. Army, Europe commanders and staff. Some of the key logistics planners for the Bosnian operation had little knowledge or experience with LOGCAP prior to the operation. Despite significant efforts to effectively manage LOGCAP, U.S. Army, Europe officials’ inexperience and lack of understanding of the contract, the contractor’s capabilities, and program management created problems during the deployment and resulted in unnecessary costs. Examples of management problems during the mission follow: The contractor and the contract administrators were sometimes not included as part of U.S. Army, Europe’s planning and management team, even though they were responsible for critical parts of the mission. In the early days of the mission, U.S. Army, Europe officials believed the contractor was not responsive to their needs. Contractor officials and contract administrators said that once the mission began, significant operational changes were made and they had little input despite being responsible for executing the changes. U.S. Army, Europe did not initially have a LOGCAP focal point to review tasks, assess options for performing these tasks, establish priorities, and resolve contractor problems. The lack of a focal point sometimes resulted in conflicting directions and a feeling on the part of some U.S. Army, Europe officials that the contractor was not being responsive. Commanders were sometimes unaware of the cost ramifications of their decisions. For example, the decision to accelerate the camp construction schedule required the contractor to fly plywood from the United States into the area of operations because sufficient stores were not available in Europe, which increased costs. For example, the contractor reported that the cost of a 3/4-inch sheet of plywood, 4’ x 8’, purchased in the United States was $14.06. Flying that sheet of plywood to the area of operations from the United States increased the cost to $85.98 per sheet, and shipping by boat increases the cost to $27.31 per sheet. According to a U.S. Army, Europe official, his commander “was shocked” to find the contractor was flying plywood from the United States. The contractor was not included in the Status of Forces Agreement with the Hungarian government. The result was the contractor paid about $18 million in value added tax to the Hungarian government, which was subsequently billed to the U.S. government as a contract cost. The Army is working to recoup these taxes from the Hungarian government. Given the absence of detailed program guidance, U.S. Army, Europe worked to resolve these problems and developed many ideas and ad hoc systems that the Army plans to incorporate into program doctrine and guidance that AMC is developing. For example, U.S. Army, Europe established Joint Acquisition Boards to prioritize work and determine the best available resources for accomplishing the work. It also developed the concept of appointing base camp “mayors” to serve as focal points for the contractor and improved the cost data provided by the contractor. Our discussions with members of the acquisition review boards and camp mayors revealed that, once established, these systems were effective in setting criteria and priorities for using LOGCAP services. However, as discussed later in this report, the boards only reviewed about 5 percent of estimated LOGCAP costs for Bosnia. The LOGCAP financial reporting systems were not sufficient to provide U.S. Army, Europe commanders with adequate information on how much money had been spent for LOGCAP and for what purpose. They were generally aware that changing operational requirements had increased LOGCAP costs beyond the contractor’s original estimate, but they were surprised by the amount of the increase. As a result of inadequacies in the government-required and approved LOGCAP financial reporting systems, U.S. Army, Europe officials developed ad hoc systems to provide stewardship over the funds. The contractor’s estimate for each assigned task is intended to provide the basis for monitoring and reporting LOGCAP costs. Weekly cost reports submitted by the contractor identify what has been spent against the estimate for each assigned task and provide a means of tracking costs and assessing variances. However, given the change in operational requirements, U.S. Army, Europe did not receive a cost estimate for its revised operational requirements until May 1996, and the Corps of Engineers and the contractor did not agree on estimated costs until August 1996. Weekly cost status reports using the government-required and approved system were submitted by the contractor from the onset of the operation. However, a U.S. Army, Europe resource manager stated that these reports were not particularly useful because (1) the data were generally not current, (2) there was no baseline estimate with which to compare the data, and (3) the reports did not explain variances from prior reports. As a result, through the early days of the mission, when the bulk of contract support money was spent, U.S. Army, Europe commanders could not determine the cost-effectiveness of alternative support approaches, nor could they determine if changes in the level of service being provided were warranted. They also had difficulty responding to Defense Department and congressional inquires about cost. A similar problem was experienced in Somalia, where a senior official expressed his concern about the command’s inability to verify expenditures and tie those expenditures to specific tasks. U.S. Army, Europe officials were concerned about the rising estimates for LOGCAP and in late March 1996, they took several steps to reduce estimated cost and limit future growth. One action was to dispatch a team to Hungary, Croatia, and Bosnia to review all LOGCAP work orders to determine if (1) the requirement was still valid and (2) contracting was the most economical means of meeting the requirement or if the work could be done more economically by alternate means such as military manpower, alternate contractors, or adjusting the level of service. To limit growth in the cost estimate, the U.S. Army, Europe Chief of Staff restricted approval authority for new work estimated to cost over $5,000. According to a U.S. Army, Europe resource manager, efforts to improve financial reporting began in December 1995, and by the end of March the data were sufficient to meet the command’s reporting and analysis needs. The improved financial data reporting format developed by U.S. Army, Europe, with assistance from the contractor, has been shared with AMC personnel who indicate they will improve the financial reporting requirements. Reviews by several agencies criticized the Army’s administration and monitoring of LOGCAP contract activities in Bosnia, noting, among other things, that the Army did not negotiate the estimated costs in a timely manner and implement a systematic method to ensure that performed work was in accordance with contract provisions. As a result, they were unable to ensure that the contractor adequately controlled costs and furnished the appropriate level of support. Similar criticisms were raised regarding LOGCAP implementation in Somalia and Haiti. The Army Corps of Engineers was responsible for LOGCAP contract administration in Bosnia. One responsibility was to develop the policies and procedures to guide the execution of LOGCAP contract activities, including property administration, contractor compliance with contractual quality assurance and safety requirements, and reviews and analyses of contractor cost proposals. Specifically, the Corps turned LOGCAP work on and off, performed quality control studies on the contractor’s services, and provided liaison support to Army field commanders. During the construction phase in Bosnia, these tasks were performed by a team from the Corps’ Transatlantic Program Center in Winchester, Virginia. During the sustainment phase, which was from about March 1996 to November 1996, the Corps delegated contract administration to the Defense Contract Management District, International, who deployed a team of 30 personnel, along with a 2-person team from the Defense Contract Audit Agency, to monitor contractor performance. According to the Army Audit Agency, timely actions were not initiated to negotiate the estimated project costs with the contractor and modify the logistical support contract. As a result, contract provisions that give the contractor major incentives to contain project costs were not effective. Moreover, delays in negotiating estimated costs greatly hindered the Army’s ability to evaluate the amount of award fee that the contractor had earned based on quality of performance. The Army Audit Agency explained that the Federal Acquisition Regulation prohibits contract provisions whereby a contractor’s profits are based on the percentage of costs incurred (or costs plus a percentage of costs). For this reason, the regulation requires the contracting officer to negotiate the estimated costs of services being furnished by the contractor. The audit agency also noted that negotiating contract costs in a timely manner is important because (1) once the estimated costs are negotiated with the contractor, the award fee pool is limited to costs that do not exceed those that were negotiated and (2) until the estimate is formalized, the contractor has no real incentive to control costs because increased project costs potentially mean a higher award fee. According to the contractor, under the terms of the contract cost control constitutes 35 percent of the award fee and that factor alone is a clear incentive. The contractor also noted that the lack of a definitized estimate precludes the submission of invoices for base or award fee to the government. In the case of Bosnia, Brown and Root Services Corporation reported that it received no fee during the first 10 months of operation. The revised statement of work for the Bosnian mission was not approved until March 7, 1996, and the contractor provided a revised estimate on May 24, 1996. By that point, the estimated cost to complete work requested by U.S. Army, Europe stood at $477.4 million. Of this amount, about $325.7 million, or 68 percent, had already been spent. The Corps of Engineers and the contractor reached agreement on an estimated cost for Bosnia on August 12, 1996. The Army Audit Agency also found that the Corps and the Defense Contract Management District, International did not implement a systematic method of inspections to monitor contract performance. As a result, they could not ensure that the contractor performed work in accordance with contract provisions, used the minimum number of resources to meet the Army’s requirements, and furnished the appropriate level of support. The Army Contracting Support Agency similarly concluded that not enough people were deployed in the early stages of the operation to monitor contractor performance for the same reasons. Contract oversight was similarly criticized in Somalia and Haiti. For example, a December 1994 Army Audit Agency report on LOGCAP operations in Haiti criticized quality control. On October 1, 1996, the Army transferred LOGCAP management responsibilities from the Corps to AMC. AMC officials have worked with U.S. Army, Europe to identify problems experienced in Bosnia and they intend to make several program changes to improve planning and management and reduce costs. Specifically, they are taking or plan actions, including changing the planning scenarios, developing doctrine and guidance on LOGCAP and senior level training and education, and providing assistance to operating commands when LOGCAP is implemented. AMC awarded a new LOGCAP contract on January 30, 1997. The contract is for 1 year with the option of extending it for 4 more years, making the program available until 2002. One major change is that the contract pricing arrangement for the planning portion of the contract has been changed from cost-plus-award-fee to a firm-fixed price. According to the AMC program officer, this change was made because planning costs are easier to estimate than execution costs. AMC officials also said that, to improve planning, the new contractor will be required to prepare worldwide and regional plans under two specific hypothetical scenarios: (1) an underdeveloped country with little or no infrastructure and a weak or nonexistent government and (2) a developed country with infrastructure and a viable and diplomatically recognized government. AMC expects that tailoring these plans will enhance execution and improve cost controls during an actual event by better defining LOGCAP requirements. AMC has also undertaken several initiatives to address other LOGCAP problems experienced in Bosnia. To improve LOGCAP doctrine and training, AMC directed the U.S. Army Combined Arms Support Command to review and revise Army regulations and field manuals so they properly reflect the program’s goals. The command is revising about 20 Army regulations and field manuals, and it expects to complete this task early in fiscal year 1998. One revised field manual, which was released in September 1996, contains an entire appendix that discusses only LOGCAP. In addition, AMC has asked the Combined Arms Support Command, the Army Command and General Staff College, the Sergeants Major Academy, and the Warrant Officer Career Center to create LOGCAP training courses. The Army hopes to begin providing this training to its senior level staff by the end of fiscal year 1997. To address the LOGCAP implementation problems experienced in Bosnia, AMC established logistics support teams to act as the single focal point with operational commands for LOGCAP planning and execution. The teams are to be located in the United States, Korea, and Germany and are to provide command staff advice on LOGCAP and its capabilities and help develop LOGCAP augmentation requirements when an operation is being planned. AMC expects that improving the planning process in this way will enhance cost controls by establishing more precise needs determinations, which will result in better planning and cost estimating to support these needs. In addition, AMC plans to establish and deploy a fully trained group of experts during the initial phases of an operation to provide technical and contractual support to commanders. The size and makeup of this team are flexible, however, and can include LOGCAP technical advisors; personnel, real estate, and communication/automation specialists; contracting and legal officers; pay agents; and planning and operations personnel. The Navy and the Air Force recently created programs to preplan for contractor support, similar in many respects to the Army’s program. According to Navy and Air Force officials, LOGCAP can meet each service’s requirements, but they see contractor responsiveness and control as benefits of separate programs. However, the programs may result in unnecessary duplication and costs. Although the size and primary purpose of the three programs differ somewhat, the contracts will require similar engineering, logistics, and planning services. For example, under all three programs, the contractors will be required to provide construction services and supplies and, in the Army and the Air Force programs, contractors are asked to identify potential civilian resources that can be relied on in contingencies. Before creating these programs, the Navy and the Air Force relied on LOGCAP for support during operations other than war such as in Somalia and Aviano, Italy. The Navy’s program is known as the Navy Emergency Construction Capabilities Program and is designed to support contingencies such as regional conflicts, humanitarian aid, and natural disasters. The Navy program consists of two geographic contracts—one covering the Atlantic and one covering the Pacific—that are identical in scope. Atlantic and Pacific contracts are managed by the Naval Facilities Engineering Commands in Norfolk, Virginia, and Pearl Harbor, Hawaii, respectively. The contracts were awarded in August 1995, for 1 year with 4 option years and provides for an annual fee of $100,000. The Atlantic contract has been used several times for services such as providing natural disaster assistance at Camp Lejeune, North Carolina, following a hurricane and preparing engineering studies to rebuild Haiti’s infrastructure. We were told that the total cost of initiatives taken under the Atlantic contract as of November 1996 was about $32 million. The Pacific contract has not been used. The Air Force’s program is known as the Air Force Contract Augmentation Program. The Air Force solicitation process began on September 13, 1996, and contract award is expected during February 1997. The contract will also be awarded for 1 year with 4 option years. The basic contract calls for a worldwide management plan, a program management team, and contractor participation in two validation exercises a year. According to program officials, their program differs from LOGCAP because Air Force engineering and support assets will be used to construct and maintain facilities during the initial stages of any contingency. The contractor will then be deployed to sustain this existing infrastructure. The contractor is, however, expected to have the capability to deploy and set up an infrastructure if requested. For planning services and exercise participation, the contractor could earn, under contract provisions, fees totaling $4,439,168 over the full 5 years of the contract. To avoid duplication of effort and improve economy and efficiency of programs that are used by all three services, the Defense Department has, on occasion, designated one service as the lead manager. For example, the Army manages the wholesale stockpile of conventional ammunition for all the services. The Army is also the lead service for the Defense Department’s program to dispose of the chemical weapon stockpile. As mentioned, we discussed many of our observations on the changes that are needed to improve the efficiency and effectiveness of LOGCAP with AMC officials, and they have initiated or plan actions critical to improving the effective delivery of services using LOGCAP. As part of this effort to improve LOGCAP, we recommend that the Secretary of Defense direct the Secretary of the Army to include specific changes to LOGCAP that incorporate lessons learned from the Bosnian operation and other missions, including developing doctrine and guidance for implementing LOGCAP that identify the way to use the contractor effectively, the type of management structure to establish, financial control and oversight requirements, and mission planning considerations; providing training to commanders on using LOGCAP, including information on contractor capabilities and roles and responsibilities in planning and execution; providing assistance to commands when LOGCAP is implemented to include deployable management teams; and developing improved financial reporting and internal controls mechanisms that provide commanders with the assurance that LOGCAP services are necessary and reasonably priced. We also recommend that the Secretary of Defense determine whether the Department’s needs for civilian augmentation support during operations are met most effectively and efficiently through individual programs or some other means such as one service acting as a single manager for the others. We received written comments on a draft of this report from the Defense Department and they appear in their entirety in appendix III. The Defense Department concurred with the report and both recommendations, noting that it will continue initiatives to further improve the effectiveness and efficiency of LOGCAP. The Department also stated that they considered the actions in the recommendation to include specific changes to LOGCAP that incorporate lessons learned to be complete. While we recognize that various actions are planned or have been taken, all are not complete. For example, the revision of Army regulations and field manuals is not planned to be completed until early in fiscal year 1998. Consequently, we will continue to follow up on the Department’s actions in each of the areas. We also received comments from Brown and Root Services Corporation. Brown and Root provided clarifying technical and editorial suggestions that have been incorporated into this report where appropriate. Brown and Root objected to the use of the term estimate on the basis that the dollar figure it provided to the Army in December 1995 was a rough order of magnitude. We revised the report to reflect Brown and Root’s position and clarify why we used the term. We are providing copies of this report to the Secretaries of Defense, the Army, the Navy, and the Air Force and the Commandant, U.S. Marine Corps. Copies will be made available to others on request. If you or your staff have any questions on this report, please call me on (202) 512-8412. The major contributors to this report are listed in appendix IV. As agreed with your staffs, the scope of our work was limited to issues related to how well the Logistics Civil Augmentation Program (LOGCAP) worked once the decision was made to use the contract. It was also agreed that other issues such as the program’s force structure implications and the cost-effectiveness of using contractors versus military personnel may be the subject of future reviews. To obtain information on how the Army has used LOGCAP in recent peacekeeping operations, we reviewed the Army’s LOGCAP regulation and implementing guidance. We discussed how this regulation and guidance were applied with officials from the Army’s Office of the Deputy Chief of Staff for Logistics, Office of the Deputy Chief of Staff for Operations and Plans, Corps of Engineers, Corps of Engineers’ Transatlantic Program Center, and Office of the Chief of Army Reserves. Because Bosnia was by far the largest use of LOGCAP and provided a first-hand opportunity to observe the contract’s implementation, our review focused primarily on that operation. However, we did generally review information related to the other operations where it was used. We also visited the U.S. Army, Europe, the U.S. European Command, and the U.S. forces deployed in Hungary, Croatia, and Bosnia to observe operations, talk with Army and contractor officials, and review records related to the implementation of the contract. To determine the LOGCAP cost for Bosnia and the primary reasons for its growth, we obtained the Army’s initial cost estimate, prepared by the contractor, from the LOGCAP program manager at the Corps of Engineers’ Transatlantic Program Center. We discussed the assumptions that were used in developing the estimate with officials from the Corps of Engineers and the Brown and Root Services Corporation. We also analyzed the revised cost estimate submitted by the contractor in May 1996 and attempted to compare that cost estimate with the original. A direct comparison of the two estimates was not possible because of significant differences in (1) the scope of work covered by the estimates and (2) the way costs were reported. We discussed the results of this comparison with military leaders responsible for the operation in Hungary, Croatia, and Bosnia and with representatives from the Brown and Root Services Corporation and obtained their views on the factors that contributed to the cost increase. We did not attempt to determine whether the estimated costs were reasonable. Our information on the Defense Department’s estimate of $191.6 million was obtained from our prior work on the cost of the Bosnian peacekeeping mission. To identify opportunities to improve LOGCAP, we interviewed officials from U.S. Army, Europe responsible for logistics planning for the Bosnian peacekeeping mission and visited U.S. Army, Europe base camps in Hungary, Croatia, and Bosnia. We interviewed resource managers, base camp mayors, members of the Joint Acquisition Boards, administrative contracting officers, quality assurance representatives, and contracting officer representatives from the Defense Contract Management District, International, who oversaw the contract. We also reviewed minutes of meetings at which LOGCAP was discussed and analyzed copies of weekly cost status reports submitted to U.S. Army, Europe. We discussed the adequacy of cost data with resource managers at U.S. Army, Europe and the way they used the contractor’s cost reports to monitor costs. We did not independently test internal controls but relied on the work of other independent audit agencies, including the Defense Contract Audit Agency and the Army Audit Agency. We interviewed auditors from the Defense Contract Agency in Hungary and Croatia and at the contractor’s home office in Houston, Texas, and discussed the scope of their work and the tests they conducted of contract controls. We interviewed Army Audit Agency auditors who tested the Army’s contract controls at their home office in Wiesbaden, Germany, and reviewed all of their supporting documents. We also spoke with Army Audit Agency managers responsible for the review at their headquarters in Alexandria, Virginia. We also analyzed lessons learned from the use of LOGCAP in prior missions from the Defense Contract Management District, International, and the Army’s Center for Army Lessons Learned. To identify Army plans to award a new LOGCAP contract, we held discussions with the new LOGCAP office at the Army Materiel Command. We obtained information on the time frame for awarding the contract and discussed changes needed to overcome problems experienced in Bosnia. Our information on the Air Force Contract Augmentation Program was obtained from Air Force officials in Washington, D.C., and its program office at Tyndall Air Force Base, Panama City, Florida. Information on the Navy Emergency Construction Capabilities Program was obtained from Navy contracting officials in Alexandria and Norfolk, Virginia, and Honolulu, Hawaii. We conducted our review from April 1996 to December 1996 in accordance with generally accepted government auditing standards. Several factors created unique challenges for the Army as it implemented LOGCAP during the Bosnia mission. These factors related to the uncertainty of the U.S. role, the need for rapid deployment once the role was defined, and the harsh weather environment. The role that U.S. forces would play in Bosnia was uncertain until the Dayton Accords were signed on December 14, 1995. The Accords called for an implementation force to provide a secure environment for approximately 1 year to allow “breathing space” or a “cooling off period” after several years of conflict. The United States is a major force provider to the implementation force and occupies North American Treaty Organization military leadership positions that are responsible for the operation. The U.S. Army, Europe provided most of the force and is the major command responsible for the mission’s logistics planning and funding. As of July 19, 1996, about 22,200 U.S. troops were deployed in support of the implementation force—about 16,200 to Bosnia, 1,400 to Croatia, and about 4,600 to Hungary and Italy. The Accords required that U.S. forces deploy rapidly, and the implementation forces had until January 19, 1996, to be in place and begin enforcement. U.S. troops entered Hungary on December 12, 1995, to establish a staging base for the deployment and on December 16, 1995, they entered Croatia and Bosnia. The key military tasks in Bosnia have been to (1) mark and monitor a 4-kilometer wide zone of separation between the three warring factions, (2) patrol the zone of separation, and (3) oversee the withdrawal of forces and weapons away from the zone and back to their cantonment areas. Deployment of the U.S. force occurred during one of the harshest winters on record in the Balkans. Weather conditions, for example, affected construction of a bridge over the Sava River to conduct the deployment operation. An unexpected winter thaw resulted in major flooding, and this bridge project became much larger than originally envisioned. The Army had to use construction material intended to build two spans over the Sava River to build the first span. Also, because of the holiday time of the year, the European rail system was heavily involved in holiday passenger and commercial traffic and rail employees were taking holiday vacations. European rail did not respond to the deployment, which it did not view as a wartime operation, with the sense of urgency it would have for a wartime operation. A rail strike in France further complicated ground transportation because many large railcars needed for the deployment could not be moved from France to Germany. Each of these factors affected the manner and extent to which LOGCAP was used. For example, originally the contractor was to build, operate, and maintain a support base in Hungary, while military engineer units were to build the necessary base camps in Bosnia. Later, the contractor was to upgrade the military-built camps. Because of the operational requirements and the harsh winter weather, however, a decision was made to increase the number of camps and to immediately upgrade the camps. Military engineer units could not meet the full construction requirement, and the contractor was brought in to assist with camp construction. The contractor also provided building materials to the military engineer units because it was able to procure and deploy supplies faster than the military could. Thomas J. Howard Glenn D. Furbish David F. Combs Robert R. Poetta The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Army's Logistics Civil Augmentation Program (LOGCAP), focusing on: (1) the extent to which the Army is using the program; (2) reasons for increases in the program's cost for the Bosnia peacekeeping mission; (3) opportunities to improve program implementation from a doctrine, cost control, and contract oversight standpoint; (4) the use of LOGCAP in Somalia, Rwanda, and Haiti; and (5) the potential for inefficiency by having similar support contract programs in the Navy and the Air Force. GAO found that: (1) over the last 4 years, the Army has relied on LOGCAP to help support various contingency operations and plans to maintain the capability as an option for providing support in the future; (2) since 1992, the Army has used LOGCAP to provide logistics and engineering support services to U.S. forces in six operations and, on January 30, 1997, awarded a new contract that will keep the program available until 2002; (3) as of December 7, 1996, estimated program costs were about $674.2 million, with the vast majority, about $461.5 million, going to the Bosnian mission; (4) according to the Army, use of the contractor is the choice of last resort but necessary in these missions because of troop ceilings, unavailability of host nation support, and the need to keep military units available to respond to a major regional conflict; (5) LOGCAP cost estimates for the Bosnian mission have increased substantially; (6) the Army's latest revised estimate of $461.5 million exceeds its original estimate of $350.2 million by $111.3 million or 32 percent; (7) GAO's review shows that the difference in the estimates was largely driven by changes in operational requirements once the forces arrived in the Balkan peninsula; (8) weaknesses in financial reporting and contract monitoring systems also contributed to cost increases; (9) GAO's analysis of LOGCAP implementation during the Bosnian peacekeeping mission shows that there are opportunities to make the program more efficient and effective; (10) little doctrine on how to manage contractor resources and effectively integrate them with force structure units exists; (11) the financial reporting and contract monitoring systems during the early phases of the Bosnian mission were not sufficient to provide U.S. Army, Europe officials with information they needed to track the cost of the operation, report on how LOGCAP funds were spent, or monitor contractor performance; (12) Army Materiel Command officials have worked with U.S. Army, Europe to identify problems experienced in Bosnia, and they are taking actions intended to improve program planning and management and reduce costs for future operations; and (13) the Air Force and the Navy recently initiated programs similar to LOGCAP, which may result in unnecessary overhead costs and duplication. |
The Congress established VETS in 1980 to carry out the national policy that veterans receive priority employment and training opportunities. Faced with growing long-term challenges of new service delivery systems, an evolving labor market, and changing technology, VETS’ vision is to find innovative ways to maximize the effectiveness of its efforts. Consequently, VETS prepared strategic and performance plans in response to the Government Performance and Results Act of 1993 (GPRA), which was intended to make agencies accountable for their performance. VETS’ strategic plan states that it will seek new and effective means to help veterans compete successfully for better paying career jobs—helping them get on a track that can provide improved income stability and growth potential. Although, in recent years, the Congress has not funded the number of authorized DVOP and LVER staff positions, VETS provides states with grants for DVOP and LVER staff according to the formula outlined in the law. These DVOP and LVER staff members, whose positions are federally funded, are part of states’ public employment services and provide direct employment services to eligible veterans. Under WIA, services provided by DVOP and LVER staff are required to be included in each state’s approved one-stop center system plan. WIA also requires the establishment of local workforce investment areas and boards to locally oversee the new one- stop center system. In the solicitation for DVOP and LVER grant applications, VETS notes that local workforce investment boards are ideally suited to developing services that best meet the needs of veterans and employers who live and work in that area. The DVOP and LVER grant agreements also include assurances by states that DVOP and LVER staff members serve eligible veterans exclusively. Under federal law, all employment service staff must give priority to serving veterans, and the assignment of DVOP and LVER staff to local offices does not relieve other employment and training program staff of this requirement. The law prescribes various duties to DVOP and LVER staff members that are intended to provide veterans with job search plans and referrals and job training opportunities. DVOP specialists are required to focus on locating veterans with disabilities and other barriers to employment and assisting them in finding jobs and job training opportunities. LVER staff members have the primary responsibility of ensuring that veterans receive priority service from the employment and training program staff. Both DVOP and LVER staff are required to assist veterans in finding jobs. This assistance can range from help with needs, such as writing a resume, to more comprehensive help, such as assessing veterans’ skills and arranging training opportunities for veterans. While the state-employed DVOP and LVER staff are the front-line providers for services to veterans, VETS carries out its responsibilities, as outlined in the law, through a nationwide network that includes regional and state representation. The Office of the Assistant Secretary for Veterans’ Employment and Training administers VETS’ activities through regional administrators (RAVET) and directors (DVET) in each state, the District of Columbia, Puerto Rico, and the Virgin Islands. In larger states, an assistant director (ADVET) is appointed for every 250,000 veterans in the state. These federally-paid VETS staff ensure that states carry out their obligations to provide service to veterans, including the services provided under the DVOP and LVER grants. To ensure priority service to veterans, VETS expects states to provide employment and training services to veterans at a rate exceeding the service to nonveterans. For example, VETS requires that veterans receive services at a rate 15 percent higher than nonveterans. Thus, if a state’s placement rate for nonveterans was 10 percent, the placement rate for veterans should be 11.5, or 15 percent higher than the nonveteran placement rate. There are also higher expectations for serving Vietnam-era veterans and disabled veterans. As required by the law, VETS must report to the Congress on states’ performance in five service categories: (1) veterans placed in or obtaining employment, (2) Vietnam-era veterans and special disabled veterans placed in jobs on the Federal Contractor Job Listing, (3) veterans counseled, (4) veterans placed in training, and (5) veterans who received some reportable service. VETS has historically used these same performance categories to measure state performance for serving veterans at a higher rate than nonveterans. The data for these performance categories is collected by states for the programs administered by ETA. As required by the DVOP and LVER grant agreements, the states then extract the relevant data for their reports to VETS. The law also requires that states establish their own performance expectations, under VETS’ guidance, for their DVOP and LVER staff to ensure that these staff are effectively utilized. The Congressional Commission on Servicemembers and Veterans Transition Assistance issued a report in 1999 that raised concerns about the performance and effectiveness of VETS’ programs. The Congress directed the Commission to review programs that provide benefits and services to veterans and service members making the transition to civilian life, which included the DVOP and LVER programs. The Commission recommended that the Congress restructure employment assistance to veterans in several ways. These suggested changes included: replacing the current DVOP and LVER programs with two new programs, establishing effective operational outcome measures for VETS, and revising the system of priority for services to ensure priority service for veterans who most need assistance in overcoming barriers to employment or who are making their transition to civilian life. The Commission also questioned the effectiveness of the administration and oversight of VETS’ programs, calling for an independent audit of agency performance. In our past reviews of VETS’ programs, we have recommended changes to VETS’ performance measures and plans. In our most recent report, we noted that VETS had proposed performance measures more in-line with those established under WIA and focused more on what VETS’ programs achieve and less on the number of services provided to veterans relative to nonveterans. However, we reported that VETS still lacked measures to gauge the effectiveness of services or whether more staff-intense services helped veterans obtain jobs. While the law still stipulates that VETS is to report to the Congress on the five service categories, according to its proposed performance measures, VETS will no longer require that states compare services provided to veterans with those provided to nonveterans. This change is a positive step, but VETS officials said that the implementation of these proposed measures did not occur in July 2001 as planned, and will not be effective until July 1, 2002. While veterans receive priority employment services at one-stop centers as required under the law, the effectiveness of the services, as indicated by the resulting employment, cannot be determined because VETS does not collect sufficient data to measure the outcomes veterans achieve from these services. State-gathered data and interviews with state officials showed that veterans are receiving priority services at one-stop centers as demonstrated by the higher rates of service for veterans compared to those of nonveterans. While one-stop centers can provide priority services to veterans in different ways, most do so primarily through the DVOP and LVER staff. Since veterans have these dedicated staff to serve them, they also received more intensive services, and received these services more readily, than nonveterans. However, the effectiveness of these services is unknown because VETS lacks adequate outcome data on job retention and wages. The only outcome data available—the percentage of veterans served who entered employment—are often inconsistent from state to state. On the basis of state data reported to VETS and interviews with state officials, veterans receive priority employment services at one-stop centers. To show that states are providing priority service to veterans, VETS requires states to report data on the number and types of services provided to veterans and nonveterans as well as the percentage of each group served that enters employment. Data reported to VETS shows that veterans generally receive employment services at a higher rate than nonveterans. Other examples of priority service include not releasing new job openings received from employers into the job database in order to identify and contact qualified veterans before the universal population has access to the information. Some state officials reported that they have other special services exclusively for veterans, such as designated computers or special information packets on available resources. State and local officials reported that veterans also receive more intensive services than nonveterans. For example, DVOP and LVER staff may provide veterans individualized services the first day they come in, while nonveterans are generally referred to self-service first. Veterans generally gain access to intensive services, similar to those offered under WIA, such as counseling and case management, more quickly than nonveterans because DVOP and LVER staff have smaller caseloads than other employment services staff and thus have the time to spend with individuals. Veterans have better access to intensive services than nonveterans because DVOP and LVER staff are funded independently of WIA and are not subject to restrictions applicable to WIA-funded programs. For example, veterans served by DVOP and LVER staff do not have to receive basic services before obtaining intensive services. While priority service can be provided in different ways depending on the one-stop center, most state officials and one-stop center managers we spoke with said that they primarily used DVOP and LVER staff to provide priority services to veterans since these staff are dedicated to assisting veterans exclusively. DVOP and LVER staff we spoke with said that they tried to talk to every veteran at least once because they were better able than other staff to identify barriers to employment and were able to provide veterans with information about other benefits available to them. However, in some of the one-stop centers we visited, only veterans determined to have employment barriers were referred to the DVOP and LVER staff, while others were referred to self-service or other one-stop center staff. In offices with no DVOP and LVER staff, veterans generally received one-on-one service from any available employment service staff, and appointments could be made with DVOP or LVER staff in other offices. According to many state officials as well as DVOP and LVER staff, the DVOP and LVER staff members relate better to veterans because they are veterans themselves. For example, because they are familiar with the processes at the Department of Veterans Affairs (VA), they can help veterans file disability claims with the VA or help them to receive the appropriate disability benefits. The DVOP and LVER staff also has broader knowledge of veterans’ issues than other one-stop center staff, partly because of their training at the National Veterans’ Training Institute, instruction that included training in case management. DVOP and LVER staff are required to network with veterans’ groups and other service providers and, therefore, are better able to refer veterans to services and resources available to them outside the one-stop center. DVOP staff members also work on the development of employment opportunities for their disabled clients and perform outreach to identify veterans; something that other employment services staff members do not have time to do. While veterans receive more services and receive these services more quickly than nonveterans, the effectiveness of these services cannot be determined. VETS currently lacks sufficient employment outcome data, such as the wages and job retention of veterans served who obtain jobs, which would indicate whether services provided to veterans were effective. VETS has proposed collecting data on employment outcomes, similar to those collected by ETA and WIA programs, and the agency has also recommended that states use unemployment insurance wage records to collect outcome data. However, these improvements have not yet been implemented, partly because the data that states report to VETS is extracted from data collected for other federal employment and training programs. To avoid requiring states to collect separate data, VETS is dependent on ETA to change the type of data it collects. The only outcome data that states currently report to VETS—the percentage of veterans entering employment after registering for employment services—is collected inconsistently. While some states compare their employment service registration records with unemployment insurance wage records, others may simply call employers for employment verification or send postcards or letters to customers asking whether they have obtained employment. States may also use a combination of these approaches. In some states where follow-up was by telephone or mail, state officials reported that the DVOP and LVER staff had more time to follow-up with their customers than other employment and training staff, resulting in more complete employment data for veterans. Furthermore, in past reviews, we have pointed out that the use of relative standards comparing the percentage of veterans entering employment with that of nonveterans, results in states with poor levels of service to nonveterans being held to lower standards for service to veterans than states with better overall performance. In addition, states and local workforce investment areas choose to register customers at different stages of the job search process, thus the percentage of “registered” veterans entering employment may differ based on when they were required to register. In some areas, customers register to use any service, including self-service; in other areas they are only required to register when using staff-assisted services. Those who find employment before being registered are not counted as having entered employment after using self-service resources available through the one- stop center. Consequently, the reported percentage of veterans served who entered employment is not comparable from state to state. Poor performance management hinders VETS’ oversight of the DVOP and LVER grants. The agency does not have a comprehensive system in place to manage state performance in serving veterans. VETS does not effectively communicate its expectations to states about performance, nor does it have meaningful incentives to encourage states to perform well. In addition, VETS’ efforts to target services to specific categories of veterans are unfocused. Furthermore, VETS is required by law to have federal staff in every state and to conduct annual on-site evaluations at every local office, but this monitoring is often unproductive. In order to oversee a program effectively, an agency must have a management system that establishes clear goals for those administering the program. Furthermore, an agency must develop performance measures that allow for the determination of whether the goals are being met. VETS does not have such a management system. The agency does not have clear goals that it communicates to states or that it tracks with outcome data. VETS’ goals are not reflected by the performance measures that the agency uses to monitor state performance. For example, one agency goal is to provide high-quality case management to veterans, but the agency has no state performance measures for assessing the quality of case management for veterans. Instead, the performance measure is the percentage of veterans served who enter employment. Because VETS’ performance measures do not reflect the agency’s goals, the agency cannot track how well its goals are being met. Furthermore, current performance measures do not affect how services are delivered to veterans. Several one-stop managers and DVOP and LVER staff said that they provide services that veterans need without concentrating on the required performance measures, hoping that the services meet or exceed the measures. Although VETS is working to improve its performance measures, it still lacks a comprehensive system to manage performance. VETS’ efforts to ensure that intensive services are focused on those veterans most in need by “targeting” specific groups of veterans are unfocused. In its strategic plan, the agency, for case management and intensive services, targets disabled veterans, minority veterans, female veterans, recently separated veterans, veterans with significant barriers to employment, special disabled veterans, homeless veterans, veterans provided vocational rehabilitation under the VA, and veterans who served on active duty in the armed forces under certain circumstances. This includes nearly all veterans, and not necessarily those most in need of service. The numerous categories of targeted veterans could result in the vast majority of veterans being targeted for case management. A VETS official said that the focus for service should be on veterans with the greatest needs as determined by individual assessments because groups targeted on a national level do not necessarily correlate to the needs of veterans in particular states or local areas. Unnecessary performance measures often add to DVOP and LVER work, without measuring quality of service to veterans. Some state and VETS officials we spoke with expressed concern about having performance measures that specifically focus on service to Vietnam-era veterans. The law requires VETS to report to the Congress on states’ service to Vietnam- era veterans; consequently, VETS includes this service as a performance goal. Since these veterans make up such a small percentage of the workforce, due in part to the fact that many are at or near retirement age and may not be seeking employment, DVOP and LVER staff may spend much of their time trying to identify and serve this group of veterans in order to meet VETS’ performance goals. In fact, one state VETS official, who is also a disabled Vietnam-era veteran, said that the time-consuming service to Vietnam-era veterans might be a distraction to DVOP and LVER staff. Some state officials also identified one of VETS’ performance measures that should be eliminated. VETS requires that Vietnam-era veterans, special disabled veterans, and veterans who served on active duty under certain circumstances are placed in jobs on the Federal Contractor Job Listing. To do this, in addition to identifying qualified job candidates from this pool of particular group of veterans, DVOP and LVER staff must monitor local federal contractors to make sure that they are listing their job opportunities with the one-stop centers and hiring these veterans. Because the presence of federal contractors in a given state or local area is unpredictable and is determined by the federal agencies awarding contracts, state employment service officials said the federal contractor measure should be eliminated. It is the responsibility of contractors to list their job openings, and the Office of Federal Contract Compliance Programs is responsible for ensuring that all companies conducting business with the federal government list their jobs with state employment service offices and take affirmative action to hire qualified veterans. Eliminating this performance measure would allow DVOP and LVER staff members more time to focus on the employment needs of individual veterans rather than compliance issues under the purview of another federal agency. Furthermore, although VETS has proposed improved performance measures, its performance management system still lacks incentives to encourage states to meet performance goals. Presently, states are neither rewarded for meeting or exceeding their performance measures, nor penalized for failing to meet these measures. If a state fails to meet its performance measures, VETS simply requires the state to develop a corrective action plan to address the deficiencies in that state. There are no financial repercussions for states not meeting their performance measures, and states will not lose funding for failing to adequately serve veterans. One VETS official said that he would never take funds away from a state for not meeting performance measures because ultimately this would deny services to veterans. In addition, there is little in the way of incentives to encourage fiscal compliance with the grants. If a state overspends DVOP or LVER funds, state officials can submit a grant modification requesting additional funds. A VETS official noted that if the DVOP and LVER grants could be awarded through a competitive bid process within states rather than awarded directly to states’ employment service agencies as required by law, the grantees might have more incentive to provide better services to veterans. VETS’ monitoring of the DVOP and LVER grants is often unproductive. It is excessive and has little effect on service. As mandated by law, VETS has an extensive field structure—with federal staff in every state—to monitor the DVOP and LVER programs. This federal oversight often duplicates state oversight and confuses the lines of authority for DVOP and LVER staff. Furthermore, VETS’ oversight may be inconsistent due in part to outdated manuals, limited training, and the lack of clear guidance from the national office. The law mandates VETS’ field structure, prescribing that each state have federal VETS staff—positions ranging from the director to office support staff. This includes about 185 field staff members in state DVET offices and about 37 field staff members in regional RAVET offices. In addition to their other duties not related to the grants, these federal VETS staff members estimated that they collectively spend about half of their time administering the DVOP and LVER grants. The federal VETS staff annually reviews every employment service office or one-stop center where DVOP and LVER staff are located. This annual review, called the Local Employment Service Office evaluation, includes an evaluation of office performance based on the review of specific documents and a site visit. While some state employment agency officials believe that the DVET presence as a VETS monitor serves as a reminder of veterans’ priority and provides immediate technical assistance, other state officials we interviewed believe that this presence is unnecessary and excessive. Many state officials believe that the DVOP and LVER grants are “micro- managed.” For example, one state official said that she receives weekly letters, daily visits, and constant phone calls from the DVET but receives very little to no communication from other employment and training programs. She did not believe that all of this contact and monitoring improved services to veterans. An official in another state pointed out that there is one monitor for every million dollars of grant money the state receives and that VETS staff are highly involved at the operational level, thus making the program feel “policed.” VETS’ annual on-site evaluations of employment services offices that we observed or whose reports we reviewed produced few substantive findings. Furthermore, according to some state officials, these evaluations have little or no effect on how DVOP and LVER staff members perform their duties. Some federal monitoring staff agree that the evaluations are not as effective as they could be because VETS has little authority to influence the way DVOP and LVER staff work at the state and local level. This monitoring may also be unnecessary for those offices that exceed their performance expectations. States generally perform their own monitoring and oversight of one-stop centers, including the services provided to veterans by DVOP and LVER staff. Most state officials we interviewed had some state oversight to monitor employment services, which included the DVOP and LVER grants. In addition, as permitted under the LVER grants, states generally had a state veterans’ coordinator, paid by the LVER grant funds, to oversee the programs. For example, one state’s veterans’ coordinator reviews several one-stop centers every quarter, as well as meets initially with all new DVOP and LVER staff. In another state, the employment services department has field supervisors who perform local office reviews and who review the quarterly reports from each one-stop regarding services to veterans. However, VETS officials questioned the adequacy of the state monitoring and stressed the necessity for the federal oversight by VETS staff to make sure that veterans are provided priority employment services. Because there are two monitoring entities—federal and state—the lines of authority for the DVOP and LVER staff may be unclear and confusing. In some cases, the DVOP and LVER staff, who are state employees, go directly to the federal officials, the DVET and his or her staff, with problems and questions rather than discussing these issues with their state supervisors. When DVOP and LVER staff directly contact the federal VETS monitors, they are bypassing their state supervisors and circumventing state procedures. According to state employment officials, federal officials, in their efforts to monitor one-stop centers, may sometimes provide information that contradicts state policies. Further confusion exists when the DVET bypasses state officials to communicate directly with DVOP and LVER staff. State employment officials believe that the DVET should contact the grantee—the state— directly and not bypass the state officials. When presented with questions from the DVET, DVOP and LVER staff may be in an awkward situation. If they give VETS officials the information they requested, they could be reprimanded by state employment officials for not following state procedures. If they tell the VETS officials to obtain the information from the state employment officials, DVOP and LVER staff might offend the VETS staff who monitors their work. In addition to duplicating state monitoring efforts, the evaluations that federal staff conducts may be inconsistent both within and between states because the manuals that guide their efforts are outdated and the training they receive is not adequate. The evaluation manual, published by the national VETS office, has not been updated since 1989 even though WIA has introduced changes to the employment service delivery system. While some federal monitors use this manual, directors in some regions and individual states have developed new guidelines. Consequently, evaluations are conducted using different criteria depending on the region and state. Some training exists for the federal monitoring staff, but the training is not adequate because, according to a VETS official, it is too focused on finding fault rather than sharing information on innovative ways to serve veterans. The training emphasizes grant management and compliance audits rather than focusing on how to assist and work with states to improve employment services to veterans. The DVOP and LVER grant programs do not always operate well in one- stop centers, according to the state and local officials we interviewed. With the passage of WIA, states are now allowed the flexibility to meet the employment and training needs of their populations through multiple programs offered through one-stop centers nationwide. However, DVOP and LVER programs operate under a law established prior to WIA. This law, which outlines two staffing grants with separate rules and funding, is very prescriptive in terms of which veterans are eligible for services and excludes, for example, persons who have served in the Reserves or National Guard. The funding year for DVOP and LVER programs does not coincide with the funding year for other employment programs offered in the one-stop centers and having Labor programs’ funding streams on different schedules is burdensome. In addition, VETS has not taken adequate steps to adjust the DVOP and LVER programs to the one-stop center environment. Instead, VETS officials said that they were waiting to see how states design their one-stop centers before making any adjustments. DVOP and LVER grant programs lack the flexibility states need to effectively meet the needs of veterans through one-stop centers. For instance, the assignment of DVOP and LVER staff to local offices is largely prescribed by the law and allows little variation for state or local office needs and circumstances. LVER staff is assigned to local offices based on the number of veterans registered for assistance at each local office. For the DVOP program, the law stipulates that at least 25 percent of the staff should be located at facilities outside of the employment service system such as veterans’ hospitals or community colleges. The Secretary of Labor can waive this requirement only if at least 20 percent of DVOP staff is located at facilities outside of the employment service system nationwide. These requirements may no longer be appropriate as the employment and training environment changes. Since the passage of WIA, many of the locations that were once considered facilities outside the employment service system are now considered part of that system. One state official noted that many community colleges with DVOP staff are now considered to be one-stop employment and training centers. While the state met the assignment requirement before WIA, it may have to move this staff to new locations outside the system simply to comply with the requirement of the DVOP grant. Smaller employment services offices or one-stop centers may have a more difficult time meeting the employment needs of their veterans because of the restrictions in the law. Although the LVER grant allows smaller locations to have a half-time LVER position, VETS does not allow this same flexibility for the DVOP program. Smaller offices in rural or sparsely populated areas that cannot justify a full-time DVOP position would not benefit from the services provided by a DVOP staff member. For instance, a state official noted that if half-time DVOP staff were permitted, this would broaden service to veterans. The law also specifies the separate duties for DVOP and LVER staff. According to the law, DVOP staff are to carry out 10 duties that include the following: promoting the development of jobs for veterans through contacts with employers, performing outreach activities to locate veterans in need of assistance, and carrying out other duties to promote the development of entry-level and career job opportunities for such veterans. LVER staff are to carry out 12 duties that include: functionally supervising services to veterans provided by the local employment service staff, providing employment assistance to veterans, and encouraging employers to hire eligible veterans. LVER staff must also provide quarterly reports to the local office manager and the state DVET regarding compliance with federal law and regulations concerning special services and priorities for veterans. Although there are some differences between the duties of DVOP and LVER staff, the staff members we visited generally perform similar duties. While the law makes distinctions between DVOP and LVER staff, a VETS official said that, in reality, they perform many of the same duties. The separate funding streams for the DVOP and LVER grants provide states with little discretion in staffing. If a state does not spend all of its grant money, states return the extra funding and VETS redistributes it to states that request additional funding; however, states are not allowed to transfer money from one grant to another. For example, a state that overspends in its DVOP program but spends less than its allocation in the LVER program would have to use other funds to cover the amount overspent in the DVOP program, and VETS would take back the additional LVER grant money. The state may request more money from VETS for its DVOP program, but there is no guarantee that it will get the additional funding. Furthermore, DVOP and LVER staff members are not allowed to serve certain individuals who may qualify for veteran services under other employment and training programs. The law governing the DVOP and LVER programs defines veterans eligible for employment assistance more narrowly than WIA or VETS for its other veterans’ activities. WIA defines a veteran more broadly as an individual who served in the active military, naval, or air service. VETS, as an agency, also assists a broadly defined group, which includes veterans, Reservists, and National Guard members. However, for the DVOP and LVER program, the law restricts the population of eligible veterans to those who served on active duty for more than 180 days. Because of this more restricted definition of an eligible veteran in the applicable law, DVOP and LVER staff are not allowed to serve veterans who were on active duty for 180 days or less, and they are not permitted to serve Reservists or National Guard members. One state official explained that there is a large and growing number of Reservists and National Guard members in his state, but fewer veterans because there are no military bases where service members are discharged. Because of the more restrictive definition for veterans, DVOP and LVER staff are not allowed to serve these Reservists or members of the National Guard in that state. This narrow definition does not permit states the flexibility to use DVOP and LVER staff to serve persons that are considered veterans under WIA or persons who VETS would help in securing employment, such as Reservists and National Guard members. VETS appears to be taking a reactive rather than a proactive approach to adapting to the one-stop center environment. For example, instead of coordinating with other programs to determine how best to fit the DVOP and LVER programs into the one-stop system, VETS’ headquarters officials reported that they are waiting to see how states implement their programs and will decide afterwards how to integrate the staff or adjust their programs. While VETS implemented, in 1997, a pilot project in several states to test new ways of measuring state performance in providing employment assistance to veterans, the agency has not yet implemented changes based on these initiatives. VETS has required states to sign an agreement to ensure that veterans will continue to receive priority services and that the DVOP and LVER staff will continue to assume duties very similar to those they had in the employment services system. However, these individual agreements with states were all very similar and did not contain any information about specific ways that DVOP and LVER staff might serve veterans within this new environment. Furthermore, VETS has not developed policies and procedures for operating within the one-stop system or adequately shared innovative ways to help veterans find and retain jobs. Because of these outdated policies and procedures, DVOP and LVER staff in many states may continue to operate separately as if they were in the old employment services system and fail to adapt to the new one-stop center environment where employment and training programs are expected to be integrated. According to one-stop managers we interviewed, this lack of integration may diminish services to veterans. For example, the DVOP and LVER staff may be unaware of all the programs and services offered through the one- stop. VETS has not addressed the fact that, unlike the DVOP and LVER staff, the one-stop center is designed to serve all customers. In order to create one- stop centers that serve all customers through seamless delivery of services, some federal, state, and local officials have developed creative ways of integrating services. For example, one DVET allows the DVOP and LVER staff in his state to serve nonveterans 2 percent of their time. This flexibility allows DVOP and LVER staff to have contact with the universal population in certain circumstances. If a DVOP staff member is the only bilingual staff member in the office, he or she may assist a customer who does not speak English without being reprimanded for serving a nonveteran. However, this flexibility is not universally permitted by the DVET staff, nor has VETS endorsed this concept. The funding year for DVOP and LVER programs does not coincide with the funding year for other employment programs offered in the one-stop centers, another sign that the DVOP and LVER grants have not been fully integrated into the one-stop environment. The appropriation to fund the DVOP and LVER grants is made available on a federal fiscal year basis (October 1 through September 30), while other employment programs and states operate on a program year basis (July 1 through June 30). Having Labor programs’ funding streams on different schedules is burdensome for states and makes the budgeting process more complicated. One state official explained that information on the other major federal grants, such as Wagner-Peyser funding to support employment service staff, is made available on a program year basis, which allows states enough time to plan for their start date. However, the DVOP and LVER grants are made on the federal fiscal year basis, so the funds are not appropriated until October or later, causing problems or delays in state planning. While the Congress has clearly defined employment service to veterans as a national responsibility, the law has not been updated to reflect the recent changes in the employment and training service delivery system introduced by WIA. The prescriptive nature of the law also creates a one- size-fits-all approach for service delivery, mandating many of the DVOP and LVER program activities and requirements. This approach is ineffective because it does not account for the fact that each state and one-stop center may have a different approach to satisfying the needs of local employers as well as different types of veterans who may need employment assistance. Although the law stipulates separate roles and responsibilities for DVOP and LVER staff, they perform similar duties and may not need to be separately funded. The law that governs VETS also stipulates how grant funds and staff must be allocated as well as how the grants should be monitored. These requirements hamper VETS’ ability to consider alternative ways of administering or overseeing the grants. Furthermore, the law requires that VETS report annually on states’ performance for serving veterans relative to serving nonveterans, which may not be a good indicator if a state serves its nonveteran population poorly. The law also requires VETS to report on requirements pertaining to the Federal Contractor Job Listing and this detracts DVOP and LVER staff members from serving veterans. While VETS planned to find innovative ways to assist veterans with employment, it has not been proactive in helping DVOP and LVER staff become an integral part of the one-stop center environment. The new one- stop center system, while giving veterans priority for employment services, gives states flexibility in planning and implementing employment and training systems and holds them accountable for performance. However, VETS has not taken steps to adjust to this new environment. The agency has not updated its oversight guidelines or staff training procedures to ensure consistent and effective monitoring of the DVOP and LVER programs within the one-stop centers. VETS has not established clear performance goals for states, nor has it given states the flexibility to decide how best to serve their veteran population. While VETS has proposed ways of improving performance measures, these measures have not yet been implemented. VETS has not proposed any incentives to hold states accountable for meeting performance goals. We suggest that the Congress consider how the DVOP and LVER programs best fit in the current employment and training system and take steps to ensure that these programs are able to be more fully integrated into this new environment. While veterans’ employment service is clearly a national responsibility, the Congress should consider updating the law to provide more flexibility and improved accountability and taking other actions, such as adjusting the DVOP and LVER grant funding cycle to correspond with that of other programs. The Congress should consider revising title 38 to provide states and local offices more discretion to decide where to locate DVOP and LVER staff and provide states the discretion to have half-time DVOP positions; allow VETS and/or states the flexibility to better define the roles and responsibilities of staff serving veterans instead of including these duties in the law; combine the DVOP and LVER grant programs into one staffing grant to better meet states’ needs for serving veterans; provide VETS with the flexibility to consider alternative ways to improve administration and oversight of the staffing grants, for example, eliminating the prescriptive requirements for monitoring DVOP and LVER grants; eliminate the requirement that VETS report to the Congress a comparison of the job placement rate of veterans with that of nonveterans; and eliminate the requirement that VETS report on Federal Contractor Job Listings. The Congress should also consider making the DVOP and LVER grant funding cycle consistent with that of other employment and training programs. We recommend that the Secretary of Labor establish more effective management and monitoring of the DVOP and LVER programs. Specifically, the Secretary of Labor should direct VETS to specify performance goals and expectations for serving veterans and allow states the flexibility to present a plan for how they intend to meet these goals and expectations; implement, as soon as possible, a performance measurement system that holds states accountable, reflects the agency’s goals and expectations, and defines how the performance data should be collected to ensure accuracy and reliability; implement a performance management system for the state grantees that provides incentives for meeting goals and penalties, beyond corrective action plans, for not meeting goals; and update oversight guidelines and improve staff training to ensure consistent monitoring of DVOP and LVER programs in one-stop centers. We provided VETS with the opportunity to comment on a draft of this report. VETS generally agreed with our findings and recommendations and had two concerns about our matters for congressional consideration. Although VETS recognizes that title 38 is prescriptive and limits the agency’s flexibility to provide different approaches for more innovative services to veterans, it had concerns about having half-time DVOP staff positions and combining the two DVOP and LVER grants into a single staffing grant. VETS said that if these matters receive further consideration, it would discuss its concerns with the appropriate congressional committee. VETS’ comments appear in appendix II. VETS said that measuring the effectiveness of services provided to veterans in one-stop centers is difficult and that the agency is working with others in the Department of Labor to develop data collection strategies supporting its proposed performance measures. VETS said that this new performance measurement system would not be effective until July 1, 2002. Furthermore, VETS intends to work with states to develop appropriate performance measures for the DVOP and LVER grants and will issue prototype performance standards that states may use for DVOP and LVER staff. In terms of its oversight of the DVOP and LVER grants, VETS agreed that improved management and monitoring of the grants is needed. VETS said that it would redouble its efforts to ensure that effective communication between its staff and DVOP and LVER staff is accomplished without compromising states’ supervisory structure. VETS plans to develop a new grant review guide and a grants management course. VETS said that its management control system parallels its performance plan. According to VETS, this system tracks program activities, performance outcomes, and corrective actions initiated. However, we found that VETS does not use this information to hold states accountable. VETS also said that incentives to encourage states to meet performance goals would be useful but said there are no discretionary funds available. In this case, we would urge the agency to consider the use of nonmonetary incentives. In addition, VETS said that agreements with each state about how DVOP and LVER staff would be integrated into the one-stop delivery system agency were developed prior to implementing WIA. We determined that these individual state agreements ensured that veterans would continue to receive priority services and that the DVOP and LVER staff would continue to assume duties akin to those they had prior to WIA. However, these agreements did not contain any information about specific ways that DVOP and LVER staff might serve veterans within the new environment. We found that DVOP and LVER programs do not always operate well in one-stop centers. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will then send copies to the Secretary of Labor and the Secretary of the Department of Veterans Affairs. We will also make copies available to others upon request. If you or your staff have any questions about this report, please contact me at (202) 512-7215 or Joan T. Mahagan at (617) 565-7532. Key contributors to this report are listed in appendix III. In designing our study, we obtained legislation, regulations, and Veterans Employment and Training Service (VETS) directives regarding the Disabled Veterans’ Outreach Program (DVOP) specialists and the Local Veterans’ Employment Representative (LVER) staffing grants to states. We interviewed VETS officials in Washington, D.C., responsible for administering the grants and VETS staff at the Regional Lead Center in Chicago, Illinois, who provided us with documentation regarding VETS’ strategic plan and general guidance for the DVOP and LVER staffing grants. To obtain additional information about the oversight of the staffing grants, we also conducted telephone interviews with all of VETS’ regional administrators and interviewed the state directors and other federal VETS staff in five states that we visited. To obtain information on how DVOP and LVER staff are integrated into the one-stop center environment, we interviewed state employment agency officials in 30 states. For five states—Connecticut, Florida, Ohio, Oregon, and Texas—we conducted site visits. For the remaining 25 states, we conducted telephone interviews with state employment officials. To identify the states for our telephone interviews, we developed a stratified random sample. We first identified all states with a veteran population over 1 million. These states included California, Florida, New York, Ohio, Pennsylvania, and Texas. Since Florida, Ohio, and Texas were states where we conducted site visits, we conducted in-person interviews with the state officials rather than telephone interviews. Thus, the states with veteran populations over 1 million that we included for telephone interviews were California, New York, and Pennsylvania. For the remaining states, we randomly selected Alabama, Arizona, Delaware, the District of Columbia, Idaho, Iowa, Kansas, Kentucky, Maine, Minnesota, Montana, New Hampshire, New Jersey, New Mexico, North Dakota, Oklahoma, South Carolina, Tennessee, Utah, Virginia, Wisconsin, and Wyoming for telephone interviews. To understand how DVOP and LVER grants are integrated in the one-stop system at the state level, we visited five states to provide a more in-depth analysis. We selected Connecticut, Florida, Ohio, Oregon, and Texas to provide a mix of different geographic locations, size of veteran populations, and entered employment rates for veterans as well as a both public and privatized service providers. The five states were located in five different VETS regions; the veterans populations varied from about 313,000 in Connecticut to about 1,652,000 in Florida; and the entered employment rates for veterans served in public employment offices ranged from 45.8 percent in Texas to 18.5 percent in Ohio. In the five states, we interviewed state VETS directors as well as state employment agency officials, local office managers, and DVOP and LVER staff. We visited a total of 17 local offices in the five states and interviewed a total of 39 DVOP and LVER staff at these locations, which were representative of both urban and more rural areas. At the local offices, we also observed operations. In addition, where appropriate, we interviewed local workforce board members. We conducted telephone interviews with five Veterans’ Service Organizations—AMVETS, the American Legion, Disabled American Veterans, Veterans of Foreign Wars, and Vietnam Veterans of America—to obtain their views on the DVOP and LVER staffing grants. We also contacted officials from the National Association of State Workforce Agencies (formerly known as the Interstate Conference on Employment Security Agencies, Inc.) and met with its Veterans’ Affairs Committee. We conducted our work from October 2000 through July 2001 in accordance with generally accepted government auditing standards. Sigurd R. Nilsen, Director, (202) 512-7215 Joan T. Mahagan, Assistant Director, (617) 565-7532. In addition to those named above, Jonathan H. Barker, Richard P. Burkard, Lara L. Carreon, Betty S. Clark, Corinna A. Nicolaou, Paul R. Schearf, Salvatore F. Sorbello, Jr., and James P. Wright made key contributions to this report. Veterans’ Employment and Training Service: Further Changes Needed to Strengthen Its Performance Measurement System (GAO-01-757T, June 7, 2001). Veterans’ Employment and Training Service: Proposed Performance Measurement System Improved, But Further Changes Needed (GAO-01- 580, May 15, 2001). Veterans’ Employment and Training Service: Better Planning Needed to Address Future Needs (GAO/T-HEHS-00-206, Sept. 27, 2000). Veterans’ Employment and Training Service: Strategic and Performance Plans Lack Vision and Clarity (GAO/T-HEHS-99-177, July 29, 1999). Veterans’ Employment and Training Service: Assessment of the Fiscal Year 1999 Performance Plan (GAO/HEHS-98-240R, Sept. 30, 1998). Veterans’ Employment and Training: Services Provided by Labor Department Programs (GAO/HEHS-98-7, Oct. 17, 1997). Veterans’ Employment and Training Service: Focusing on Program Results to Improve Agency Performance (GAO/T-HEHS-97-129, May 7, 1997). | Recognizing that the country's fragmented employment and training programs were not serving job seekers or employers well, Congress enacted the Workforce Investment Act (WIA) in 1988. One of WIA's goals was to create a one-stop center system to help unify the services provided by many programs and give states the flexibility to design services better suited to local workforce needs. Veterans' employment and training programs, administered by the Department of Labor's Veterans' Employment and Training Service (VETS), are mandatory program partners in this new one-stop center system. VETS administers two grants programs--the Disabled Veterans' Outreach Program (DVOP) and the Local Veterans' Employment Representative (LVER) program--that fund staff offering services for veterans. Although veterans receive priority employment services at one-stop centers, VETS does not collect appropriate data for determining the effectiveness of these services, including subsequent job retention and wages. VETS requires states to collect information on the number and type of employment services provided to veterans relative to nonveterans. This information showed that veterans received more intensive services, and received these services more readily, than did nonveterans seeking services through states' employment service offices or one-stop centers--an elevated level of service principally provided by DVOP and LVER staff. VETS' oversight of the DVOP and LVER grants is inadequate. The agency lacks a comprehensive system in place to manage state performance in serving veterans. The two programs do not always operate well within the one-stop center environment because states do not have the flexibility to design their services for veterans in a way that best meets the needs of employers and veterans. The success of the one-stop system depends on providing services that meet the changing employment needs in local communities. GAO summarized this report in testimony before Congress; see: Veterans' Employment and Training Service: Greater Flexibility and Accountability Needed to Better Serve Veterans, by Sigurd R. Nilsen, Director of Education, Workforce, and Income Security Issues, before the Subcommittee on Benefits, House Committee on Veterans' Affairs. GAO-02-192T , Oct. 30 (13 pages). |
The Homeland Security Act of 2002 created DHS, effective March 1, 2003, by merging agencies and organizations that specialize in one or more aspects of homeland security. Some of those specialties are intelligence analysis, law enforcement, border security, transportation security, biological research, critical infrastructure protection, and disaster recovery. The intent behind DHS’s merger and transformation was to improve coordination, communication, and information sharing among the multiple federal agencies responsible for protecting the homeland. Critical to performing the homeland security mission is the effective interaction between and integration of these agencies and organizations. Table 1 shows DHS’s eight principal organizations and their missions. Of the 23 entities that joined DHS from other agencies, only 7 came with their own procurement support. Providing support to the other entities— as well as a number of newly created entities, such as the offices of the Chief Information Officer and Chief Financial Officer—is an eighth office, the Office of Procurement Operations (Procurement Operations). That office was not created until January 2004, almost a year after DHS came into being. Appendix III lists all of the DHS organizations that receive contracting support from Procurement Operations. Figure 1 shows the sources of contracting support for DHS’s principal organizations. To carry out acquisition effectively across a large federal organization requires an integrated structure with standardized policies and processes, the appropriate placement of the acquisition function within the department, leadership that fosters good acquisition practices, and a general framework that delineates the key phases along the path for a major acquisition. An effective acquisition organization has in place knowledgeable personnel who work together to meet cost, quality, and timeliness goals while adhering to guidelines and standards for federal acquisition. In the 2 years since its creation, DHS has realized some successes in opening the lines of communication among the various organizations within the department through its strategic sourcing and small business programs. Both of these efforts have involved every principal organization in DHS, along with strong involvement from the Chief Procurement Officer, and both have yielded positive results. DHS already has begun to demonstrate that its strategic sourcing program can foster collaboration across the department and at the same time maximize the department’s overall buying power. DHS’s small business program has a presence departmentwide, and according to DHS officials, the department exceeded its 23 percent small business goal for fiscal year 2004. Under the authority of the Chief Procurement Officer, DHS created a strategic sourcing group in October 2003 to leverage departmentwide spending for various commodities. The group brought together diverse expertise from throughout DHS. To identify commodities with the most potential for savings, strategic sourcing officials conducted a spend analysis using available acquisition databases, such as the Federal Procurement Data System, and input from DHS senior management. The following 15 commodities were identified as having potential to leverage the department’s buying power: aviation, boats, business wireless communications, copiers, energy, enterprise software agreements, facilities, facilities security, vehicle fleets, mail, office supplies, professional services, uniforms, and weapons. Consistent with best practices, the strategic sourcing group then established commodity councils composed of representatives from across DHS. The commodity councils were assigned responsibility for further collection and refinement of historical procurement data in order to better assess future purchasing strategies. Typically, members from the strategic sourcing group and the DHS organization with the most expertise in a particular commodity serve as council cochairs. For example, a Coast Guard official is a cochair for the boats commodity council. Commodity council cochairs said they were willing to devote time to the strategic sourcing initiatives because they recognized the unique opportunity DHS had to move forward to leverage buying power across the department. Further, the cochairs were virtually unanimous in telling us that the councils enable stakeholders to build awareness of a particular commodity and develop strong relationships throughout DHS. They said the councils foster a sense of community in which the various organizations can share information, participate in forums, find commonalities, engage in open and productive communication, and make smarter and more collaborative business decisions. For example, the weapons commodity council routinely shares information on ammunition. When one DHS organization is low on ammunition, others help meet the need. Appendix IV contains more detail on initiatives that several commodity councils have undertaken. In fiscal year 2004, 4 commodity councils—office supplies, boats, energy, and weapons—reported approximately $14.1 million in cost savings and cost avoidances, and department officials expect the savings to continue to grow. The savings have resulted from DHS negotiating lower rates with suppliers and leveraging resources across the department. Figure 2 depicts the savings trend over a 12-month period. The September 2004 surge resulted when authorized DHS employees began purchasing pistols through two large contracts, a strategy spearheaded by the weapons commodity council. Some councils are encountering a problem faced by many federal departments and agencies, namely, a shortage of comprehensive data upon which to draw an accurate and detailed picture of what is being spent on certain commodities over time. Strategic sourcing officials and commodity council members told us that they cannot take full advantage of spend analyses, nor can they accurately chart historical spending, because DHS’s acquisition databases do not contain enough procurement data. The problem is compounded by the fact that when parts of existing agencies, such as the Immigration and Naturalization Service from the Department of Justice, joined DHS, detailed information on its spending history was not available. Without an accurate analysis of how DHS organizations historically purchased a commodity, council members will likely continue to rely on a patchwork of estimates, as well as information from suppliers, to glean information on spending history and develop purchasing strategies for the future. In addition, some commodity council members have found it challenging to balance council duties with the demands and responsibilities of their full-time positions within DHS. Officials told us that council meetings and activities sometimes stall because council members must shift attention to their full-time positions. Many commodity councils did not make much progress during the last month of fiscal year 2004, we were told, because council members’ time was diverted to year-end priorities. Our prior work on strategic sourcing shows that leading commercial companies often establish full-time commodity managers to more effectively manage commodities. Commodity managers help commodity councils define requirements with internal clients, negotiate with potential vendors, and resolve performance or other issues arising after a contract is awarded and can help maintain consistency, stability, and a long-term strategic focus. DHS’s small business program has also had initial successes, reporting that 35 percent of fiscal year 2004 obligations were awarded to small business prime contractors, exceeding the department’s goal of 23 percent. Although reporting directly to the Deputy Secretary of DHS, the Director of the Office of Small and Disadvantaged Business Utilization works closely with the Chief Procurement Officer to emphasize throughout the department the important public policy objective of small business inclusion in acquisition activities. The small business office, in conjunction with the procurement staff across the department, has created an outreach program that advises small businesses on ways to market goods and services to DHS. Small business representatives have been designated in each DHS procurement office, and each office is required to submit a forecast of upcoming contract opportunities above $100,000. DHS posts this information on a Web site so that small businesses can identify opportunities to do business with the department. The small business office has conducted extensive outreach to DHS’s business partners through regular seminars and has established a mentor-protégé program that is designed to motivate and encourage large businesses to provide mutually beneficial developmental assistance to small businesses. The Director of the Office of Small and Disadvantaged Business Utilization and his staff have also been directly involved in DHS’s strategic sourcing efforts to help ensure that, even as the department leverages its buying power, small businesses continue to have opportunities to compete for contracts. Several commodity councils have developed strategies to address this issue. The office supplies council has worked out an arrangement for DHS employees to purchase office supplies from the Department of Defense’s (DOD) Web-based Emall, where employees can easily identify and order from small businesses. The head of procurement in the Immigration and Customs Enforcement organization, working closely with the weapons commodity council, awarded a contract for half of the largest pistol procurement in the history of U.S. law enforcement to a small business. According to the chair of the boats council, the council plans to consult with the Coast Guard’s small business specialist to explore future possibilities for providing opportunities to small businesses. DHS’s goal of integrating the acquisition function more broadly across the department has not been accomplished, and the introduction of a new policy has been unsuccessful in breaking down barriers to effective departmentwide management. An integrated acquisition organization is essential to the department’s success in executing policies and processes to effectively obligate and administer billions of dollars in acquiring what DHS needs to accomplish its mission. An October 2004 DHS management directive emphasizes the need for an integrated acquisition organization and reiterates the Chief Procurement Officer’s responsibility to manage, administer, and oversee all acquisition activity across DHS and to establish a qualified acquisition workforce. In practice, these responsibilities are spread throughout the department with unclear accountability. Further hampering efforts to effectively integrate the acquisition function, the directive provides that the Coast Guard and the Secret Service are statutorily exempt from its application. We found no reasonable basis to conclude that the directive could not be made applicable to them. The various organizations within DHS continue to operate in a largely disparate manner, with a lack of centralized oversight of compliance with the department’s acquisition regulation and policies. Staffing disparities across the procurement organizations have only recently begun to be addressed. We found that staffing shortfalls led Procurement Operations to rely extensively on outside agencies for contracting support—often for a fee—and that this office lacked adequate internal controls to properly manage this interagency contracting activity. Because of the risks associated with interagency contracting, we recently designated this approach as a high-risk issue. In October 2004, the Secretary of DHS signed a management directive entitled “Acquisition Line of Business Integration and Management.” This directive, the department’s principal guidance for “leading, governing, integrating, and managing” the acquisition function, states that DHS will standardize acquisition policies and procedures and continue to consolidate and integrate the number of systems supporting the acquisition function. It directs managers from each organization to commit resources to training, development, and certification of acquisition professionals. The directive also highlights the Chief Procurement Officer’s broad authority, including management, administration, and oversight of departmentwide acquisition, financial assistance, strategic sourcing, and competitive sourcing programs; promotion of career development and establishment of qualifications, training, and certification standards for the acquisition and financial assistance workforce; development and publication of departmentwide acquisition and financial assistance regulations, directives, policies, and procedures; designation of all heads of contracting activities; and development and maintenance of contracting officer warrant and financial assistance officer programs, including designation of qualified persons as contracting officers and financial assistance officers. However, the directive may not achieve its goal of creating an integrated acquisition organization, because it creates unclear working relationships between the Chief Procurement Officer and heads of DHS’s principal organizations. For example, the Chief Procurement Officer and the director of Immigration and Customs Enforcement share responsibility for recruiting and selecting key acquisition officials, preparing performance ratings for the top manager of the contracting office, and providing appropriate resources to support the Chief Procurement Officer’s initiatives. The policy leaves unclear how the responsibilities will be implemented or what enforcement authority the Chief Procurement Officer has to ensure that initiatives are carried out. In addition, directors are only required to “consider” the allocation of resources to meet procurement staffing levels in accordance with the Chief Procurement Officer’s analysis. Agreements have not been developed on how the resources to train, develop, and certify acquisition professionals in the principal organizations will be identified or funded. In a relatively new department like DHS, which is still in the process of instituting procedures, developing a strong organizational culture, and establishing clear roles and missions, this concept of dual accountability—absent effective implementing guidance—may not accomplish the intended goals. The October 2004 management directive does not apply to the Coast Guard or the Secret Service, further hampering efforts to integrate the acquisition organization. The Coast Guard is one of the largest organizations within DHS, with obligations accounting for about $2.1 billion in fiscal year 2004, nearly 23 percent of the department’s total. According to the directive, the Coast Guard is exempted by statute. We disagree. We are not aware of any explicit statutory exemption that would prevent the application of this directive. While several provisions in the Homeland Security Act would limit the range of management initiatives concerning the Coast Guard, none of them would appear to be applicable in this case. For example, the Homeland Security Act requires the Coast Guard to be maintained as a distinct entity within the department. Other limitations prevent the transfer of assets, alteration of missions, and changes in reporting relationships. The act also expressly provides that “the authorities, functions, and capabilities of the Coast Guard to perform its missions shall be maintained intact and without significant reduction after the transfer of the Coast Guard to the department.” We find nothing in the directive that contravenes these limitations. Nothing in the document would reasonably appear to threaten the status of the Coast Guard as a distinct entity or otherwise impair its ability to perform statutory missions. We raised the question of statutory exemption with the DHS General Counsel, who shared our assessment concerning the explicit statutory exemptions. He viewed the applicability of the management directive as a policy matter, noting that “the determination of whether the application of all or part of this would impact the [Coast Guard’s] ability to perform its mission is not a legal matter and is more appropriately made by DHS policy officials.” We agree that DHS officials, with sufficient reasons, could make a policy decision that a particular management directive impacts the Coast Guard’s ability to perform its missions. In this instance, however, we found no evidence that such a decision had been made. The directive also provides that the Secret Service is exempted by statute. As with the Coast Guard, we are unaware of any specific statutory exemption that would prevent the application of the directive. The Homeland Security Act requires the Secret Service to be maintained as a distinct entity within the department. The 2005 Homeland Security Appropriations Act reiterates this requirement and imposes additional limitations on altering reporting relationships. Given the nature of the management directive, we also conclude that there is no apparent reason to exempt the Secret Service from its application. DHS’s principal organizations are, to a large extent, still functioning much as they did in premerger days with regard to acquisition-related functions. Embedded within seven of the procurement organizations are, for the most part, the same contracting staffs that joined DHS from their former agencies. The eighth organization, Procurement Operations, created to meet the needs of the many DHS organizations that do not have colocated procurement support, has a direct reporting chain to the Chief Procurement Officer. Until recently, the Chief Procurement Officer, whom DHS’s top leadership delegated with the key responsibility of ensuring compliance with the department’s acquisition regulation and policies, had only two staff members to carry out this duty. Consequently, the department’s acquisition oversight program relies extensively on self-assessments by personnel in each procurement organization. A component of the oversight program is a recent initiative to review DHS acquisition plans, according to dollar thresholds, and to perform on-site evaluations of each procurement organization. The fiscal year 2005 budget provided the Chief Procurement Officer with five additional staff, but it is too soon to tell whether this number will be adequate to effectively implement the oversight program. Further, it remains unclear what the result would be if an organization were found not to be in compliance with DHS’s acquisition regulation and policies. Our prior work shows that in a highly functioning acquisition organization, the chief procurement officer is in a position to oversee compliance with acquisition policies and processes by implementing strong oversight mechanisms. Adequate oversight of acquisition activities across DHS is imperative, in light of the department’s mission and the problems that have been reported by us and inspectors general for some of the large agencies and organizations within the department. These reports have highlighted the lack of important management controls for monitoring contractors and ensuring efficiencies and effectiveness in the acquisition process. For example, the Department of Homeland Security Inspector General reported that during its first year of operation, the Transportation Security Administration relied extensively on contractors to accomplish its mission. It also found that contracting officers wrote contracts without clearly defined deliverables, and on occasion, contractors themselves were permitted to determine requirements and define deliverables. As a result, the cost of those initial contracts ballooned. The Transportation Security Administration is in the process of devising policies and procedures that require adequate procurement planning, contract structure, and contract oversight. We have also reported that the former U.S. Immigration and Naturalization Service did not have the basic infrastructure—including oversight of procurement activities—to ensure that its contracting office was effective. DHS’s Inspector General recently reported that the Federal Emergency Management Agency discovered it has not been reporting or tracking procurements handled by its field offices. In July 2003, we recommended that DHS develop a data-driven assessment of the department’s acquisition personnel, resulting in a workforce plan that would identify the number, location, skills, and competencies of the workforce. DHS concurred with the recommendation and has drafted a plan, based on best practices, that defines the acquisition workforce, focuses on the need for continuous training, and implements a certification program for contracting officials, program managers, and contracting officers’ technical representatives. However, the department faces challenges in implementing the plan. As part of its acquisition workforce planning efforts, the department has not conducted an assessment of whether contracting staff within DHS are appropriately distributed for the varying workloads in each procurement organization. Our analysis shows that some disparities may exist. We divided the obligated fiscal year 2004 dollars for each contracting office by the number of contracting staff. While this approach is limited in that it does not take into account the complexity of the acquisitions being performed, it can provide senior leadership with an indication of whether disparities may exist in the contracting workforce. Figure 3 shows the amount of contracting obligations per contracting staff within DHS contracting activities. As of September 2004, Procurement Operations had only 19 contracting staff to support a number of DHS organizations that, taken together, accounted for about 21 percent, or almost $2 billion, of DHS’s fiscal year 2004 obligations. That year, Procurement Operations contracting staff on the average handled $101 million per employee, whereas the contracting staff for the Federal Law Enforcement Training Center on the average handled close to $2.7 million per employee. Disparities such as this may indicate the need to assess the numbers of contracting staff across the department to determine whether imbalances exist and whether actions are needed to correct the imbalances. Another challenge to effectively implementing the acquisition workforce plan pertains to the lack of enforcement of DHS’s certification program. While the plan calls for program managers responsible for acquisitions to be certified in accordance with DHS’s established training and experience requirements, in practice, the means to enforce compliance is lacking. In January 2005, the Director for the Acquisition Workforce Program, within the Office of the Chief Procurement Officer, determined that only 22 percent of the identified programs in the department had program managers that had documented that they had the training and experience requirements for certification. While the Office of the Chief Procurement Officer has issued a management directive requiring program mangers to meet the department’s certification and training requirements—and the number of certified program managers has been increasing— accountability for complying with the certification program rests with the principal organizations to whom the program managers report. At present, according to DHS officials, no mechanism is in place to ensure that program managers take the required training and obtain certification from the Chief Procurement Officer. Established almost 1 year after DHS was formed and tasked with providing contracting support to the department organizations that did not have their own contracting support, Procurement Operations has struggled to manage its almost $2 billion workload because of staffing shortfalls. Lacking in-house capability, Procurement Operations has turned extensively to interagency contracting, and we found that management controls were not in place to effectively oversee this activity. Interagency contracting occurs when a federal agency obtains supplies or services through another federal agency, either by placing orders on existing contracts that have already been awarded by the other agency, or by asking the other agency to award and administer contracts or issue and administer task orders on its behalf. Use of these contracts demands a high degree of business acumen and flexibility on the part of the federal acquisition workforce. We found that Procurement Operations had transferred almost 90 percent of its obligations to other federal agencies through interagency agreements in fiscal year 2004. For example, DHS transferred $12 million to the Department of the Interior’s National Business Center to obtain contractor operations and maintenance services at the Plum Island Animal Disease Center. Interior charged DHS $62,000 for this assistance. While some of the interagency agreements were for contracting support, others were for program support, such as sending funds to Department of Energy laboratories for providing a threat and capability assessment. DHS has issued a management directive that sets forth a number of requirements meant to ensure that internal controls are in place when using interagency contracting. Based on a random sample of 136 interagency agreements between Procurement Operations and outside agencies, we found that the office had not complied with the requirements in the directive. We can project, for example, that in fiscal year 2004: 94 percent of Procurement Operations’ files did not document that the contracting staff had conducted the required analysis of alternatives to justify the decision to pay an outside agency for contracting support; 47 percent of the files did not identify the contracting officer’s technical representative, although this information is required to be in the files; 35 percent of the files did not contain the required determination and 96 percent of the files lacked an indication that contractor oversight had been performed. Further, we found that Procurement Operations was not tracking how much it is paying in fees to other agencies for contracting support. On the basis of our sample, we found that the office had spent $12.9 million in fees in fiscal year 2004. While the oversight problems we identified are in large part due to the staffing shortages in the office, we also found evidence that contracting staff lacked basic information on how to use interagency contracting. For example, a memo from Procurement Operations to DHS’s Director of Acquisition Policy and Oversight requested clarification on what documentation is required in order to use another agency for contracting support. In September 2004, DHS’s Office of General Counsel reviewed 20 of Procurement Operations’ interagency agreements and found that 16 were not legally sufficient. For example, 13 agreements appeared to require performance by a contractor, but appropriate documentation was not included in the contract files. Three were insufficient because it was unclear whether the servicing agency would perform cost/price analysis and trade-off, or whether Procurement Operations had conducted a technical competition and expected the servicing agency to award without a trade-off. According to a Procurement Operations official, a fiscal year 2005 initiative for the office is to establish a policy for processing interagency agreements that provides clear guidance to staff. Since January 2004, Procurement Operations has increased its staffing level from 7 to 42 employees, and it plans to build to 127 staff in fiscal year 2005. Rather than use direct appropriations to fund the additional positions, the office plans to require the DHS organizations that rely on its contracting services to contribute to a working capital fund, to be replenished on a no-profit basis with payments based on the extent to which the various organizations use the office’s support. Although the DHS budget for fiscal year 2005 includes $8.9 million to add contracting staff through the fund, we found that the mechanics of making the fund viable have not been worked out. Currently, Procurement Operations is negotiating agreements with each organization it supports to determine the terms and conditions of support and the dollar level to be contributed to the fund. According to DHS officials, this negotiation process has been problematic. For example, at the time of our review, the Science and Technology Directorate and Procurement Operations were having difficulty reaching a decision about who would be responsible for hiring the contracting staff that would support the directorate. As of January 2005, no agreements had been reached. Some DHS organizations have large, complex, and high-cost acquisition programs that need to be closely managed. For example, the Bureau of Customs and Border Protection’s Automated Commercial Environment system, which is a new trade processing system intended to improve the movement of goods imported into the United States, is projected to cost $5 billion, and the Coast Guard’s Deepwater Program is expected to cost $17 billion and take 2 to 3 decades to complete. To review major, complex investments such as these (referred to as level 1 investments), DHS’s Office of the Chief Financial Officer has put in place a multitiered process. DHS has taken positive steps in creating a knowledge-based framework, or philosophy, for managing major investments; however, it still lacks key reviews and deliverables—both best practices—within this framework to ensure that cost and schedule estimates for major investments are as accurate as possible. These reviews take place at critical junctures in the process and include demonstrating knowledge about technologies, design, and manufacturing processes. In addition, we found that contractor oversight, an important tool for managing programs, is not receiving high-level attention in the review process. Finally, we identified several areas of confusion surrounding the mechanics of implementing the process from a program manager’s perspective. The management directive on the review process has been under revision for many months, and DHS officials could not tell us when the directive would be finalized. DHS’s investment review process involves several different levels of review, depending on the dollar threshold and risk level of the program. The Investment Review Board makes decisions on level 1 investments with prior review and input from the Joint Requirements Council, which in turn seeks input from other DHS specialists who have expertise in such areas as asset management and information technology. In classifying investments as level 1, DHS considers the following criteria: contract costs; importance to DHS strategic and performance plans; high development, operating, or maintenance costs; high risk; high return; and significance in resource administration. Investments classified as levels 2, 3, or 4 are considered lower-level acquisitions and follow different investment review processes. In addition, many of the major DHS organizations, such as the Transportation Security Administration and the Coast Guard, have their own review processes, which occur prior to higher-level review in the department. Figure 4 illustrates who is involved in the decision-making process and the levels of review. DHS has adopted several best practices from lessons learned from leading commercial companies and successful federal programs that, if applied consistently, could refine its ability to reduce risk to meet cost and delivery targets for major investments. One of the best practices is a knowledge-based approach, or framework, for managers to hold reviews at key decision points in order to reduce risk before investing resources in the next phase of a program’s development. The investment review policy provides guidance to program managers to provide knowledge about important aspects of a product at key points in the acquisition process and encourages them to reduce technology risk through demonstration prior to beginning a project. The policy also encourages program managers to demonstrate a product’s design with critical design reviews and reduce manufacturing risk prior to a production decision. However, we found, based on our extensive body of work on this knowledge-based approach, that additional program reviews and knowledge deliverables could be incorporated into the process as internal controls to better position DHS to make well-informed decisions on its major, complex investments. Figure 5 generally depicts the major phases of the knowledge-based approach and the positioning of three knowledge points, or gates, when key reviews are scheduled. The figure applies the knowledge-based approach to DHS’s investment review framework and displays an exclamation mark where key reviews or information are missing. As shown in figure 5, DHS review points do not fully align with the knowledge-based approach. For example, DHS does not require a review to ensure that an investment’s design performs as expected before investing in a prototype. In addition, DHS’s mandatory review to proceed to production does not occur until after low-rate initial production is well under way. DHS does have a review for low-rate initial production; however, it is at the discretion of the Investment Review Board. Our past work has shown that successful investments reduce risk by ensuring that high levels of knowledge are achieved at these key points of development. We found that investments that were not reviewed at the appropriate points faced problems—such as redesign—that resulted in cost increases and schedule delays. We also found that some critical information is not addressed in DHS’s investment review policy or the guidance provided to program managers. In other cases, it is made optional. For example, before program start (knowledge point 1) is approved, DHS policy requires program managers to identify an acquisition’s key performance requirements and to have technical solutions in place. This information is then used to form cost and schedule estimates for the product’s development to ensure that a match exists between requirements and resources. However, DHS policy does not establish cost and schedule estimates for the acquisition based on knowledge from preliminary designs. At knowledge point 2, while DHS policy requires program managers to identify and resolve critical operational issues before proceeding to production, initial reviews—such as the system and subsystem reviews—are not mandatory. Not all investments require the use of every piece of information included under a knowledge-based approach. Many of DHS’s major investments use commercial, off-the-shelf products that do not require the same level of review as a complex, developmental investment would. However, DHS is investing in a number of major, complex systems, such as the Coast Guard’s Deepwater Program and the U.S. Visitor and Immigrant Status Indicator Technology (US-VISIT), which incorporate new technology and therefore require greater adherence to the knowledge-based approach in order to ensure risk is reduced before committing to the next phase of the investment. In addition, the added reviews and information included in the knowledge-based approach may still be required for programs that use existing technology, such as the Counter-MANPADS program, which involves placing military technology on commercial aircraft. In addition to the knowledge-based approach and its associated controls, DHS’s investment review policy and guidance adopt a number of other important acquisition management practices, such as requiring program managers to submit acquisition plans and project management plans. However, a key practice, contractor tracking and oversight, is not fully incorporated in the policy and guidance. We have cited the need for increased contractor tracking and oversight for several large DHS programs. For example, we previously reported that the Coast Guard’s Deepwater program needed increased management and contractor oversight. One activity of contract tracking and oversight requires that a quantitative set of software and system metrics are used to define and measure product quality and contractor performance. The Coast Guard had not developed measurable performance goals or adhered to effective procedures for holding the contractor accountable for its ongoing performance. In addition, we previously recommended that the US-VISIT program should improve attention to implementing acquisition best practices. While DHS agreed, and the US-VISIT program office has assigned responsibility for implementing the recommended management controls, the department has not yet developed explicit plans or time frames for defining and implementing acquisition best practices. A list of selected acquisition management practices and required activities is in appendix V. The investment review process has been under revision for many months. According to DHS officials, the changes will include shifting responsibilities of some tiers in the review process and increasing the dollar threshold for level 1 investments. To date, the new process has not been finalized, and officials could not provide us with a time frame for completion. In the meantime, we found unclear guidance and confusion about several aspects of the process. In some cases, the confusion has resulted in key stakeholders, such as the Chief Procurement Officer, not receiving materials in time to conduct a thorough review and provide meaningful feedback prior to investment review meetings. The issues we found include the following: Program managers have been provided with only draft guidance regarding the information they are required to submit and the time frames for submissions. This draft guidance is, in some cases, unclear. Some DHS officials noted that their submissions to the review board had been rejected on an inconsistent basis with no explanation. Program managers have not received formal training on the investment review process. Officials told us that some program managers have been unaware of when to submit information about their programs for review. In practice, major investments in services are exempt from the review process and are only reviewed when done as part of a capital investment. Officials from the Office of the Chief Financial Officer who are in charge of the process told us that services investments are reviewed only when they are part of a capital investment because these acquisitions are not complex and therefore do not need the same level of scrutiny reserved for the acquisition of goods. Currently, program managers receive assistance in developing their review board submissions from a small number of staff in the Chief Financial Officer’s Office of Program Analysis and Evaluation at the beginning of a program and at DHS’s key decision points. However, because of limited resources, the office has only been able to provide limited support to programs to assist them in completing their submissions. In the 2 years since its merger, DHS has taken strides toward putting in place an acquisition organization that contains many promising elements, but the steps taken so far are not enough to ensure that the department is effectively managing the acquisition of the multitude of goods and services it needs to meet its mission. More needs to be done to fully integrate the department’s acquisition function, to pave the way for the Chief Procurement Officer to fully carry out his responsibilities in a modern-day acquisition organization, and to put in place the strong internal controls needed to effectively manage interagency contracting activity and large, complex investments. Unless DHS’s top leaders address these challenges, the department is at risk of continuing to exist with a fragmented acquisition organization that provides stopgap, ad hoc solutions. DHS has an opportunity, while it is still involved in transformational efforts, to avoid the complications that plague acquisition efforts in other long- established federal departments. To help ensure that DHS receives the goods and services it needs at the best value to the government, we recommend that the Secretary of Homeland Security take the following six actions: establish a structure to ensure continued support for commodity councils, such as appointing full-time dedicated commodity managers, to ensure that the commodity councils develop long-term strategies, maintain momentum, and continue to realize savings; provide the Office of the Chief Procurement Officer with sufficient resources and enforcement authority to enable effective, departmentwide oversight of acquisition policies and procedures; conduct a departmentwide assessment of the number of contracting staff and, if a workload imbalance is found, take steps to correct it by re-aligning resources; direct higher-level management attention to the implementation of the working capital fund (which is to be used to fund contracting staff for the Office of Procurement Operations) by, for example, determining the level of contracting support needed by the organizations relying on this office, ensuring that appropriate funds are committed to hire needed contracting staff, and ensuring that funds are available on an ongoing basis for continuity; revise the October 2004 management directive “Acquisition Line of Business Integration and Management” to eliminate reference to the Coast Guard and Secret Service being statutorily exempt from complying; and ensure that DHS’s management directive on interagency agreements is followed and that fees paid to other agencies are tracked. To help ensure that DHS leadership is aware of risks as they arise during the acquisition of major, complex systems, we recommend that the Secretary of Homeland Security take the following seven actions: in making revisions to the investment review policy: require for all complex, developmental investments a formal design review between the integration and demonstration of a program to ensure that the design is stable and has been demonstrated through prototype testing; require for all complex, developmental investments a review before initial production; require that program managers supply additional information—such as cost and schedule estimates based on results of a preliminary design review and critical design review—when their major, complex programs are reviewed; and require program managers to specifically address contractor oversight in their submissions to investment review boards. ensure that stakeholders, including acquisition officials in the Office of the Chief Procurement Officer, have adequate time to review investment submissions and provide formal input to decision-making review boards; implement training for program managers on the investment review process that emphasizes the importance of a knowledge-based approach; and require that major acquisitions of services be subject to oversight by the investment review board. We provided a draft of this report to DHS for review and comment. In written comments, DHS generally agreed with our facts and conclusions and concurred with all of our recommendations. Regarding three of our recommendations on the investment review process, DHS stated that the actions exist in current directives and are already being done. We disagree. Our work demonstrated that DHS’s review points do not fully align with the knowledge-based approach. For example, DHS’s mandatory review to proceed into production does not occur until after low-rate initial production is well under way, and the review for starting low-rate initial production only occurs at the discretion of the Investment Review Board. Also, DHS's framework lacks the knowledge deliverables necessary at each key review to ensure that cost and schedule estimates for major investments are as predictable as possible. Our past work has shown that investments that were not reviewed at the appropriate points faced problems that resulted in cost increases and schedule delays. The department’s comments are reprinted in appendix II. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. We are sending copies of this report to other interested congressional committees, the Secretary of the Department of Homeland Security, and the Director of the Office of Management and Budget. In addition, the report will be available on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (937) 258-7915. Staff making major contributions to this report are listed in appendix VI. To identify the areas where the Department of Homeland Security (DHS) has been successful in promoting collaboration among its various organizations, we interviewed senior acquisition officials at DHS headquarters and analyzed pertinent documents. We obtained information from the Office of Strategic Sourcing and Acquisition Systems to analyze how DHS has used strategic sourcing to leverage the department’s buying power. We interviewed senior strategic sourcing officials at DHS headquarters to obtain information on how they identified the commodities with potential for savings. We reviewed studies, policies, guidance, and other documents related to ongoing or proposed strategic sourcing initiatives that leveraged buying power, cut costs, or achieved other performance benefits. Our review found that the department’s strategic sourcing cost savings methodologies appear reasonable; however, we did not verify the accuracy of any strategic procurement costs savings reported to us. We asked senior strategic sourcing and commodity council participants about potential barriers to employing strategic sourcing at DHS. We interviewed the Director, Office of Small and Disadvantaged Business Utilization, and procurement officials within the department. We obtained policies, memorandums, and other documents from the small business office, procurement organizations, and the U.S. Small Business Administration. To determine areas where DHS faces challenges in integrating the acquisition function, we reviewed DHS organizational charts to gain insight into where the procurement offices fall in the hierarchy and to determine the lines of responsibility and authority between the various stakeholders in the acquisition process. We reviewed DHS policies, guidance, and procedures governing acquisition and analyzed internal audit reports, when available, to determine if those policies and procedures were being followed. We obtained statistics from DHS’s Office of the Chief Procurement Officer on the department’s procurements and the acquisition workforce. We interviewed procurement policy officials at headquarters and conducted interviews with personnel in each of the procurement organizations. To assess DHS’s effectiveness in managing its acquisition workforce, we interviewed contracting and human resource officials at DHS headquarters. We analyzed DHS’s processes and procedures for certifying program managers, warranting contracting officers, and tracking the acquisition workforce training. Lastly, we reviewed previous GAO work regarding best acquisition practices for organizational alignment and oversight. Because the Office of Procurement Operations has, by far, the highest level of interagency contracting activity in the department, we examined the office’s database of contracts to gain an understanding of the general scope of activity involving interagency agreements. We randomly selected and then reviewed 136 interagency agreement contract files. We interviewed officials responsible for the data to ensure that the system they use to track procurement activity was adequate for identifying the sample population. We reviewed the interagency agreement contract files to assess key aspects of the acquisition process—such as a signed determination and findings in accordance with the Federal Acquisition Regulation, acquisition planning, and interagency agreement contract administration, including contractor oversight. We held follow-on discussions with the Office of Procurement Operations to discuss discrepancies noted in the files. Further information on our methodology and sampling error rates is as follows: In fiscal year 2004, the Office of Procurement Operations predominately obtained contracting services for its customers through the issuance of interagency agreements with other government agencies. We drew our sample from an original population of 984 agreements. Of the 150 items we initially sampled, the department deleted 14 of these agreements and withdrew them from the data. As a result, we adjusted the population of agreements to which we are making estimates to 892 agreements. All estimates are to these 892 agreements based upon a sample size of 136 agreements. In addition, 4 files were missing and were not able to be reviewed, and one agreement was a duplicate. This resulted in only 131 files being reviewed. As we conducted our reviews, the agency became better at recording the agreements that should be included in its database. Currently, Procurement Operations reports that 1,104 agreements are contained in its records and total $1.8 billion. We reviewed the files and documents for these 131 agreements, using as our criteria the department’s directive on interagency agreements. The following projections are made from our sample of 136 agreements. The estimates from a statistical sample are always subject to some uncertainty because the entire collection is not reviewed. This uncertainty is called sampling error. Tables 2 and 3 show the sampling errors for certain factors relating to the issuance of interagency agreements. To assess the department’s progress in implementing a review process for major, complex systems, we compared DHS’s acquisition policies for major acquisitions to our knowledge-based approach. We used information from several of our prior reports that examine how commercial best practices can improve outcomes for acquisition programs. Specifically, we compared and contrasted DHS’s investment review process with the best practices for commercial acquisitions identified in our past reports. Our analysis focused on whether DHS’s policies contained the measurable criteria and management controls necessary for minimizing cost, schedule, and performance risks. To clarify the content of the investment review process, we met with various DHS officials from the Office of the Chief Procurement Officer and the Office of Program Evaluation and Analysis within the Office of the Chief Financial Officer. We also discussed the review process with officials from DHS procurement organizations and collected reports and analyzed available program data on the current status of major acquisitions being carried out by DHS. We conducted our review from March 2004 through February 2005 in accordance with generally accepted government auditing standards. Leverages DHS’s purchasing power and reduces amount spent on office supplies: For its main strategic sourcing initiative, this council partnered with the Department of Defense’s Electronic Mall (DOD Emall). DOD Emall is an Internet-based catalog ordering system that provides 24- hour-a-day, 7-day-a-week access to over 200 small and large office supply vendors. Because many military services also purchase office supplies through DOD Emall, DHS can take advantage of large volume discounts to increase its buying power. As of June 1, 2004, DHS mandated all of its purchase cardholders to exclusively use DOD Emall to buy office supplies. As a result, DHS has already become the third-largest federal government user of DOD Emall. For the 4-month period starting June 1, 2004, DHS spent over $14.5 million on DOD Emall, representing 16.7 percent of the total dollars spent on Emall. Before the full implementation of DOD Emall, the council also generated savings by using an office supplies blanket purchase agreement that the Transportation Security Administration had in place to provide office supplies to other DHS principal organizations. Through September 30, 2004, the council estimated cost savings of $8 million. Establishes standard boat procurements to decrease life cycle costs, facilitate interoperability, reduce training burden, and provide immediate cost savings: For example, Customs and Border Patrol needed six boats in fiscal year 2004. Instead of creating a new contract, the council explored whether there were any existing contract vehicles within DHS that could satisfy the need. The council purchased the six boats through an existing Coast Guard contract and took advantage of large volume discounts. As a result of these strategic sourcing efforts, the council was able to acquire each boat for $50,000 less than anticipated, resulting in a total of $300,000 in cost savings. Identifies and consolidates emerging firearms and ammunition requirements for DHS: In fiscal year 2004, the council planned to acquire pistols for DHS organizations to meet critical, mission-driven requirements. The council surveyed all DHS organizations interested in weapons, factored in the end users’ requirements, and established a list of potential vendors that could provide best value for pistols and satisfy requirements. As a result, DHS awarded contracts to two vendors for 65,000 pistols each over 5 years—the largest pistol acquisition in the history of U.S. law enforcement. As of September 20, 2004, the council has reported cost savings of over $4.1 million and $915,000 in cost avoidance. Identifies strategies for aggregating and centralizing DHS’s energy procurements to take advantage of economies of scale and negotiate more competitive prices with suppliers: Although DHS spent approximately $58 million for electricity in fiscal year 2003, only $9 million of the spending was for negotiable energy services in states with deregulated electricity industries. Nevertheless, the council estimates more than $705,000 in cost savings through September 30, 2004. Plans are prepared during acquisition planning and maintained throughout the acquisition. Planning addresses the entire acquisition process, as well as life cycle support of the products being acquired. The acquisition organization has a written policy for planning the acquisition. Responsibility for acquisition planning activities is designated. The acquiring organization has sufficient insight into the contractor’s activities to manage and control the contractor and ensure that contract requirements are met. The acquiring organization and contractor maintain ongoing communication; commitments are agreed to and implemented by both parties. All contract changes are managed throughout the life of the contract. The acquisition organization has a written policy for contract tracking and oversight. Responsibility for contract tracking and oversight activities is designated. The acquiring organization involves contracting specialists in the execution of the contract. A quantitative set of software and system metrics is used to define and measure product quality and contractor performance. In addition to incentives for meeting cost and schedule estimates, measurable, metrics-based product quality incentives are explicitly stated in the contract. Projectwide participation in the identification and mitigation of risks is encouraged. The defined acquisition process provides for the identification, analysis, and mitigation of risks. Milestone reviews include the status of identified risks. The acquisition organization has a written policy for managing acquisition risk. Responsibility for acquisition risk management activities is designated. In addition to those named above, Daniel Chen, Lily Chin, Benjamin Federlein, Arthur James Jr., John Krump, Jose Ramos, and Russell Reiter made key contributions to this report. | Department of Homeland Security (DHS) organizations are expected to work together to protect the United States from terrorism. To support this primary mission, DHS has been acquiring billions of dollars worth of goods and services. DHS also has been working to integrate the disparate acquisition processes and systems that organizations brought with them when DHS was created 2 years ago. GAO was asked to identify (1) areas where DHS has been successful in promoting collaboration among its various organizations and (2) areas where DHS still faces challenges in integrating the acquisition function across the department. GAO was also asked to assess DHS's progress in implementing an effective review process for major, complex investments. DHS's disparate organizations have quickly established collaborative relationships to leverage spending for various goods and services without losing focus on small businesses. DHS is using strategic sourcing, that is, formulating purchasing strategies to meet departmentwide requirements for specific commodities, such as office supplies, boats, energy, and weapons. By fostering collaboration, DHS has leveraged its buying power and savings are expected to grow. Also off to a good start is the small business program, whose reach is felt across DHS. Representatives have been designated in each DHS procurement office to help ensure that small businesses have opportunities to compete for DHS's contract dollars. In contrast, lack of clear accountability is hampering DHS's efforts to integrate the acquisition functions of its numerous organizations into an effective whole. DHS remains a collection of disparate organizations, many of which are performing functions with insufficient oversight, giving rise to an environment rife with challenges. Some of DHS's organizations have major, complex acquisition programs that are subject to a multitiered investment review process to help reduce risk and increase chances for successful outcomes in terms of cost, schedule, and performance. Part of the review process features a knowledge-based acquisition approach pioneered by successful commercial firms. DHS's adaptation of this best practices approach, however, does not require two critical management reviews and is missing some key information before decisions are made to invest additional resources. In addition, contractor tracking and oversight is not fully incorporated into DHS policy and guidance. Finally, some aspects of the review process--which has been under revision for many months--need clarification. |
The Glen Canyon Dam was completed by the Bureau of Reclamation in 1963 as a multipurpose facility. It is the key feature and major storage unit of the Colorado River Storage Project. The Colorado River Storage Project was authorized in 1956 to develop and use the water resources in the Upper Colorado River Basin. The operations of the Glen Canyon Dam and its reservoir, Lake Powell, enable the Colorado River Storage Project to fulfill the downstream water release requirements while the runoff from the Upper Basin is stored and used for irrigation, recreation, and municipal and industrial purposes. The powerplant at the Glen Canyon Dam has been used primarily for generating power during high-demand periods (peaking power). The fluctuating releases of water associated with peaking power operations have caused concern among federal, state, and tribal resource management agencies; river users who fish in Glen Canyon or take white-water raft trips in the Grand Canyon; and Native American and environmental groups, in connection with the detrimental effects that such water releases have on the cultural resources and the downstream plants, animals, and their habitats. The Glen Canyon Dam powerplant has eight generators with a maximum combined capacity of 1,288,000 kilowatts at a 95-percent power factor. The maximum combined discharge capacity of the eight turbines is approximately 33,200 cubic feet per second (cfs) when Lake Powell is full; however, Reclamation has limited such releases to 31,500 cfs. Fluctuations within a day have typically ranged from 12,000 cfs in October to about 16,000 cfs in January and August. Although water can be released from the dam through the powerplant, the outlet works, or the spillways, discharging water through the powerplant’s turbines is the preferred method because electricity and its associated revenue can be produced. The power generated by the Glen Canyon Dam is marketed principally in a six-state area—Arizona, Colorado, Nevada, New Mexico, Utah, and Wyoming. Figure 1.1 shows the various release capacities for the Glen Canyon Dam. Historically, the Glen Canyon Dam, as part of the Colorado River Storage Project, was operated to produce the greatest amount of firm capacity and energy practicable while adhering to the releases required under the “Law of the River.” The Law of the River—a collection of federal and state statutes, compacts, court decisions and decrees, federal contracts, a treaty with Mexico, and formally determined long-range operating criteria—defines the operation and management of the Colorado River. The operating criteria for the dam were established under the “Criteria for Coordinated Long-Range Operation of Colorado River Reservoirs” (Long-Range Operating Criteria), which include the criteria for annual operations. The Annual Operating Plan, which is prepared under the Long-Range Operating Criteria, addresses monthly operations while interagency agreements control the dam’s hourly operations. The annual volume of releases from the dam is based on the water inflow to Lake Powell and the remaining space in Lake Powell and Lake Mead. The annual release volumes vary greatly, but all adhere to the Long-Range Operating Criteria’s objectives of an 8.23-million-acre-feet minimum annual release and equalized storage between the two reservoirs. From 1968 to 1989, the annual releases ranged from 8.23 million acre-feet to 20.4 million acre-feet. Annual releases greater than the minimum were permitted to avoid anticipated spills (excess annual releases that cannot be used for project purposes) and to equalize storage. The minimum release occurred in about half the years. The volume of water released from Lake Powell each month depends on the forecasted inflow, existing storage level, monthly storage targets, and annual release requirements. Demands for electrical energy, fish and wildlife needs, and recreation needs are also considered and accommodated as long as the risk of spilling and storage equalization between Lakes Powell and Mead are not affected. Power demand is highest during the winter and summer months, and recreation needs are highest during the summer. Therefore, higher-volume releases are scheduled during these months whenever possible. Each month during the inflow forecast season (January to July), the volume of water to be released for the rest of the year is recomputed on the basis of updated streamflow forecast information. The Scheduled releases for the remaining months are adjusted to avoid anticipated spills and maintain conservation storage in accordance with the Long-Range Operating Criteria. Hourly releases from the dam are set to reach monthly release volumes, to maintain established minimum flow rates, and to follow energy demand. Hourly power operations are most flexible during those months with moderate release volumes. The need to maintain minimum flows in the months with low release volumes limits the flexibility to accommodate changing hourly power demands. If the reservoir is nearly full and the inflow is extremely high, the monthly releases are scheduled at or near the maximum capacity most of the time, again leaving little flexibility for the hourly releases to change in response to power demand. To the extent possible, the Glen Canyon Dam follows these guidelines in producing hydropower: • Maximize water releases during the peak energy demand periods, generally Monday through Saturday between 7 a.m. and 11 p.m., • Maximize water releases during peak energy demand months and minimize during low demand months, • Minimize and, to the extent possible, eliminate powerplant bypasses. Before the construction of the Glen Canyon Dam, the Colorado River’s sediment-laden flows fluctuated dramatically during different seasons of the year. Flows of greater than 80,000 cfs were common during the spring runoff. In contrast, flows of less than 3,000 cfs were typical throughout the late summer, fall, and winter. Water temperatures ranged from near freezing in the winter to more than 80 degrees Fahrenheit in the summer. The construction of the Glen Canyon Dam altered the natural dynamics of the Colorado River. The dam replaced seasonal flow variations with daily fluctuations, greatly reduced the amount of sediment in the river, and resulted in nearly constant water release temperatures of about 46 degrees Fahrenheit. In response to the concerns of federal, state, and tribal agencies and the public about the negative effects of the dam’s operations, in December 1982 the Secretary of the Interior directed Reclamation to initiate a series of interagency scientific studies. These studies were to examine the short- and long-term effects of the dam’s historic, current, and alternative operations on the environmental and recreational resources of the Glen and Grand canyons. The studies became known as phase I of the Glen Canyon Environmental Studies. From 1982 through 1987, 39 technical reports were prepared evaluating terrestrial biology, aquatic biology, sediment and hydrology, recreation, and the dam’s operations. However, no studies were conducted on the economic impact to hydropower from changes in the dam’s operations. According to Reclamation, of primary importance in the Glen Canyon Environmental Studies was the research connected with endangered fish. The existence and operations of the dam were believed to be important factors involved in the extinction of two fish species (the Colorado squawfish and bonytails) from the river corridor. The dam and its operations were also considered to present survival problems for the existing populations of the humpback chub and razorback sucker as well as other native fish species. Therefore, according to Reclamation, the biological opinion issued by the U.S. Fish and Wildlife Service in 1994 was an important factor in the ultimate formulation of the preferred alternative in the environmental impact statement (EIS). The Glen Canyon Environmental Studies technical reports were concurrently reviewed by the National Research Council and the Executive Review Committee. The Executive Review Committee was made up of policy-level representatives from Reclamation, the National Park Service, the U.S. Fish and Wildlife Service, the Department of the Interior’s Office of Environmental Policy and Compliance, and the Western Area Power Administration. This Committee then prepared a report in January 1988 on the findings and conclusions of phase I of the Glen Canyon Environmental Studies and made recommendations and suggested options for revising the dam’s operations. In June 1988, phase II of the Glen Canyon Environmental Studies was initiated to gather additional data over a 4- to 5-year period on the dam’s specific operational elements. Phase II was to further define the impacts on the natural environment, public uses associated with recreation, cultural resources, and power-generation economics. At the urging of the National Research Council, an entity of the National Academy of Sciences, non-use values were incorporated into the studies. “Non-use value” is the term used to describe the monetary value that non-users place on the status of the environment. For example, the values that people may receive from the knowledge that such things as rare plants, animals, and unspoiled natural environments exist are defined as non-use values. A number of federal and state resource agencies, Indian tribes, private consultants, universities, and river guides participated in phase II of the Glen Canyon Environmental Studies. Funding for these studies was provided mainly from the revenue derived from the sale of electricity generated by the Glen Canyon Dam. In July 1989, the Secretary of the Interior decided that Reclamation should prepare an environmental impact statement to reevaluate the operations of the Glen Canyon Dam. The purpose of the EIS was to determine specific options for operating the dam that could minimize the adverse impacts on the downstream environmental and cultural resources, as well as on the Native American interests in the Glen and Grand canyons, while still producing hydropower. Reclamation was designated by the Secretary to be the lead agency responsible for preparing the EIS; other participants were the following cooperating agencies: the Bureau of Indian Affairs, the National Park Service, the U.S. Fish and Wildlife Service, the Western Area Power Administration, and the Arizona Game and Fish Department. In 1989, after the EIS process started, Reclamation also made the following Native American tribes cooperating agencies: the Hopi Tribe, the Hualapai Tribe, the Navajo Nation, the Pueblo of Zuni, the San Juan Southern Paiute Tribe, and the Southern Paiute Consortium. Officials from many of these same agencies and tribes participated in the Glen Canyon Environmental Studies, which formed the basis for the analyses of alternatives for the EIS. Calif. The requirement to prepare an EIS accelerated the scheduled completion of the research studies in phase II of the Glen Canyon Environmental Studies to provide more timely data for the EIS. This acceleration was accomplished by designing special “research flows,” a series of carefully designed discharges of water and data collection programs conducted in June 1990 through July 1991. Each research flow lasted 14 days and included 3 days of steady 5,000 cfs flows and 11 days of either steady or fluctuating flows. The research flows provided a means to evaluate the short-term responses of certain resources to a variety of discharge parameters, including minimum and maximum flows, the rate of change in flow, and the range of daily fluctuations. To protect downstream resources until the completion of the EIS and the formal adoption of new operating criteria for the Glen Canyon Dam, Reclamation implemented the interim dam operations on November 1, 1991. The interim operating criteria were purposely designed to be conservative for the protection of natural and cultural resources. Specifically, the interim criteria reduced peak water releases from the approved maximum of 31,500 cfs to 20,000 cfs; restricted daily fluctuations in releases to between 5,000 cfs and 8,000 cfs; and restricted the rate of change in releases (ramp rates) to 2,500 cfs per hour when increasing and to 1,500 cfs per hour when decreasing. While these limitations were imposed, the interim criteria met the minimum annual release of 8.23 million acre-feet in accordance with the 1970 Long-Range Operating Criteria. Although the interim operating criteria could be modified on the basis of new information, they were to remain in effect until the EIS and the Secretary’s Record of Decision for new operating criteria for the dam were completed. Subsequent to Reclamation’s initiation of the EIS process, on October 30, 1992, the Congress enacted the Grand Canyon Protection Act of 1992 (title XVIII of P.L. 102-575). The act addresses the protection of the Grand Canyon National Park, the Glen Canyon National Recreational Area, the interim operating criteria for the dam until the EIS is completed, long-term monitoring and research, and the replacement of lost power from any changes to the dam’s operation. The act requires that the Glen Canyon Dam be operated to protect, mitigate adverse impacts to, and improve the downstream resources of the Grand Canyon National Park and the Glen Canyon National Recreational Area. The act also required the Secretary of the Interior to complete a final environmental impact statement for the Glen Canyon Dam’s operations by October 30, 1994. Furthermore, the act required GAO to audit the costs and benefits of the various operating alternatives identified in the final environmental impact statement. On the basis of the findings, conclusions, and recommendations made in the EIS, other relevant information, and our audit report, the Secretary is to issue a Record of Decision adopting future operating criteria and operating plans for the Glen Canyon Dam. The National Environmental Policy Act of 1969 (NEPA) (42 U.S.C. 4321 et seq.) establishes the national environmental policy and goals for protecting, maintaining, and enhancing the environment, and it provides a process for implementing these goals within federal agencies. The act requires, among other things, that the applicable federal agency prepare a detailed EIS for every major federal action that may significantly affect the quality of the human environment. The EIS is designed to ensure that important environmental impacts will not be overlooked or underestimated before the government commits to a proposed action. The act also established the Council on Environmental Quality, which oversees the NEPA process. The Council on Environmental Quality’s Regulations for Implementing the Procedural Provisions of the National Environmental Policy Act (40 C.F.R. 1502.4) provide federal agencies with a process for determining whether or not to prepare an EIS. If it is determined that an EIS is necessary, regulations require, among other things, that the EIS must (1) address the purpose of and need for the action, (2) describe the environment that will be affected, (3) identify alternatives to the proposed action, (4) present the environmental impacts of the proposed action (including the direct, indirect, and cumulative impacts), (5) identify any adverse environmental impacts that cannot be avoided should the proposed action be implemented, and (6) identify any irreversible and irretrievable commitment of resources that would occur should the proposed action be implemented. The regulations also require each federal agency to identify the agency’s preferred alternative or alternatives, if one or more exists, in the draft and the final EIS. In addition, before making a decision, the responsible agency must solicit comments from the public and from other government agencies that may have jurisdiction by law or expertise with respect to any environmental impacts. Under section 309 of the Clean Air Act, the Environmental Protection Agency (EPA) is required to review and publicly comment on the environmental impacts of major federal actions, including actions that are the subject of a draft or final EIS. EPA reviews and comments on both the adequacy of the analyses and the environmental impacts of the proposed action. If the Administrator, EPA, determines that the action is environmentally unsatisfactory from the standpoint of the public’s health or welfare or environmental quality, this determination shall be published and the matter will be referred to the Council on Environmental Quality. If the action involves a federal project located at a specific site, the appropriate EPA regional office has the jurisdiction and delegated responsibility for carrying out the section 309 review and working with the proposing federal agency to resolve any problems. EPA’s Region IX in San Francisco, California, was the region responsible for reviewing the draft and final EIS for the operation of the Glen Canyon Dam. The preparation of the Operation of Glen Canyon Dam Final Environmental Impact Statement was a cooperative effort involving Reclamation, the cooperating agencies, the participants in the Glen Canyon Environmental Studies program, and the representatives of an interagency EIS team. Although Reclamation was designated to be the lead agency responsible for preparing the EIS, its objective was to obtain substantial input from these organizations during the decision-making process, and its goal was to build a consensus for the ultimate decision of recommending a preferred alternative in the EIS. The group of cooperating agencies, which prior to the development of the formal EIS included only federal agencies, was established in July 1989. This group ultimately included representatives from Reclamation, the Bureau of Indian Affairs, the Environmental Protection Agency, the National Park Service, the U.S. Fish and Wildlife Service, the Western Area Power Administration, the Arizona Game and Fish Department, the Hopi Tribe, the Hualapai Tribe, the Navajo Nation, the San Juan Southern Paiute Tribe, the Southern Paiute Consortium, and the Pueblo of Zuni. The EIS team was established in mid-1990 and included representatives from Reclamation, the National Park Service, the U.S. Fish and Wildlife Service, the Western Area Power Administration, the U.S. Geological Survey, the Arizona Game and Fish Department, the Hopi and Hualapai Tribes, the Navajo Nation, and a private consulting firm. Reclamation charged the EIS team with formulating alternatives for operating the dam and assessing their impacts on the environment. For resources that were to be studied in detail, subteams were formed to make the impact determinations, document their findings, and draft that particular section of the EIS. For the other resources, individuals with expertise in a particular field were assigned the responsibility for determining the impacts and preparing the documentation. Figure 1.3 shows some of the key dates in the preparation of the Glen Canyon Environmental Studies and the EIS. The initial step in preparing an EIS involves a scoping phase that provides for the early identification and consideration of environmental issues and alternatives. In February 1990, Reclamation published a notice in the Federal Register announcing the opening of the scoping phase of the Glen Canyon Dam’s EIS. This phase included environmental scoping meetings to obtain public comments and determine the appropriate scope of the EIS. The comment period, initially established for March 12 through April 16, 1990, was extended to May 4, 1990, in response to comments by the public. Reclamation provided opportunities for public participation in the scoping phase through news releases, mailings, legal notices, and contacts with media, organizations, and individuals. Throughout the process, the EIS team periodically reported the results of its analyses to the cooperating agencies and the public. The cooperating agencies acted as a steering committee and provided input to Reclamation on both the EIS process and the EIS document after a period of review and discussion. More than 17,000 comments were received during the scoping period. Numerous comments were received about suggested alternatives and factors to be considered in the development of alternatives. These comments ranged from general suggestions about the management of the dam to specific flow release recommendations. As a result of the analyses and the categorization of the oral and written scoping comments by a Reclamation contractor, the EIS team consolidated and refined the public’s issues of concern. The following resources were identified to be analyzed in detail in the EIS: water, sediment, fish, vegetation, wildlife and their habitat, endangered and other special-status species, cultural resources, air quality, recreation, hydropower, and non-use value. In July 1990, representatives from the cooperating agencies and various interest groups participated in a “brainstorming” workshop to fully consider all concepts and suggestions in formulating alternatives for the dam’s operations. On the basis of the results of the workshop, scoping comments, and the Glen Canyon Environmental Studies phase I report, the interdisciplinary EIS team formulated 10 preliminary alternative flow scenarios. Some of these alternatives would provide for warmer water release temperatures in the summer, add sediment to the river below the dam, or reregulate releases to provide steady flows downstream. The EIS team presented these alternatives to the cooperating agencies and, following their approval, presented them to the public in March 1991. The public was asked to comment on the range of preliminary alternatives as part of the EIS scoping process. The predominant public comment was the need to separately consider alternatives that deal with the operations of the dam from those considering changes to the structure of the dam. Using the additional input received from the public, professional judgment, and analysis of interim flows, the EIS team reviewed and revised the preliminary alternatives. Seven alternatives were then identified for detailed analysis. Later, to present a full range of reasonable operations for study in the EIS, two more alternatives were formulated. These included the Maximum Powerplant Capacity alternative, which was developed to allow use of the powerplant’s maximum discharge capacity of 33,200 cfs, and the eventual preferred alternative—the Modified Low Fluctuating Flow alternative. The Modified Low Fluctuating Flow alternative was similar to the Interim Flow but included a habitat maintenance flow. Habitat maintenance flows are high, steady releases of water within the powerplant’s capacity for 1 or 2 weeks in the spring. The purpose of these flows is to reform and rejuvenate backwaters and maintain sandbars, which are important for native fish habitat. Table 1.1 presents the nine alternative flows studied in detail in the Glen Canyon Dam’s environmental impact statement. These alternatives can be categorized as follows: unrestricted fluctuating flows, restricted fluctuating flows, and steady flows. All of the restricted fluctuating flow and steady flow alternatives include elements designed to provide additional resource protection or enhancement. Since these elements were common to all such alternatives, they became known as the “common elements.” Each impact analysis includes these common elements. The common elements include adaptive management, monitoring and protecting cultural resources, flood frequency reduction measures, beach/habitat-building flows, further study of selective withdrawal structures, measures to increase populations of an endangered fish—the humpback chub, and emergency operating exception criteria. The concept of adaptive management is based on the recognized need for operational flexibility to respond to future monitoring and research findings and varying resource conditions. The purpose of the Adaptive Management Program would be to develop future modifications to the dam’s operating criteria if monitoring and/or research results indicate a need for change. Long-term monitoring and research would measure how well the selected alternative meets the resource management objectives. The basis for any decision would be linked to the response of the resources to the operations of the dam. (Further details on the Adaptive Management Program are provided in ch. 2.) The existence and operation of Glen Canyon Dam has had an effect on the historic properties within the Colorado River corridor of the Glen and Grand canyons. These properties include prehistoric and historic archeological sites and Native American traditional cultural properties and resources. Impacts are likely to occur to some of these historic properties regardless of the EIS alternative chosen for implementation. The National Historic Preservation Act, as amended in 1992, instructs federal agencies to develop measures to avoid or minimize the loss of historic properties resulting from their actions. Under this common element, the frequency of unscheduled flood flows greater than 45,000 cfs would be reduced to no more than once in 100 years as a long-term average. This would allow management of certain other common elements—habitat maintenance flows and beach/habitat-building flows. The two separate methods of reducing flood frequency that were identified include (1) increasing the capacity of Lake Powell by raising the height of the spillway gates by 4.5 feet and (2) reducing the volume of the lake by 1 million acre-feet from its current capacity in the spring until the runoff peak has clearly passed. Sandbars above the river’s normal peak stage will continue to erode, and backwater habitat within the river’s flow will tend to fill with sediment under any EIS alternative. Beach/habitat-building flows involve controlled high releases of water greater than the powerplant’s capacity for a short duration; they are designed to rebuild high-elevation sandbars, recycle nutrients, restore backwater channels, and provide some of the dynamics of a natural system. Reclamation would perform a study to determine if structures that would allow the withdrawal of water from various depths of the reservoir should be installed at the Glen Canyon Dam. Currently, water released from the dam to produce hydropower is withdrawn from the cold depths of Lake Powell, averaging 230 feet below the water’s surface when the reservoir is full. This withdrawal process is accomplished by a series of eight 15-foot-diameter intake pipes that provide the water directly to the dam’s eight turbines. This water withdrawal process results in the river water temperature downstream of the dam being a nearly constant year-round average of about 46 degrees Fahrenheit. Many native fish species cannot reproduce and survive in these constant cold temperature conditions. Increasing mainstream water temperatures by means of selective withdrawal structures offers the greatest potential for creating new spawning populations of humpback chub and other native fish in the Grand Canyon. Multilevel intake structures (a means of selective withdrawal) could be built at Glen Canyon Dam to provide seasonal variation in the water temperature. A structure would be attached to each of the eight existing intake pipes to withdraw warmer water from the upper levels of the reservoir. However, the cost of installing multilevel intake structures at the Glen Canyon Dam has been estimated at $60 million. With the assistance of the U.S. Fish and Wildlife Service, the National Park Service, the Arizona Game and Fish Department, and other land management entities, such as the Havasupai Tribe, Reclamation would make every effort—through funding, facilitating, and technical support—to establish a new population of humpback chub within the Grand Canyon. The humpback chub is currently a listed species under the federal Endangered Species Act of 1973 (16 U.S.C. 1532 et seq.) and is one of the native fish species that faces continued ecological health problems due to the cold water temperatures of the Colorado River. Such cold temperatures are not conducive to the humpback chubs’ spawning or the survival of eggs and young. Normal operations described under any alternative could be altered temporarily to respond to power and water emergencies, such as insufficient generating capacity, the restoration of the electrical system, or search and rescue operations. These changes in operations would be of short duration (usually less than 4 hours) and would be the result of emergencies at the dam, downstream, or within the interconnected electrical system. On January 4, 1994, Reclamation filed a draft EIS with EPA. The Draft EIS presented the impacts of the nine flow alternatives, including the No-Action alternative (historic operations) that provided a baseline for comparison, on the 11 resources that could be affected by the various dam-operating regimes. Over 33,000 written comments were received on the draft EIS. More than 2,300 separate issues and concerns were extracted from an analysis of the comments. EPA’s Region IX supported the preferred alternative (Modified Low Fluctuating Flow) selected by Reclamation in the draft EIS. However, EPA gave the draft EIS a qualified rating based on insufficient information on two issues. First, EPA expressed concern about the lack of information on the impacts of raising the dam’s spillway gates as a flood frequency reduction measure and recommended that the final EIS include a more thorough evaluation of the flood frequency reduction options. Second, EPA recommended that the final EIS contain further discussion of Reclamation’s Adaptive Management Program and how it plans to implement beach/habitat-building flows. Reclamation issued a preliminary final EIS for the operations of the Glen Canyon Dam in December 1994. The preliminary final EIS also took into consideration the discussions with the U.S. Fish and Wildlife Service (FWS) in connection with the consultation requirements of the Endangered Species Act and with the provisions of the Fish and Wildlife Coordination Act. Section 7 of the Endangered Species Act, as amended (16 U.S.C. 1536), requires federal agencies to consult with FWS to ensure that the actions they authorize, fund, or carry out are not likely to jeopardize the continued existence of a species listed under the act as endangered or threatened. If the action would jeopardize a listed species, FWS suggests a reasonable and prudent alternative that the federal agency can implement to minimize and/or mitigate the activity’s impact on the species or their critical habitat. The Fish and Wildlife Coordination Act of 1958 (16 U.S.C. 661 et seq.) was enacted to ensure that fish and wildlife receive equal consideration during the planning and construction of federal water projects. FWS prepares a Fish and Wildlife Coordination Act report that contains nonbinding recommendations for actions that would be beneficial to fish and wildlife. The cooperating agencies and the EIS team reviewed the preliminary final EIS, and additional changes were made to the EIS on the basis of that review. On March 21, 1995, Reclamation filed the final EIS with EPA. In June 1995, EPA informed Reclamation that it continues to support the preferred alternative and was pleased that Reclamation had addressed EPA’s concerns about the draft EIS. Specifically, the final EIS states that Reclamation will conduct a detailed evaluation of the flood frequency reduction measures before a decision is made and provides more information on the approach that Reclamation will use to implement an Adaptive Management Program and conduct beach/habitat-building flows. EPA applauded the efforts made by all of the agencies, tribes, organizations, and individuals involved in the research, scoping, and preparation of the EIS. EPA summarized that the dedication to sound science and cooperative relations was critical to developing a preferred alternative (including adaptive management), which it believes will protect and enhance the environmental and cultural resources downstream from the Glen Canyon Dam. In the Glen Canyon Dam’s final environmental impact statement, Reclamation recommends the Modified Low Fluctuating Flow as the preferred method for the future operations of the Glen Canyon Dam. According to the final EIS, the Modified Low Fluctuating Flow alternative was developed to reduce daily flow fluctuations well below no-action levels and to provide periodic high, steady releases of short duration, with the goal of protecting or enhancing downstream resources while allowing limited flexibility for power operations. This alternative would have the same annual and essentially the same monthly operating plan as under the No-Action alternative but would restrict daily and hourly water releases. Specifically, minimum flows would be no less than 8,000 cfs between 7 a.m. and 7 p.m. and 5,000 cfs at night. The maximum rate of release would be limited to 25,000 cfs during fluctuating hourly releases. Ramp rates would be limited to 4,000 cfs per hour for increasing flows and 1,500 cfs per hour for decreasing flows. Daily fluctuations would be limited to 5,000, 6,000, or 8,000 cfs depending on the monthly release volume. The preferred alternative also included periodic habitat maintenance flows, which are steady high releases within the powerplant’s capacity for 1 to 2 weeks in the spring. The purpose of these flows is to rejuvenate backwater channels that are important to fish habitat and maintain sandbars that are important for camping. Habitat maintenance flows differ from beach/habitat-building flows in that they would be within the powerplant’s capacity and would occur nearly every year when the reservoir’s volume is low. According to Reclamation, when the reservoir is low, water flows normally would not exceed about 22,000 cfs, and the probability of an unscheduled spill is small. Therefore, the habitat maintenance flows would be scheduled in those years. Habitat maintenance flows would not occur in years when a beach/habitat-building flow is scheduled. Beach/habitat-building flows are controlled floods with scheduled high releases of water greater than the powerplant’s capacity for a short duration, designed to rebuild high elevation sandbars, deposit nutrients, restore backwater channels, and provide some of the dynamics of a natural river system. According to Reclamation, instead of conducting the beach/habitat building flows in years in which Lake Powell storage is low on January 1, it has been agreed to modify the preferred alternative in the Record of Decision to accomplish the flows in high reservoir years when bypassing the powerplant would be necessary for safety purposes at the dam. In the spring of 1996, Reclamation conducted its first experiment of the controlled flood concept. The controlled experiment commenced with 4 days of constant flows at 8,000 cfs. Flows began to increase incrementally on March 26, 1996, until they reached a maximum of 45,000 cfs, where they remained for 7 days. After 7 days of high flows, the releases were reduced, gradually, to a constant flow of 8,000 cfs for 4 days of evaluation. According to Reclamation, the preliminary results indicate that the release increased sandbars in the Glen and the Grand canyons by as much as 30 percent and also created numerous backwaters for fish. Subsection 1804(b) of the Grand Canyon Protection Act states that the Comptroller General shall (1) audit the costs and benefits to water and power users and to natural, recreational, and cultural resources resulting from the management policies and dam operations identified pursuant to the environmental impact statement and (2) report the results of the audit to the Secretary of the Interior and the Congress. While the act states that GAO should audit the “costs and benefits” of various alternative dam operations identified in the EIS, the National Environmental Policy Act does not require, and Reclamation did not perform, a cost and benefit analysis. In preparing the impact statement, Reclamation studied the impact of nine dam-operating alternatives on 11 resources. In the absence of a cost and benefit analysis, we determined that the statute does not require us to conduct our own cost and benefit analysis. As discussed with the staff of the Majority and Ranking Minority members of the Senate and House committees having jurisdiction over these matters, to fulfill the requirements of the act, we examined • whether Reclamation’s determination of the impact of various flow alternatives on selected resources was reasonable and • what, if any, concerns still exist on the part of key interested parties about the final EIS. To assess whether Reclamation’s impact determinations were reasonable, we assessed for each resource, the methodologies and data used to make the impact determinations, how the methodologies were implemented, and the results achieved. The details of our analysis, and a comprehensive list of individuals contacted and key studies identified, are contained in appendixes I through X of this report. The title of each appendix is the designation (name) of the resource, and they are numbered in alphabetical order. We combined our analysis of the vegetation and wildlife/habitat impact determinations into one appendix—appendix IX. We made this choice because (1) similar indicators were studied in making the impact determinations for these resources, (2) the riparian vegetation that developed along the Colorado River corridor plays an important role as habitat to support the diversity of wildlife within the Glen and the Grand canyons, and (3) the same EIS team member was responsible for the impact determinations of both resources. For three resources—hydropower, recreation, and non-use values—Reclamation quantified the economic impact of the cost or benefit that the various flow alternatives would have on the resource. For these resources, we also reviewed the documentation on the modeling techniques and economic assumptions used to make the impact determinations. For example, for Reclamation’s power methodology, we reviewed key economic assumptions, results, and documentation, including reports entitled Power System Impacts of Potential Changes in Glen Canyon Power Plant Operations, Final Report, October 1993, and Power System Impacts of Potential Changes in Glen Canyon Power Plant Operations, Phase III Final Report, July 1995. These reports were prepared by the Power Resources Committee, a subgroup of the EIS team which included experts from the federal government, the utility industry, and the environmental community. This committee was charged with determining the impact of the nine flow alternatives on hydropower. We interviewed members of the Power Resources Committee, including the Reclamation officials who served as Chairman and economist, and representatives from the Western Area Power Administration, the Colorado River Energy Distributors Association, the Environmental Defense Fund, and the Reclamation contractor that conducted the studies. In addition, to assess the methodology used, economic assumptions, and results, we reviewed federal guidance on water resource projects entitled Economic and Environmental Principles and Guidelines for Water and Related Land Resources Implementation Studies, U.S. Water Resources Council, March 10, 1983; public comments on the draft and final EIS, and comments provided by three energy consultants retained by HBRS, Inc. to review the power analysis. HBRS, Inc. (now called Hagler Bailly Consulting), was Reclamation’s primary contractor for conducting the power analysis. Also, we reviewed the comments provided by the National Research Council on the power analyses in the draft and final EIS. We used standard microeconomic principles to assess the reasonableness of key economic assumptions. Our assessment of the reasonableness of Reclamation’s methodology was limited to a review of the general analytical framework and an assessment of the reasonableness of the key assumptions and data. We did not evaluate the Power Resources Committee’s calibration of the power simulation models used or the spreadsheet models used, nor did we verify the accuracy of all data inputs. For both the recreation and non-use methodologies, we reviewed the literature and research principles on the contingent valuation method to assess the reasonableness of the methodology, assumptions used, and results in conjunction with standard economic principles. Economists and survey researchers working in the natural resource and environmental areas have developed the theory and practice of contingent valuation to estimate non-use values. To gain an understanding of Reclamation’s recreational methodology, key assumptions, and results, we reviewed documentation that describes these in detail, including the EIS. We also interviewed members of the Recreation subgroup, including Reclamation officials and their contractors, as well as representatives from the National Park Service and the Arizona Game and Fish Department. In addition, we interviewed academic experts in the field and a member of the National Academy of Sciences’ team that reviewed the EIS. To gain an understanding of Reclamation’s non-use value study methodology and results, we reviewed the final report entitled GCES Non-Use Value Study, dated September 8, 1995. We interviewed Reclamation officials responsible for the preparation of the report, and a Senior Associate at Hagler Bailly Consulting, who was a primary contributor to the development of the report. To evaluate Reclamation’s non-use study, we made use of some general guidelines that focus on the quality of a contingent valuation study and on the underlying survey research. Specifically, to assess the contingent valuation study, we relied on general guidelines developed by a panel of prominent researchers convened by the National Oceanic and Atmospheric Administration. The panel’s report was published in the Federal Register on January 15, 1993. To assess the total design method for conducting mail surveys used by Reclamation in the non-use study we used the most widely accepted written standards for mail questionnaires published by Don A. Dillman in 1978. We also interviewed a number of the Non-Use Value Committee members to obtain their opinion of the methodologies and data used and the results achieved. The Committee included members from the power industry, environmental groups, Native American tribes, and federal agencies. The Committee was tasked to consider interim study results and provide input to the study process. For the eight resources whose impact determinations were not economically quantified, to determine the methodology and data used to make an impact determination, we obtained and reviewed the following documents: the draft EIS and associated appendixes, the preliminary final EIS, the final EIS, public comments on the draft EIS, Reclamation’s analysis of and responses to these comments, copies of the minutes of EIS team meetings, summaries of the cooperating agency meetings, and Reclamation’s newsletters on the EIS process. We also obtained and reviewed the U.S. Fish and Wildlife Service’s draft biological opinion and final biological opinion on the Glen Canyon Dam’s EIS, Reclamation’s comments and responses to the biological opinions, and the U.S. Fish and Wildlife Service’s report required by the Fish and Wildlife Coordination Act. Also, we reviewed numerous scientific studies related to each of the resources that were identified by EIS team members as the most useful in developing the impact determinations for the respective resources. To obtain a better understanding of other issues related to the EIS process, we also reviewed the Colorado River Simulation System Overview, the Final Analysis Report on Scoping Comments, and the Glen Canyon Dam EIS Preliminary Alternatives Report. Other documents reviewed included the draft and final environmental assessment of the spring 1996 beach/habitat-building test flow and papers presented at a 1991 National Research Council Symposium on the Glen Canyon Environmental Studies. Because certain parameters included in the preferred alternative were changed, we reviewed a document entitled “Assessment of Changes to the Glen Canyon Dam Environmental Impact Statement Preferred Alternative from Draft to Final EIS,” issued by Reclamation in October 1995. This paper explained the background and scientific basis of the changes to the preferred alternative between the draft and final EIS. A comprehensive list of the documents we reviewed is contained in the discussion of each of the 11 resources in appendixes I through X (vegetation and wildlife/habitat are both discussed in appendix IX). To assess the reasonableness of the impact determinations for the eight resources that were not economically quantified, we interviewed the EIS team members and/or subgroup members who had the primary responsibility for making the impact determinations, writing sections of the draft EIS, and revising the EIS following the receipt of public comments. We also spoke with scientists identified by EIS team members and members of EIS subgroups who commented on issues in their area of expertise. Finally, we interviewed other agency officials with information on the EIS and Glen Canyon Environmental Studies processes. For each of these resources, we obtained his or her views on the reasonableness of the methodology and data used in making the impact determinations, how well the methodologies were implemented, and the reasonableness of the results achieved. To obtain information on what, if any, concerns still exist on the part of key interested parties about the final impact statement, including how many supported the preferred alternative, we surveyed 37 key organizations and individuals knowledgeable about the EIS and its development. Our judgmental sample included officials of federal agencies, state agencies, Indian tribes, environmental organizations, water and power suppliers and users, and individuals involved in the development of the EIS. Specifically, among the 37 organizations and individuals we asked to respond to our survey, 23 were organizations and individuals that provided what Reclamation considered to be the most substantive comments on the draft EIS. These agencies and individuals include the Navajo Nation, Hualapai Tribe, Hopi Tribe, Bureau of Indian Affairs, National Park Service, Arizona Game and Fish Department, U.S. Fish and Wildlife Service, Western Area Power Administration, Plains Electric Generation and Transmission Coop, Inc., Environmental Protection Agency, Environmental Defense Fund, National Research Council, Upper Colorado River Commission, Department of the Interior’s Office of Environmental Policy and Compliance, Salt River Project, Colorado River Energy Distributors Association, Grand Canyon Trust, American Rivers, Sierra Club Legal Defense Fund, American Fisheries Society, Grand Canyon River Guides, and Dr. Larry Stevens. Dr. Stevens is considered by many to be the leading authority on vegetation in the Grand Canyon region. He was a major contributor of research on both the vegetation and wildlife/habitat resources for the EIS. We also contacted Mr. David Marcus, whom Reclamation stated also provided substantive comments on the draft EIS. However, Mr. Marcus stated that he worked as a consultant for American Rivers and that he preferred to provide us with his comments through that organization, not as an individual. As such, we did not include Mr. Marcus as part of our survey universe. We also contacted the three cooperating agencies (Pueblo of Zuni, Southern Paiute Tribe, and Southern Paiute Consortium) that were not among the 22 above. Furthermore, the seven Colorado River Basin states (Arizona, California, Colorado, Nevada, New Mexico, Utah, and Wyoming) were asked to respond to our survey. In addition, another five environmental groups with interests in the Glen Canyon Dam area (Sierra Club, Arizona Flycasters, Friends of the River, America Outdoors, and Trout Unlimited) were also contacted. We received responses from 30 of the 37 (81 percent) organizations and individuals we contacted. The seven nonrespondents did not represent any particular interest group. Specifics on how the 37 organizations and individuals responded to our survey are provided in chapter 3 of this report. We conducted our work from January 1995 through September 1996 in accordance with generally accepted government auditing standards. We provided copies of a draft of this report to the Department of the Interior for its review and comment. Interior generally agreed with the information presented in the report and stated that they were impressed with the quality of the product developed by the audit team. Interior also provided several technical clarifications to the draft, which have been incorporated into the report as appropriate. Interior’s comments and our responses are included in appendix XII. In preparing the Glen Canyon Dam’s environmental impact statement, Reclamation studied the impact of the dam’s various flow alternatives on hydropower, non-use values, and other selected resources located below the dam. To make these impact determinations, Reclamation used a variety of methodologies and data sources. Generally, we believe the methodologies used to be reasonable and appropriate and the data used to be the best available at the time. Some prominent economists, however, question the credibility of results obtained from the methodology Reclamation used to derive non-use values. We also noted some shortcomings in some of Reclamation’s economic assumptions and its application of certain methodologies. In addition, we found that some of the data used in the resource analyses were dated, preliminary, or incomplete. Overall, these limitations reduce the precision of the estimated impacts contained in the EIS. In addition, there is general agreement that as a result of incomplete information, the impact of steady flow alternatives on fish resources remains uncertain. Nonetheless, our work disclosed no evidence that these limitations would alter the relative ranking of the fluctuating and steady flow alternatives. Therefore, we believe that these limitations are not significant enough to render the final impact statement unusable to the Secretary of the Interior as a decision-making document. Generally, Reclamation and other experts associated with the development of the Glen Canyon Dam’s environmental impact statement believe that the impact determinations are reasonable. At the same time, they recognize that there are limitations to the EIS. However, they believe that these limitations are not significant enough to make the results unusable. Furthermore, Reclamation recognizes that many uncertainties still exist. To address these uncertainties, Reclamation intends to initiate a process of “adaptive management” that would provide for long-term monitoring and research to measure the actual effects of the selected alternative. The results of this effort would form the basis for possible future modifications of the dam’s operations. We found that, in general, the variety of methodologies and research techniques used by Reclamation to make impact determinations were reasonable and appropriate. For most resource assessments, Reclamation relied on multidisciplinary subteams consisting of experts representing federal and state governments, tribal interests, academic and scientific communities, the electric utility industry, environmental organizations, and the recreation industry. The exact makeup of each team depended on the resource and the area of concern. In addition, for each resource, the subteam assessed, either quantitatively, qualitatively or both, how alternative flows would affect the resource relative to a No-Action (base case) flow. The EIS teams generally used state-of-the-art modeling techniques and/or the latest scientific research to make the impact determinations. Furthermore, the methods used and results achieved were reviewed by peers and outside experts, including the Glen Canyon Environmental Studies Review Team and the National Academy of Sciences. To conduct the impact analyses of various flows on hydropower, Reclamation established the Power Resources Committee—a group of electricity and modeling experts from Reclamation, the Western Area Power Administration, the electric utility industry, private contractors, and the environmental community. Using a 50-year analysis period (1991-2040) and the No-Action Flow alternative (historic operations) as the base case, the Committee assessed how various flow alternatives would affect hydropower production and then projected the subsequent economic costs that would be incurred by regional utilities and end-users to replace the dam’s forgone power production. The Committee considered the fixed costs associated with the existing generating capacity in the region to be “sunk” costs and, hence, excluded them from the economic cost calculations. The Committee also used two state-of-the-art modeling techniques and detailed utility-specific data to quantify the economic impacts. In addition, the Committee used sensitivity analysis to test the impact of changes in key economic assumptions. The results of the power study were then incorporated into the draft EIS for public comment. The Committee solicited and received an independent review of the power study from three energy experts. On the basis of the comments received from the public and outside experts, the Committee partially revised its initial power study. For example, the Committee updated the projected costs of building gas-combustion powerplants, revised its retail rate analysis, and conducted additional sensitivity analyses. The results of both power studies were incorporated into the final EIS. (See app. V for details on the results of the power study.) For fish resources, numerous public comments were received by Reclamation expressing concern about the impact determinations presented in the draft EIS. To respond to these concerns, Reclamation formed an Aquatic Biology Team workgroup. This work group consisted of EIS team members representing Reclamation, the U.S. Fish and Wildlife Service, the Arizona Game and Fish Department, and two Indian tribes. The workgroup was tasked to respond to comments and to reorganize and rewrite the fish section of the final EIS. Individual workgroup members were given specific assignments, interactive discussions were held, and decisions were made through consensus. As a result of this effort, several major changes were made to the final EIS, including more explicit recognition of the uncertainty and disagreement that exist among scientists about the response of fish to the steady flow alternatives. (See app. IV for details on the results of the fish impact determinations.) To assess the impact of various flow alternatives on water and sediment, Reclamation’s EIS team used the Colorado River Simulation System (CRSS) to project the long-term (50 years) and short-term (20 years) impacts on annual and monthly streamflows, floodflows and other water spills, water storage, water allocation deliveries, and Upper Colorado River Basin yields. CRSS is a package of computer programs and databases designed to assist water resource managers in performing comprehensive long-range planning and operations studies that arise from proposed changes in the Colorado River’s operations, proposed development of the Colorado River Basin, or changes in present water use throughout the basin. The development of CRSS took place over a 10-year period and stemmed from the need for a comprehensive model of the Colorado River Basin that would incorporate all areas of interest, including legislative requirements. According to Reclamation and other experts, CRSS is the most comprehensive and detailed simulation of the Colorado River system that exists. (See app. VIII and app. X for details on the results of the sediment and water analyses, respectively.) To quantify the economic impact of the dam’s various flow alternatives on non-use values and recreation, Reclamation primarily relied on a methodology called contingent valuation. Social scientists and economists have long acknowledged the existence of non-use values—the monetary value placed on the status of the environment by people who never visit or otherwise use these features. Contingent valuation relies on public surveys to elicit information from consumers and estimate how much they would be willing to pay for a non-use good. For valuing most goods and services, economists are able to rely on people’s actual purchases of goods in markets. However, by definition people do not purchase non-use goods, and some prominent economists question whether the contingent valuation method can accurately elicit the values consumers place on non-use goods. For example, Peter A. Diamond and Jerry A. Hausman state, “We believe that contingent valuation is a deeply flawed methodology for measuring non-use values, one that does not estimate what its proponents claim to be estimating.” Still many economists and survey researchers working in the natural resource and environmental areas have developed and used this methodology, and it is currently the only known approach for estimating non-use values. (See app. VI for details on the results of the non-use value study.) Economists generally have fewer questions about the application of the contingent valuation methodology in measuring the value of goods and services that consumers actually purchase. Therefore, there are fewer questions about the usefulness of this approach for measuring the values associated with recreational activities. (See app. VII for details on the results of the recreation studies.) In light of the results of our work and the opinions of the experts we contacted, we believe the methodologies used by Reclamation and its EIS teams to make impact determinations were generally reasonable. We did note, however, some shortcomings in the economic assumptions used in the hydropower analysis and in Reclamation’s implementation of certain methodologies. Specifically, in the hydropower analysis, the assumptions used do not explicitly include the mitigating effect that higher electricity prices would have in reducing the demand for electricity (that is, price elasticity). For example, the Power Resources Committee assumed that both the demand for and price of electricity would continue to rise over the planning period. However, we believe the rise in the price of electricity would likely induce some electricity consumers (both wholesalers and end-users) to consume less electricity or switch to cheaper alternative suppliers, which is not taken into account in the analysis. Consequently, fewer resources would be needed to replace forgone power at the Glen Canyon Dam, and the subsequent economic impacts would be lower than estimated (all else being the same). In addition, the Committee’s assumptions about future natural gas prices are relatively high. The Committee assumed that the average gas price would increase annually by 8 percent from 1991 through 2010. In 1994, industry forecasters projected that the price of natural gas would increase by about 6 percent for the same time period, and in 1995, forecasts assumed that prices will rise by only 5 percent. The higher escalation rates could affect the power analysis by overstating the economic cost of replacing the Glen Canyon Dam’s power. We also found that Reclamation’s staff made two computational errors during the revision of the initial power analysis. The Power Resources Committee acknowledged these errors in its final report and stated that the errors affected the results in opposite directions, that is, one error may have overstated costs while the other error may have understated costs. The Committee was unable to correct the errors in the report because of time and funding constraints. These shortcomings, combined with the inherent uncertainty in making economic forecasts, reduce the precision of the estimated economic impacts. However, an association that represents the affected power utilities, while maintaining that the costs to the power system are understated, does not believe that Reclamation’s analysis is inaccurate by a large magnitude. Furthermore, because these shortcomings affect the estimated economic impact of all alternatives equally, we believe that addressing these shortcomings would not alter the relative ranking of the fluctuating and steady flow alternatives. Although we believe the recreation impacts methodology is generally reasonable, we noted several limitations. For example, the survey data used as the basis of the analysis were gathered during an unusually high-water year; therefore, some respondents may not have actually experienced how various alternative flows would have affected their recreational experience, which is what they were being asked to value. In addition, the survey was designed well before the flow alternatives to be studied in the Glen Canyon Dam’s EIS were finalized. As a result, the survey scenarios do not systematically correspond to the flow alternatives presented in the EIS. Finally, although researchers tested proposed questions to determine which ones offered the highest response rate, they did not adequately pretest some survey instruments to detect wording, construction, and presentation defects or other inadequacies. Because the recreation economic model used the results of these survey instruments as a basis for the analysis, the estimated dollar value of the benefits may not be very precise. Reclamation and National Park Service officials involved in the process acknowledged that the recreation analysis has limitations but stated that these limitations would not affect the ranking of the alternatives. They also noted that the estimated recreation benefits identified by this research were not a key element in the selection of the preferred alternative. In addition to the shortcomings in the hydropower and recreation analyses, we also noted that there was no formal opportunity for affected parties as well as the general public to offer comments on the Glen Canyon non-use value study. Although the final EIS notes that the non-use value is positive and significant, the actual quantified results are not included in the final EIS. Reclamation did not include the non-use value study results because they were not available when the final EIS was published. The non-use study was completed as a separate Glen Canyon Environmental Studies report and, according to Reclamation, will be attached to the Record of Decision package sent to the Secretary of the Interior. In that way, it will become part of the final decision-making process. Reclamation noted that although the non-use study did not go through the public comment process, the study team solicited and received peer review at various key decision points and that the final results of the non-use value study received a positive review by the National Academy of Sciences and the Office of Management and Budget. Reclamation also noted that interests likely to be affected by any changes in the operations of the Glen Canyon Dam, such as power groups and environmental groups, were involved in the non-use value study process. In addition, there were scoping sessions and focus groups that were derived from members of the general public. The results of these sessions were used to assist in the development of the content of the survey and the relevant issues to be addressed. Reclamation’s National Environmental Policy Act Handbook requires that all EIS analyses be based on the best reasonably obtainable scientific information. According to Reclamation and other experts who developed the Glen Canyon Dam’s environmental impact statement, the data used to make the impact determinations were the best available at the time. For example, for the impact of various flow alternatives on nonfish endangered species, one researcher said the terrestrial and bird-related research used as a basis for making impact determinations was “top notch.” Another researcher who worked on endangered species stated that when they were clarifying information or needed data to fill gaps, the EIS team contacted researchers directly to get the latest available data. For information on cultural resources and properties, members of that resource team believe that Reclamation went beyond federal requirements for the development of an impact statement by performing assessments of all previously identified archeological sites within the Colorado River corridor in the Glen and Grand canyons. According to many experts, when completed, this effort generated the best and most current scientific information available. For some resources, we found that although the data were the best available, they had limitations. Some of the data used in making the impact determinations were dated, preliminary, or incomplete. For example, Reclamation used survey data collected in 1985 to assess the economic impact of alternative dam flows on recreational activities. Reclamation’s contractor surveyed a sample of anglers, day-rafters, and white-water boaters about their recreational experiences on the Colorado River and what effect, if any, different streamflows would have on their recreational experiences. However, because the survey was undertaken in 1985, it may not represent more recent trends in recreational experiences. For example, the number of angling trips on the Colorado River more than doubled between 1985 and 1991 (the base year used by Reclamation in preparing the draft EIS), which may influence the value of each trip. Reclamation updated some of the data to 1991 but acknowledges that the survey data were generally dated. Reclamation stated, however, that the recreation analysis was adequate to present a good picture of the potential impact of alternative flows on various recreational experiences and that because of the limited impact of alternative flows on recreation, limited research funds could be better used to improve other analyses. The National Research Council generally found the recreation analysis to be adequate. In addition, the estimated non-use values for the steady flow alternatives could be overstated because of new information that was not available at the time the survey instruments were developed. The non-use value surveys described the environmental impacts based on information that was the best available at the time. This information indicated that improvements would be obtained for fish resources under fluctuating and steady flow alternatives. However, after the development of the survey instruments, the fish section of the EIS was revised to recognize the uncertainty that exists about the impact of steady flow alternatives. To the extent that the non-use value surveys did not capture this degree of uncertainty, the precision of the non-use value estimates could be reduced. Many of the results of the Glen Canyon sediment studies were preliminary, in draft form, and had not been published at the time that the draft impact statement or the final impact statement was written. In addition, in some cases definitive information on the impact of a specific flow alternative was not available. Therefore, the EIS team had to extrapolate from the existing data using their professional judgment to estimate the potential impact of a specific alternative. The EIS team told us that they always verified the reasonableness of their conclusions and extrapolations with the researchers. However, they believed that if finalized data had been available, the reasons for the selection of the preferred alternative would have been more clearly supported. These researchers added that no new or additional information on sediment impacts has been obtained that would alter the information or conclusions presented in the final impact statement. Finally, information on some resources is incomplete, as is the knowledge of how changes in the Glen Canyon Dam’s operations will affect those resources. For example, the experts’ opinions vary, in part because of incomplete data, on how native and nonnative fish interact and how changes to the dam’s operations would affect these interactions. Many researchers and EIS team members we interviewed expressed regret about the lack of coordinated time frames between the completion of the Glen Canyon Environmental Studies and the development of the Glen Canyon Dam EIS. The leader of the workgroup responsible for developing the EIS impact determinations for fish stated that this difference in time frames was especially problematic when the preferred alternative was selected. At that point, decisions had to be made, but data and analyses were not complete. Reclamation explicitly acknowledges the uncertainty that exists about the impact of the steady flow alternatives on fish resources in the final EIS. In its final biological opinion, the U.S. Fish and Wildlife Service stated that Reclamation’s preferred alternative is likely to jeopardize the existence of two native endangered fish species (the humpback chub and the razorback sucker). In general, the biological opinion’s “reasonable and prudent alternative” would modify the preferred alternative by including seasonally adjusted steady flows. The U.S. Fish and Wildlife Service and Reclamation have agreed to categorize these flows as experimental and include them as part of the Adaptive Management Program. Reclamation and other experts associated with the development of the Glen Canyon Dam’s EIS generally believe that the impact determinations presented in the final EIS are reasonable. (A summary of Reclamation’s comparison of alternatives and impacts is presented in app. XI of this report.) They recognize that there are limitations to the results, but they believe that these limitations are not significant enough to make the impact determinations unusable for the Secretary’s decision-making. For example, one EIS team member stressed that in the process of scientific decision-making and economic forecasting, complete and certain information is never available. Furthermore, Reclamation noted that the Congress had mandated that the final EIS be issued within a certain time frame; therefore, decisions had to be made on the basis of the best information available at the time. Reclamation recognizes that uncertainties still exist about the impact of the various flow alternatives on resources. To address these uncertainties, Reclamation intends to initiate a process of “adaptive management.” We discussed the results of the impact determinations for each resource with Reclamation and other experts involved in the development of the Glen Canyon Dam’s EIS. Although these individuals recognized that there were some shortcomings in the analyses, they generally agreed that the results of the impact determinations as presented in the Glen Canyon Dam’s final EIS were reasonable. For example, although some researchers described the model used (the sand-mass balance model) to determine the impact of various flows on sediment as “simplistic” compared with models that are currently being developed by U.S. Geological Survey researchers, none of the preliminary results from the new models contradict the conclusions reached by the sand-mass balance model. Another researcher who worked on the vegetation and wildlife resources told us that although the EIS may have been based on incomplete information, subsequent science supports it. The researcher further added that the results of the EIS were right on track with the best scientific evidence available at the time. The results of some impacts, however, such as how steady flows will affect fish, are still uncertain. The individual responsible for leading the fish impact determinations process stated that the lack of final results from the fish research studies was frustrating and that the limited data allowed differences of opinion and scientific interpretation to arise about the impacts on fish resources. However, he added that he believed that if final data had been available, they would have refined the EIS team’s conclusions but would not have changed the impact determinations or the preferred alternative. Although there is general agreement that the results of the Glen Canyon Dam’s EIS are reasonable, there is also general agreement that additional research is needed to further refine or, in the case of fish resources, define the impact on resources of changes to the dam’s operations. For example, impacts to some archeological and cultural properties are bound to occur regardless of the flow alternative chosen. To avoid or minimize the loss of historic properties and comply with the requirements of the National Historic Preservation Act, Reclamation developed a programmatic agreement between federal and state agencies as well as affected Native American tribes. Implemented in 1994, the agreement led to numerous monitoring trips and site-stabilization efforts, but all parties involved believe that more research is needed to understand how water flow affects cultural resources. Furthermore, several sediment researchers we interviewed stated that they supported the impact determinations and the preferred alternative. However, one stated that as more information is obtained about the various systems in the canyon, the preferred alternative may become less restrictive in terms of the allowed water releases for hydropower use. Reclamation recognizes that uncertainties exist about the downstream impacts of water releases from the Glen Canyon Dam. To address these uncertainties, Reclamation plans to initiate an Adaptive Management Program. The concept of adaptive management is based on the recognized need for ongoing operational flexibility to respond to future monitoring and research findings and varying resource conditions. The objective of the Adaptive Management Program is to establish and implement long-term monitoring programs that will ensure that the Glen Canyon Dam is operated, consistent with existing law, in a manner that will protect, mitigate adverse impacts to, and improve the values for which the Glen Canyon National Recreational Area and the Grand Canyon National Park were established. According to Reclamation, long-term monitoring and research are essential to adaptive management. Reclamation believes that such an effort is needed to measure the performance of any selected EIS alternative. In this way, managers can determine whether the alternative is actually meeting resource management objectives and obtain an additional understanding of the resources’ responses to the dam’s operations. Under Reclamation’s current proposal, the Adaptive Management Program, which would be under the direction of the Secretary of the Interior, would be facilitated through an Adaptive Management Work Group. The Adaptive Management Work Group, chartered under the Federal Advisory Committee Act, would include representatives from each of the EIS cooperating agencies, the basin states, contractors for the purchase of federal power, recreation interests, and environmental organizations. The work group would: • develop proposals for (1) modifying the operating criteria, (2)research under the long-term monitoring program, and (3) other mitigation actions as appropriate and facilitate technical coordination and input from interested parties. The Adaptive Management Work Group would be supported by a monitoring and research center and a technical work group. The Monitoring and Research Center would manage and coordinate monitoring activities, research, and inventory programs and maintain a scientific information database. The technical work group would include technical representatives from federal, state, and tribal governments and their contractors. This work group would translate the policy and goals of the Adaptive Management Work Group into resource management objectives and establish criteria and standards for long-term monitoring and research. The independent scientific review panel would include scientific experts not otherwise participating in the long-term monitoring and research studies. The responsibilities of this review panel would include reviewing scientific study plans, resource reports, and scientific logic and protocols. Since December 1982, Reclamation has been studying the effects of the Glen Canyon Dam on various resources within the Glen and the Grand canyons. According to Reclamation, during this 14-year period, over $75 million was spent initially on the Glen Canyon Environmental Studies and then on the Glen Canyon Dam’s EIS. This research and analysis was aimed at providing sufficient information to recommend an operating plan for the dam that would permit the recovery of downstream resources while maintaining some level of hydropower flexibility. Still, after all this time and money, the process of selecting a preferred alternative involved not only scientific evidence but also trade-offs and compromise. This occurred because no one alternative could maximize benefits to all resources and because the impacts of some of the flow alternatives remain uncertain. Nevertheless, over 83 percent of the key interested parties who responded to our survey support Reclamation’s preferred alternative as a good starting point for the future operations of the Glen Canyon Dam. In addition, many respondents supported the process used to develop the Glen Canyon Dam’s EIS. However, while expressing their support, some organizations still had concerns about the final EIS. “The Glen Canyon Dam EIS was a lengthy, complex process with many individuals and interests involved. It is safe to say that the preferred alternative will not completely satisfy any one group, however it represents a balance of interests and a reasonable starting point for future dam operations.” Another factor that the EIS team considered was that some affected resources were renewable, while others were viewed as nonrenewable. They avoided recommending an alternative dam-operating procedure that would result in significant loss of any existing nonrenewable resource and tried to minimize the adverse impacts to most renewable resources. They eliminated the No-Action, Maximum Powerplant Capacity, and High Fluctuating Flow alternatives from consideration as a preferred alternative because the data indicated that while these alternatives were beneficial to hydropower, they would either increase or maintain conditions that result in adverse impacts to nonrenewable downstream resources. The EIS team also eliminated the Year-Round Steady Flow alternative from consideration as the preferred alternative. This alternative exhibited the highest probability for net gain in riverbed sand, had the largest potential for expanding riparian vegetation, and received the highest ranking among all alternatives for white-water boating safety benefits. However, the EIS team believed that the alternative probably exceeded sediment protection requirements for long-term management and would result in the lowest-elevation sandbars. The team was also concerned that a completely stable flow alternative would permit vegetation to adversely affect camping beaches and over time reduce the value of wildlife habitat. In addition, a stable flow may increase the negative interaction between native fish and predator and competitor nonnative fish. Finally, the team eliminated this alternative because they believed that it did not provide benefits that could not be provided by other alternatives, yet it would cause large adverse effects to hydroelectric power generation. Of the remaining alternatives, the Existing Monthly Volume Steady Flow alternative was eliminated for reasons similar to those discussed for the Year-Round Steady Flow alternative. The Low Fluctuating Flow alternative was eliminated to reduce redundancy—Reclamation considered the Modified Low Fluctuating Flow alternative an improved version of the Low Fluctuating Flow alternative. The EIS team considered the impacts associated with the three remaining alternatives (Moderate Fluctuating Flow, Modified Low Fluctuating Flow, and Seasonally Adjusted Steady Flow), although they were substantially different from the effect of the No-Action alternative, to be very similar in their assumed benefits to most downstream resources. Reclamation’s former NEPA Manager for the Glen Canyon Dam’s EIS advised us that from an ecosystem perspective, sediment was identified as the key resource in the selection of a preferred alternative. Riverbed sand and sandbars were the sediment resources of primary interest affected by riverflows below the dam. For sandbars to exist, sufficient amounts of sand must be stored on the riverbed. Because the dam traps 90 percent of the sediment, the sand supply is currently limited to whatever is contributed by downstream tributaries and hundreds of side canyons. Of equal concern is the river’s capacity to transport sediment. Riverflows must be large enough to move and deposit sediment but not so large as to carry the sediment out of the canyon ecosystem. Frequent high flows, either from floods or large daily fluctuations, can transport greater amounts of sand than are contributed, causing a net decrease in both the amount of stored riverbed sand and the size of sandbars. Water release patterns modify the natural process of sandbar deposition and erosion. Rapid drops in the level of the river drain groundwater from sandbars, thus accelerating sandbar erosion. The EIS team concluded that any of these three alternatives were very similar in their assumed benefits to most downstream resources. The effects on native fish did, however, vary among the three remaining alternatives. The Moderate Fluctuating Flow alternative provides potential minor benefits to native fish over no-action conditions. The benefits from the Seasonally Adjusted Steady Flow alternative were uncertain given the improvement in habitat conditions that this alternative would provide for predator and competitor nonnative fish. The team also determined that seasonally adjusted steady flows would create conditions significantly different from those under which the current aquatic ecosystem had developed since the construction of the dam. Finally, for hydropower, the team determined that the Seasonally Adjusted Steady Flow alternative would have the highest economic cost of any alternative, estimated at about $124 million annually. Ultimately, the EIS team decided to recommend the Modified Low Fluctuating Flow for the preferred alternative in the draft EIS. The members believed that this alternative would create conditions that permit the recovery of downstream resources to acceptable management levels while maintaining a level of hydroelectric power flexibility. The EIS team presented this recommendation to the cooperating agencies. Most cooperating agencies concurred, and the group recommended that this alternative be adopted by Reclamation. The draft EIS was issued by Reclamation in January 1994 with the Modified Low Fluctuating Flow identified as the preferred alternative. After the draft EIS was provided for public comment but before the issuance of the final EIS, Reclamation changed two parameters of the preferred alternative. Specifically, the draft EIS’ preferred alternative had a maximum release level of 20,000 cfs and a maximum upramp rate of 2,500 cfs per hour. In the final EIS, Reclamation modified the preferred alternative to provide a maximum release level of 25,000 cfs and a maximum upramp rate of 4,000 cfs per hour. The primary reason for these changes was to benefit hydropower. The preferred alternative presented in the draft EIS had the same maximum release rate and upramp rate as the interim operating criteria. Reclamation stated that the interim operating criteria were based on the results of phase I of the Glen Canyon Environmental Studies and professional judgment and were designed to be environmentally conservative over the interim period. With the benefit of the additional phase II results of the Glen Canyon Environmental Studies and EIS impact analyses, Reclamation stated that the upramp rate and maximum flow criteria were found to be overly conservative for the long term and that the two changes would not cause adverse impacts to downstream resources. As a result, with the concurrence of the cooperating agencies, the preferred alternative was modified in the final EIS. In July 1995, Reclamation issued a document entitled Flow Modifications to the Glen Canyon Dam Environmental Impact Statement Preferred Alternative. Those who commented on that document expressed concern that no studies on the specific upramp and maximum flow criteria had been conducted. In October 1995, Reclamation issued a new report entitled Assessment of Changes to the Glen Canyon Dam Environmental Impact Statement Preferred Alternative from Draft to Final EIS. This report provided a more detailed and focused assessment of the impacts associated with the increased upramp rate and maximum flow criteria. While acknowledging that no new studies were conducted, Reclamation pointed out that the same was true for the parameters of the interim flows when they were selected and implemented. Furthermore, Reclamation stated it was possible to determine the effects of these changes by using the extensive amount of knowledge gained from both phase I and phase II of the Glen Canyon Environmental Studies. Reclamation concluded that the analyses were fully adequate to justify the change. The respondents to our survey of key parties interested in the Glen Canyon Dam’s EIS overwhelmingly supported Reclamation’s preferred alternative—the Modified Low Fluctuating Flow operating regime. We surveyed 37 key organizations and individuals about whether they support the preferred alternative and what, if any, remaining concerns they may have about implementing this alternative as the future operating plan for the Glen Canyon Dam. Our judgmental sample included federal and state resource agencies, American Indian tribes, water and power suppliers and users, and environmental groups. Specifically, Reclamation identified 23 of these organizations and individuals as providing the most substantive comments on the draft EIS. We excluded David Marcus from our survey analysis because he had commented on the draft EIS as a consultant to American Rivers and preferred to provide us with his comments through that organization. In addition, we surveyed any other organizations that were considered to be cooperating agencies in the development of the impact statement as well as other key interested parties. We also queried the seven Colorado River Basin states: Arizona, California, Colorado, Nevada, New Mexico, Utah, and Wyoming. Over 83 percent (25 of 30) of the respondents to our survey supported the preferred alternative. Of the five remaining respondents, three organizations stated that they had no position on the issue, while two, the San Juan Southern Paiute Tribe and the Grand Canyon River Guides, believe that the current interim flows would be more protective of resources and, as such, consistent with the intent of the Grand Canyon Protection Act. Table 3.1 provides details on whom we surveyed and their response, if any. Many respondents to our survey supported the process used by Reclamation to complete the EIS. In fact, many respondents commended Reclamation for its efforts to produce a comprehensive EIS. For example, the National Park Service stated that the EIS process was directed very well by Reclamation and that alternatives for the operation of the dam were fully explored. American Rivers, an environmental interest group, stated that the EIS is a high-quality document that reflects a process that was exemplary in its scope, thoroughness, and overall achievement. The Grand Canyon Trust stated that the EIS represents a significant and productive effort to understand the complexities of the river’s ecosystem below Glen Canyon Dam and to include broad participation by the public and parties vitally interested in the issue. They further stated that in addition to increasing the scientific understanding of the Colorado River system, a great deal of trust and good faith were created between traditionally contentious interest groups. The Navajo Nation stated that overall, they were very pleased with the EIS process, citing that Native American concerns were taken into account by Reclamation and that the affected tribes had real input into the development of the EIS. While respondents to our survey were generally positive about the selection of a preferred alternative and the process used by Reclamation to develop the EIS, some were still concerned about the preferred alternative and the Glen Canyon Dam’s final environmental impact statement. These concerns focus on the manner in which compliance with the Endangered Species Act will be achieved, the economic impact of reducing the Glen Canyon Dam’s hydroelectric power capacity, the lack of consideration in the EIS of other causes of downstream adverse impacts other than water releases from Glen Canyon Dam, the simultaneous changing of two of the dam’s operating parameters very late in the EIS process, the adequacy of the flood frequency reduction measures, the need for selective withdrawal structures, and issues related to adaptive management, including future research and monitoring. The U.S. Fish and Wildlife Service supports the preferred alternative as modified by its reasonable and prudent alternative. FWS’s biological opinion expressed concern that the preferred alternative recommended flows would likely jeopardize the continued existence of two endangered species, the humpback chub and the razorback sucker. The biological opinion’s reasonable and prudent alternative would modify the preferred alternative with seasonally adjusted steady flows about 25 percent of the time. FWS and Reclamation agreed to categorize these flows as experimental, or research flows, so that studies could be conducted to verify an effective dam-operating plan and to include those flows with another element of the reasonable and prudent alternative, adaptive management. However, there are concerns on the part of the Colorado River Energy Distributors Association, which represents over 140 nonprofit utilities that purchase power from the Western Area Power Administration (WAPA), that the implementation of endangered fish research flows will proceed regardless of the outcome of the Adaptive Management Program. The association strongly supports the EIS preferred alternative as a reasonable point to begin modified dam operations and adaptive management. However, the association also believes that an important part of the adaptive management process is that if an analysis of a research proposal indicates an inappropriate risk to the endangered fish or other resource, the Secretary could decide not to pursue this element of the preferred alternative. As such, the association objects to the language in the final EIS and the final biological opinion that indicates that the research flows will go forward regardless of the outcome of the adaptive management research design and risk assessment. The Colorado River Energy Distributors Association and the Salt River Project, an agricultural improvement district that provides electrical service to various counties in the state of Arizona, are concerned that the economic cost of reducing the hydroelectric power capacity of the Glen Canyon Dam is understated in the EIS. Both the association and the Salt River Project believe that the preferred alternative does not adequately address the economic cost to power users of research flows. In addition, the Salt River Project believes that the EIS does not analyze the full economic impact of the preferred alternative on Salt River and its customers and on WAPA and its customers, resulting from WAPA’s being unable to fulfill its obligations under an exchange agreement. The exchange agreement obligated Salt River to build and operate power generation facilities near customers in Colorado and New Mexico and to deliver the power produced by those facilities to WAPA to serve those customers. In exchange, WAPA was obligated to deliver a like amount of power to the Salt River Project from the Glen Canyon Dam. WAPA stated that the EIS assumes that the dam’s operations (water releases) are the only cause of the adverse impacts on the downstream resources and that, therefore, changing the dam’s operations is the only technique or method available for managing and enhancing those resources. WAPA believes that other causes of downstream impacts include lack of sediment, cold water temperatures, nonnative fish species, and human usage. Accordingly, they believe that changing the operations at Glen Canyon Dam is not the only, or necessarily the best or lowest-cost, means of achieving positive resource changes. WAPA believes that a more holistic approach to the management of the downstream resources should be taken and supports the investigation of both operational and nonoperational management techniques, practices, and programs. Although WAPA supports the preferred alternative, it stated that the concepts of pumping sand, protecting beaches with native materials, augmenting sediment, managing vegetation, restricting human use, restricting raft moorings, reducing the competition for native fish, developing new tributary habitats for native fish, and using a reregulation dam (build another dam below the Glen Canyon Dam to regulate river flow) are all valid management techniques that merit detailed investigation and consideration. Several environmental and recreational organizations, although supporting the preferred alternative, were concerned that Reclamation changed certain parameters of the preferred alternative very late in the EIS process. Specifically, the draft EIS’ preferred alternative had a maximum release level of 20,000 cfs and a maximum rate of increase (upramp rate) of 2,500 cfs per hour. In the final EIS, Reclamation modified the preferred alternative to allow for a maximum release level of 25,000 cfs and a maximum upramp rate of 4,000 cfs per hour. Two basic concerns exist about this change: (1) the higher parameters were substituted in the final EIS without adequate scientific evidence that such flows would not negatively affect the downstream resources of the Glen and Grand canyons and (2) two parameters were changed simultaneously, which could compromise the ability to scientifically monitor and assess the future impacts of these flow parameters in the proposed adaptive management framework. Reclamation believes that it has adequately addressed both of these concerns by conducting an assessment of the proposed changes. Some agencies, including the Wyoming State Engineer’s Office, America Outdoors, American Rivers, and the Sierra Club Legal Defense Fund still believe that adequate specific scientific testing was not done to fully evaluate the effect of changing these flow parameters. However, these groups still support the preferred alternative at this time because of Reclamation’s proposed Adaptive Management Program. The New Mexico Interstate Stream Commission believes that the spillway gates on the Glen Canyon Dam must be increased in height by about 4.5 feet to add the flexibility to accomplish flood protection without reducing the water supply available to the Upper Colorado Basin. The Commission, which supports the preferred alternative, also believes that the selective withdrawal outlet proposal for Glen Canyon Dam has not been adequately justified; the estimated cost of $60 million needs to be arrayed against the resulting benefits; and an assessment needs to be made of the potential adverse impacts associated with increasing water temperature. Future monitoring and research efforts were a concern of several groups, including federal agencies, Native American tribes, and an environmental group. For example, American Rivers urged Reclamation to do everything in its power to ensure that an effective Adaptive Management Program be in place or sufficiently delineated in scope and substance and that a specific long-term monitoring program be identified that will quantify any impacts before the proposed flow changes are implemented. | Pursuant to a legislative requirement, GAO evaluated the Bureau of Reclamation's final environmental impact statement (EIS) on the operations of the Glen Canyon Dam, focusing on: (1) whether the Bureau's determination of the impact of various operating alternatives on selected resources was reasonable; and (2) key interested parties' concerns about the final impact statement. GAO found that: (1) in general, Reclamation used appropriate methodologies and the best available information in determining the potential impact of the dam's various flow alternatives on selected resources; (2) GAO identified some shortcomings and controversy in Reclamation's application of certain methodologies, and some of the data Reclamation used in making its impact determinations were dated, preliminary, or incomplete; (3) these limitations, combined with the inherent uncertainty associated with making forecasts, reduce the precision of the impacts in the statements, and some uncertainty remains; (4) according to GAO's analysis and the opinions of experts, these limitations are not significant enough to alter the relative ranking of the flow alternatives or render the final EIS unusable as a decisionmaking document; and (5) Reclamation recognizes that uncertainties still exist and intends to initiate a process of adaptive management that would provide for long-term monitoring and research to measure the actual effects of the selected alternative. GAO also found that, many of the key interested parties affected by the Glen Canyon Dam's EIS support the process used by Reclamation to develop the EIS as well as the implementation of the preferred alternative; however, while expressing their support, some interested parties raised specific concerns that still exist about the final EIS, including: (1) achieving compliance with the Endangered Species Act; (2) the economic impact of reducing the dam's hydroelectric power capacity; (3) the consideration of other possible causes of adverse downstream impacts; (4) the difficulties in measuring the impact of changes in the dam's operations; (5) the adequacy of measures for reducing the frequency of unscheduled floods; (6) the need for installing multilevel water intake structures on the dam to raise the downstream water temperature; and (7) the implementation of the adaptive management program. |
FSA manages and administers student financial assistance programs authorized under title IV of the Higher Education Act of 1965 (HEA), as amended. These postsecondary programs include the William D. Ford Federal Direct Loan Program (often referred to as the “Direct Loan”), the Federal Family Education Loan Program (often referred to as the “Guaranteed Loan”), the Federal Pell Grant Program, and campus-based programs. Annually, these programs provide more than $50 billion in student aid to approximately 8 million students and their families. As a consequence, the student financial aid environment is large and complex. It involves about 5,300 schools authorized to participate in the title IV program, 4,100 lenders, and 36 guaranty agencies. Currently, FSA oversees or directly manages approximately $200 billion in outstanding loans representing about 100 million borrowers. Congress has recognized the need to make federal agencies more results- oriented by shifting from a focus on adherence to required processes to a focus on achieving program results and customer satisfaction. Toward this end, Congress established PBOs, which are discrete management units remaining in their current department under the policy guidance of the department secretary. PBOs are to commit to clear management objectives and specific targets for improved performance. These clearly defined performance goals, coupled with flexibility in managing operations and direct ties between the achievement of performance goals and the pay and tenure of the head of the PBO and other senior managers are intended to lead to improved performance. In October 1998, Congress established FSA as the government’s first PBO. As defined in the legislation, the specific purposes of the PBO are to improve service in the student financial assistance programs; reduce costs of administering the programs; increase accountability of officials; provide a greater flexibility in management; integrate information systems; implement an open, common, integrated delivery system; and develop and maintain a system containing complete, accurate and timely data to ensure program integrity. FSA’s enabling legislation also, among other things, requires the appointment of a chief operating officer; requires the development of 5-year and annual performance plans; requires the PBO, through the secretary, to report annually on the performance of the PBO; requires the PBO to have performance agreements for the COO and other senior managers; requires the COO in consultation with the secretary to appoint a student loan ombudsman; allows for the payment of performance bonuses to the COO and other senior managers; allows FSA to make use of certain personnel and procurement flexibilities. We have reported on selected agencies’ use of performance agreements, including FSA, the Department of Transportation, and the Veterans Health Administration. Although these three agencies developed and implemented agreements that reflected their specific organizational priorities, structures and cultures, we identified five common emerging benefits from each agency’s use of the agreements. These emerging benefits include: strengthened alignments of results-oriented goals with daily operations, collaboration across organizational boundaries, enhanced opportunities to discuss and routinely use performance information to make program improvements, results-oriented basis for individual accountability, and continuity of program goals during leadership transitions. In addition to FSA, other PBOs include the U.S. Patent and Trademark Office (USPTO), established as a PBO in March 2000, and the Federal Aviation Administration’s Air Traffic Organization (ATO), in December 2000. Similar to FSA, USPTO, and ATO are subject to the policy direction of their parent departments and are to have the flexibility and independence to operate more like a business, with greater autonomy over their budget, hiring, and procurements in carrying out their functions. Further, USPTO and ATO are also required to designate an individual responsible for operational improvements, develop multiyear and annual performance plans, implement performance agreements, and provide for performance bonuses. The British Next Steps initiative was used as a model in crafting the PBO concept in the United States. The Next Steps agencies—now known as executive agencies—are still the predominant form of service delivery in the United Kingdom. As of December 2001, there were over 130 executive agencies covering more than three-quarters of the British civil service. FSA has taken several steps toward developing and implementing a strategic direction—its plan for achieving the purposes Congress specified for it in the PBO legislation—but, even though these efforts have shown promising results, additional actions are needed. FSA’s performance plan discusses its three strategic goals—increase customer and employee satisfaction while decreasing unit cost—and the annual goals and strategies it will use to accomplish these three goals. The performance plan, however, could be more useful to congressional decision makers with respect to systems integration and program integrity. FSA has also begun to implement a balanced scorecard—a report that links employees’ day-to-day activities with the organization’s progress toward its strategic goals, but even with the scorecard, some employees have found it difficult to make this link. Finally, FSA and the department have not met its requirement to report annually to Congress on its progress in meeting the goals laid out in its performance plan, along with other requirements specified in the PBO legislation. FSA’s performance plan discusses strategic goals for increasing customer and employee satisfaction and reducing unit costs. In addition, it includes measures for gauging FSA progress in meeting each of these strategic goals. (See table 1.) FSA’s management uses these goals and associated performance measures to determine areas for quality improvement, monitor changes in customer perceptions, and evaluate the success of ongoing quality improvement efforts in its student aid delivery. To measure customer and employee satisfaction, FSA uses the American Customer Satisfaction Index (ACSI) and the Gallup Q12, respectively. Both measures are used by the private sector and other government entities, and, as a result, FSA can compare its own scores with those of others. FSA’s scores on both the ACSI and Gallup Q12 increased from fiscal year 1999 through fiscal year 2001, suggesting improvement in both areas. Indeed, comments from representatives from several higher education associations we interviewed and who work closely with FSA also suggest that customer satisfaction has improved. For example, an association official noted the willingness of FSA managers to listen and learn from students, schools, and lending institutions. To track reductions in costs, FSA has developed a unit cost measure. FSA uses the measure to demonstrate how it is reducing the cost of administering the student aid programs. However, FSA’s current calculation has some limitations in this regard. First, in calculating unit cost, FSA divides budget obligations (an obligation reserves funds for an eventual cash payment for goods and services) by the total number of people who received aid. This means that FSA’s unit cost does not measure costs, per se. Further, the unit cost calculation does not include obligations FSA sees as beyond its control—obligations for services shared with the department (e.g., telecommunications) and obligations associated with loan consolidation, which is influenced by demand, for example. Obligations FSA considers as fully under its control include those for salaries and benefits, operations and modernization contracts, and general operations, such as travel, training, printing, and equipment. This means that unit cost does not measure total obligations per person receiving aid. Second, the way FSA currently calculates unit cost is a change from the way it calculated it in the past. This change makes comparing unit cost across years difficult. In 1998 through 2000, FSA calculated unit cost by dividing the actual cost (those it considered under its control) of administering student aid (instead of budget obligations) by the total number of people who had received aid. According to FSA officials, FSA changed the calculation of unit cost to make it more useful as a management tool, in part because actual costs for a particular year are sometimes not known until well into the next fiscal year and because managers are more accustomed to using budget obligations, in part because of their experience in using obligations in budget formulation and execution. Using actual cost in the calculation, the unit cost in fiscal year 2000 was $19.08. When FSA recalculated unit cost for fiscal year 2000 using budget obligations instead, the amount changed to $20.14. FSA officials told us that they believe the unit cost measure is a useful tool for internal management information purposes, allowing managers to gauge the efficiency of their operations and to highlight, for its employees, the importance of reducing costs. Although these are important objectives, FSA’s unit cost measure is less useful to congressional decision makers because, among other things, FSA does not include all program obligations in the measure nor explain the basis of its measure in reporting on its performance. According to the Federal Accounting Standards Advisory Board (FASAB), decision makers in Congress as well as the public should be provided with information on the full costs of programs and their outputs. The FASAB has also stated that agencies should develop and report cost information on consistent bases and that using different accounting bases and measurement methods can confuse users of cost information. Because FSA does not relate its unit cost measures to total program costs and because it has changed its method for calculating it, it is difficult to discern whether changes in the measure are indicative of changes in total program costs. In addressing systems integration and program integrity, FSA’s performance plan has several limitations. It is not always obvious how the goals and strategies included in the plan relate to systems integration, or how FSA can effectively assess systems integration by relying on measures for its strategic goals. Moreover, the performance plan provides only limited information regarding FSA’s strategies for achieving program integrity. Congress designated FSA as a PBO, in part, to encourage the integration of the many, disparate information systems used to deliver student financial aid. In 1997, we reported that Education would likely be unable to correct longstanding problems resulting from a lack of integration across its student financial aid systems until a sound systems architecture was established and effectively implemented. FSA subsequently devised an enterprise-wide systems architecture in response to our conclusion that such an architecture was needed, and in response to our related recommendations. As part of its continuing systems integration efforts, FSA recently initiated a new approach, commonly referred to as middleware, to provide users with a more complete and integrated view of information contained in multiple databases. We recently reported that in selecting middleware, FSA adopted a viable, industry-accepted means for integrating and using its existing data on student loans and grants. FSA’s implementation of the middleware technology remains in its early stages. FSA now needs to properly implement and manage its strategy. If implemented and managed properly, this new technology should help ameliorate FSA’s longstanding database integration problems. While FSA’s strategy for integrating its many computer systems shows promise, both we and Education’s IG have found that neither its performance plans nor its subsequent annual reports readily provide information about its progress in integrating systems. As a step toward providing this information, the IG recommended that FSA include an overall systems integration goal that was objective, quantifiable, and measurable. The IG stated that an overall systems integration goal would help to inform Congress and others of FSA’s progress in integrating systems. However, FSA’s COO disagreed with this recommendation, arguing that FSA could not achieve its strategic goals without integrating its systems and therefore a distinct systems integration goal was unnecessary. While FSA’s performance plans included numerous goals and strategies, it is not always obvious how they relate to systems integration. For example, the performance plan identifies one of FSA’s strategies as “create the data mart.” However, what the data mart is or how completing it would bring FSA closer toward integrating its systems is never explained. Similarly, in an earlier performance plan, FSA referred readers to its Modernization Blueprint— its plan for integrating and modernizing its student aid information systems—for additional information on its goals and strategies. However, Education’s IG characterized the Modernization Blueprint as lengthy, complex and lacking clear performance goals and measures. FSA relies on the measures for its strategic goals to reflect the results of its system integration effort, even though they were not specifically designed to do so. Many factors unrelated to FSA’s systems integration efforts influence these measures. FSA’s technical assistance activities, for example, may result in increased customer satisfaction even though these activities do not involve systems integration. On the other hand, FSA could make technological progress in integrating its systems that would not be evident to the customer. For example, before implementing systems to integrate databases, FSA spends considerable time developing the databases. Measures of customer satisfaction would not capture these initial efforts. As a result, FSA’s customer satisfaction measure may not fully reflect progress made or lack of progress with regard to systems integration. Another goal Congress prescribed for FSA was to enhance program integrity. FSA had no strategic goal for program integrity in its fiscal year 2001 and earlier performance plans, but draft documents FSA provided to us suggest that its fiscal year 2002 plan may include such a goal. It is unclear from these draft documents, however, how FSA will define measurable outcomes to demonstrate its progress in enhancing program integrity. FSA works to ensure program integrity in many ways, including providing technical assistance to schools to increase compliance with regulations, working to prevent defaults, and collecting on defaulted loans. FSA’s draft fiscal year 2002 performance plan reflects its increasing reliance on providing technical assistance to schools as a way to ensure their compliance with financial aid rules and regulations. In the past, FSA relied much more extensively on conducting on-site program reviews to assess schools’ compliance with rules and regulations. The following list, taken from FSA’s fiscal year 2002 performance plan, shows the technical assistance strategies FSA plans to implement during fiscal year 2002: Develop and deliver a series of services to new schools, which includes assistance during the first 12 months of their participation in Title IV programs. Identify trends in risk areas and provide targeted technical assistance to schools. Conduct at least three national conferences for schools. Develop a “How To” guide with our oversight partners on processing school closures that focuses on reducing the impact to students. Promote the Title IV schools’ quality performance by providing them with tools for understanding and improving management practices, program requirements, and verification outcomes. Identify areas for improving compliance effectiveness and take the appropriate steps to fix them. While FSA has developed strategies intended to improve schools’ regulatory compliance, it is not clear how FSA will know whether its strategies are effective. First, FSA has not developed an indicator of schools’ compliance. Second, while FSA’s fiscal year 2002 performance plan defines success for the strategies shown above, the definitions may not be appropriate. For example, FSA plans to conduct at least three national conferences for schools to disseminate information about student financial aid programs and processes including program integrity. FSA states that high scores on participant evaluations of these national conferences will indicate its success in disseminating this information. While participant evaluations may reflect the quality of presentations, they will not indicate whether the information helped institutions comply with applicable laws, regulations, and procedures. Another way that FSA ensures program integrity is through its efforts to collect and prevent defaulted student loans. FSA’s draft fiscal year 2002 performance plan specifies the goals it has for default management; however, it includes only limited information about the strategies it will use to achieve those goals. For example, in its fiscal year 2002 plan, FSA includes the following goals for default management: increase the fiscal year 2002 default recovery rate to 15 percent, ensure that the defaults recovered exceed the total default claims for the fiscal year, demonstrate the pursuit of improved default management and prevention strategies, and keep the default rate under 8 percent. FSA’s plan, however, only includes one strategy to address these goals—expand the use of the National Directory of New Hires—a database matching program—to recover $200 million in defaulted student loans. As the result of not giving details on its strategies for default recovery and prevention, it is not clear how FSA will achieve its goals relating to default management and how its efforts help ensure program integrity. In order to help employees connect the work of individual teams to the FSA-wide strategic goals, FSA’s management has adopted the “balanced scorecard.” The scorecard is intended to provide a simple, one-page presentation of FSA’s performance on its three strategic goals. The scorecard also reports on team-specific contributions towards achieving the three strategic goals. Because the balanced scorecard approach is a new initiative (about one quarter of FSA’s teams are using it), FSA has not yet resolved some of the difficulties that staff have in linking scorecard results to their work. Some staff reported that it was difficult to understand how they could influence scores for customer satisfaction and unit cost measures. For example, one FSA manager told us that she thought the ACSI data was too complicated and at too high a level for it to be useful to front-line staff while others said their staff did not understand the unit cost calculation and how they could affect it. The PBO’s enabling legislation requires the COO, through the secretary, to report annually on the performance of the PBO to Congress based on its previous year’s performance plan. For fiscal year 2000, although FSA prepared an annual report, it was not submitted to Congress as required by the legislation. FSA submitted a draft fiscal year 2000 report to the department in March 2001; however, the draft was incomplete and not in compliance with the PBO legislation, according to a senior Education official. Despite attempts to finalize the report, Education, in a subsequent review of the draft late in the year, still found that the report did not comply with statutory requirements. Given the late date and in light of the fact that the subsequent year’s performance report would soon be due, Education decided not to submit the fiscal year 2000 report at that time. Instead, according to the official, Education and FSA plan to issue a combined report for fiscal years 2000 and 2001. The department has not yet received the combined report from FSA. In transmitting the report through the secretary, FSA is required to submit specific information related to the performance of the PBO, but FSA’s reports have been incomplete. The annual report must include, among other things, the evaluation rating of the performance of the COO and other senior managers including the amounts of bonus compensation awarded to these individuals, and recommendations for legislative and regulatory changes to improve service to students and their families, and to improve program efficiency and integrity. In the documents FSA submitted for fiscal year 1999 and in its draft report for fiscal year 2000, did not include required information such as recommendations for legislative and regulatory changes. In addition, while FSA included information about the amounts of bonus awarded to the COO and senior managers, it did not include the evaluation rating for them as required. FSA has begun to better organize its services and manage its employees, but gaps exist in its human capital strategy and it has not yet implemented performance management initiatives to fully develop and assess its employees. To better serve its customers and improve employee performance, FSA reorganized its operations, hired senior managers accountable for specific strategic goals, and encouraged accountability among all employees. However, FSA’s human capital senior manager has not been an active participant in setting FSA’s strategic direction. Also, FSA still faces challenges in planning for the succession, deployment, and training of staff. Moreover, FSA has not yet implemented a performance management system though its enabling legislation requires it to do so. Sound human capital principles state that organizations should be structured on the basis of their strategic goals, have a strategic vision, and ensure accountability for commitment to those goals and vision. FSA has taken steps to adopt these practices. Since being established as a PBO, FSA has restructured itself into three customer-oriented “channels”—one for students, schools, and financial partners (guaranty agencies and lenders)—-each led by a channel general manager. According to FSA officials, the realignment was intended to improve the organization’s performance and increase coordination of mission-critical activities. FSA also created a number of “enterprise” units to support the channels by focusing on internal customer or stakeholder needs. These units, each with its own enterprise director, focus on activities such as analysis, communications, and human resources. The operations of the chief financial officer (CFO) and chief information officer (CIO) are considered support organizations responsible for technical and financial management practices and infrastructure. Figure 1 shows how FSA’s total workforce of about 1,200 employees is organized and how the COO positioned his office in the middle of FSA’s official organization chart to stress the importance of the three customer-oriented channels. In addition to changing the way its staff is organized, FSA also created a management council to steer the organization strategically and ensure communication among the channels. The council is comprised of the COO, CIO, CFO, each of the channel general managers, and representatives from FSA’s primary contractors responsible for modernizing information systems. To hold FSA accountable for achieving results, FSA’s enabling legislation requires the COO and each senior manager to enter into an annual performance agreement that sets forth measurable organizational and individual goals. According to FSA officials, the organization’s annual performance plan serves as the basis of these agreements. The annual goals and strategies for which each manager has responsibility serve as his or her agreement. Since the annual goals and strategies contribute to one or more of FSA’s three strategic goals, the performance agreements ensure that managers are responsible for contributing to the organization’s overall performance. For example, a channel manager may be responsible for increasing the number of aid applications filed electronically and, in so doing, help FSA achieve its strategic goals of increasing employee and customer satisfaction and reducing unit cost. Each fall, senior managers submit to the COO a document indicating how their work over the prior year has led to the accomplishment of the annual goals and strategies in their performance agreements. If they achieve their goals, they are awarded bonuses—50 percent of the bonus is based on the COO’s evaluation of the managers’ overall contribution; the remaining 50 percent is based on the extent to which FSA reached its three strategic goals. The COO is also eligible for a bonus based on the secretary’s evaluation of the COO’s performance. The COO and FSA senior managers who have performance agreements with the COO are also subject to removal for failing to achieve sufficient progress toward performance goals. In fiscal year 2001, the COO received a bonus of $60,165 and 17 other senior managers received bonuses ranging from $10,277 to $30,082. FSA has also tried to encourage and reward high performance throughout the organization by awarding bonuses to all staff based on the COO’s assessment of FSA’s success in meeting its strategic goals. For fiscal year 2001, staff received a bonus equivalent to 90 percent of their pay for one biweekly period. An FSA employee making $1,000 per biweekly period would receive a bonus of $900, for example. FSA has taken important steps towards developing its human capital, but gaps remain in its overall human capital approach. In its fiscal year 2002 performance plan and human capital plan FSA laid out its human capital priorities, such as seeking to implement employee incentive and recognition programs, but it did not discuss its strategy for using its human capital resources to drive the organization toward achievement of its three strategic goals. Our work on human capital management has shown that sound human capital practices require agencies to transform their traditional human resources function from a support office to a partner in setting the organization’s strategic direction, preparing for future needs by identifying pending retirements and anticipating hiring needs, and linking training and development activities to employee skill sets and expectations for job performance. FSA’s efforts in these areas, however, have fallen short because it has not fully addressed these critical elements of human capital management. The position of human resources unit director—the designated human capital senior manager—was not permanently staffed until May 2000—in part, because it was thought of as “second tier,” according to one official. Further, the existing human resources director does not have an active role on FSA’s Management Council. While some of the members of the Management Council may have human capital responsibilities for their particular offices, no one person on the council has overall responsibility for FSA’s human capital planning and management. The strategic role of human capital staff is vital if FSA is to increase the effectiveness of its current human capital management practices. However, nothing in the performance plan or FSA’s recently proposed human capital plan suggests that the human capital function will be elevated in stature within FSA and hold “a place at the table” among senior management in decision making. In the high-performing organizations that we studied, human capital staff participated as full members of management teams and ensured that those teams proactively addressed human capital issues. For example, several organizations we studied told us that they involved their human capital staff as decisionmakers and internal consultants by having leaders of their human capital staff serve on senior executive planning committees similar to FSA’s Management Council. In addition, while FSA, in its draft human capital plan, has proposed expanding the role of its human capital unit to include serving as a liaison to the department in carrying out agency-wide programs and policies, and overseeing specific human capital initiatives within FSA, it proposed a similarly expanded role in a September 2000 plan that was never approved by the department. As of September 2001, about 38 percent of FSA’s workforce was eligible for retirement, yet FSA does not have a formal plan to address pending retirements. Should those eligible to retire do so, FSA will be faced with a substantial loss of institutional knowledge. FSA’s draft human capital plan begins to address attrition by discussing how it will work to retain and reward top performers, get rid of poor performers, use contractors to complete appropriate business functions, but FSA has no hiring plans that address such factors as how many staff are needed and the skills they should possess. Having a plan that addresses such factors is important even though FSA cannot immediately hire individuals for key positions due to departmental hiring restrictions. According to several FSA officials, hiring has been problematic in light of special departmental procedures that have affected FSA’s ability to fill about 300 vacancies. These procedures—effective since January 24, 2001—restrict certain personnel selections, reassignments, and promotions at FSA and a number of other offices within the department. Currently, FSA can only reassign or detail its staff within the PBO, and it must request exemptions to these procedures for all other decisions related to hiring, promoting, or detailing staff. Decisions related to posting employment opportunities and extending employment offers, for example, must first be approved by the department. Between February 7 and December 7, 2001, FSA requested 73 exemptions to these procedures. Of these, 33 were approved, while the remaining have been denied or have not yet been acted upon. We found that concerns over hiring and the deployment of existing staff were particularly prominent in the Case Management and Oversight (CMO) unit in the schools channel, which performs functions critical to ensuring the integrity of FSA’s financial aid programs. Among other things, CMO staff certify schools’ eligibility to participate in student aid programs and enforce programmatic requirements. To more effectively use its staff and fulfill its responsibilities, CMO has instituted a variety of strategies. For example, CMO has recently implemented an assessment tool to identify schools with the greatest likelihood of noncompliance with financial aid regulations. Using this tool, CMO believes it can better target its staff’s enforcement activities. However, in three of the five regional offices we visited, CMO officials told us that these efforts were not enough. These officials expressed concern that, without sufficient staff, institutional oversight and technical assistance activities could decrease, potentially compromising the integrity of the financial aid programs. FSA has expanded the training opportunities available to its staff since its PBO designation. Table 2 provides a description of current training programs. Even though FSA has expanded the courses it offers, it has yet to implement tools that would allow it to assess its employees’ training needs. FSA has proposed what it calls the “performance development process” (PDP). The PDP has two core components—improving employee performance by introducing Individual Development Plans (IDP) to the workforce and documenting employee skills through a comprehensive skills catalogue—intended to identify employees’ training needs. IDPs would allow all staff to link their professional goals to the goals of FSA by developing work plans in collaboration with their supervisors. FSA managers would appraise employees’ job performance by determining whether they’ve met, exceeded, or failed to reach the goals they have self- assigned in their IDP. The second part of the PDP, the skills catalogue, will attempt to allow FSA managers to identify employees’ training needs by ascertaining the skills they already have. FSA proposed the PDP not only as a sound human capital management tool, but also in order to meet legislative requirements. The PBO legislation requires FSA to establish a performance management system that creates goals for the performance of employees, groups, and the organization consistent with the PBO’s performance plan. Despite the steps discussed above, FSA’s relationship with its union has made implementation of many of these initiatives difficult. Both FSA and union officials have had difficulty negotiating on related proposals. According to its collective bargaining agreement, the union has the opportunity to review actions affecting any aspect of employee working conditions, including those related to training, development, and appraisals. According to an FSA official, because FSA and the union could not reach agreement on the proposed PDP, due to unresolved differences regarding the appraisal component of the PDP, FSA has recently withdrawn the proposal from negotiations, leaving the status of an integral component of its human capital plans undecided. Education continues to take steps to clarify FSA’s level of independence and its relationship with other Education offices. The legislation establishing FSA as a PBO provided that, subject to the secretary’s direction, FSA would exercise independent control with respect to certain functions. To address this issue, Education and FSA, under the previous administration, developed and signed memorandums of understanding (MOU) to specify the authorities provided to FSA and procedures concerning how FSA would interact with other Education offices. With the arrival of the current administration in January 2001, Education established special interim procedures for all its department units, including FSA, that were intended to ensure that personnel and financial resources are managed effectively and efficiently throughout the department while long term management plans are being developed. As a result of the interim procedures, Education now provides greater direction and oversight of FSA than did the previous administration. Education is currently reviewing FSA’s role and responsibilities as part of that overall departmentwide management planning effort. The results of this planning effort will be used to make future decisions concerning FSA’s level of independence and its relationship to other Education offices, according to Education officials. The legislation establishing FSA as a PBO provided that, subject to the secretary’s direction, FSA would exercise independent control with respect to certain functions. In addition, the secretary in agreement with the COO, is authorized to allocate to the PBO such other functions that they determine necessary to achieve the purposes of the PBO. Interviews with FSA and former Education officials indicated that together they struggled with balancing the PBO’s independence and identifying how the organization fit into the structure of the department. For example, issues of service duplication with other Education offices in areas like human resources and information technology had to be balanced with FSA’s desire to mold these functions to meet its mission. To address such issues, the department and FSA, under the previous administration, developed and signed memorandums of understanding (MOUs) for human resource management, acquisition and contracting, and information technology. These documents delegated certain authorities to the COO and set out policies and guidelines to be followed because FSA’s operations in these areas interacted with the rest of the department. For example, in the area of human resources, the MOU delegated authority for, among other things, establishing the performance management system and hiring to FSA. Because some of these human capital functions required union involvement to complete, the MOU required FSA to work in consultation with the department to finalize any changes that impact the terms of the department’s collective bargaining agreement. Since the change in administration in January 2001, the department has been reassessing the MOUs and FSA’s relationship with the department. In contrast to the past, FSA is currently subject to special interim procedures established by the department for all of its units in January 2001 and updated in September 2001. According to a departmental memo, the special procedures were put into place to allow the department to manage its personnel and financial resources in the most effective and efficient ways possible and in accordance with the President’s Management Agenda. An overall strategy for improving the management and performance of the federal government, the Agenda specifically includes taking actions that result in FSA’s student financial aid programs no longer being designated as high risk by GAO. The special procedures, for principal offices with senior political appointees in place, require prior departmental approval to (1) advertise and fill positions at the senior level, (2) reassign employees, (3) hire or continue the services of any consultant, or (4) award any new contracts above $100,000. The special procedures pertaining to FSA are stricter and the same as those applicable to principal offices with vacancies at the senior political level. These procedures require department-level officials to review and act on all administrative, management, and policy issues. As a result of these changes, FSA’s independence has lessened. As previously discussed, for example, hiring has been problematic in light of the special departmental procedures and has affected FSA’s ability to fill about 300 vacancies, according to several FSA officials. Education responded to the President’s Management Agenda by developing its Blueprint for Management Excellence. The Blueprint specifies the steps it will take to have GAO’s high-risk designation removed from its student financial aid programs and addresses other longstanding management challenges facing the department. As noted in its Blueprint, the department is reviewing the prior MOUs to “determine what is and is not working as intended.” The Blueprint also provides that after consultation with the community and members of Congress, the department will resolve relationship issues between FSA and other department offices. To help develop comprehensive strategies to implement its Blueprint, the department is currently working with the National Academy of Public Administration (NAPA) and the Private Sector Council(PSC). According to Education officials, decisions concerning FSA as well as plans to address departmental management challenges will be based on the results of these efforts. Education expects its work with NAPA and PSC to result in a final report, scheduled to be issued in June 2002. Congress established FSA as a PBO in hopes that doing so would result in long sought operational changes in its programs. As we have discussed, elements of PBO reform include an expectation for results in exchange for flexibility. Although established as a PBO for a relatively short time, FSA has made important progress in undertaking reforms and its performance to date, as reflected in gains in customer and employee satisfaction, shows promise. Despite these gains, FSA needs to make additional improvements. As a PBO, FSA must ensure that it meets its obligation to report the progress it is making towards the goals Congress established for it. Key to reporting results is submitting complete, useful, and timely information to Congress. Because of the longstanding concerns over FSA’s lack of the financial and management information needed to ensure the integrity of the student financial aid programs, FSA needs to clearly inform Congress and the public of its progress in addressing this issue. In particular, FSA needs to improve its reporting of the progress it is making with regard to implementing its plans for integrating its student financial aid data systems and enhancing the integrity of its student loan and grant programs. In addition, in light of the complexity of FSA’s unit cost calculation as well as recent changes in how it calculates costs, it will be important for FSA to disclose these issues in future performance plans and reports. FSA also needs to ensure it makes human capital management an integral part of its strategic approach for accomplishing its mission. Without doing so, FSA cannot ensure that its workforce is adequately prepared to meet future challenges and accomplish its mission. In particular, FSA needs to address critical issues including workforce planning and development. To ensure that congressional decision makers and the public understand the measure FSA uses to gauge its performance with respect to the costs of administering student financial aid programs, we recommend that the secretary of education direct FSA’s COO to fully disclose in its performance plans and subsequent performance reports the bases of its unit cost calculation and to clarify what costs are included and excluded from the calculation. To ensure accountability for making continued progress toward its legislative mandate to integrate systems, we recommend that the secretary of education direct FSA’s COO, in collaboration with the secretary, to develop and include clear goals, strategies, and measures to better demonstrate in FSA’s performance plans and subsequent performance reports its progress in implementing plans for integrating its financial aid systems. To ensure accountability for enhancing the integrity of its programs, we recommend that the secretary of education direct FSA’s COO, in collaboration with the secretary, to develop performance strategies and measures that better demonstrate in its performance plans and subsequent performance reports its progress in enhancing the integrity of its student loan and grant programs. In particular, FSA should develop measures that better demonstrate whether its technical assistance activities result in improved compliance among schools and additional strategies for achieving its default management goals. To inform Congress about FSA’s performance and to comply with statutory requirements, we recommend that the secretary of education and FSA’s COO work collaboratively to take the steps necessary to ensure that complete and timely annual performance reports are submitted to Congress. To ensure that FSA’s workforce is adequately prepared to meet future challenges and accomplish its mission, we recommend that the secretary of education and FSA’s COO coordinate closely to develop and implement a comprehensive human capital strategy that incorporates succession planning and addresses staff development. In written comments on our draft report, Education agreed with our reported findings and recommendations and discussed its efforts to address longer term and structural issues that hinder the efficient and effective performance of FSA and the department. In response to our recommendation regarding FSA’s unit cost calculation, Education told us that it is in the process of working with FSA senior management to refine the measure and will stop using the current measure in the mid-year amendment to the FSA 2002 performance plan. In addition, Education said that it would include a detailed explanation of how unit costs are calculated in the upcoming annual performance report. Moreover, FSA’s performance plan will be revised to establish measurable goals and milestones for systems integration efforts to provide both direction to FSA and enhance its accountability. In response to our recommendation regarding program integrity issues, Education said that it is examining new performance measures that focus on compliance and risk. Also, Education said that it is working with FSA to finalize the 2000-2001 annual performance report and told us that it will submit a report that meets all statutory requirements to Congress soon. Finally, Education said that it is developing comprehensive strategies integrating human capital management, competitive sourcing, and restructuring for the entire Department. As part of this effort, Education said that it would direct FSA’s COO to implement and execute the steps in these strategies that are applicable to FSA’s goals and objectives. Education also provided technical clarification, which we incorporated when appropriate. Education’s written comments appear in appendix I. We are sending copies of this report to the secretary of education and other interested parties. We will also make copies available to others upon request. This report is available at GAO’s homepage, http://www.gao.gov. If you or your staff have any questions about this report, please contact me on (202) 512-8403 or Jeff Appel at (202) 512-9915. Other contacts and acknowledgments are listed in appendix II. In addition to those named above, the following people made significant contributions to this report: Jonathan Barker, Patricia Bundy, Patrick DiBattista, Joy Gambino, Simin Ho, and Judith Kordahl. | The Department of Education's Office of Federal Student Aid (FSA) administers more than $53 billion in financial aid for more than 8.1 million students. Since 1990, GAO has included student financial aid on its high-risk list. To address these and other long-standing management weaknesses, Congress established FSA as a performance-based organization (PBO) within Education in 1998. To develop and implement a strategic direction, FSA set three strategic goals, created indicators to measure progress toward these goals, and developed a tool to link employees' day-to-day activities to these goals. The goals are to (1) increase customer satisfaction, (2) increase employee satisfaction, and (3) reduce unit cost. FSA's efforts have generally improved customer and employee satisfaction scores. FSA has begun to implement some human capital practices to better organize its services and manage its employees. But gaps exist, and FSA has not yet implemented performance management initiatives to develop and assess its employees. To better serve customers, FSA reorganized to reflect its different customers--students, schools, and financial partners. To encourage accountability, FSA is linking staff bonuses to FSA's strategic goals. Education continues to clarify FSA's level of independence and is now reviewing FSA's role and responsibilities as part of the departmentwide management planning effort. |
Colombia is the source of 90 percent of the cocaine and 40 percent of the heroin entering the United States. To assist the Colombian government in its efforts to implement Plan Colombia and reduce the cultivation and trafficking of illegal drugs, the United States has pursued a strategy emphasizing interdiction, aerial eradication and alternative development. The strategy has resulted in a 33 percent reduction in the amount of coca cultivated in Colombia over the last 2 years—from 169,800 hectares in 2001 to 113,850 hectares in 2003—and a 10 percent reduction in the amount of opium poppy cultivated over the last year. However, according to Drug Enforcement Administration officials and documents, cocaine prices nationwide have remained relatively stable—indicating that cocaine is still readily available—and Colombia dominates the market for heroin in the northeastern United States. Despite improvements in Colombia’s security situation in 2003—for example, the murder rate declined 20 percent that year—insurgent and paramilitary groups still control large parts of the countryside. According to State Department officials, the insurgents exercise some degree of control in up to 40 percent of Colombia’s territory east and south of the Andes—which, as illustrated in figure 1, includes the primary coca-growing regions of Colombia. These groups, which include the Revolutionary Armed Forces of Colombia, the National Liberation Army, and paramilitary forces such as the United Self Defense Forces of Colombia, are involved in every facet of narcotics trafficking and are on the State Department’s list of terrorist organizations. Recognizing that the insurgents and illicit drug activities are inextricably linked, the Congress provided “expanded authority” in 2002 for the use of U.S. assistance to Colombia. This authority enables the government of Colombia to use U.S.-provided equipment to fight groups designated as terrorist organizations as well as to fight drug trafficking. Beginning in fiscal year 2000, the United States substantially increased counternarcotics assistance to Colombia. For fiscal years 2000 through 2004, the United States provided a total of approximately $3.3 billion, making Colombia the fifth largest recipient of U.S. assistance since fiscal year 2002. (See table 1.) Most of this funding was provided through the Andean Counterdrug Initiative, an appropriation provided annually that supports counternarcotics programs throughout the Andean region. Much of this assistance was provided to the Colombian Army to conduct interdiction missions and to the Colombian National Police to conduct the aerial eradication of coca and poppy. For fiscal year 2005, the administration has proposed an additional $571 million for assistance to Colombia. U.S.-provided nonmilitary assistance to Colombia indirectly assists in reducing narcotics cultivation and trafficking by providing alternatives to cultivating illicit crops, assisting vulnerable groups, and supporting democracy and rule of law reforms. As shown in table 2, for fiscal years 2000 through 2004, the United States has programmed about $566 million for nonmilitary assistance to Colombia, which represents about 17 percent of the total U.S. assistance to Colombia during the period. State, Justice, and USAID have obligated about $575 million and expended about $310 million of these funds. Most of the funding—about $210 million—has been programmed for democracy, rule of law, and enhancement of state presence programs. The administration has requested an additional $150 million for nonmilitary programs in fiscal year 2005. Our past reports have addressed each of these nonmilitary programs. In February 2002, we reported that USAID faced serious obstacles to developing alternatives to cultivating illicit crops in Colombia, among them the Colombian government’s lack of control over many coca-growing areas. In August 2001, we reported that international organizations generally met the emergency food and shelter needs of internally displaced persons in Colombia, but were less effective in meeting their longer-term needs, and that the U.S. government lacked an overall policy to coordinate its efforts for dealing with the displaced. In March 2003, we reported that U.S. democracy programs in six countries, including Colombia, had a limited effect as a result of various factors, and questions remained regarding the sustainability of the gains made with U.S. assistance. A key component of U.S. counternarcotics strategy in Colombia has involved providing nonmilitary assistance for programs to promote legitimate economic alternatives to the cultivation of coca and opium poppy; assist Colombia’s vulnerable groups, particularly internally displaced persons; and strengthen the country’s democratic, legal, and security institutional capabilities. Each of the three U.S. nonmilitary assistance programs has begun to produce results envisioned in 2000 when U.S. funding for Plan Colombia was approved. However, each program has limitations. Alternative development projects often benefit only a few people or families; have difficulty marketing products; and, without additional sources of funding, likely cannot be sustained. The assistance for vulnerable groups program cannot address all the needs identified because of limited resources, and the number of individuals displaced and needing assistance is increasing. U.S. assistance for democracy and rule of law is a long-standing program, but progress has been limited because the government does not control large parts of the country, and many projects are small scale and have insufficient numbers of trained personnel and equipment. USAID oversees and implements the alternative development program. According to the agency’s strategy, the objective of the alternative development program is to provide economic and social alternatives to illicit crop production through short- and long-term projects involving crop substitution, infrastructure development, and income generation projects in rural parts of the country, as well as in secondary cities affected by illicit crop cultivation. The alternative development program has had some success promoting economic and social alternatives to illicit crop production, but individual projects are relatively localized and small in scale. USAID’s original alternative development strategy from 2000 focused primarily on encouraging farmers to manually eradicate illicit crops, and those who did received assistance in licit, short-term, income-producing opportunities. This assistance was intended to complement the eradication and interdiction components of Colombia’s effort to eliminate coca cultivation in southern Colombia. USAID primarily supported initiatives in the departments of Caquetá and Putumayo, where, at the time, much of Colombia’s coca was cultivated. USAID (and its implementing partners) found it difficult to implement projects in the largely undeveloped south, where the Colombian government exercised minimal control. In addition, poor soil made growing licit crops a challenge, and farmers found it more lucrative to continue growing coca. Furthermore, the USAID/Colombia mission estimated that implementing such a comprehensive alternative development program could involve assisting as many as 136,600 families and cost up to $4 billion over 3 years. As a result, USAID revised its approach in February 2002 to support long- term income-generating activities, focus more attention and resources outside southern Colombia, and encourage private sector participation. The agency’s revised strategy is to promote and leverage significant private sector investment in longer-term, economically viable agro-business and forestry initiatives, as well as linkages to small- and medium-sized enterprises. Unlike the initial alternative development efforts, the program is no longer based on an explicit mandate to assist illicit crop growers whose crops had been eradicated or who agreed to manually eradicate their illegal crops. Some current program participants were not directly involved in cultivating coca or poppy. USAID has alternative development projects in 25 of Colombia’s 32 departments. To assess its progress, USAID uses four measures: the number of hectares of illicit crops eradicated, the number of hectares of licit crops cultivated, the number of families benefited, and the number of small infrastructure projects established. Table 3 illustrates USAID’s reported accomplishments. Based on these four measures, the alternative development program has started to produce results. However, USAID officials acknowledge that these indicators do not measure the agency’s progress in reaching its primary objective of promoting economic and social alternatives to illicit crop production. Individual alternative development projects may employ only a small number of people for a short period of time or benefit a relatively small number of families. Without broader participation and financial support, such projects may not be sustainable if U.S. support is reduced. Furthermore, as we reported in 2002, the lack of security in the project areas continues to seriously hamper the Colombian government’s ability to develop infrastructure where illicit crop cultivation takes place, establish viable and reliable markets for licit products, and attract the private investment needed for long-term, income-generating development. For example: In 2002, a contractor received about $1.4 million from USAID to build a water treatment plant in Villa Garzón in the department of Putumayo. The plant is designed to provide clean water for the town and to create employment opportunities for local residents. Construction began in December 2002, and when we visited the site in January 2004, it was nearing completion. Although the project provided jobs for some local residents, these jobs will end shortly. Another contractor received funding for a hearts of palm canning plant in Puerto Asís, Putumayo, which is intended to provide long-term employment opportunities for the workers and income to farmers who grow palm fronds. The United Nations Drug Control Program built the plant with the government of Colombia in the late 1990s, but it was dormant for several years. USAID took over the plant in 2002. When we visited the site in January 2004, it was operating at 30 percent capacity. Although the plant had secured a buyer for its product, USAID support will end in September 2004, and the plant manager told us he did not know if the plant could maintain or increase its operating capacity when U.S. funding stops. The same contractor overseeing the hearts of palm plant also receives USAID funding to operate a woodworking center in Puerto Asís, where program participants make furniture parts. According to the project’s annual work plan, the woodworking center will directly employ 25 people. The contractor plans to sell the furniture parts for assembly elsewhere, targeting the North American market. However, when we toured the center, we learned that the contractor has not been able to market the wood products outside Putumayo because when the products are shipped to less humid regions, the wood cracks. An alternative development project outside Putumayo is designed to encourage families to cultivate specialty coffee rather than coca or opium poppy. To participate, farmers must commit to eradicate or not enter into illicit crop cultivation. However, the contractor has been able to market only a very limited amount of the product because before a specialty coffee can be marketed, measures must be taken to ensure that the coffee meets industry standards—a process that can take 1 to 5 years due, in part, to the need to renovate coffee farms and implement more stringent quality control procedures. Moreover, according to the contractor, before February 2004, security concerns prevented U.S. buyers from traveling to Colombia’s coffee-growing regions to evaluate the product. As we reported in February 2002, alternative development progress in Bolivia and Peru took 20 years of sustained U.S. assistance, and the host government agencies involved in the efforts continued to be heavily dependent on U.S. support. The situation in Colombia is similar. As noted earlier, the USAID/Colombia mission once estimated that a comprehensive alternative development program could involve assisting as many as 136,600 families and cost up to $4 billion over 3 years. The agency has requested about $56 million for the program in fiscal year 2005, and for fiscal years 2006 through 2008, USAID planning documents call for a total of $234 million. In addition, according to USAID officials, recent funding and personnel cuts have hurt the Colombian alternative development agency’s ability to support the USAID program. State and USAID implement programs to assist Colombia’s vulnerable groups—particularly its displaced population. Internally displaced persons—those forced to flee their homes because of armed conflict and persecution but who remain within their own country—are among the most at-risk, vulnerable populations in the world. They are unlikely to have adequate shelter, health care, and the ability to earn a livelihood. By many estimates, Colombia has one of the world’s largest internally displaced populations. The U.S. vulnerable groups program has provided assistance to many internally displaced persons and others, but program beneficiaries may not receive all of the services they need, and State and USAID do not track individuals after they receive assistance. In fiscal year 2003, State provided about $19 million to seven organizations for assisting Colombia’s internally displaced persons— generally for a 3-month period immediately following initial displacement. This emergency assistance included protection, shelter, medical assistance, and food and assistance targeted specifically to help displaced children. State also provided some emergency humanitarian assistance to Colombian refugees living in neighboring countries, primarily Ecuador. However, State does not have any written strategy outlining the objectives and performance goals of its vulnerable groups program. Furthermore, State does not routinely track the number of people its program supports. After several requests by us, State officials said the program assisted 763,000 internally displaced persons in 2003. State officials did not provide comparable figures for fiscal years 2000 through 2002. State does not have a mechanism to “hand off” its program beneficiaries to USAID’s longer-term assistance program after they have received the emergency aid. Although USAID’s annual report for fiscal year 2003 states that USAID helped internally displaced persons gain access to basic services after short-term emergency relief provided by State had expired, this has not happened in any systematic way. USAID’s Longer-Term Assistance During fiscal year 2003, USAID provided about $38.2 million to seven nongovernmental and international organizations for mid- to long-term development assistance to Colombia’s vulnerable groups. The agency reported that as of December 2003, its program had helped more than 1.4 million individuals. Following are examples of USAID’s projects that assist vulnerable persons. One grantee received $5.1 million from USAID to alleviate child hunger and improve the health and well-being of displaced families. The project’s two primary activities are a school feeding program and a health education project for mothers. While these services address a significant need, a relatively small number of beneficiaries will receive them. Children and adolescents account for half (at least 1 million persons) of Colombia’s displaced population. According to agency documents, 113,000 displaced school children will benefit from this program. Another USAID project in Soacha (just outside Bogotá) is designed to address the health and education needs of displaced Afro-Colombian children and their families. An assistance center provides day care to children in the community, trains youth in life- and job-related skills, and provides information to mothers about childcare and nutrition. Colombia has at least 279,000 Afro-Colombian internally displaced persons; this project will provide services to 120 Afro-Colombian children and their families, 100 adolescents and their families, 210 fathers, and 50 lactating mothers and their families. Another USAID grantee received $16.7 million to, among other things, provide microenterprise loans (averaging $1,000) and home improvement loans (averaging $2,000) to internally displaced persons. However, grantee officials stated that they have had minimal success with both types of loans. Internally displaced persons often move to new locations with little notice or lack the financial knowledge to manage a loan. For these reasons, the grantee has decided to limit the number of loans it awards. USAID’s program to rehabilitate and reintegrate excombatant children into Colombian society provides specialized, individualized care, including medical attention and psychosocial counseling. Some receive formal education; others receive vocational or agricultural training. When they reach age 18 or are reunited with their families, the children are supported through regional reference centers that provide continued assistance through a network of social service providers. Types of assistance provided include employment assistance, legal aid, and general services available through Colombia’s social service system. USAID reports that it has assisted 1,375 former child combatants, or roughly 13 to 23 percent of Colombia’s total child soldier population. About 450 to 500 children currently receive assistance through USAID’s rehabilitation and reintegration program. The rehabilitation center we visited had 30 former child soldiers enrolled. Program participants were taking traditional classes and learning useful skills through more unconventional projects. Some students were learning how to make household cleaning products and were communicating with a local company about marketing the products to the local community. However, the program may face difficulty reintegrating its beneficiaries into society. Several students we met with expressed concern about what will happen when they leave the center. One student stated that he wanted to stay and become a teacher, rather than leave. Although USAID reports that it has provided at least some assistance to more than half of Colombia’s estimated 2.5 million internally displaced persons, this does not mean that the individuals received all or even most of the services they needed. This is because most USAID grantees specialize in one or two areas of assistance and operate in different locations. Of the 27 departments in Colombia with vulnerable groups projects, more than half had just one or two grantees providing assistance. In addition, although USAID’s most recent annual report (January 2004) identifies “durable solutions” for program beneficiaries as one of its performance goals, USAID officials acknowledged that they have no way to track program beneficiaries once they have received assistance through one of the agency’s projects to determine whether they have been assimilated back into society or still need additional assistance. State and USAID programs to assist Colombia’s vulnerable groups are achieving some of the intended results, but U.S. assistance cannot address all the identified needs. One organization estimates that providing a basic package of services to all of Colombia’s internally displaced persons would cost approximately $1 billion. However, U.S. government expenditures for assistance to vulnerable groups have declined each year since fiscal year 2001—from $36 million in fiscal year 2001 to $21 million in fiscal year 2004. Nevertheless, the Office of the United Nations High Commissioner for Refugees estimates that in Colombia, 900 to 1,000 individuals are newly displaced everyday. In addition, USAID anticipates the demobilization of 30,000 insurgents and paramilitaries over a 5-year period. USAID estimates that the complete demobilization of all illegal armed groups in Colombia could cost between $254 million and $298 million. USAID, State, and Justice provide support and oversight for the democracy and rule of law programs. In the 1980s, the United States began to help Colombia and other Latin American countries improve their judicial systems as a way to counter political instability and support democratic principles and institutions. According to planning documents from the three agencies, the objectives are to promote a more responsive, participatory, and accountable democracy; enhance state presence; and strengthen Colombia’s justice sector. Democracy and rule of law programs are intended to increase the Colombian government’s control over its territory and thereby help prevent the cultivation of illicit crops in those areas. In addition, a strengthened justice sector would help enforcement of Colombian laws that make cultivation of coca and opium poppy illegal and afford greater protections to vulnerable populations. The United States has achieved some results in reaching its three main objectives in the area of democracy and rule of law reform in Colombia, but individual projects often produce limited results. USAID reports progress in promoting a more responsive, participatory, and accountable democracy in Colombia, but many of the projects are implemented on the scale of demonstration projects. State indicates that it has made progress toward enhancing state presence and public security through specially trained police units, but these units have limited equipment and show mixed results. Finally, Justice reports that it has made some progress in strengthening Colombia’s justice sector, but budget cuts have impeded the Colombian government’s ability to take over full program responsibility, and Justice has lowered its initial targets in some cases. USAID’s primary objective is to promote a more responsive, participatory, and accountable democracy in Colombia. Its Casa de Justicia (Justice House) program is designed to increase Colombians’ access to legal services, as well as to enhance the presence of the state throughout the country. Justice houses are multi-agency centers of information, orientation, reference, and conflict resolution. People in poor, marginalized areas visit these centers to receive both formal and informal legal services. To date, 37 justice houses have been built, and USAID plans to expand this number to 40 by 2005. Since the start of the program, more than 2 million cases have been handled in the justice houses. However, the USAID contractor told us some justice houses cannot provide services to residents on a daily basis because government of Colombia personnel do not always show up for work. Another project supported by USAID is a public defense pilot center. Until recently, public defenders in Colombia worked on a part-time basis, were paid a low fixed salary, and handled less than 10 percent of cases involving poor defendants. In September 2003, USAID opened a public defense pilot center in Bogotá specifically designated to handle cases requiring a public defender. The center houses offices and a law library and makes it possible to have a permanent public defense service. USAID pays half the salaries of public defense lawyers, while Colombia has responsibility for the other half. As a pilot project, the center’s benefits have been limited—the 15 full- time public defenders that the center employs are the only ones in the country. USAID’s Peace Initiatives Program consists primarily of support for the peace negotiations and implementation of coexistence and resolution activities. These activities include establishing self-determination projects and coexistence centers. Both are designed to provide basic government services at the municipal level. The self-determination projects promote cooperation, coordination, and confidence building between citizens and the state in municipalities. These projects have two principal components: (1) training in peaceful coexistence, local governability, and civic education; and (2) financial and technical support for infrastructure. In Cauca, for example, the citizens of one municipality formed a committee to determine the community’s needs. They decided that they needed a road connecting the various small towns in the area. Using USAID funds, the citizens are planning to build the road themselves. USAID has implemented self- determination projects in three municipalities; its goal is to have 40 projects by 2005. Coexistence centers, like justice houses, provide government services to marginalized populations. They are located in municipalities considered too small for justice houses. Coexistence centers provide on-site administrative and legal assistance, educational opportunities for children, youth, and adults, and a neutral space for community meetings, dialogue, and events. Some of the services offered include libraries, ludotecas (which are similar to preschools), and municipal family services. Although USAID’s goal was to establish 6 coexistence centers by September 30, 2003, 4 coexistence centers had been established through the end of 2003. USAID intends to establish 14 centers by the end of 2005. State’s primary objective is to enhance state presence and public security. Reestablishing a government of Colombia presence in all municipalities is also one of President Uribe’s primary strategic objectives. When President Uribe assumed office in August 2002, 158 municipalities in Colombia lacked a police presence. As of February 2004, State reported that all municipalities in Colombia had a police presence for the first time in history. According to State’s 2003 Human Rights Report, as a result of the Colombian government’s emphasis on improving security, murders were reduced by 20 percent over the year, kidnappings by 39 percent, and forced displacements of persons by 49 percent. State has assisted the Colombian National Police in organizing, training, and equipping more than 16,500 police officers. Once trained, special police units were sent to targeted municipalities to establish a secure base and begin the process of restoring public security. According to State, afterwards, permanent police units of a minimum of 46 police were sent in; the more conflictive municipalities received units of up to 180 police. Anecdotal evidence indicates that these units may have improved conditions in some areas. State officials say that judges and prosecutors will now be able to visit some municipalities that were previously deemed too dangerous and provide local justice services to citizens whose only prior recourse was appealing to the local insurgency leader. However, some of the police units cannot safely leave their posts, and they face difficulty patrolling their areas of responsibility. For example, Colombian National Police mobile police squadrons, which are tasked with reinforcing security in rural conflict zones, have a limited ability to do so. The United States is providing basic equipment to the squadrons, while the government of Colombia is responsible for maintaining them. To date, none of the mobile squadrons has been fully equipped. Justice’s primary objective is to strengthen Colombia’s justice sector. Its Justice Sector Reform Program is intended to help Colombia develop and sustain a modern, effective, and efficient criminal justice system. The program consists of 12 interrelated project areas, including developing human rights investigative units; combating organized financial crime; supporting joint case investigations and prosecutions; and providing witness and judicial officer protection. For example, Justice has supported satellite human rights units to investigate and prosecute human rights cases in Colombia. Investigations increased significantly in fiscal years 2002 and 2003; arrest warrants increased by 35 percent, accusations by 73 percent, and guilty pleas by more than 200 percent. However, Justice has reduced its original target to establish 32 satellite units to as few as 15 units; as of January 2004, 11 had been created. Justice officials expect funding for this program to decrease. Although Justice has budgeted $4 million for fiscal year 2004 and requested $3 million for fiscal year 2005, the department plans to reduce the funding level to less than $2 million in later years. Justice has also assisted the Colombian government in developing a new criminal procedure code. As we noted in a prior report, Colombia enacted constitutional reform in 1991 that called for criminal justice reform, but little progress had been made. According to Justice, the new code provides the framework for an accusatory criminal justice system and oral trials. In order to prepare for and support the code’s implementation, Justice trained 122 prosecutors in criminal trial techniques in fiscal year 2003 and plans to train 10,000 judicial police investigators by 2005 for their new roles as witnesses in oral trials. The department also plans to train an additional 3,000 prosecutors in the new procedural code and their changed roles in an accusatory system. Justice uses a “train-the-trainer” approach to encourage and facilitate the transition of program responsibility to Colombian personnel. Although the U.S. nonmilitary assistance programs are beginning to achieve some of the results originally envisioned, Colombia and the United States must address management and financial challenges. USAID has not yet maximized the mutual benefits of its programs, and State and USAID have not coordinated their assistance programs to internally displaced persons. State, Justice, and USAID have not established timelines, nor have State or USAID developed an overall strategy for turning programs over to the Colombian government or to the private sector. In addition, funding constraints and Colombia’s long-standing conflict will complicate sustainability efforts. As we reported in 1998, U.S. counternarcotics activities were hampered by a lack of planning and management coordination. While U.S. agencies recognize the need for greater coordination to maximize program benefits, we found this was not always happening. USAID was not maximizing the interrelationships among its programs for alternative development, vulnerable groups, or democracy, and its implementing partners expressed concern that they were often not aware of one another’s projects even when they were nearby. Moreover, State and USAID were not coordinating their programs for internally displaced persons. The three nonmilitary assistance programs are interrelated. Alternative development can provide legitimate income generation for coca and opium poppy farmers. An increased state presence and strengthened judicial system can provide greater protection and a safer environment for those who want to grow licit crops and participate in other licit income- generating alternatives. A more secure situation can lead to fewer people leaving their homes and depending on assistance for internally displaced persons. The USAID/Colombia mission recognizes this interrelationship among its programs. Its recently amended strategy for fiscal years 2006 through 2008 recognizes the need to explore opportunities for program synergies and efficiencies. However, coordination among USAID’s implementing partners is not always occurring. A February 2004 evaluation of USAID’s alternative development projects in Putumayo concluded that the successful continuation of these projects depended, in part, on greater coordination among USAID’s contractors and grantees. Many of the grantees and contractors implementing USAID’s three nonmilitary assistance programs told us they had never met as a group to discuss and coordinate their efforts. In our meetings with grantees working with vulnerable groups, the representatives also suggested that specific barriers limit coordination. For instance, if grantees from two different programs implement a joint project, only one of them can claim an achievement for having served the project beneficiaries. According to one grantee, this is a disincentive to cooperate with other grantees. Another barrier cited was general confusion among grantees about how to account for money taken from different programs— according to some grantees, USAID’s rules and regulations about using funding from different strategic objectives are prohibitively complex. USAID officials and representatives of many of its implementing partners told us that while USAID holds monthly meetings to ensure that alternative development grantees and contractors coordinate with one another, no mechanisms exist for ensuring that similar coordination occurs among grantees and contractors working in USAID’s other assistance programs, even in areas of the country where several projects are taking place near one another. For example, in January 2004 we met with local USAID democracy grantees in Antioquia. All told us they had never met each other and did not know about one another’s projects, even when they dealt with similar issues. They reported that as a result of their meeting with us, they would make a better effort to coordinate with one another. In addition to coordination problems among the nonmilitary assistance programs, coordination is weak within the vulnerable groups program. Although State and USAID have agreed to split responsibilities for providing emergency aid and longer-term development assistance to internally displaced persons, respectively, they do not have any procedures for coordinating or transitioning from one to the other. USAID’s and State’s Strategic Plan for fiscal years 2004 through 2009 does not include any specifics for joint program implementation. We found that during a site visit to a USAID-funded project outside of Bogotá, an agency official was surprised to learn that State also funded a project in the same location; and half of the grantees involved in USAID’s program were unaware of State’s program to assist the displaced and did not know whether their project beneficiaries had first received emergency humanitarian assistance from State. While State and USAID are not explicitly required to assist the same beneficiaries, agency officials and program documents indicate that their goal is to ensure that internally displaced persons who receive emergency aid are then provided longer-term assistance, if needed. In 2001, we reported that the U.S. government had difficulty coordinating and managing its programs to aid the internally displaced. These challenges continue in Colombia. Under the original concept of Plan Colombia, the government of Colombia pledged $4 billion and called on the international community to provide $3.5 billion. We reported in June 2003 that this international assistance— apart from that provided by the United States—did not materialize as expected. International donations not directly related to Plan Colombia have also been limited. For example: The United Nation’s Consolidated Inter-Agency Appeal for $62 million in humanitarian assistance to Colombia is underfunded. Donations as of November 2003 amounted to approximately $14 million, of which the United States contributed about 42 percent. As we reported in August 2001, scarce or declining budgetary resources provided by the international donor community inhibit agencies from expanding their internally displaced person protection and assistance activities. The Colombian government has dedicated some of its own resources for nonmilitary assistance programs, although they are not sufficient to sustain ongoing programs. For example, according to a United Nations agency, Colombia is providing resources to support internally displaced persons, and Colombian law exempts internally displaced persons from paying fees for education, health, and other basic services. However, the report (dated May 2003) goes on to note that only 43 percent of the total number of internally displaced persons registered with the Colombian government received relief items. Furthermore, the government’s response to displacement does not reach remote areas and is inadequate in urban areas. Similarly for democracy programs, the Colombia Human Rights Ombudsman’s office agreed to produce a sustainability plan outlining its financial and technical responsibilities on a long-term basis by January 2004. As of May 2004, the plan had not been completed. Specifically within the rule of law program, Colombian nondefense budget reductions have prevented the government from taking control of the human rights investigative units as originally planned and funds for maintaining the justice houses may be in jeopardy. A number of domestic and foreign factors have limited the Colombian government’s ability to contribute more resources. In August 2003, President Uribe promoted a referendum designed to produce fiscal reform. However, voter turnout was short of the threshold required, and the referendum failed. To mitigate the effects of these failed cost-cutting measures, State said that the Uribe administration introduced new economic austerity legislation in the Colombian Congress. According to State officials, these measures included taxes on wealth, personal income, and financial transactions; creation of anti-evasion policies; and an expansion of the tax base. However, these measures will not entirely eliminate the fiscal shortfall. According to State, the tax bill that passed the Colombian Congress in December 2003 provided $817 million in added revenues, leaving a $286 million gap to be bridged by spending cuts. Fiscal constraints due to revenue shortfalls and an International Monetary Fund requirement to reduce the combined sector deficit to 2.5 percent of gross domestic product will preclude the government from increasing both defense and nondefense spending in 2004. Because the success of President Uribe’s democratic security policy depends in part on increasing the size of Colombia’s security forces, President Uribe has announced that nondefense spending will be cut to enable the Colombian government to meet its fiscal targets. This strategy should enable the government to meet its short-term fiscal targets. However, without significant cuts in expenditures for pensions and other earmarks, U.S. embassy officials stated that the Colombian government may also need to reduce defense spending to meet its long-term goal of significantly reducing public debt. At a time when nonmilitary assistance programs are beginning to produce intended results, such budget cuts could impede project implementation and sustainability. The government of Colombia has stated that ending the country’s civil conflict is central to solving Colombia’s problems, from improving economic conditions to stemming illicit drug activities. The continuing violence limits both the U.S. and Colombian government’s ability to institute economic, social, and political improvements. A peaceful resolution to the decades-old insurgency would help stabilize the nation, speed economic recovery, help ensure the protection of human rights, and restore the authority and control of the Colombian government in the coca- growing regions. Although the Colombian National Police, with U.S. assistance, have reestablished a presence in every municipality, rebel groups continue to exercise control in large geographic areas. State estimates that Colombia still does not control up to 40 percent of the country. Lack of government control intensifies the difficulty of implementing assistance programs. According to USAID officials, the agency is still prohibited from operating in certain parts of the country because of security concerns. Within the alternative development program, for example, it makes the process of verifying that communities are adhering to voluntary eradication agreements highly risky. Moreover, while many human rights indicators improved last year due to the Colombian government’s efforts to improve security, both armed forces and insurgents continue to commit serious human rights abuses, according to human rights organizations, as well as State’s 2003 Human Rights Report. The ongoing violence often prevents USAID and contractor officials from visiting project sites to implement and monitor efforts. Furthermore, it discourages private business groups from traveling to and investing in remote parts of Colombia. The long-standing insurgency also limits the government’s ability to address the socio-economic conditions—including poverty, inadequate social services, and high unemployment—that encourage illicit activities. Several USAID officials emphasized the importance of job creation in the fight against violence and illicit activities, yet unemployment was over 14 percent in September 2003. In 2002, the World Bank estimated that 60 percent of Colombia’s population lives below the poverty line, and rural poverty in Colombia is estimated at 79 percent. The World Bank also calculated that even if a positive growth path is reestablished and sustained, Colombia will require more than a decade to reduce poverty to the levels recorded in 1995—an economic performance that Colombia has not been able to achieve in recent years. Colombia is a long-time ally and significant trading partner of the United States and, therefore, its economic and political stability is important to the United States as well as to the Andean region. Colombia’s long-standing insurgency and the insurgents’ links to the illicit drug trade complicate the country’s efforts to tap its natural resources and make systemic economic reforms. Solving these problems is important to Colombia’s future stability. Colombia and the United States continue to face financial and management challenges in implementing and sustaining counternarcotics and counterinsurgency programs in Colombia. Namely, the government of Colombia does not have the capacity to sustain alternative development projects, provide the level of assistance needed for vulnerable groups, or implement democracy and judicial reform. Colombia’s financial resources are limited and its economy is weak, and thus it will need U.S. assistance for the foreseeable future. In 2000 and 2001, USAID determined that an alternative development program for the estimated 136,600 families involved in illicit drugs could cost up to $4 billion. At least one organization has predicted that providing basic services to Colombia’s displaced population could cost $1 billion. If demobilization occurs on a large scale, it could cost well over $250 million. In addition, we note that these estimates do not include future funding needed for other U.S. programs in Colombia, including support for the Colombian Army and Colombian National Police. In recent years, world events—from the global war on terrorism to the massive reconstruction efforts in Afghanistan and Iraq—have diverted scarce U.S. resources and made it paramount that the United States fully consider the resources committed to its overseas assistance programs. Because of competing demands, the United States very likely cannot continue current levels of assistance to Colombia; in some instances, State, Justice, and USAID have already begun to limit or curtail their programs. Yet, State and USAID have not systematically coordinated their programs to maximize the interrelated benefits or developed a plan for turning program responsibilities over to the Colombian government and the private sector. Because of Colombia’s prolonged conflict and the limited financial resources available for nonmilitary assistance programs, we recommend that the Secretary of State, in consultation with the Attorney General and the Administrator, USAID, develop a detailed plan for improving systematic coordination among the three nonmilitary assistance programs in Colombia. The plan should include clearly defined objectives and future funding requirements for the programs; a timeline for achieving the stated objectives; and a strategy for sustaining the results achieved, including transitioning program responsibility to the government of Colombia and the private sector. Particular attention should be placed on establishing a coordination mechanism between State and USAID to facilitate internally displaced persons’ transition from emergency aid to longer-term assistance. The Secretary of State should provide this information to the Congress for consideration in the fiscal year 2006 appropriations cycle. State, Justice, and USAID provided written comments on a draft of this report. See appendixes I, II, and III, respectively. Overall, the agencies found the report helpful, but none specifically commented on our recommendation. Justice did not address coordination. State and USAID noted instances of where coordination was occurring and said that they are looking for ways to improve. For instance: State reported that it is exploring ways in Washington, D.C., and the field to improve coordination between State and USAID on the hand-off of beneficiaries from State’s emergency assistance to USAID’s longer-term assistance. USAID acknowledged that more can be done to improve coordination and detailed new initiatives designed to do so, including the creation of a Joint Policy Council between State and USAID. USAID also noted that, with the start-up phase of its programs completed, it was developing approaches and programs that are more sustainable and relying on private sector support to leverage additional resources where possible. Our recommendation was intended to help ensure that State, Justice, and USAID worked together to build on the progress that each of the nonmilitary programs is making by taking advantage of the synergies among the programs. Without a more formal plan for improving systematic coordination, we do not believe that the U.S. nonmilitary assistance to Colombia will be leveraged to the extent possible. Each agency also provided additional information and elaborated on the status of their programs. In addition, the agencies provided us technical comments and updates that we have incorporated throughout the report, as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees, the Secretary of State, the Attorney General, and the Administrator of the U.S. Agency for International Development. We will also make copies available to others on request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128 or [email protected], or Al Huntington, Assistant Director, at (202) 512-4140 or [email protected]. Other key contributors to this report were José M. Peña, Elizabeth Singer, and Judith Williams. To identify the objectives of each program; determine the programs’ reported accomplishments; as well as the factors, if any, limiting their implementation, we analyzed project design documents, including funding documents and contracts and grant agreements, describing the projects from State, Justice, and USAID; reviewed project documentation, including progress reports and other documents prepared by the grantees and contractors implementing the projects; interviewed cognizant contractor and grantee officials both in Washington, D.C., and Colombia; and interviewed State, Justice, and USAID officials responsible for program oversight and implementation both in Washington, D.C., and at the U.S. Embassy in Bogotá. We traveled to Colombia in January 2004. In Colombia, we held two roundtable discussions with representatives of most of the grantees and contractors responsible for alternative development and vulnerable groups projects. We observed U.S.-funded projects in Bogotá and Soacha (near Bogotá), Medellín, and Puerto Asís and Villa Garzón in Putumayo. During these site visits, we met with project beneficiaries and interviewed representatives of the nongovernmental organizations implementing the projects. To determine the challenges faced by Colombia and the United States in sustaining these programs, we obtained program information and economic data prepared by a variety of sources and interviewed U.S. and Colombian government officials. In Washington, D.C., we interviewed agency officials from State, Justice, and USAID. We also examined political and economic reports prepared by the Congressional Research Service, the World Bank, and the International Monetary Fund. We reviewed several studies evaluating issues of concern and U.S. assistance to Colombia, particularly alternative development, vulnerable groups, and democracy and rule of law programs. In Colombia, we reviewed program documents, including USAID’s draft 5-year strategic plan, a February 2004 evaluation of USAID’s programs in the Putumayo, the U.S. Embassy’s Mission Performance Plan, and contractor and grantee organization reports. In addition, we interviewed U.S. embassy officials knowledgeable about Colombia’s economic and political situation and met with Colombian government officials knowledgeable about the state of the Colombian economy and the Colombian government’s budgetary constraints, including the director of the Office of National Planning, which is similar to the U.S. Office of Management and Budget. To determine the reliability of the funding data used in this report, we examined State, Justice, and USAID quarterly progress reports and other financial management activity reports. Agency officials also verified the data. Moreover, we obtained copies of State, Justice, and USAID Inspector General audits of their respective agencies’ consolidated financial statements, which reported, among other things, on their internal control structures. All three agencies received unqualified opinions. However, State’s Bureau of International Narcotics and Law Enforcement Affairs did not provide complete funding data for the programs it supports. As a result, the funding figures may not reflect what was actually programmed, obligated, and expended for assisting vulnerable groups, promoting democracy and rule of law programs, and enhancing state presence and public security. Moreover, we did not audit the funding data and are not expressing an opinion on them. However, based on our examination of the documents received and our discussions with cognizant agency officials, we concluded that the funding data we obtained were sufficiently reliable for the purposes of this engagement. To determine the reliability of the performance measurement data we obtained, we asked State, Justice, and USAID program officials how the data were collected and verified. We found that because of the difficult security situation in Colombia, U.S. agencies (USAID in particular) must often rely on third parties, including the United Nations, to document performance data, such as the number of hectares voluntarily eradicated. We also found that while U.S. embassy officials conduct oversight to assess the accuracy of program data submitted by grantees and contractors, not all do. For example, according to State, it does not independently verify estimates of the number of beneficiaries assisted by the international organizations it funds. In addition, any data collected by the agencies is subject to some limitations. For example, the November 2003 Inspector General report stated that the alternative development program might be overstating the number of families benefited due to the way program data are collected. In addition, the vulnerable groups program may double count project beneficiaries, and the statistics collected through the justice houses are generally not reliable because they are not equipped to collect data regularly on their own. However, USAID has taken measures to address these limitations. For example, in response to its Inspector General’s concerns, USAID agreed to separate the alternative development program data between crop substitution and infrastructure projects to avoid double counting. Similarly, to avoid the double counting in the vulnerable groups program, the agency asks grantees to jointly report on individuals assisted in areas where more than one grantee was present. Finally, to correct data collection difficulties associated with the justice houses, the USAID contractor plans to have a national automated information system by 2005. Nevertheless, based on our discussions with State, Justice, and USAID officials, we concluded that the performance data we obtained were sufficiently reliable for the purposes of this engagement. The following are GAO’s comments on the Department of State letter, dated June 28, 2004. 1. Throughout this report, we acknowledge the many obstacles that the U.S. government faces in reaching its nonmilitary assistance objectives, including Colombia’s long-standing conflict and limited financial resources. As such, we recognize that establishing a formal mechanism for transitioning beneficiaries of the vulnerable groups program from emergency to longer-term assistance is not an easy task. Nevertheless, State and USAID will benefit from a more formal mechanism to address this transition gap, as we recommended. Any informal coordination that already occurs is an important step toward implementing this recommendation. 2. While some of State’s implementing partners may track some individuals after they receive assistance, not all do. Further, it should be noted that while the Colombian Government’s Social Solidarity Network works to avoid duplication of assistance and to attend to registered internally displaced persons, both State’s and USAID’s implementing partners provide services to persons who are not registered with the Colombian government. 3. State is incorrect. GAO did not praise the Policy and Program Review Committee (PPRC) regional policy paper process in past reports. After we inquired about this point, a PRM official acknowledged that State’s Inspector General and the Office of Management and Budget have complimented the process, but GAO has not. In addition, State declined to provide GAO a copy of PPRC #2004-38, and the same official said that State had not provided a copy to USAID, either. 4. We recognize that tracking beneficiaries assisted by international organizations may be difficult. However, we found that USAID tracks the number of individuals assisted each quarter by its grantees, including international organizations. 5. The report does not state that there is no coordination. Rather, we concluded that State and USAID can do a better job of “handing off” State’s short-term beneficiaries to USAID’s longer-term assistance program. 6. We modified the text to better describe State’s funding. 7. The $1 billion figure was not intended to be a definitive estimate. The point is that U.S. assistance cannot address all identified needs. 8. We do not agree that better coordination between State and USAID would compromise the security of the staff. 9. We modified the text to acknowledge the government of Colombia’s efforts to enhance public security and the improvement in human rights indicators over the past year. However, as State quotes from its own 2003 Human Rights report, “The Government’s human rights record remained poor.” The following are GAO’s comments on the Department of Justice letter, dated June 23, 2004. 1. As we indicate in note “c” on p. 8, State transfers funding to Justice for its rule of law programs. We have added Justice’s total originally appropriated figure of $88 million, which is approximately 16 percent of total U.S. nonmilitary assistance funding. 2. Rather than budget increments, President Uribe has announced cuts in nondefense spending. 3. GAO recognizes that the new asset forfeiture law referred to by Justice has strengthened the government of Colombia’s ability to employ seized assets, but it remains to be seen to what extent that will benefit the justice sector’s capacity. 4. We recognize that Justice has a variety of projects within its Justice Sector Reform Program and that these projects are instrumental in strengthening Colombia’s justice sector. We did not focus on all of the projects in detail, however, because of their small size (in terms of funding) relative to State’s and USAID’s projects. We do highlight the human rights units, code reform assistance, prosecutor training, and judicial police training projects. 5. We modified the text to give Justice more credit for its efforts to turn programs over to the Colombian government. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” | Since 2000, the U.S. government has provided a total of $3.3 billion to Colombia, making it the fifth largest recipient of U.S. assistance. Part of this funding has gone toward nonmilitary assistance to Colombia, including programs to (1) promote legitimate economic alternatives to coca and opium poppy; (2) assist Colombia's vulnerable groups, particularly internally displaced persons; and (3) strengthen the country's democratic, legal, and security institutional capabilities. GAO examined these programs' objectives, reported accomplishments, and identified the factors, if any, that limit project implementation and sustainability. We also examined the challenges faced by Colombia and the United States in continuing to support these programs. Although U.S. nonmilitary assistance programs have begun to produce some results, individual projects reach a relatively small number of beneficiaries, face implementation challenges, and may not be sustainable. For example, projects designed to promote legitimate economic alternatives to illicit crop cultivation have helped about 33,400 families. However, the U.S. Agency for International Development (USAID) estimated in 2000 and 2001 that as many as 136,600 families needed assistance, and these projects face implementation obstacles, such as difficulty marketing licit products and operating in conflictive areas. U.S. assistance to Colombia's vulnerable groups has provided support to many internally displaced persons, but these program beneficiaries do not receive all of the assistance they need, and there is no systematic way for beneficiaries to transition from emergency aid to longer-term development assistance. The U.S. government has made some progress toward facilitating democratic reform in Colombia, but projects face certain obstacles, such as limited funding and security constraints. Despite the progress made by the three nonmilitary assistance programs, Colombia and the United States continue to face long-standing management and financial challenges. The Colombian government's ability to contribute funds for nonmilitary assistance programs is limited by a number of domestic and foreign factors, and Colombia's longstanding conflict poses additional challenges to implementing and sustaining nonmilitary assistance efforts. The U.S. government has not maximized the mutual benefits of its nonmilitary assistance programs and has not established a mechanism for vulnerable groups to transition from emergency aid to longer-term assistance. Furthermore, the Departments of State and Justice and USAID have not established timelines for achieving their stated objectives, nor have State and USAID developed a strategy to turn programs over to the Colombian government or to the private sector. |
An objective of DOD’s 1993 Report on the Bottom-Up Review was to identify potential infrastructure savings and to launch a long-term process to reduce and streamline DOD’s infrastructure without harming readiness. The report stated that infrastructure activities accounted for $160 billion in fiscal year 1994, or about 60 percent of DOD’s total obligational authority. It defined infrastructure as all DOD activities other than those directly associated with operational forces, intelligence, strategic defense, and applied research and development and identified seven infrastructure categories. The categories were logistics, medical, personnel, training, acquisition management, installation support, and force management. The FYDP is an authoritative record of current and projected force structure, costs, and personnel levels that have been approved by the Secretary of Defense. The FYDP displays the allocation of resources by programs and activities known as program elements. There are about 2,600 program elements in DOD’s fiscal year 1996 FYDP, which covers fiscal years 1996-2001. In September 1995, we reported on the significant differences between the fiscal year 1995 and 1996 FYDPs. As part of that work, we requested that DOD identify for us the infrastructure programs in the FYDP. DOD officials stated that they were in the process of coordinating changes to some infrastructure activities and categories, and therefore, would not identify the FYDP infrastructure related programs at that time. Based on DOD’s infrastructure definition and categories in the bottom-up review report, we identified the program elements in the FYDP that we considered to be associated with infrastructure activities. In our 1995 report, we concluded that, based on our analysis of the 1996 FYDP using the program elements that we considered to be associated with infrastructure activities, the proportion of infrastructure funding in the total defense budget would remain relatively constant through 2001. DOD officials concurred with this conclusion. In November 1995, DOD provided us with a detailed breakdown of the infrastructure related program elements in the FYDP. According to DOD officials within the Office of Program Analysis and Evaluation (PA&E), DOD’s efforts to identify and track infrastructure funding have been underway for several years. PA&E officials told us DOD has a better understanding of the elements that fund DOD infrastructure activities than it had at the time of the bottom-up review. Using the FYDP, DOD has clearly identified program elements that fund infrastructure activities and refer to these as “direct infrastructure.” However, there are parts of the total infrastructure funding that cannot be clearly identified in the FYDP. According to PA&E officials, this is about 20 to 25 percent of DOD’s total infrastructure funding and mostly represents logistics purchases which cannot be specifically identified. Since the FYDP is the most comprehensive source of continuous defense resource data, PA&E, with assistance from the Institute for Defense Analyses, sought to define infrastructure programs in terms of FYDP program elements. In June 1995 the Institute issued a manual and a mapping scheme that categorize each of the FYDP program elements as either mission programs or infrastructure programs. Activities and programs that produce the outputs expected of DOD or directly support missions by deploying with the combat forces are classified as mission programs. Activities that provide support services to the mission programs and primarily operate from fixed locations are classified as infrastructure programs. PA&E assigned each infrastructure program element to one of the following eight categories based on the program’s activities: acquisition infrastructure; installation support; central command, control, and communications; force management; central logistics; central medical; central personnel; and central training. These categories are described in appendix II. Central command, control, and communications is a new category since the bottom-up review. The program elements in this category were previously included in the force management category. PA&E officials told us that some infrastructure activities and programs could not be clearly identified in the FYDP because their funding is derived from the goods and services they provide to others. For example, the Defense Logistics Agency receives most of its funds from the goods and services it sells to other DOD activities. As a result, the costs of its infrastructure activities are included in all of the other defense activities’ budgets that purchase their goods and services. This situation is common for activities that are included in DBOF. According to the officials, PA&E has estimated a range for the DBOF infrastructure costs funded by mission programs based on data from various DOD financial systems. For the fiscal year 1995 FYDP (1995-1999), PA&E estimated these annual costs to be between $28 billion and $39 billion, or about 20 to 25 percent of the total infrastructure funding. However, the officials consider these estimates to be preliminary until more precise methods to calculate this portion of the infrastructure are developed next year. We could not verify the source or accuracy of these estimates. DOD defines infrastructure as activities that provide support services to the mission programs and primarily operate from fixed locations. In our analysis of DOD’s infrastructure and mission programs, we found that many intelligence, space, and command, control, and communications programs are excluded from the infrastructure, even though they appear to fit DOD’s infrastructure definition. In fiscal year 1996, intelligence, space, and command, control, and communications programs accounted for $25.2 billion, or 20 percent of mission programs. These programs include installations, facilities, and activities that would not deploy with combat forces but would support those forces. For example, the command, control, and communications mission program was projected to receive $3.6 billion in fiscal year 1996. Over $1 billion was for long-haul communications for the defense communications system and various expenses within the World-Wide Military Command and Control Systems. Although combat forces may link into these systems, the actual systems operate from fixed locations. We believe that by categorizing most intelligence, space, and command, control, and communications programs as mission activities, even though they appear to include infrastructure activities, DOD’s accounting of infrastructure may not be complete. Our review of DOD’s fiscal year 1996 FYDP found no significant net infrastructure savings between fiscal years 1996 and 2001 because the proportion of infrastructure in the DOD budgets under current plans will remain relatively constant through 2001. For example, although infrastructure funding was projected to decline from 1996 to 1997, the DOD budget was also projected to decline at about the same rate. Infrastructure activities would have to be reduced more than DOD’s total budget to achieve net savings in infrastructure. About 60 percent of DOD’s budget is expected to fund infrastructure activities during the 1996-2001 period, the same as was reported for fiscal year 1994 in the bottom-up review report. Figure 1 shows the trends for DOD’s total planned budgets and infrastructure activities—both direct and estimated DBOF infrastructure funded by mission programs. We analyzed the eight infrastructure categories to see if their estimated funding levels changed from 1996 through 2001. For this and subsequent analyses, we used direct infrastructure funding since we had no basis to allocate DBOF funds across these categories. Figure 2 shows the projected funding for the infrastructure categories through 2001. As figure 2 shows, DOD has programmed about 25 percent less for installation support in 2001 than in 1996. Most of the planned decline results from base closures and realignments and reductions in base operation costs and military construction costs. However, any savings resulting from the decline in installation support costs between 1996 and 1998 are offset by the projected reductions in DOD’s total budget. The decline in installation support costs from 1998 to 2001 is almost entirely absorbed by the increases in the other infrastructure categories. The projected funding by fiscal year for the infrastructure categories is shown in table 1. Table 1 shows that three categories, installation support, central training, and central medical, comprise 50 percent of the total direct infrastructure in fiscal years 1996 and 2001. The table also shows that only two categories increase over the 1996-2001 period—force management and acquisition infrastructure. Although it is not possible to allocate the DBOF infrastructure in mission programs by infrastructure categories, we believe that much of this infrastructure would be included in the central logistics category because many of the DBOF activities perform logistics functions. As shown in figure 3, most direct infrastructure activities are funded by operation and maintenance and military personnel appropriations. These appropriations have been closely associated with the readiness and quality-of-life of the force, priority areas of the Secretary of Defense for the last few years. Thus, DOD must identify significant infrastructure savings from these appropriations to modernize its force. As shown in table 2, 90 percent of DOD’s planned direct infrastructure costs are funded out of three appropriations—operation and maintenance (about 50 percent), military personnel (about 30 percent), and research, development, test, and evaluation (about 10 percent). Table 2 also shows that infrastructure funded by four appropriations—operation and maintenance, military personnel, military construction, and family housing—decline. The largest percentage decline (about 50 percent) is in the military construction appropriation. Most of the decline in the operation and maintenance, military personnel, and military construction appropriations is from fiscal years 1996 to 1998. The infrastructure funded by the procurement appropriation increases by about $2.4 billion, or by 73 percent, between fiscal years 1996 and 2001. Table 3 shows the distribution of operation and maintenance funds by infrastructure program categories. Almost 60 percent of the total operation and maintenance funding for direct infrastructure in fiscal years 1996 and 2001 is for installation support, central logistics, and central medical costs. Central medical is the only category that is projected to increase during the 1996 to 2001 period. Installation support is projected to decline by over 20 percent, or by about $2.5 billion. Table 4 shows the distribution of military personnel funds by infrastructure category. Central training accounts for about 30 percent of the infrastructure funded by military personnel appropriations in fiscal years 1996 and 2001. As the table shows, all of the categories decline slightly during the 6-year period. Table 5 shows the distribution of research, development, test, and evaluation funds by infrastructure categories. As the table shows, about 90 percent of the funds are in the acquisition infrastructure category. The table also shows that the total direct infrastructure funding for research, development, test, and evaluation remains relatively constant during the 6-year period. Our ongoing work and prior reports have identified numerous opportunities to reduce, consolidate, and streamline operations in areas such as industrial facilities, inventory management, and training activities. We believe that changes would yield savings in DOD’s infrastructure over the longer term and need to be aggressively pursued. This is critical, since the savings derived from reducing infrastructure can be used for other purposes, such as to modernize weapon systems or reduce the deficit. Moreover, savings could also help address long-standing financial management problems in DOD. Historically, DOD has encountered problems in putting effective financial management systems in place. Our work has shown that DOD continues to have serious problems in many areas, including accounting for billions of dollars in annual disbursements, failing to identify and disclose potential future government liabilities, failing to protect its assets from fraud, waste, and abuse and being unable to reliably report on the costs of its operations. In order to address these problems, DOD may need to make investments to consolidate and improve the quality and reliability of its financial and accounting systems as well as to upgrade the agency’s financial management personnel. Below, we discuss several examples of our work. Our work highlights several actions that could be taken to improve the cost-effectiveness of the DOD depot maintenance program. These actions include using more cross-servicing and public-private competitions and reducing costly excess capacity that exists at intermediate level maintenance units. Our work suggests that DOD could reduce costs by adopting commercial inventory management practices for hardware items. For example, DOD inventories of hardware items existing in 1992 are expected to decrease only 20 percent by 1997. Even then, projected inventory for construction, electronics, general, and industrial hardware items could last for between 2 to 4 years, compared to private sector levels of about 90 days. Our work on DOD’s training infrastructure found that an overall plan to guide and measure the progress of reducing the training infrastructure is lacking. Moreover, the lack of a management information system with reliable cost data within the various training categories makes it difficult for DOD to evaluate the overall effectiveness of alternate methods of providing training and assess whether actions taken to reduce costs are achieving the expected results. Reengineering and modern technology offer opportunities to reduce costs and improve the quality of service. DOD has invested heavily in costly information systems that have failed to produce dramatic service improvements, increase productivity, or reduce costs. As a result, DOD may lock itself into automated ways of doing business that do not serve its goals for the future and cannot provide promised benefits and savings. We present 13 options in appendix I where estimates of budgetary savings were developed by CBO. We discuss a few of these options below. Some of the options reflect our recommendations; others do not, but rather represent one way to address, in a budgetary context, some of the significant problems identified in our evaluation of DOD programs. Inclusion of a specific option in this report does not mean that we endorse it as the only or most feasible approach or that other spending reductions are not also appropriate for consideration by Congress. Our option with the highest dollar value savings addresses DOD’s acquisition workforce. In November 1995, we reported that DOD acquisition organizations had a combined acquisition workforce of about 464,000—398,000 civilian and 66,000 military in 1994. Even with declines in both the defense procurement budget and the civilian acquisition workforce since 1990, the number of acquisition organizations remains relatively constant. Subsequent to our report, the National Defense Authorization Act for Fiscal Year 1996 required DOD to provide a plan to reduce the number of military and civilian personnel in acquisition organizations by 25 percent over 5 years and eliminate duplicative functions among existing acquisition organizations. CBO estimates the 5-year savings (fiscal years 1997-2001) associated with the civilian personnel reductions alone would be approximately $5.5 billion. Another option addresses savings for the central logistics infrastructure category. In February 1996, we reported that DOD’s transportation costs are higher than necessary. DOD customers frequently pay prices for transportation services that are double or triple the cost of the basic transportation. Driving these higher costs are the U.S. Transportation Command’s fragmented management processes and its inefficient organizational structure, which includes not only the command headquarters but the Army Military Traffic Management Command, the Navy Military Sealift Command, and the Air Force Air Mobility Command. Salaries and wages alone for the U.S. Transportation Command in fiscal year 1994 were more than $1 billion. Our option illustrates one way to improve the U.S. Transportation Command’s operations by combining functions and eliminating some personnel at the Military Traffic Management Command and Military Sealift Command. Civilian personnel savings associated with this reorganization effort could be $450 million for fiscal years 1997-2001. An option for the central medical infrastructure category establishes copayments for care received in military hospitals. Health care received by military beneficiaries in military hospitals and clinics is free. However, military beneficiaries share in the costs of care they obtain from civilian providers. Research has shown that free care leads to greater and unnecessary utilization and, therefore, greater costs. By establishing cost-sharing requirements for care received in military hospitals similar to civilian cost-sharing requirements, 5-year savings for fiscal years 1997-2001 of approximately $1 billion could be achieved. Table 6 summarizes our options organized by infrastructure category. The cumulative 5-year total (fiscal years 1997-2001) of budgetary savings estimated by CBO is $11.8 billion. In oral comments, DOD agreed with this report’s findings and conclusions. The comments dealt primarily with technical accuracy and clarification. We have changed the report, as appropriate, to respond to these comments. To define and evaluate DOD’s infrastructure activities, we interviewed officials in DOD’s Office of PA&E and analyzed data contained in the fiscal year 1996 FYDP. The fiscal year 1997 FYDP was not available. In addition, we reviewed DOD’s Reference Manual For Defense Mission Categories, Infrastructure Categories, and Program Elements prepared by the Institute for Defense Analyses; the President’s fiscal year 1996 budget submission; the fiscal year 1996 Authorization Report; our prior reports; and pertinent reports by the CBO, the Congressional Research Service, and others. The direct infrastructure was derived using DOD’s mapping scheme. The DBOF infrastructure funded by mission programs was projected using PA&E’s data. For the fiscal year 1995 FYDP, which included data for fiscal years 1995-1999, PA&E estimated the DBOF portion of the infrastructure funded by mission programs as 20 to 25 percent of the total infrastructure. DOD did not calculate an annual value of DBOF infrastructure funded by mission programs for the years included in the 1996 FYDP. Therefore, we based our fiscal years 1996-2001 estimates of DBOF infrastructure funded by mission programs on the same proportions DOD had estimated for the 1995 FYDP. For example, we took the direct infrastructure, which we could measure using the 1996 FYDP, to equal 75 to 80 percent of the total value of infrastructure. We then extracted the additional 20 to 25 percent of infrastructure from the total value of mission programs as DBOF infrastructure funded by mission programs to obtain our estimated values for total infrastructure. Infrastructure options were drawn from our prior and ongoing work. CBO determined the budgetary effects of these options. Our work was conducted from October 1995 to March 1996 in accordance with generally accepted government auditing standards. We are providing copies of this report to appropriate congressional House and Senate committees; the Secretaries of Defense, the Air Force, the Army, and the Navy; and the Director, Office of Management and Budget. We will also provide copies to other interested parties upon request. If you have any questions concerning this report, please call me on (202) 512-3504. Major contributors to this report were Robert Pelletier, William Crocker, Deborah Colantonio, Edna Thea Falk, and Scott Hornung. This appendix provides GAO’s infrastructure options organized by infrastructure category. In addition to the infrastructure category, GAO provides information about the budget account, GAO’s framework theme,and a summary and description of budgetary implications. Although the descriptions are intended to synopsize the key issues and problems developed in GAO’s audits and evaluations, readers are encouraged to refer to the related GAO products, listed at the end of each option, for a complete discussion. In November 1995, GAO reported that DOD had a combined acquisition workforce of about 464,000—398,000 civilians and 66,000 military personnel in fiscal year 1994. The DOD acquisition infrastructure consumes enormous resources that could otherwise be used to meet modernization needs. In 1994, DOD’s civilian acquisition workforce was 12 percent lower than in 1980; however, these personnel reductions have not resulted in a commensurate decline in civilian payroll costs. This is due in part to the significant decline in blue collar workers. In addition, DOD officials stated that civilian payroll costs increased because of other factors, such as the advent of locality pay and changes in grade structure. Despite declines in both the defense procurement budget and the civilian workforce since 1990, the number of acquisition organizations remains relatively constant. Each acquisition organization maintains similar occupational fields in common areas, such as personnel, budgeting, computer specialists, and contracting, and many of the duties performed in these occupations are not unique to an acquisition organization’s mission. As a result, there are significant opportunities to improve efficiencies in these areas. The National Defense Authorization Act for Fiscal Year 1996 contains a provision (title IX, section 906) that requires DOD to provide a plan to reduce the number of personnel (both military and civilian) assigned to defense organizations by 25 percent over a 5-year period. The provision also requires an actual reduction of 15,000 personnel during fiscal year 1996. The total civilian personnel reductions would be about 90,000. Further, the provision requires eliminating duplicative functions among the acquisition organizations. Successful implementation of a 25-percent reduction in DOD’s acquisition workforce and consolidation of functions would result in substantial future savings. The savings from civilian personnel salaries alone are estimated in the following table. Defense Acquisition Organizations: Changes in Cost and Size of Civilian Workforce (GAO/NSIAD-96-46, Nov. 13, 1995). Research, Development, Test, and Evaluation, Defense-wide (97-0400) Estimates of DOD’s portion of the total federal funds to be spent on defense conversion for fiscal years 1993 through 1997 increased in the early years of the current administration. However, GAO found no evidence that (1) the level of spending is appropriate in light of other government programs that support similar purposes and (2) the private economy has not responded to the need for which these funds were authorized and appropriated. Consequently, Congress may wish to slow DOD’s spending in this area. The President’s defense conversion initiative, announced on March 11, 1993, totaled $19.6 billion over 5 years; DOD’s portion was 42 percent. The administration’s February 1994 estimate of the initiative’s cost was $21.6 billion; DOD’s portion had increased to 59 percent. A study for DOD’s 1993 Defense Conversion Commission identified 116 federal or state programs, not classified as defense conversion, that could help ease the impact of defense downsizing. These programs cost about $24 billion in fiscal year 1993. Other related programs include federal activities to develop advanced industrial technology with costs of about $10 billion in fiscal year 1994. The United States is now in the 11th year of defense downsizing, and many firms, individuals, and communities that were adversely affected may have already responded. Overall, savings from slowing defense conversion spending would depend on the programs and activities affected. As an illustrative example, CBO estimates that if the Technology Reinvestment Program, one component of defense conversion spending, is eliminated beginning in fiscal year 1997, the following savings could be achieved. Technology Reinvestment Project: Recent Changes Place More Emphasis on Military Needs (GAO/T-NSIAD-95-167, May 17, 1995). Defense Conversion: Capital Conditions Have Improved for Small- and Medium-Sized Firms (GAO/NSIAD-94-224, July 21, 1994). Defense Conversion: Status of Funding and Spending (GAO/NSIAD-94-218BR, June 30, 1994). Defense Conversion: Slow Start Limits Spending (GAO/NSIAD-94-72, Jan. 25, 1994). Operation and Maintenance, Air Force (57-3400) The Air Force accounts for its fighter force structure in wing equivalents that represent 72 aircraft. At the end of the Air Force’s planned drawdown, the Air Force’s active component F-15 and F-16 communities will make up about 10 fighter wing equivalents. The Air Force plans to station these aircraft in 37 squadrons at 17 bases in the United States and overseas. Until recently, Air Force fighter wings were predominantly organized in 3 squadrons of 24 aircraft. However, the Air Force has decided to reduce its squadron size to 18, which also reduced its wing size to 54. This change in unit size increased the number of wings and squadrons to more than would have been needed had the squadron size stayed at 24. The Air Force has not demonstrated that it needs additional squadrons. Air Force officials maintain that more squadrons are needed to provide the Air Force with additional flexibility to respond to numerous potential conflicts across the globe. Although the Air Force considers smaller fighter squadrons beneficial, it had not performed any analysis to justify its decision. Further, according to Air Force officials, Commanders in Chiefs, who are responsible for conducting these operations, developed plans based on the number of aircraft that are needed to execute missions—regardless of squadron size. Keeping more squadrons than are needed increases operating costs and may result in more base infrastructure than the Air Force needs. GAO developed several notional basing plans that the Air Force could use in considering how to consolidate its fighter force into fewer squadrons. Implementing these plans could eliminate not only between two and seven squadrons, but also a wing and/or fighter base. CBO identified operating and support cost savings ranging between $37 million and $145 million annually (in 1996 dollars). Recurring savings resulting from a base closure are estimated at an additional $40 million annually (in 1996 dollars). However, these savings would not begin to accrue until 3 to 4 years after the base closure decision. If Congress chose to consolidate the Air Force’s fighter force into fewer squadrons by eliminating seven of them, the following operating savings could be achieved. Operation and Maintenance, Army (21-2020); Air Force (57-3400) In 1983, the U.S. established a military presence at Soto Cano Air Force Base, Honduras, to support U.S. military and political interests in Central America, which were threatened by communist expansion in the area. Since the end of the Cold War, the major mission of U.S. personnel at Soto Cano has been to support military training exercises. In February 1995, GAO reported that a continuing U.S. presence at Soto Cano was not critical to U.S. government activities in Central America. Although current data on the cost of the U.S. presence were not available, fiscal year 1994 operation and maintenance costs were about $30 million. Since that time, activities at Soto Cano have not changed substantially. Congress may wish to eliminate the Army and Air Force presence at Soto Cano, which could result in the following savings. 1996 DOD Budget: Potential Reductions to Operation and Maintenance Program (GAO/NSIAD-95-200BR, Sept. 26, 1995). Honduras: Continuing U.S. Presence at Soto Cano Base Is Not Critical (GAO/NSIAD-95-39, Feb. 8, 1995). Operation and Maintenance, Defense-wide (97-0100) In fiscal year 1995, DOD requested $10 million for the Legacy Resource Management Program, which was created in 1990 to protect and preserve the natural and cultural resources on DOD-owned land. Congress appropriated $50 million, but the DOD Comptroller has only released $30 million for use by this program. Examples of activities funded during fiscal year 1995 by the program included preservation of historic documents related to the Air Force band, a study of Peregrine falcon migration, research on German prisoners of war murals, restoration and rehabilitation of a historic adobe structure, and salmon rearing. For fiscal year 1996, DOD has requested $10 million for the program. While the program may be worthwhile, the question is whether funding this program represents the best use of DOD funds. By eliminating funds for this program, Congress could reduce DOD’s infrastructure funding by $10 million annually. 1996 DOD Budget: Potential Reductions to Operation and Maintenance Program (GAO/NSIAD-95-200BR, Sept. 26, 1995). After several false starts, in May 1994 DOD announced it would begin consolidating and reducing the size of its finance and accounting infrastructure during fiscal year 1995. It plans to reduce the number of sites where finance and accounting activities are conducted from over 300 to 26 which will result in a major reduction in staff years. The 26 sites are composed of 5 large existing finance centers and 21 new sites that are called operating locations. To date, 16 operating locations have been opened. Despite these consolidation efforts, additional opportunities exist to reduce the infrastructure and improve the efficiency of finance and accounting operations. In September 1995, we reported that the process DOD used to identify the appropriate size and location of its consolidated operations was flawed. Not only would the planned infrastructure be larger than necessary, but it would also perpetuate the continued use of older, inefficient, and duplicative systems. With fewer people available to support the same operations and systems at fewer locations, the consolidation could degrade, rather than improve, customer service. Moreover, DOD’s plan does not reflect leading-edge business practices and, therefore, may require additional consolidations if business process reengineering techniques are used to identify more productive business practices for DOD finance and accounting operations. Because DOD’s decision to open 21 new operating locations was not based on current or future operating requirements, customer needs, or leading-edge business practices, other consolidation alternatives could produce substantial infrastructure savings. The Defense Finance and Accounting Service (DFAS) Consolidation Task Force showed that savings could occur by retaining the 5 large centers plus 6, 10, or 15 operating locations. The Task Force concluded, however, that 6 new operating locations was the best alternative because it would save more money and allow an optimum consolidation of finance and accounting functions. Based on this and other factors, we recommended that DOD reassess the number of operating locations needed to efficiently perform finance and accounting operations. DOD’s subsequent reassessment concluded that 16 rather than 21 operating locations are needed to support its finance and accounting operations. Because of its interpretation of congressional intent, however, DOD continues to support the opening of all 21 locations. We are currently in the process of analyzing DOD’s reassessment of its operating location requirements but have preliminarily concluded that DOD has misinterpreted congressional intent and at a minimum, should not be opening the 5 facilities that it no longer believes are needed. We have not yet done enough work to determine how many, if any, additional operating locations are excess to DOD’s needs. In presenting this option, therefore, we relied on the analysis performed by the DFAS Consolidation Task Force which identified 6 as the optimum number of operating locations. Recognizing the costs DOD has incurred to open 16 centers, reducing the number of operating locations from 16 to 6 could achieve savings in several different ways. First, a reduction in the infrastructure would require fewer support and management personnel and related items to operate the locations. Second, military construction funding for sites that would require extensive renovations would not be necessary. Third, in anticipation of the efficiencies and service improvements that would be achieved under DOD’s reengineering and privatization efforts, annual funding could be reduced 10 to 15 percent. If Congress was to direct the Secretary of Defense to reduce the existing 16 locations to 6, as recommended by the DFAS Consolidation Task Force, the following savings could be achieved in civilian personnel and military construction. This represents the optimum consolidation of locations according to the DFAS Consolidation Task Force. The savings estimate assumes that by reducing the number of sites to six, 6,500 civilian personnel positions would be eliminated. This magnitude of personnel reductions can only be attained if DOD achieves the productivity gains it expects from reengineering and privitization/outsourcing initiatives. However, Congress and DOD will need to reach an agreement on the exact number of operating locations and reductions in personnel. Moreover, as we pointed out in our letter, DOD may need to make investments in this area to improve its financial management systems. DOD Infrastructure: DOD’s Planned Finance and Accounting Structure Is Not Well Justified (GAO/NSIAD-95-127, Sept. 18, 1995). Operation and Maintenance, Defense-wide (97-0100) The Civil Air Patrol is a nonprofit corporation that is comprised of private citizens who assist in national and local emergencies, such as inland search and rescue missions, emergency air transport, counter drug surveillance, and humanitarian airlift missions. The Air Force has been providing financial support and some management personnel to the patrol for a number of years. In response to congressional concerns about patrol funding, in January 1995, the Air Force began a reorganization to reduce (1) the number of active duty military and Air Force civilian employees who provide support to the patrol and (2) the need for funding by $3 million a year. The reorganization has resulted in a need for more, not less, operation and maintenance funding. The reason for this is that the number of employees (about 250 before the reorganization) was not significantly reduced and state liaisons, who were once paid from the military pay appropriation, are now paid from operation and maintenance funds. After the reorganization is complete, there will be 75 Air Force military and civilian employees supporting the patrol. In addition, there will be 162 patrol employees who will be paid with appropriated funds. This total includes 90 military retirees who will serve as wing liaisons in each of the 50 states, the District of Columbia, and Puerto Rico. These individuals will be compensated with operation and maintenance funds at a rate equal to the difference between what their retirement pay is and what their active duty pay would be if they were still on active duty. For fiscal year 1996, the Air Force received $17 million of operation and maintenance funds to provide support to the patrol. This amount represents an increase of $6 million over the fiscal year 1995 funding level. Because the reorganization has not achieved the intended savings, Congress could cap the program at the fiscal year 1995 level. The resultant estimated savings are shown in the following table. 1996 DOD Budget: Potential Reductions to Operation and Maintenance Program (GAO/NSIAD-95-200BR, Sept. 26, 1995). Operation and Maintenance, Navy (17-1804); Army (21-2020); Air Force (57-3400); Marine Corps (17-1106) Various studies, commissions, and task forces dating as far back as 1949 have recommended changes in the defense transportation system organizational structure. Transportation processes were found to be fragmented, inefficient, and costly. Traffic management processes and automated systems were developed independently for each mode of transportation. The entire defense transportation system was built along service and modal lines. Furthermore, no one DOD transportation agency was responsible for handling or managing all facets of cargo movement. In 1987, after the Goldwater-Nichols Act of 1986 urged that actions be taken to unify transportation management, the Secretary of Defense established the U.S. Transportation Command (USTRANSCOM). USTRANSCOM was created as a unified combatant command for transportation missions; combining the missions, responsibilities, and forces of the defense transportation single managers. The managers were the Army’s Military Traffic Management Command (MTMC), which is responsible for managing land transportation, military traffic, and water port operations; the Navy’s Military Sealift Command (MSC), which is responsible for sealift; and the Air Force’s Air Mobility Command (AMC), which is responsible for airlift. At first, mission responsibility was restricted to times of war or conflicts. But in 1992, USTRANSCOM’s mission was expanded to cover both wartime and peacetime, and MTMC, MSC, and AMC, though they remained major commands of their respective services, became component commands of USTRANSCOM. In addition, USTRANSCOM was given control of all transportation assets, except for those that are service-unique or theater-assigned. A recent study by USTRANSCOM concluded that transportation process fragmentation remains. GAO’s recent report concludes that traffic management processes perpetuate fragmentation, typically along service and transportation modal lines, much as they were before USTRANSCOM was created. The report also indicates that even with the establishment of USTRANSCOM, recommendations to change the organizational structure have not been implemented. This extensive infrastructure is costly. Transportation services that the military component commands have traditionally provided, such as port handling and intermodal transfers, are being handled primarily by commercial carriers. Component field offices are part of an antiquated system that moves cargo by separate modes and requires on-site personnel at modal transfer points. For example, a military customer is charged $2,624 for a shipment from New Jersey to Rotterdam, Netherlands; yet a commercial carrier charges $1,553 for the shipment. The added cost to the customer of $1,071 (which is 69 percent of the carrier’s $1,553 charge) represents the overhead amount charged to the customer. Opportunities exist to reduce the defense transportation infrastructure and improve the efficiency of cargo traffic management operations. Combining common-user transportation functions and positions under the direct command and control of a single manager, USTRANSCOM, would eliminate unnecessary overhead, duplication of functions, and overlapping responsibilities. Ultimately, streamlining the command structure would reduce the costs of operations being passed to customers. Under such a realignment, service-unique functions would remain with the services. Likewise, unique transportation readiness requirements would be reported separately and funded directly to the services. Nearly 90 percent of defense cargo moves by domestic commercial motor carriers during peacetime and noncontingency operations. Additional opportunities for outsourcing include use of direct booking during noncontingency operations whereby customers book directly with carriers and substantially decrease the involvement of government traffic management; use of commercial freight forwarders, not government traffic managers; employment of third-party logistics firms to handle documentation, billing, and payment; and use of existing commercial system capabilities for in-transit and total asset visibility needs. By increasing the use of outsourcing to satisfy peacetime requirements, USTRANSCOM and its customers could achieve additional cost savings as well as dedicate resources to the critical role of strategic planning. Various options exist to achieve defense transportation infrastructure savings. Fixing the organizational structure is a mandatory first step to substantially reduce costs. A logical way, though not the only one, would be to take the following steps. First, place the 362 Defense Business Operations Fund Transportation MSC staff worldwide together with MTMC. This move would create a single MTMC/MSC headquarters staff—one set of personnel responsible for such activities as public affairs, internal review, equal employment opportunity, and other staff functions. MTMC’s Field Operating Activity and MSC’s Central Technical Activity would be consolidated. One office would be responsible for all contract negotiations and administration, comptroller/budget activities, litigation/legal activities. And, all MSC field staff functions currently at area commands would be merged with MTMC area command staff. In fiscal year 1994, MSC’s Defense Business Operations Fund Transportation staff costs were $54 million. Second, close MTMC continental United States area commands at Bayonne, New Jersey, and at Oakland, California. These commands are not justifiable because of budgetary pressures. Labor costs for these two commands alone in fiscal year 1994 were $65 million, $29 million for Eastern Area-Bayonne (civilian and military), $12 million for Eastern Area-Bayonne (military garrison-Bayonne), $21 million for Western Area-Oakland (civilian and military), and $3 million for Western Area-Oakland (military garrison-Oakland) Third, eliminate MTMC overseas area commands. Overseas areas commands in fiscal year 1994 were $29 million—$20 million for MTMC-Europe, Rotterdam (civilian and military) and $9 million for MTMC-Pacific, Wheeler Army Air Field, Hawaii (civilian and military). Fourth, eliminate MTMC port commands. MTMC operates 26 port and terminal facilities around the world, with more than 1,200 staff, with a support cost, based on fiscal year 1994 data, exceeding $70 million (not including contract stevedore costs). If Congress chose to consolidate the organizational structure as outlined above, the following civilian personnel savings could be achieved. Defense Transportation: Streamlining of the U.S. Transportation Command Is Needed (GAO/NSIAD-96-60, Feb. 22, 1996). Defense Transportation: Commercial Practices Offer Improvement Opportunities (GAO/NSIAD-94-26, Nov. 26, 1993). Defense Health Program (97-0130) In 1972, Congress created two complementary physician accession sources: the Health Profession Scholarship Program and the Uniformed Services University of the Health Sciences. Under the scholarship program, DOD pays tuition and fees, plus a monthly stipend for students enrolled in civilian medical schools. In return, the students incur an obligation to serve a year of active duty service for each year of benefits received, with a 2-year minimum obligation. In contrast, students at the University enter active military service as medical students, receive the pay and benefits of an officer at the O-1 level, and incur a 10-year service obligation. In 1994, 155 medical students graduated from the University. GAO’s analysis shows that the University provides a medical education that compares well with that of other U.S. medical schools. Traditional measures of quality place the University within the mid-range of medical schools nationwide and its graduates at or above other military physicians. In addition, the University provides education and training for other health care and related professions and engages in research, consultation, and archival activities. These activities, which do not directly contribute to the education of military physicians, involve University faculty and staff. DOD would likely continue to conduct these activities even if the University were closed. University graduates begin their military medical careers with more readiness training than their peers, but the significance of the additional training is unclear. Due to the absence of objective measures, no conclusive evidence exists that University graduates are better prepared to meet the needs of military medicine than their civilian-educated peers. The services have not assessed the impact of readiness training, and a thorough assessment is needed to determine the type and amount of such training that military physicians need. GAO’s analysis shows that on a per graduate basis, the University is the most expensive source of military physicians when considering DOD costs and total federal costs. With DOD education and retention costs of about $3.3 million, the cost of a University graduate is more than 2 times greater than the $1.5 million cost for a regular scholarship program graduate. When costs are distributed over the expected years of military physicians’ service, the University remains more costly when only DOD costs are considered, but it is nearly equal to the cost of the regular scholarship program and lower than the cost of the deferred program when total federal costs are considered. This difference occurs because University graduates are expected to have much longer military careers and the University receives much less non-DOD federal support than civilian medical schools. Given the changes in operational scenarios and DOD’s approach for delivering peacetime health care, new assessments of the military’s physician needs and the means to acquire and retain such physicians are needed. For example, if DOD continues to need a cadre of experienced career physicians, alternative strategies, such as an additional scholarship option with a longer service obligation, could be considered as a potentially less expensive way to increase the length of selected military physicians’ careers. Additional readiness training could be provided through a post graduate period specifically designed to enhance the physician’s preparation for the special needs of military medicine. If Congress chose to close the Uniformed Services University of the Health Sciences and maintain a steady supply of physicians through other sources, the following savings could be achieved. Military Physicians: DOD’s Medical School and Scholarship Program (GAO/HEHS-95-244, Sept. 29, 1995). Defense Health Program (97-0130) Currently, care received by military beneficiaries in military hospitals and clinics is free. However, when care must be obtained through civilian providers, military beneficiaries share in the costs of the care they receive. This uneven system has led to confusion, uncertainty, and inequity among beneficiaries as to what their health care benefits are. Further, research has shown that free care leads to greater (and unnecessary) use and, therefore, greater costs. Congress may wish to establish beneficiary cost-sharing requirements for care received in military hospitals that are similar to the cost-sharing for care that beneficiaries receive from civilian providers. Estimated savings from doing so are shown in the following table. Defense Health Care: DOD’s Managed Care Program Continues to Face Challenges (GAO/T-HEHS-95-117, Mar. 28, 1995). Defense Health Care: Issues and Challenges Confronting Military Medicine (GAO/HEHS-95-104, Mar. 22, 1995). Defense Health Care: Lessons Learned From DOD’s Managed Health Care Initiatives (GAO/T-HRD-93-21, May 10, 1993). Defense Health Care: Obstacles in Implementing Coordinated Care (GAO/T-HRD-92-24, Apr. 7, 1992). Defense Health Care: Implementing Coordinated Care—A Status Report (GAO/HRD-92-10, Oct. 3, 1991). The Military Health Services System—Prospects for the Future (GAO/T-HRD-91-11, Mar. 14, 1991). Operation and Maintenance, Army (21-2020) The Army, as the executive agent for recruiting facilities, is responsible for requesting funds for all recruiting offices. For fiscal year 1996, the Army’s operation and maintenance budget request includes $102.6 million for leasing costs associated with the recruiting facilities. GAO estimates that leasing costs could be reduced about $5.1 million by collocating the supervisory personnel with the recruiters rather than maintaining separate facilities for the supervisors. According to DOD officials, in fiscal year 1994, all of the Army’s and about one-half of the Navy’s and Air Force’s supervisory personnel occupied separate office space. In contrast, the Marine Corps locates its supervisory recruiting personnel with its recruiters. An additional $13.3 million of leasing costs could be saved if the least productive recruiting offices were closed. GAO’s December 1994 report noted that 518 counties, out of a total of 1,036 counties in which recruiting offices were located, accounted for only 13.5 percent of the services’ accessions. Of this total, approximately 290 counties each produced only one recruit during the first 5 months of 1994. On the other hand, 259 counties, or 25 percent of the total counties, produced 70 percent of all service accessions. If the services closed the recruiting offices in the least productive 50 percent of the 518 counties, about 2,800 recruiters could be reassigned and $13.3 million dollars could be saved in annual leasing costs. Thus, Congress may want to direct that supervisory recruiting personnel be collocated with the recruiting personnel and that the least productive recruiting offices be closed. Taking these actions could result in the following savings. 1996 DOD Budget: Potential Reductions to Operation and Maintenance Program (GAO/NSIAD-95-200BR, Sept. 26, 1995). Military Recruiting: More Innovative Approaches Needed (GAO/NSIAD-95-22, Dec. 22, 1994). Operation and Maintenance, Navy (17-1804); Army (21-2020); Air Force (57-3400) The National Defense Act of 1916 established the Junior Reserve Officers’ Training Corps (JROTC) program for high schools and private secondary schools. The program’s primary purpose was to disseminate military knowledge among the secondary school population of the United States. The ROTC Vitalization Act of 1964 expanded the program and required the Secretary of each military department to establish and maintain JROTC units. In the wake of the August 1992 Los Angeles riots, the President and the Chairman of the Joint Chiefs of Staff made plans to double the size of the program within 5 years. The services’ fiscal year 1996 operation and maintenance requests include $124.3 million for the JROTC program, an increase of $16.8 million, which will be used in part to add 78 schools to the program. According to service officials, the current program is essentially a stay-in-school program and is operated in about 2,300 high schools in the United States and overseas. The program’s objectives are to teach military and citizenship subjects. In addition, the Army operates a summer camp, and operation and maintenance funds are used to help pay instructors’ salaries. Service officials emphasized that the program is not viewed as a recruiting tool for the services. While the program may benefit the community and the public in general, the question is whether DOD should be involved in funding this type program or whether the program should be funded by a non-DOD appropriation account. Congress may wish to discontinue or phase out the JROTC program, which would save about $124 million annually. If the program was eliminated the following savings could be achieved. 1996 DOD Budget: Potential Reductions to Operation and Maintenance Program (GAO/NSIAD-95-200BR, Sept. 26, 1995). Operation and Maintenance, Defense-wide (97-0100) In 1992, Congress authorized the National Guard to undertake a pilot program in 10 states to determine if the life skills and employment potential of high school dropouts could be improved through military-based training. In fiscal year 1993, Congress provided the first funds to conduct the Civilian Youth Opportunities pilot program. This program, known as ChalleNGe, is a 5-month residential program with a 1-year post-residential mentoring segment aimed at high school dropouts. Currently, the program operates in 15 states and has an enrollment of about 3,716 youths. The DOD fiscal year 1996 operation and maintenance budget request includes $56.65 million for this program. A second program, called Starbase, is a 5-week course that focuses on math, science, and technology for in-school youths in grades kindergarten through 12. This program operates in 14 states at 17 locations. The fiscal year 1996 budget request includes $4.75 million for this program. While these programs may benefit the community and the public in general, the question is whether DOD should be involved in funding this type of program or whether the program should be funded by a non-DOD appropriation account. Congress may wish to discontinue National Guard youth programs, which would result in the following savings. 1996 DOD Budget: Potential Reductions to Operation and Maintenance Program (GAO/NSIAD-95-200BR, Sept. 26, 1995). Installation support consists of activities that furnish funding, equipment, and personnel to provide facilities from which defense forces operate. Activities include construction planning and design, real property maintenance, base operating support, real estate management for active and reserve bases, family housing and bachelor housing, supply operations, base closure activities, and environmental programs. Acquisition infrastructure consists of all program elements that support program management, program offices, and production support, including acquisition headquarters, science and technology, and test and evaluation resources. This category includes earlier levels of research and development, including basic research, exploratory development, and advanced development. Central logistics consists of programs that provide support to centrally managed logistics organizations, including the management of material, operation of supply systems, maintenance activities, material transportation, base operations and support, communications, and minor construction. This category also includes program elements that provide resources for commissaries and military exchange operations. Central training consists of program elements that provide resources for virtually all non-unit training, including training for new personnel, aviation and flight training, military academies, officer training corps, other college commissioning programs, and officer and enlisted training schools. Central medical consists of programs that furnish funding, equipment, and personnel that provide medical care to active military personnel, dependents, and retirees. Activities provide for all patient care, except for that provided by medical units that are part of direct support units. Activities include medical training, management of the medical system, and support of medical installations. Central personnel consists of all programs that provide for the recruiting of new personnel and the management and support of dependent schools, community, youth, and family centers, and child development activities. Other programs supporting personnel include permanent change of station costs, personnel in transit, civilian disability compensation, veterans education assistance, and other miscellaneous personnel support activities. Command, control, and communications consists of programs that manage all aspects of the command, control, and communications infrastructure for DOD facilities, information support services, mapping and charting products, and security support. This category includes program elements that provide nontactical telephone services, the General Defense Intelligence Program and cryptological activities, the Global Positioning System, and support of air traffic control facilities. Force management consists of all programs that provide funding, equipment, and personnel for the management and operation of all the major military command headquarters activities. Force management also includes program elements that provide resources for defense-wide departmental headquarters, management of international programs, support to other defense organizations and federal government agencies, security investigative services, public affairs activities, and criminal and judicial activities. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO: (1) reviewed the Department of Defense's (DOD) infrastructure activities and their associated costs in the Future Years Defense Program (FYDP) to determine whether DOD plans to spend less for infrastructure activities by fiscal year (FY) 2001; and (2) summarized its work that identified opportunities for DOD to reduce or streamline infrastructure activities, and asked the Congressional Budget Office (CBO) to estimate potential budgetary savings. GAO found that: (1) there are no significant net infrastructure savings to DOD between FY 1996 and FY 2001, based on GAO analysis of infrastructure-related program elements in FYDP; (2) the proportion of planned infrastructure funding in DOD budgets will remain relatively constant at about 60 percent through 2001; (3) the combination of operation and maintenance and military personnel appropriations fund about 80 percent of infrastructure activities that can be identified in FYDP; (4) DOD excludes most intelligence, space, and command, control, and communications programs the provide support services to mission programs from its definition of infrastructure; (5) these programs account for about $25.2 billion in FY 1996; (6) parts of total infrastructure funding cannot be clearly identified in FYDP, including funds that pay for Defense Business Operations Fund activities; and (7) there were 13 options for consolidating, streamlining, or reengineering infrastructure activities that CBO estimates could result in savings of $11.8 billion from FY 1997 through FY 2001. |
VA is responsible for providing federal benefits to veterans. Headed by the Secretary of Veterans Affairs, VA operates nationwide programs for health care, financial assistance, and burial benefits. According to VA, in fiscal year 2009 the department received appropriations of almost $97 billion, including over $50 billion in discretionary funding, primarily for health care and approximately $47 billion in mandatory funding, primarily for disability compensation, pensions, and education benefit programs. VA is organized into three administrations to provide health care, financial, and burial benefits to veterans and their families: The Veterans Health Administration (VHA) provides a broad range of primary health care, specialized care, and related medical and social support services through its network of more than 1,200 medical facilities. The Veterans Benefit Administration (VBA) distributes financial benefits to veterans and their families related to compensation and pension, vocational rehabilitation and employment, home loans, life insurance, and education. The National Cemetery Administration (NCA) maintains national cemeteries and provides burial and memorial services to veterans. The Chief Financial Officers (CFO) of the 24 major departments and agencies identified in 31 U.S.C. § 901(b) are required to, among other things, develop and maintain integrated accounting and financial management systems, including financial reporting and internal controls, and to direct, manage, and provide policy guidance and oversight of all agency financial management activities. These CFOs are also required to assist the heads of their agencies with annually preparing and submitting to Congress and the Office of Management and Budget audited financial statements and statements of assurance on the effectiveness of their agencies’ systems of internal control. The Comptroller General’s Standards for Internal Control in the Federal Government (the Green Book) provides that federal agencies should establish policies and procedures to ensure that the findings of audits and other reviews are promptly resolved. In addition, Office of Management and Budget (OMB) Circular No. A-123, Management’s Responsibility for Internal Control, requires management to develop corrective action plans for material weaknesses—identified through management reviews, OIG and GAO reports, program evaluations, and financial statement audits— and periodically assess and report on the progress of those plans. Further, the CFOC A-123 Guidance provides that agencies construct a corrective action planning framework to facilitate plan preparation, accountability, monitoring, and communication. The guidance provides that agency managers are responsible for developing and implementing action plans for taking timely and effective action to correct deficiencies. The CFOC A- 123 Guidance is widely viewed as a “best practices” methodology for executing the requirements of Appendix A of OMB Circular No. A-123. In the independent auditor’s report on VA’s fiscal year 2008 financial statements, the auditor identified the following three material weaknesses: Financial management system functionality—reported since fiscal year 2000, is linked to VA’s outdated legacy financial systems impacting VA’s ability to prepare, process, and analyze financial information that is reliable, timely, and consistent. Legacy system deficiencies necessitated significant manual processing of financial data and a large number of adjustments to the balances in the system, thereby increasing the risk of processing errors and misstatements in the financial statements. IT security controls—also reported as a material weakness since fiscal year 2000, resulted from the lack of effective implementation and enforcement of an agencywide information security program. Security weaknesses in the areas of access control, segregation of duties, change control, and service continuity continued to place VA’s program and financial data at risk. For example, weaknesses in information security controls placed sensitive financial and veterans’ medical and benefit information at risk of inadvertent or deliberate misuse, improper disclosure, theft, or destruction, possibly occurring without detection. Financial management oversight—reported as a material weakness beginning in fiscal year 2005 and as a significant deficiency in fiscal years 2000 through 2004. This weakness stemmed from a number of control deficiencies whose operational causes varied. Common issues included the recording of financial data without sufficient review and monitoring, a lack of human resources with the appropriate skills, and a lack of capacity to effectively process a significant volume of transactions. When aggregated, the independent auditor found that these deficiencies suggested a recurring theme of inadequate or ineffective financial management oversight. To help resolve the financial management system functionality material weakness, modernize the IT environment, and implement an integrated financial management system, VA established the Financial and Logistics Integrated Technology Enterprise (FLITE) program, managed by the FLITE Program Office, to replace its current legacy systems. The FLITE Program involves a multiple-year phased approach comprised of three major components: the Strategic Asset Management (SAM) project, a logistics and asset management system; the Integrated Financial Accounting System (IFAS), which focuses on financial management; and a data warehouse that is intended to assist in financial reporting. As of January 2009, VA planned to complete FLITE implementation in fiscal year 2014. Although VA had eliminated some significant deficiencies in prior years, other deficiencies have emerged that require attention. As a result of its recurring internal control weaknesses in financial reporting, VA continues to be at risk of processing errors and misstatements in VA’s financial reports. The financial management system functionality material weakness, which is linked to VA’s outdated financial systems, consists of seven underlying significant deficiencies. The following four significant deficiencies were newly reported in fiscal year 2008. VBA Benefit Delivery Network (BDN) and Veterans Services Network (VETSNET) had insufficient audit trail documentation for the transfer of data to a data warehouse and the storage of such data, increasing the risk of misstatements in the financial statements and other financial reports. VETSNET lacked data mining capabilities, thereby preventing VA financial managers from analyzing transactions at a level needed to prepare routine reconciliations on billions of dollars in transactions. Automated inventory systems at the Consolidated Mail Order Pharmacy facilities could not provide the data needed to properly record the cost of inventory, resulting in potential misstatements in the financial statements and other financial reports. VA lacked a system to track obligations and purchases by vendors resulting in VA relying on vendors to supply operational sales data on medical center purchases. Three of the seven significant deficiencies were repeat conditions: Inadequate year-end closing procedures for the financial system and related records, reported since fiscal year 2000, created a significant risk of error in the annual financial statements. Business line system integration problems, reported since fiscal year 2004, resulted in inadequate support for amounts recorded in the general ledger, such as VETSNET accounts receivables, and the potential for misstatements in the financial statements and other financial reports. Fixed asset reporting limitations, reported since fiscal year 2007, prohibited VA from readily identifying all current year PP&E additions and reclassifications of work in process. The financial management oversight material weakness, reflecting a recurring theme of inadequate or ineffective financial management oversight, consisted of nine underlying significant deficiencies. The following three were newly reported in fiscal year 2008: Missing records in the mortgage loan portfolio maintained by an outside contractor resulted in unsupported amounts and potential errors in the general ledger. Incorrect formulas for estimating the projected default rate for guaranteed and direct loans in VA’s housing model could lead to material misstatements of estimated costs of guaranteed and direct loans in the financial statements and other financial reports. Incorrect expensing and capitalization of software development costs could result in an understatement of PP&E and an overstatement of operating program costs. Six of the nine significant deficiencies were repeat conditions: A lack of adequate review and follow-up procedures for accrued services payable and undelivered orders, reported since fiscal year 2007, resulted in invalid balances for obligations and accrued services payable and potential misstatements in the financial statements and other financial reports. VA reported a total of $8 billion in undelivered orders in fiscal year 2008. Untimely depreciation, improper recording of disposed assets, discrepancies in estimated useful life of equipment, and other inadequate capitalization and accounting for PP&E, reported since fiscal year 2000, could result in misstated PP&E and related expense accounts. VA reported a $13 billion PP&E balance in fiscal year 2008. Inconsistent methodologies and unsupported estimates for environmental and disposal liabilities, reported since fiscal year 2004, could lead to misstatements in the financial statements. VA reported a $928 million balance in environmental and disposal liabilities in fiscal year 2008. Inadequate review of unbilled receivables and contractual adjustments, reported since fiscal year 2007, could lead to misstatements of account receivable balances. VA reported over $1.7 billion in accounts receivable for fiscal year 2008. Inadequate BDN and VETSNET reconciliations, reported since fiscal year 2007, increased the likelihood that an error in the financial statements will occur and go undetected. BDN and VETSNET processed over $40 billion in compensation, pension, education, and vocational rehabilitation and employment benefits in fiscal year 2008. Inadequate reconciliations of the data input to the compensation and pension actuarial liability model, reported since fiscal year 2007, could result in misstatements in the financial statements. VA reported a $1.4 trillion actuarial liability in fiscal year 2008. In fiscal year 2008, VA reported successfully eliminating two prior significant deficiencies concerning insufficient follow-up of accounts receivable collections and errors in payroll data submissions to the Office of Personnel Management underlying the financial management oversight material weakness, as well as a prior material weakness regarding the retention of computer-generated detail records for benefit payments. VA has established corrective action plans intended to remediate many of its 16 significant deficiencies in the near term independent of FLITE implementation. However, although VA had corrective action plans in place, many of these corrective action plans did not contain the detail needed to provide VA or congressional oversight officials with assurance that the plans had near-term actions that could be effectively implemented on schedule. As shown in the table 1, VA planned to remediate 9 deficiencies in fiscal year 2009, 3 in fiscal year 2010, 3 in fiscal year 2012, and 1 in fiscal year 2014. However, VA lacked documented policies and procedures to ensure the consistent and comprehensive design of these plans, and most of VA’s plans for correcting financial reporting deficiencies in the near term lacked key information suggested in CFOC A- 123 Guidance. Eight of the 13 plans we reviewed lacked key information as recommended by the CFOC A-123 Guidance. As shown in table 2, 5 plans lacked milestone dates for action steps, 1 plan lacked validation activities, and 2 plans lacked both milestone dates and validation activities. In accordance with CFOC A-123 Guidance, agencies should prepare comprehensive corrective action plans that list action steps with related monthly milestone dates to help ensure senior VA officials can monitor progress. Seven of VA’s corrective action plans did not include intermediate milestone dates necessary to gauge whether planned corrective actions are proceeding according to schedule, thus increasing the risk that corrective action plans will not be implemented on schedule. For example, In one plan, VA combined several action steps, needed to rewrite the Consolidated Mail Order Pharmacy inventory management software, into one 2-year milestone period. For example, VA combined developing a statement of work, rewriting the software, and developing an inventory module for each CMOP into one 2-year milestone period. In addition, two other action steps lacked completion dates. Without interim milestones and completion dates, it is more difficult for VA officials to identify whether the necessary activities for remediating weaknesses are occurring and whether they are on schedule. Without such information, VA could miss opportunities to address issues that might hamper timely completion of the remediation. VHA’s plan for addressing the inadequate monitoring and accounting for PP&E only specified the fiscal year in which the tasks were to be completed. The lack of intermediate milestones makes it difficult for senior management to adequately monitor the progress of implementation efforts. Because most action steps only had a fiscal year target date, it was unclear when during the year the steps were to be taken and whether or not they were sequential. In addition, the plan did not include any descriptions or related milestones for two action steps. In accordance with CFOC A-123 Guidance, senior management is responsible for determining when sufficient action has been taken to declare that a significant deficiency or a material weakness has been corrected, and corrective action plans should include activities to validate the resolution of the deficiency. Without such validation measures, it is difficult for VA management to provide assurance that the corrective actions have effectively remediated the deficiency. Three of VA’s corrective action plans did not include activities to validate that the planned actions would resolve the deficiency. For example, the corrective action plan to address deficiencies in VA’s automated inventory systems at its Consolidated Mail Order Pharmacy facilities did not include activities to validate whether action steps were implemented and the desired results achieved. Deficient corrective action plans (discussed previously) and ineffective oversight of corrective action plan implementation have resulted in missed remediation milestones, placing VA at risk of continued errors and misstatements in financial information. As of August 2009, VA had missed milestones in 5 of the 13 corrective action plans to remediate fiscal year 2008 significant deficiencies underlying the financial management system functionality and financial management oversight material weaknesses. Our analysis of corrective action plans for two significant deficiencies— the untimely capitalization of construction projects and inadequate reconciliations related to benefit payments—showed that slipping milestones could jeopardize VA’s completion of these plans by fiscal years 2009 and 2012 respectively, and therefore may impair VA’s ability to obtain the improved data reliability originally envisioned within those time frames. For the plans lacking interim milestones, it is difficult for VA management to monitor progress, identify whether there is any slippage, and take timely steps to keep actions on track. The lack of milestones and the related accountability for meeting targets could also limit incentives for staff to ensure actions are implemented on schedule. In addition, VA lacked documented policies and procedures for overseeing the implementation of corrective action plans to remediate material weaknesses identified in financial statement audits. In January 2009, VA recognized the need to better coordinate these oversight activities and created an office of Financial Process Improvement and Audit Readiness (FPIAR). As shown in table 3, VA missed milestones in 5 of the 13 corrective action plans that we reviewed, and the status of progress in implementing 3 other plans was unknown because they lacked sufficient interim milestones. VA missed milestones related to preparation of detailed procedures for the Fixed Asset Package, PP&E policies and procedures, benefit payment reconciliations, the development of reports to support reconciliations of expense accounts in the actuarial liability model, and year-end closing procedures. An analysis of the status of corrective action plans for two significant deficiencies—the inadequate monitoring and accounting for PP&E and inadequate reconciliations related to benefit payments—provided examples of how missed milestones result in continuing risks of errors in related VA financial reporting. Specifically, VA missed its milestones for the creation of detailed procedures for capitalizing PP&E and automated reconciliations to support veteran benefit payments. Although the PP&E corrective action plan called for procedures related to timely capitalization of PP&E to be developed by March 2009, they had not been issued by August 2009. Failing to capitalize construction projects in a timely manner may lead to misstated financial information if projects are not capitalized in the same fiscal year they are placed in service. In addition, related depreciation expenses may also be misstated as a result of time lags in capitalizing projects. Finally, if projects are not closed out in a timely fashion, VA is unable to determine whether funds are available for use on other construction projects. Our analysis at two VHA medical facilities identified continuing problems in the timely capitalization of PP&E. According to federal accounting standards and VA policy issued by VA’s Assistant Secretary for Management (the VA CFO), construction projects are to be recorded as work in process (WIP) until they are placed in service, at which time the WIP balances are to be transferred to general PP&E. We reviewed the 21 projects at the Albuquerque, New Mexico Medical Center and the 4 projects at the Lyons, New Jersey Medical Center that had been placed into service since the start of fiscal year 2008 and found continuing significant delays in the amount of time it took to close out and capitalize projects after they were placed in service. In Albuquerque, VA fiscal staff told us their undocumented practice was to capitalize projects within 30 days of being placed in service. However, while they had capitalized 11 of 21 projects within 30 days, 6 projects were not capitalized for 30 to 60 days, and 4 projects were not capitalized for more than 120 days after they had been placed into service. At Lyons, VA staff capitalized 3 of 4 projects more than 180 days after they were placed in service. VBA also experienced slipping milestones in remediating the benefit payment reconciliation deficiency. VBA did not perform necessary reconciliations between the BDN and VETSNET systems and VA’s general ledger on a monthly basis prior to March 2008. Lacking such reconciliation VA is at continuing risk of improper reporting of benefit payments. That year, these systems processed over $41.6 billion in benefits payments related to compensation and pension, as well as a portion of education benefit programs as authorized by law. This information is critical to the correct determination of VA’s overall cost of operations. VBA developed a corrective action plan to correct this deficiency that contained 43 separate activities with related milestones, including developing automated reconciliations, documenting processes, and training end users. According to VBA documents and officials, VBA missed and pushed back milestones related to the development of reports supporting veteran education payments and automated reconciliations. For example, as of August 2009, work on the development of detailed reports supporting the Vocational Rehabilitation and Employment education payments was pushed back 5 months from November 2009 to April 2010 and VBA reported slippage ranging from 3 to14 months in the development of various reconciliations supporting Dependent’s Education Benefits. VA lacked policies and procedures for overseeing the design and implementation of corrective action plans to correct financial reporting material weaknesses identified in financial statement audits. Further, VA did not have an agencywide accountability mechanism in place to oversee and coordinate the remediation of the material weaknesses in financial reporting. Rather, VA delegated responsibility for the design, implementation, and oversight of the corrective action plans to the various administrations and offices responsible for the areas in which the deficiencies were identified (e.g., VHA and VBA). Lacking centralized VA- wide guidance, the administrations inconsistently defined the parameters for milestone dates in corrective action plans. For example, VHA corrective action plans provided milestones by fiscal year, while VBA plans often had monthly milestone dates. As a result, VA’s ability to determine the status of corrective action plan implementation and identify and address any slippages was impaired. In contrast to its financial reporting weaknesses, VA had documented policies and procedures to identify and correct its programmatic material weaknesses, specifically those in the areas of accountability and effectiveness over VA programs and operations. These policies and procedures, which could also be applied to the remediation of financial reporting material weaknesses identified through financial statement audits, are outlined in a manual which includes a detailed template for developing corrective action plans that specified parameters for milestone dates and other key information. Further, VA had a Senior Assessment Team (SAT) in place (chaired by the Assistant Secretary for Management and comprised of other senior management representatives from VA and its three administrations) to oversee remediation of programmatic control weaknesses detected through VA’s internal control reviews completed under OMB Circular No. A-123. In January 2009, VA recognized the need to better oversee and coordinate agencywide oversight activities for financial reporting material weaknesses identified through financial statement audits. Specifically, VA recruited a director to head a new office of Financial Process Improvement and Audit Readiness (FPIAR) reporting to the VA Deputy CFO in the Office of Finance under the VA Assistant Secretary for Management. FPIAR was established with responsibility for: coordinating and overseeing comprehensive corrective action plans for VA’s audit-related material weaknesses, in consultation and coordination with VA’s three administrations and applicable staff offices; assisting VA and the three administrations and staff offices in executing and monitoring the corrective action plans; ensuring compliance of VA offices and field stations with VA policies, plans, procedures, and internal controls; and assisting in updating corrective action plans as needed and developing recommendations and actions for ensuring completion of stated objectives and milestones in the event of slippage. In addition, the FPIAR Director’s position description calls for FPIAR to perform analysis and remediation efforts for any comparable internal control deficiencies being resolved as part of VA’s ongoing OMB Circular No. A-123 reviews in concert with work to remediate VA’s audit-related material weaknesses. Integrating VA’s A-123 review process and remediation activities for financial reporting material weaknesses identified in financial statement audits could enhance the efficiency of VA’s corrective actions and the elimination of material weaknesses. As of September 2009, according to FPIAR’s Director, VA had filled three permanent staff positions and hired six full-time contractors to assist VA in addressing a variety of financial reporting issues (e.g., helping address the IT Security Controls material weakness and outstanding issues surrounding the capitalization of software development costs, updating and reformatting corrective action plans, and developing requirements for an interface between VETSNET and VA’s general ledger). The VA Deputy CFO said that as office operations have evolved, VA has decided to hire one or two more permanent staff for the FPIAR and use contractors to fill other positions. He said that contractors can provide VA with the flexibility to address short-term staffing needs as well as the necessary technical expertise to remediate individual significant deficiencies. However, the FPIAR did not have a workforce plan defining the number of staff and expertise needed in the office. In fiscal year 2009, while not included in documented policies and procedures, the FPIAR began practices intended to establish agencywide procedures for oversight of corrective action plans to remediate material weaknesses identified in financial statement audits. For example, the FPIAR Director began participating in monthly SAT meetings chaired by the Assistant Secretary for Management and attended by other senior VA officials including the VHA CFO and VBA CFO. These meetings provide an opportunity for the FPIAR Director to highlight the status of specific corrective actions underway to address financial reporting significant deficiencies requiring the attention of key stakeholders across the agency. Further, the director told us that by the end of calendar year 2009, the FPIAR intends to begin using a corrective action plan template consistent with the CFOC A-123 Guidance to remediate significant deficiencies identified in the fiscal year 2009 financial statement audit. Because VA has developed a corrective action template for addressing A-123 control deficiencies, the FPIAR Director told us she is considering whether to adopt this template for corrective action plans to remediate financial reporting control weaknesses, which could provide efficiencies and help integrate resolution of some deficiencies. VA’s Deputy CFO also told us that oversight by the SAT, combined with the use of the corrective action plan template, will allow for more rigorous oversight of remediation efforts of weaknesses detected in the financial statement audits. VA has had serious, long-standing material weaknesses in financial reporting that could result in significant misstatements in financial information reported to Congress and used by VA to manage its operations. One of the significant deficiencies is not planned for resolution until FLITE is fully implemented, which will not be until 2014. Other deficiencies can be addressed in the near term. While VA has corrective action plans for near-term actions intended to provide more accurate and complete financial data, they often lacked key information. Consequently, VA managers could not readily identify and address slippage in remediation activities, exposing VA to continued risk of errors in financial information and reporting. Immediate actions to provide a rigorous framework for the design and oversight of corrective action plans will be essential to ensuring the timely remediation of internal control weaknesses before FLITE implementation. Well-defined corrective action plans provide a “road map” for remediation activities and facilitate effective oversight by senior VA officials. Continued support from senior VA officials and administration CFOs will also be critical to ensure that key corrective actions are developed and implemented on schedule. To help focus VA’s corrective action plans on more effectively establishing and completing consistent and comprehensive near-term actions, we recommend that the Secretary of VA direct the Assistant Secretary for Management to issue policies and procedures for identifying and reporting on financial audit weaknesses to include: Detailed guidance (such as a set of tools and templates in place to identify and report on programmatic weaknesses) on required corrective action plan elements (including milestones for completion of interim action steps and validation steps). Establishing a VA Secretariat-level agency-wide governance structure for overseeing all OMB Circular No. A-123 and financial statement audit material weakness remediation activities that provides for (1) involving key stakeholders in the remediation process (such as the FPIAR, administration CFO’s, and other senior VA officials); (2) clearly defining stakeholder roles and responsibilities; (3) establishing and implementing strategic workforce planning for FPIAR; and (4) regularly assessing and reporting on the status of corrective action plans and identification of any actions needed to address any slippages of remediation activities. To help ensure the timely and complete capitalization of property, plant, and equipment, we recommend that the Secretary of VA direct the Assistant Secretary for Management to issue procedures on specific actions and identify specific reasonable time frames, such as within 30 days, to implement VA policy to capitalize PP&E projects when they are placed in service. In its written comments, VA generally agreed with our findings and recommendations and identified specific actions it has taken and plans to take to implement these recommendations. In response to our recommendation to provide detailed guidance (such as a set of tools and templates in place to identify and report on programmatic weaknesses) on required corrective action plan elements (including milestones for completion of interim action steps and validation steps), VA stated that the FPIAR has begun integrating its corrective actions for financial audit weaknesses with VA’s OMB Circular No. A-123 processes. VA also said that FPIAR will migrate to a set of corrective action plan tools, templates, and documented procedures in fiscal year 2010. VA partially concurred with our recommendation that VA establish a Secretariat-level agencywide governance structure for OMB Circular No. A-123 and financial statement audit remediation activities. In its comments, VA stated it already established a Senior Assessment Team as the coordinating body for corrective action planning to address control deficiencies identified as a result of OMB Circular No. A-123 reviews and financial statement audits. As discussed in our draft report, we recognized VA has taken action to establish agencywide accountability for oversight of its corrective action plans and has begun to establish related practices. However, these practices had not yet evolved into the rigorous framework needed to effectively ensure timely control weakness remediation. VA stated that its Internal Controls Service is developing a handbook for all stakeholders that will provide detailed guidance for corrective action planning, monitoring, reporting, and validation procedures for all financial statement audit and OMB Circular No. A-123 significant deficiencies and material weaknesses. Also, VA noted that as FPIAR matures, it will continue to define and meet staffing requirements. VA also concurred with our recommendation that VA issue procedures for specific actions and identify reasonable time frames, such as within 30 days, to implement VA policy to capitalize PP&E projects when they are placed in service. VA provided a copy of recently issued procedures which identified specific actions and time frames for the capitalization of PP&E. These procedures provide guidance for monthly communications between engineering staffs, program directors, and the appropriate fiscal activity regarding construction project status, costs, and useful life. The procedures also provide that property should be capitalized no later than the end of the fiscal month following the month that the property is put into use or accepted by VA. If fully and effectively implemented, the guidance should help address the problems we found related to timely capitalization of VA’s PP&E. In its written comments, VA also provided technical comments which we considered and incorporated as appropriate. We are sending copies of this report to other interested congressional committees and to affected federal agencies. In addition, this report is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-9095 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To determine the nature of the internal control weaknesses identified in the Department of Veterans Affairs (VA) fiscal year 2008 financial audit report and how long they have been outstanding, we obtained and analyzed the financial statement audit reports for fiscal years 2000 to 2008. We summarized available information on the extent and nature of the internal control weaknesses characterized as material weaknesses, as well as the underlying significant deficiencies and identified their evolution over time. We also interviewed VA and Office of Inspector General (OIG) officials and VA’s independent auditor, and reviewed VA documents, prior GAO and OIG reports, and independent auditor workpapers to better understand control deficiencies underlying the material weaknesses. We did not perform independent audit work to test and validate whether the material weaknesses and related significant deficiencies reported by the independent auditor were accurate and complete. To determine whether VA had plans appropriately focused on near-term actions to address financial reporting deficiencies prior to the implementation of its Financial and Logistics Integrated Technology Enterprise (FLITE) system in fiscal year 2014, we analyzed VA’s corrective action plans for remediating significant deficiencies underlying two of the three material weaknesses impacting the reliability of financial information integral for helping inform management decision making— weaknesses in VA’s financial management systems and in its financial management oversight. We interviewed VA officials, VA OIG officials, and independent auditor officials who completed VA’s fiscal year 2008 financial statement audit about near-term actions in VA plans to correct these underlying significant deficiencies. We also analyzed related corrective action plans to remediate 15 of the 16 significant deficiencies underlying two material weaknesses to determine whether they included key information specified in the Chief Financial Officers Council’s (CFOC) Implementation Guide for OMB Circular A-123, Management’s Responsibility for Internal Control – Appendix A, Internal Control over Financial Reporting: action steps with related milestones to provide a “road map” for remediation activities, validation activities to help ensure the proposed actions worked as envisioned, a description of the deficiency to be corrected in sufficient detail to provide clarity and facilitate a common understanding of what needs to be done, and clear delineation of responsible officials for completing the planned actions. We also reviewed VA’s task work plan to remediate the final significant deficiency—the documentation of data transfer from VBA benefit payment systems to a data warehouse—in fiscal year 2009. To determine whether VA had appropriate oversight mechanisms in place to help ensure that near-term corrective action plans to address financial reporting deficiencies are implemented on schedule, we assessed the status of plan implementation in July and August 2009 by identifying whether VA met specific milestones and any slippages that had occurred. We also evaluated the timeliness of implementation of corrective action plans for two significant deficiencies—one to address the inadequate capitalization and accounting for property, plant, and equipment (PP&E) and another to improve reconciliations of benefit payments. One plan was designed and implemented by the Veterans Health Administration, and one by the Veterans Benefit Administration—the two principal VA administrations. We selected these plans for further review because the related deficiencies were not currently being audited or reviewed by other oversight organizations, their associated account balances exceeded a material dollar threshold ($12.7 billion), and the deficiencies contributed to the two material weaknesses that we, VA officials, and VA’s independent auditor considered most integral for developing useful and reliable information for decision making. We reviewed these plans’ implementation in detail to determine the extent to which delays jeopardized VA’s ability to remediate these control deficiencies and provide reliable financial management information to senior VA officials prior to FLITE implementation. In this regard, we reviewed documentation and transactions concerning 25 projects that had been placed in service since the start of fiscal year 2008: 21 projects at the Albuquerque, New Mexico Medical Center and 4 projects at the Lyons, New Jersey Medical Center to determine how long it took VA to capitalize these projects after they had been placed in service. We also reviewed VA’s progress in implementing benefit payment reconciliation procedures in a timely manner. We interviewed VA, OIG, and independent auditor officials about mechanisms in place to oversee the design and implementation of near- term corrective action plans to remediate material financial reporting weaknesses identified through financial statement audits. We reviewed minutes of oversight meetings involving senior VA management to determine how VA monitored the status of remediation efforts related to internal control deficiencies identified through financial statement audits. We also interviewed agency officials about VA’s overall accountability for timely remediation of internal control deficiencies in the near term, and reviewed the status of ongoing VA efforts to staff a new office responsible for coordination and oversight of the development of corrective action plans. We conducted our audit work from November 2008 to November 2009 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. GAO Contact – Susan Ragland, (202) 512-9095 or [email protected]. Staff Acknowledgments – In addition to the contact named above, Glenn Slocum (Assistant Director), Richard Cambosos, Patrick Frey, W. Stephen Lowrey, David Ramirez, and George Warnock made key contributions to this report. | In fiscal year 2008, the Department of Veterans Affairs (VA) identified three material internal control weaknesses over financial reporting--financial management system functionality, IT security controls, and financial management oversight. VA is developing a new financial system--FLITE--but full implementation is not expected until 2014. Therefore, the Subcommittee asked us to determine whether VA corrective action plans and oversight are appropriately focused on near-term actions to provide improved financial information. This report addresses (1) the nature of the internal control weaknesses identified in the VA fiscal year 2008 financial audit report and how long they have been outstanding, (2) whether VA had plans appropriately focused on near-term corrective actions, and (3) whether VA had appropriate oversight mechanisms in place to help assure that near-term corrective action plans are implemented on schedule. GAO reviewed corrective action plans for significant deficiencies underlying 2 of the 3 material weaknesses and performed additional analysis for two underlying significant deficiencies. VA's fiscal year 2008 material weaknesses in financial management system functionality and financial management oversight have been reported since fiscal years 2000 and 2005, respectively. These two material weaknesses are comprised of 16 underlying significant financial reporting control deficiencies. Although VA had eliminated some significant deficiencies in prior years, other deficiencies have emerged. As a result, continuing serious deficiencies in financial reporting leave VA at risk of processing errors and misstatements in its financial statements. Although VA had corrective action plans in place intended to result in near-term remediation of the 16 fiscal year 2008 significant control deficiencies, many of these plans did not contain the detail needed to provide VA officials with assurance that the plans could be effectively implemented on schedule. VA lacked documented policies and procedures needed to assure the consistent and comprehensive design of these corrective action plans, and 8 of 13 of VA's plans for correcting its financial reporting deficiencies lacked key information regarding milestones for action steps and validation activities.As of August 2009, VA had missed milestones in 5 of the 13 corrective action plans. For example, our analysis of plans for remediating deficiencies regarding the capitalization of property, plant, and equipment and inadequate benefit payment reconciliations showed that slipping milestones could jeopardize VA's timely completion of these plans, and consequently may impair VA's ability to obtain improved data reliability within the time frames originally envisioned. VA lacked documented policies and procedures for overseeing implementation of the corrective action plans, but recently took steps intended to better coordinate its oversight activities. |
Since 1998 VA and DOD have been trying to achieve the capability to share patient health care data electronically. The original effort—the government computer-based patient record (GCPR) project—included the Indian Health Service (IHS) and was envisioned as an electronic interface that would allow physicians and other authorized users at VA, DOD, and IHS health facilities to access data from any of the other agencies’ health information systems. The interface was expected to compile requested patient information in a virtual record that could be displayed on a user’s computer screen. Our prior reviews of the GCPR project determined that the lack of a lead entity, clear mission, and detailed planning to achieve that mission made it difficult to monitor progress, identify project risks, and develop appropriate contingency plans. Accordingly, reporting on this project in April 2001 and again in June 2002, we made several recommendations to help strengthen the management and oversight of GCPR. Specifically, in 2001 we recommended that the participating agencies (1) designate a lead entity with final decision-making authority and establish a clear line of authority for the GCPR project, and (2) create comprehensive and coordinated plans that included an agreed-upon mission and clear goals, objectives, and performance measures, to ensure that the agencies could share comprehensive, meaningful, accurate, and secure patient health care data. In 2002, we recommended that the participating agencies revise the original goals and objectives of the project to align with their current strategy, commit the executive support necessary to adequately manage the project, and ensure that it followed sound project management principles. VA and DOD took specific measures in response to our recommendations for enhancing overall management and accountability of the project. By July 2002, VA and DOD had revised their strategy and had made some progress toward electronically sharing patient health data. The two departments had renamed the project the Federal Health Information Exchange (FHIE) program and, consistent with our prior recommendation, had finalized a memorandum of agreement designating VA as the lead entity for implementing the program. This agreement also established FHIE as a joint effort that would allow the exchange of health care information in two phases. The first phase, completed in mid-July 2002, enabled the one-way transfer of data from DOD’s existing health information system to a separate database that VA clinicians could access. A second phase, finalized this past March, completed VA’s and DOD’s efforts to add to the base of patient health information available to VA clinicians via this one-way sharing capability. The departments reported total GCPR/FHIE costs of about $85 million through fiscal year 2003. The revised strategy also envisioned the pursuit of a longer term, two-way exchange of health information between DOD and VA. Known as HealthePeople (Federal), this initiative is premised upon the departments’ development of a common health information architecture comprising standardized data, communications, security, and high-performance health information systems. The joint effort is expected to result in the secured sharing of health data required by VA’s and DOD’s health care providers between systems that each department is currently developing—DOD’s Composite Health Care System (CHCS) II and VA’s HealtheVet VistA. DOD began developing CHCS II in 1997 and has completed the development of its associated clinical data repository—a key component for the planned electronic interface. The department expects to complete deployment of all of its major system capabilities by September 2008. It reported expenditures of about $464 million for the system through fiscal year 2003. VA began work on HealtheVet VistA and its associated health data repository in 2001, and expects to complete all six initiatives comprising this system in 2012. VA reported spending about $120 million on HealtheVet VistA through fiscal year 2003. Under the HealthePeople (Federal) initiative, VA and DOD envision that, upon entering military service, a health record for the service member will be created and stored in DOD’s CHCS II clinical data repository. The record will be updated as the service member receives medical care. When the individual separates from active duty and, if eligible, seeks medical care at a VA facility, VA will then create a medical record for the individual, which will be stored in its health data repository. Upon viewing the medical record, the VA clinician would be alerted and provided access to the individual’s clinical information residing in DOD’s repository. In the same manner, when a veteran seeks medical care at a military treatment facility, the attending DOD clinician would be alerted and provided with access to the health information in VA’s repository. According to the departments, this planned approach would make virtual medical records displaying all available patient health information from the two repositories accessible to both departments’ clinicians. VA officials have stated that they anticipate being able to exchange some degree of health information through an interface of their health data repository with DOD’s clinical data repository by the end of calendar year 2005. While VA and DOD are making progress in agreeing to and adopting standards for clinical data, they continue to face significant challenges in providing a virtual medical record based on the two-way exchange of data as part of their HealthePeople (Federal) initiative. Specifically, VA and DOD do not have an explicit architecture that provides details on what specific technologies they will use to achieve the exchange capability; a fully established project management structure that will ensure the necessary day-to-day guidance of and accountability for the departments’ investment in and implementation of the exchange; and a project management plan describing the specific responsibilities of each department in developing, testing, and deploying the interface and addressing security requirements. VA’s and DOD’s ability to exchange data between their separate health information systems is crucial to achieving the goals of HealthePeople (Federal). Yet, successfully sharing health data between the departments via a secure electronic interface between each of their data repositories can be complex and challenging, and depends significantly on the departments’ having a clearly articulated architecture, or blueprint, defining how specific technologies will be used to achieve the interface. Developing, maintaining, and using an architecture is a best practice in engineering information systems and other technological solutions. An architecture would articulate, for example, the system requirements and design specifications, database descriptions, and software descriptions that define the manner in which the departments will electronically store, update, and transmit their data. VA and DOD lack an explicit architecture that provides details on what specific technologies they will use to achieve the exchange capability, or just what they will be able to exchange by the end of 2005—their projected date for having this capability operational. While VA officials stated that they recognize the importance of a clearly defined architecture, they acknowledged that the departments’ actions were continuing to be driven by the less specific, high-level strategy that has been in place since September 2002. Officials in both departments stated that a planned pharmacy prototype initiative, begun this past March in response to requirements of the National Defense Authorization Act of 2003, would assist them in defining the electronic interface technology needed to exchange patient health information. The act mandated that VA and DOD develop a real-time interface, data exchange, and capability to check prescription drug data for outpatients by October 1, 2004. In late February, VA hired a contractor to develop the planned prototype but the departments had not yet fully determined the approach or requirements for it. DOD officials stated that the contractor was expected to more fully define the technical requirements for the prototype. In late April, the departments reported approval of the contractor’s requirements and technical design for the prototype. While the pharmacy prototype may help define a technical solution for the two-way exchange of health information between the two departments’ existing systems, there is no assurance that this same solution can be used to interface the new systems under development. Because the departments’ new health information systems—major components of HealthePeople (Federal)—are scheduled for completion over the next 4 to 9 years, the prototype may only test the ability to exchange data in VA’s and DOD’s existing health systems. Thus, given the uncertainties regarding what capabilities the pharmacy prototype will demonstrate, it is difficult to predict how or whether the prototype initiative will contribute to defining the architecture and technological solution for the two-way exchange of patient health information for the HealthePeople (Federal) initiative. Industry best practices and information technology project management principles stress the importance of accountability and sound planning for any project, particularly an interagency effort of the magnitude and complexity of HealthePeople (Federal). Based on our past work, we have found that a project management structure should establish relationships between managing entities with each entity’s roles and responsibilities clearly articulated. Further, it is important to establish final decision- making authority with one entity. However, VA and DOD have not fully established a project management structure that will ensure the necessary day-to-day guidance of and accountability for the departments’ investment in and implementation of the two-way capability. According to officials in both departments a joint working group and oversight by the Joint Executive Council and VA/DOD Health Executive Council has provided the collaboration necessary for HealthePeople (Federal). However, this oversight by the executive councils is at a very high level, occurs either bimonthly or quarterly, and encompasses all of the joint coordination and sharing efforts for health services and resources. Since a lead entity has not been designated, neither department has had the authority to make final project decisions binding on the other. Further, the roles and responsibilities for each department have not been clearly articulated. Without a clearly defined project management structure, accountability and a means to monitor progress are difficult to establish. In early March, VA officials stated that the departments had designated a program manager for the planned pharmacy prototype and were establishing roles and responsibilities for managing the joint initiative to develop an electronic interface. Just this month, officials from both departments told us that this individual would be the program manager for the electronic interface. However, they had not yet designated a lead entity or provided documentation for the project management structure or their roles and responsibilities for the HealthePeople (Federal) initiative. An equally important component necessary for guiding the development of the electronic interface is a project management plan. Information technology project management principles and industry best practices emphasize that a project management plan is needed to define the technical and managerial processes necessary to satisfy project requirements. Specifically, the plan should include, among other things, the authority and responsibility of each organizational unit; a work breakdown structure for all of the tasks to be performed in developing, testing, and deploying the software, along with schedules associated with the tasks; and a security policy. However, the departments are currently operating without a project management plan for HealthePeople (Federal) that describes the specific responsibilities of each department in developing, testing, and deploying the interface and addressing security requirements. This month, officials from both departments stated that a pharmacy prototype project management plan that includes a work breakdown structure and schedule was developed in mid-March. They further stated that a work group that reports to the integrated project team has been given responsibility for the development of security and information assurance provisions. While these actions should prove useful in guiding the development of the prototype, they do not address the larger issue of how the departments will develop and implement an interface to exchange health care information between their systems by 2005. Without a project management plan, VA and DOD lack assurance that they can successfully develop and implement an electronic interface and the associated capability for exchanging health information within the time frames that they have established. VA and DOD officials stated that they have begun discussions to establish an overall project plan. Achieving an electronic interface that will enable VA and DOD to exchange patient medical records is an important goal, with substantial implications for improving the quality of health care and disability claims processing for the nation’s military members and veterans. In seeking a virtual medical record based on the two-way exchange of data between their separate health information systems, VA and DOD have chosen a complex and challenging approach that necessitates the highest levels of project discipline, including a well-defined architecture for describing the interface for a common health information exchange; an established project management structure to guide the investment in and implementation of this electronic capability; and a project management plan that defines the technical and managerial processes necessary to satisfy project requirements. These critical components are currently lacking; thus, the departments risk investing in a capability that could fall short of expectations. The continued absence of these components elevates concerns about exactly what capabilities VA and DOD will achieve—and when. To encourage significant progress on achieving the two-way exchange of health information, we recommend that the Secretaries of Veterans Affairs and Defense instruct the Acting Chief Information Officer for Health and the Chief Information Officer for the Military Health System, respectively, to develop an architecture for the electronic interface between their health systems that includes system requirements, design specifications, and software descriptions; select a lead entity with final decision-making authority for the initiative; establish a project management structure to provide day-to-day guidance of and accountability for their investments in and implementation of the interface capability; and create and implement a comprehensive and coordinated project management plan for the electronic interface that defines the technical and managerial processes necessary to satisfy project requirements and includes (1) the authority and responsibility of each organizational unit; (2) a work breakdown structure for all of the tasks to be performed in developing, testing, and implementing the software, along with schedules associated with the tasks; and (3) a security policy. The Secretary of Veterans Affairs provided written comments on a draft of this report and we received comments via e-mail from DOD’s Interagency Program Integration and External Liaison for Health Affairs; both concurred with the recommendations. Each department’s comments are reprinted in their entirety as appendixes I and II, respectively. In their comments, the officials also provided information on actions taken or underway that, in their view, address our recommendations. We are sending copies of this report to the Secretaries of Veterans Affairs and Defense and to the Director, Office of Management and Budget. Copies will also be available at no charge on GAO’s Web site at www.gao.gov. Should you have any question on matters contained in this report, please contact me at (202) 512-6240, or Barbara Oliver, Assistant Director, at (202) 512-9396. We can also be reached by e-mail at [email protected] and [email protected], respectively. Other key contributors to this report were Michael P. Fruitman, Valerie C. Melvin, J. Michael Resser, and Eric L. Trout. | A critical element of the Department of Veterans Affairs' (VA) information technology program is its continuing work with the Department of Defense (DOD) to achieve the ability to exchange patient health care information and create electronic medical records for use by veterans, active-duty military personnel, and their health care providers. While VA and DOD continue to move forward in agreeing to and adopting standards for clinical data, they have made little progress since last winter toward defining how they intend to achieve an electronic medical record based on the two-way exchange of patient health data. The departments continue to face significant challenges in achieving this capability. VA and DOD lack an explicit architecture--a blueprint--that provides details on what specific technologies will be used to achieve the electronic medical record by the end of 2005. The departments have not fully implemented a project management structure that establishes lead decision-making authority and ensures the necessary day-to-day guidance of and accountability for their investment in and implementation of this project. They are operating without a project management plan describing the specific responsibilities of each department in developing, testing, and deploying the electronic interface. In seeking to provide a two-way exchange of health information between their separate health information systems, VA and DOD have chosen a complex and challenging approach--one that necessitates the highest levels of project discipline. Yet critical project components are currently lacking. As such, the departments risk investing in a capability that could fall short of what is expected and what is needed. Until a clear approach and sound planning are made integral parts of this initiative, concerns about exactly what capabilities VA and DOD will achieve--and when--will remain. |
FERC has made few substantive changes to either its merger review process or its postmerger oversight as a consequence of its new responsibilities and, as a result, does not have a strong basis for ensuring that harmful cross-subsidization does not occur. To review mergers and acquisitions, FERC officials told us that they do not intend to make changes to their process other than to require companies to disclose any existing or planned cross-subsidization and explain why it is in the public interest, and to certify in writing that they will not engage in harmful cross- subsidization. For postmerger oversight, FERC intends to continue to rely on its existing enforcement mechanisms, as expanded by EPAct, to detect potential cross-subsidies—primarily companies’ self-reporting of noncompliance and a limited number of compliance audits. However, FERC does not formally consider the risks posed by various companies in determining which companies to audit—a consideration that financial auditors and other experts told us is important when auditing with limited resources. We also found that where affiliate transactions were audited, the resulting audit reports sometimes lacked clear and useful information. FERC’s merger review process requires companies to submit evidence that a merger or acquisition will not result in unapproved cross- subsidization, and its ability to prevent cross-subsidization depends largely on commitments by the merging parties rather than independent analysis. FERC-regulated companies that are proposing to merge with or acquire a regulated company must submit a public application for FERC to review and approve. As part of its review of these applications, FERC is now responsible for ensuring that mergers do not result in harmful cross- subsidies. To do this, FERC attempts to ensure that mergers will not result in: any transfer of facilities between or issuance of securities by a traditionally regulated public utility to an affiliate; any new financial obligation by a traditionally regulated public utility for the benefit of an affiliate; or any new affiliate contract between a nonutility affiliate company and a traditionally regulated public utility company, other than agreements subject to review by FERC under the Federal Power Act. To fulfill this new responsibility, FERC established an additional requirement that the merging companies submit new information as part of their application for merger or acquisition approval, referred to as “Exhibit M.” Exhibit M requires companies to describe organizational and financial information, such as affiliate relationships and any existing or planned cross-subsidies. If cross-subsidies already exist or are planned, companies are required to describe how these are in the public interest by, for example identifying how the planned cross-subsidy benefits utility ratepayers and does not harm others. Further, in FERC’s recent supplemental merger policy statement, issued July 20, 2007, FERC provided additional guidance on certain types of transactions that are not likely to raise concerns about cross-subsidization—termed “safe harbors.” FERC also requires company officials to attest that they will not engage in unapproved cross-subsidies in the future and specifically requires the merger application, including Exhibit M, to be signed by a person or persons having appropriate knowledge and authority. FERC’s merger or acquisition decision is based on a public record that starts with an initial application. This record includes the filing of the initial application. FERC’s review process also allows stakeholders or other interested parties, such as state regulators, consumer advocates, or others to submit information and arguments to this public record for FERC to consider. FERC officials told us that they evaluate the information in the public record for the application and do not separately develop or collect evidence or conduct separate analyses of a proposed merger beyond what is submitted as part of the record. FERC officials told us that they can, and sometimes do, request that applicants provide additional information or conduct additional analysis. In addition, FERC may require a public hearing before making a decision. Whether or not a hearing is held, officials noted that they are required to make their decision based on the evidence that is in the public record. On the basis of this information, FERC officials told us that they will determine which, if any, existing or planned cross-subsidies may be allowed, which is then detailed in the final merger or acquisition order. According to experts, FERC is generally supportive of mergers. FERC officials largely acknowledged this perspective, telling us that under law and regulation, FERC must approve mergers that are consistent with the public interest. These officials also said that FERC believes it has broad flexibility in determining what is consistent with the public interest, particularly in light of changing conditions in the industry and, as such, it does not read the statute as creating a presumption against mergers. On the other hand, FERC officials said that FERC was not prepared to presume that all mergers were beneficial but that it was the merger applicant’s responsibility to demonstrate that the merger was consistent with the public interest by, for example, demonstrating how it improves efficiency or lowers costs while not harming competition. Between the time EPAct was enacted in 2005 and July 10, 2007, FERC has reviewed or was in the process of reviewing 15 mergers or potential mergers (see table 1). FERC has not rejected any merger applications. In nine cases, FERC approved the merger without condition. In three cases, FERC approved the merger with conditions, for example, requiring the merging parties to provide further evidence of ratepayer protection consistent with FERC-approved “hold harmless” provisions. One merger was withdrawn by the merging parties prior to FERC’s decision. The two other applications are still pending. FERC officials in the Office of Enforcement intend to use the same tools to enforce prohibitions on cross-subsidization that they currently use for other enforcement actions. In general, the Office of Enforcement relies on two primary tools—self-reporting and a limited number of compliance audits. However, we found that FERC does not use a formal risk-based approach to guide its audit planning—the active portion of its oversight efforts to detect cross-subsidization—or deploy its limited audit resources. As such, FERC’s actions do not provide a strong basis for ensuring the detection of potentially harmful cross-subsidization. The first detection tool that FERC emphasizes is that companies self- police their own affiliate transactions and intercompany relationships and voluntarily self-report instances of harmful cross-subsidization to FERC. FERC’s policy statement on enforcement emphasizes such voluntary internal compliance and reporting as well as cooperation with FERC in order to detect and correct violations. A company’s actions in following this policy, along with the seriousness of a potential violation, help inform FERC’s decision on the appropriate level of potential penalty to impose on violating companies. FERC indicates that it places great importance on company’s proactive self-reporting because it believes that companies are in the best position to detect and correct both inadvertent and intentional violations of FERC orders, rules, and regulation. According to FERC officials, companies can actively police their own behavior through a formal program for internal compliance, internal audits, and through annual external financial audits. Since the enactment of EPAct, when Congress formally highlighted its concern about cross-subsidization, no companies have self-reported any of these types of violations. FERC officials said that FERC had approved 12 settlements with natural gas and electric entities, none of which involved violations of the PUHCA 2005 provisions in EPAct. In these cases, FERC has assessed civil penalties totaling $39.8 million on the companies. FERC officials told us that because it can now levy much larger fines—up to $1 million per violation per day—they expect companies to become more vigilant in monitoring their behavior. Regarding FERC’s reliance on self-reporting, key stakeholders have raised several concerns about this approach. First, because FERC’s rules related to affiliate transactions are broad, company managers may not always be fully aware of how these rules apply to specific affiliate transactions. According to market experts, including a November 2007 report issued by a former FERC Commissioner on behalf of a broad consortium of energy companies, FERC’s rules are often written broadly and it is unclear what standards of conduct FERC uses to oversee transactions between companies. This can result in utility managers being unaware that specific transactions may violate current FERC policies. One controller we met with told us that these broad rules can be counterproductive in encouraging company compliance and self-reporting because it is difficult to determine if the rules are actually being violated. Second, internal company audits tend to focus on areas of highest perceived risk and, as a result, may not focus specifically on affiliate transactions. Internal auditors with whom we spoke told us that they have relatively small staffs and are responsible for auditing a wide range of matters within a corporation and, as such, they focus their efforts on areas they believe pose the highest risk to the company. They said this approach means that they rarely focus on affiliate transactions, unless those transactions represent a large financial exposure to the company’s potential profitability. Finally, financial audit firms we spoke with told us their work primarily focuses on auditing financial statement balances and related disclosures. These audits focus on providing an opinion about whether the financial statements present fairly, in all material respects, the financial position and operations of the company. As such, they said that their work with regard to affiliate transactions is limited to the related disclosures rather than determining if harmful cross-subsidization was occurring. Only in cases where transactions could have a material effect on the overall financial statements of a company would they conduct detailed testing and review pricing arrangements. Compounding these concerns, and FERC’s belief that the threat of large fines will encourage companies to self-report, companies expressed uneasiness over FERC’s use of its new penalty authority on self-reporting companies. One company official noted that some of the recent penalties for companies that self-reported violations were large and would “chill” companies’ willingness to self-report violations. In addition, state commissions expressed concerns about a reliance on self-reporting of cross-subsidies and reported that effective oversight would require regular and rigorous audits of affiliate transactions. As a second way to detect potential harmful cross-subsidization, FERC plans to conduct a limited number of compliance audits of holding companies each year. Since enactment of PUHCA 2005 provisions in EPAct, FERC has not completed any audits to detect whether cross- subsidization is occurring. In our review of FERC processes for planning these audits, however, officials with the Division of Audits in the Office of Enforcement told us that FERC conducts audit planning for 1 fiscal year at a time. On the basis of this approach, FERC’s current audit plan for these matters in 2008 will audit three companies—Exelon Corporation, Allegheny, Inc., and the Southern Company. The overall objective of these audits will be to determine whether these companies are inappropriately cross-subsidizing or granting special preference to affiliates or burdening utility assets for the benefit of nonutility affiliated companies. Such compliance audits, officials told us, will determine whether companies are complying with FERC rules for the pricing of affiliate transactions, among other things. FERC’s audit plan is not designed to address the number of audits FERC will conduct beyond 2008, or at what companies it will conduct them since the planning for 2009, for example, will not be done until sometime later in 2008. In addition, based on discussions with FERC officials, the development of its audit plan is informal and developed in an ad hoc manner to address the specific audits for a given year. Specifically, these officials said that the plan is developed through informal discussions between FERC’s Office of Enforcement, including its Division of Audits, and relevant FERC offices with related expertise, including the Office of General Counsel, the Office of Energy Markets Regulation, and the new Office of Electric Reliability. FERC officials also told us that the plan is reviewed by top agency officials and approved by the Chairman. While FERC’s audit plan for 2008 reflects insights of key FERC staff, it does not formally consider the risks posed by individual companies, or the overall universe of companies, in determining which companies to audit or how many audit resources to deploy. FERC officials told us that while they do not specifically consider the individual or collective risks posed by companies in a formal manner, they believe that their discussions with knowledgeable staff provide a reasonable picture of risk. However, on the basis of our discussions with FERC staff, this picture of risk may be somewhat limited in that it is informed only by the views of a few key staff and does not seek input from stakeholders, such as the financial community or state commissions, or reflect analysis of key data on risk. To obtain a more complete picture of risk, FERC could more actively monitor company-specific data to develop a picture of the risks posed by the companies it regulates—something it currently does not do. To partly address this, FERC recently required certain affiliates to begin gathering comprehensive financial information in 2008 and filing the first of what will be annual financial reports by May 2009. According to a FERC audit official, after a year or 2 of data collection, analysis, and conducting audits, it will be in a much better position to plan, conduct, and report the results of its audits of affiliate relationships and potential cross- subsidization. In addition, this official said that FERC does not typically review certain publicly available financial information, such as bond ratings and stock prices for companies that FERC regulates or their affiliates. According to bond rating companies, they actively monitor companies’ operating and financial condition to identify the key risks faced by companies and reflect these risks in the ratings they assign to the company’s debt. Further, state officials agreed that such information may help provide a view of the financial condition of specific companies, or the overall industry, and how they may be changing. In support of the use of this information, some state regulators told us that such information has been helpful to them in identifying when companies may engage in unlawful cross-subsidies. Finally, some state officials said that because they regulate companies on a day-to-day basis, they have considerable expertise and knowledge that may prove useful to FERC. Thus, unless FERC changes its view about the usefulness of such data, it will continue to lack available information that may be potentially useful in assessing risk. The importance of formally considering risk when carrying out compliance oversight is highlighted by prior GAO reports. In these reports GAO identified instances where other agencies, such as SEC, the Department of Homeland Security, and the Environmental Protection Agency could use and have used risk-based approaches to inspect for compliance with regulations. In some cases, agencies have developed and used statistical models to estimate an entity’s (e.g., a company’s) risk of a violation and as a means to target limited audit resources. In other cases, we have recommended that agencies continue to devote some resources to auditing entities on a random basis but use the data collected from these random audits to update statistical models so that the agency can continue to identify high-risk entities. Furthermore, according to financial auditors and other experts we spoke with, risk assessments are an important consideration in targeting audits and allocating resources to detect noncompliance. Without a sufficient assessment of risk, it may be difficult for FERC to convince companies, states, and other market stakeholders that it can adequately and consistently detect cross- subsidization. At present, without a risk-based approach to guide its audit planning and deploy its limited audit resources, FERC may not be effectively allocating its staff to audit the companies it regulates. FERC’s Division of Audits currently has a total of 34 full-time staff, including 21 accountants/ auditors, 6 energy industry analysts, 3 economists, 2 engineers, 1 attorney, and 1 support staff. FERC has determined that of the 149 companies that have been identified as holding companies, 36 of them are currently subject to its PUHCA 2005 authority and it plans to allocate 9 of its available staff to these audits in 2008. Officials in the Division of Audits told us that they believe a typical audit would involve three to four audit staff—an auditor-in-charge and one or two auditors. Other companies and state auditors involved in auditing affiliate transactions told us that these audits can be difficult and require significant use of auditors with specialized skills and experience. These auditors also told us that examining affiliate transactions can be resource intensive since determining whether a transaction is unfair may require detailed analysis of the transaction and the market for the good or service that was the subject of the transaction. At its planned 2008 audit rate of 3 companies, it would take FERC 12 years to audit each of these companies once. In commenting on the report, FERC noted that the number of audits in future years may change. Nevertheless, FERC may face additional companies, some of which may require more complex audits. According to financial and industry experts we spoke with, the elimination of PUHCA 1935 is likely to attract companies previously restricted from owning utilities to consider mergers or acquisitions. For example, some experts told us that foreign companies, corporate conglomerates, and private equity companies are considering mergers or acquisitions of U.S. utilities. In addition to companies subject to FERC’s oversight under the PUHCA 2005 provisions of EPAct, FERC also has audit responsibilities for the electric reliability organization, the North American Electricity Reliability Corporation, which oversees issuing and enforcing rules, such as compliance with reliability standards, focused on ensuring reliable electricity supplies. At present, there are about 4,700 companies that could potentially be audited for compliance with FERC’s rules, regulations, and orders regarding reliability, transmission, and electricity pricing rules. FERC officials said some overlap exist between categories, such as investor-owned utilities and electric suppliers with market-based rate authority. In addition, according to FERC, Federal Power Act section 215 companies would initially be audited and overseen by the new Regional Reliability Organization and the related regional entities. FERC officials also said that they intend to audit about 100 of these companies during 2008. The universe of companies that FERC is responsible for auditing is identified in 10 categories in table 2. Because of the magnitude of companies it oversees and the range of rules it enforces, FERC enforcement and audit officials described their offices as resource constrained and acknowledged that the Office of Enforcement has not yet adopted a formal, risk-based approach to target these resources. FERC’s publicly available audit reports pertaining to affiliate transactions are not clear and, thus, their usefulness in terms of public transparency and disclosure is limited. Although FERC has not yet completed any affiliate transaction audits or yet issued any reports under EPAct, officials with the Division of Audits told us that they intend to rely on their existing “exception-based” audit reporting policy. A FERC official told us their “exception-based” audit reporting policy means audit reports would only reflect the audit findings and recommendations associated with the audit issues on which FERC found the company to be out of compliance. In contrast, if an audit does not result in FERC taking an enforcement action due to noncompliance, the audit report does not provide information on the methodology the auditors used nor their findings. Thus, FERC’s public audit reports may not always fully reflect key elements such as objectives, scope, methodology, and the specific audit findings. Federal government auditing standards, developed by GAO and referred to as Generally Accepted Government Auditing Standards (GAGAS), stipulate that audit reports contain this basic information, and other information as well, in order to comply with GAGAS. According to FERC officials, they are not required to comply with GAGAS, but “follow the spirit” of these standards because they provide a good framework for performing high-quality audits. In our review of 18 recent FERC audit reports pertaining to affiliate transactions, we found that they did not always identify any findings on affiliate transactions or have any recommendations. Further, the audit reports sometimes lacked key information, such as the type, number, and value of affiliate transactions at the company involved and the percentage of all affiliate transactions tested, or the test results. A FERC official conceded that FERC past audit reports on affiliate transactions do not always meet GAGAS standards because they are not required to do so. However, without this information, it may be difficult for regulated companies to understand the nature of FERC’s oversight concerns and to conduct internal audits to identify potential violations that are consistent with those conducted by FERC—key elements in improving companies’ self-reporting. Further, financial audit firms, internal auditors, and auditors at state commissions told us that they typically review prior related audits, including those done by FERC, as part of their preparation for a new audit. To the extent that FERC audit reports lack information on the work they performed, they limit the usefulness of these audits for future auditors as well as miss an opportunity to improve FERC’s audit practices and transparency to state regulators and other companies and stakeholders. Furthermore, without such information in the audit report, we and other stakeholders, such as state commissions, cannot confidently and credibly determine that the auditor’s efforts to detect abusive affiliate transactions and cross- subsidization were sufficient. A recent report prepared by a former FERC Commissioner on behalf of a wide range of industry stakeholders expressed concern that FERC increase the transparency of its audits and investigations in order to, among other things, help individual market participants to improve their internal compliance programs and correct deficiencies before they cause harm to consumers. States utility commissions’ views of their oversight capacities vary, but many states foresee a need for additional resources to respond to changes from EPAct. Almost all states have specific authority to review and either approve or disapprove mergers and acquisitions. Despite this authority, many states’ commission staff expressed concern over their ability to regulate the resulting companies. Almost all states report they have some type of authority over affiliate transactions, although many states report reviewing or auditing few of these transactions. Further, although almost all states can access the books and records of the utility to substantiate costs and other relevant data, many states report they cannot obtain such access to these books and records at the holding company or other affiliated nonutility companies. Almost half of the states report they need additional staff and funding to respond to changes stemming from EPAct. On the basis of our survey of state commission staff, all but 3 states (out of 50 responses) have authority to review and either approve or disapprove mergers. The types of authority states have vary, however. For example, one state noted that, technically, it could only disapprove a merger and, as such, the state allows a merger by taking no action to disapprove it. Three states noted their state legislatures had not provided them direct merger review authority, but they were able to use other commission authority to conduct such reviews. State commissions responding to our survey noted that the most important factors they consider in evaluating mergers or acquisitions are the effects on regulated rates and the quality of retail service (e.g., no significant problems with service interruptions for consumers). The next most important factors were the commission’s ability to regulate the resulting company and the effect on the financial complexity of the company that would result from the merger. Staff from one state told us in additional narrative comments that they were concerned that with the passage of EPAct utilities will become larger, more complex, and located in geographically diverse areas. They specifically expressed concerns over the challenges of allocating costs between various entities due to the potential for centralization of services in these types of resulting companies. Table 3 below lists the 4 top factors rated as either of very great importance or great importance out of 15 factors we asked states to rate in their evaluation of proposed mergers and acquisitions. In recent years, the difficulty and increased complexity of regulating merged companies has been cited by two state commissions denying proposed mergers in their states. For example, a state commission official in Montana told us the commission denied a merger in July 2007, between Northwestern Company and Babcock and Brown Infrastructure, an Australian company, even though it had been approved by FERC. This merger involved a Montana regulated utility, whose headquarters was located in South Dakota and was being bought by a foreign-owned holding company. According to this official, the commission denied the merger partly due to concerns about regulating the utility under such a corporate combination. He noted concerns that no top corporate officials would be located in Montana and that the time zone differences with the Australian company made contact with those officials more difficult in dealing with regulatory issues. As a result of the denial by the state commission, the merger was not allowed to proceed. In a different proposed merger in Oregon, state utility commission officials told us they denied the proposed merger in March 2005 between Portland General Electric, one of their regulated utilities and the Texas Pacific Group, a private equity fund company. They noted under their implementation of Oregon’s statutes, mergers must meet two standards: (1) they must provide net benefits to consumers and (2) they cannot harm consumers. Officials in Oregon noted that the state commission was concerned that consumers could be harmed because regulating the resulting company would be more difficult due to the financial complexity of the new ownership arrangement. In addition, the commission was concerned that consumers faced potential harm due to risks posed by high levels of debt and the private equity firm’s short- term business plan. Although an application had been made for a review at FERC it was withdrawn in April 2005 prior to FERC review. State commission views regarding potential mergers and acquisitions are of increasing importance in the financial community, as well. Officials from the financial community noted they believe state commissions may be highly suspicious of some of the new corporate structures being proposed, especially the role of private equity firms. They also noted that some commissions have expressed significant concerns over the formation of vast utility companies operating in multiple states. As a result of these and other concerns, these officials reported that some companies potentially interested in merging with or acquiring utilities have been reluctant to propose transactions so far. Almost all states report having authorities over affiliate transactions or regular reporting of such transactions, or both. Nationally, 49 states noted they have some type of affiliate transaction authority. These authorities, however, vary from prohibitions against certain types of transactions, or prior approval by the commission for transactions over a certain dollar amount, to less restrictive requirements such as allowance of the transaction without prior review. In some cases state commission authorities permit them to disallow these transactions at a later time if they were inappropriate. In fact more than half the states (27) reported that under their authority, affiliate transactions did not require prior commission approval, but could be reviewed and disallowed later. Such a disallowance would result in the cost of the transaction not being passed on to consumers or being recovered from the company. Only 3 states reported that affiliate transactions always needed prior commission approval. Nearly all states (41) require utilities to report affiliate transactions at least annually, or more frequently. These reports varied, however, in frequency of reporting, types of transactions requiring reporting, and the detail of reporting. For example, some states required reporting all transactions at least annually, while others required reporting of only certain types of transactions or just reporting the total dollars spent by each affiliate. Several of the state commissions we interviewed noted the importance of strong state authority over affiliate transactions. Staff in one state noted their commission must preapprove any affiliate transactions over $25,000 and conditions for approval were stringent. In some instances the state’s attorney general stepped in to stop companies from going ahead with affiliate transactions that had not been preapproved. Some states are concerned that they may not have sufficient authorities to oversee affiliate transactions, after the repeal of PUHCA 1935. In our survey, some state commissions expressed a need to increase their authority over affiliate transactions. During the course of our work one state took action to increase its authority. In 2006, the California commission strengthened existing affiliate transactions authorities, partly due to concerns related to the repeal of PUHCA 1935. The new rules clarified the scope of allowable utility affiliate transactions and tightened the rules on when and how specific services, such as, legal services could be shared between affiliates and the regulated utility. Despite various authority governing the prior authorization and disclosure of affiliate transactions, many states responding to our survey reported they audit few if any affiliate transactions or dedicate much staff time to reviewing these transactions. The majority of states reported they have audited 1 percent or less of these transactions over the last 5 years and dedicated no staff time to reviews or audits over the last year. Table 4 shows that many states are not performing reviews or audits of affiliate transactions. Since the passage of EPAct several aspects of monitoring of affiliate transactions were raised as key challenges by several state commissions responding to our survey and during our interviews. For example, an attorney from one state utility commission expressed concerns about having enough resources and expertise to enforce existing authorities. He noted that holding company and affiliate transactions can be very complex and time-consuming to review. He noted these reviews are resource intensive, since determining whether a transaction is unfair may require detailed analysis of the transaction and the market for the good or service that was subject of the transaction. Another expert, with extensive experience with FERC and several state public utility commissions noted that on the basis of his experience, states do not generally have the resources to effectively review affiliate transactions, particularly when they are multistate in nature. Similarly, a consultant whose firm does numerous affiliate transaction audits in many states, noted in a March 2007 FERC technical conference on related issues that many states, even when they have significant authority, lack staff to review transactions. Further, he noted that state commissions often lack the staff expertise to adequately address the accounting and financial operations aspects of these affiliate relationships as well as the risks inherent to audits of affiliate transactions Some states, however, do put special emphasis on auditing affiliate transactions. All four states we visited routinely audit affiliate transactions. Commission officials in one of these states told us they commit the equivalent of 2.5 full time employees to auditing affiliate transactions for reasonableness (e.g., prices appear to be correct). If they find unreasonable transactions the commission can adjust future electricity rates to correct for the problem (e.g., they disallow some or all of the value of the transaction and remove that amount from prices that consumers pay). Their goal is to audit each utility every 2 years and they estimate that over the last 5 years they have audited 100 percent of all utility affiliate transactions. As part of their audits the staff requests SEC filings, monitors credit reports, and reviews other related financial data. However despite this effort, representatives from two consumer groups in this state expressed concerns that affiliate transactions are so complex that the state commission just does not have enough resources to fully audit these transactions. Two additional states commissions we interviewed contract with outside auditors to do specific audits of the affiliate transactions of the state’s regulated utilities biennially. State commission staff in one of these states noted their audits review company affiliate transactions for appropriateness and proper pricing. The purpose of the audits is to show the transactions were made fairly to the utility and that ratepayers are not paying more than they should. One auditor who had done affiliate transaction audit work for another state we visited described that state’s approach to auditing affiliate transactions as being very aggressive in that their audits involved significant data analysis and the reports contained considerable detail about the findings. All states regularly require financial reports from utilities and are able to obtain access to the financial books and records of these utilities that document costs, but access beyond the utility varies. All 49 states that responded to this survey question, noted that they require utilities to at least provide financial reports. Most states (41) only require such reporting by the utility but 8 states require reports that also include the holding company or both the holding company and the affiliated companies. Of the 48 states that responded to our questions about the frequency of required reporting, 35 require annual reports; 6, quarterly reports; and 7, monthly reports. Although all states but 1 report having access to the books and records of the utilities in their states, some report they do not have such access to other companies within the holding company. Nearly one-third of the states reporting said they do not have access to the books and records of the utility holding company. Similarly, over 40 percent of the states reporting said they do not have such access to affiliated nonutility companies. Table 5 shows state commission access to different parts of holding companies. Utility experts also expressed concerns over state commissions’ access to the books and records of holding companies or other affiliate companies either through state authority or through assistance by FERC. Lack of such access, these experts noted, may limit the effectiveness of state commission oversight and result in harmful cross-subsidization because the states cannot link financial risks associated with affiliated companies to their regulated utility customers. Experts expressed concern over state commission authority. For example, the president of an audit company, who currently works with two-thirds of the utility commissions across the country and completed many affiliate audits, noted that there is a lack of clear authority in some states to gain access to the key records in other states, even though the utility shares common services across the states that bear upon the utilities transactions. Similarly, one commission official told us that it is difficult to get access using state authority alone. He noted that holding companies can set up numerous roadblocks for staff to access the records. Consistent with this view, in comments to our survey concerning key challenges since the passage of EPAct one state noted a concern about the responsiveness of a parent holding company based out of state to specific in-state inquiries. While the PUHCA 2005 provisions of EPAct provide states with additional access to books and records, some states expressed reservations relating to the level of protection this offered their states. In response to our survey, 8 states noted that access to books and records, if they had to gain assistance through FERC, offered little or no protection to their states, while another 14 states noted this offered only some protection. In contrast, only 3 states noted that FERC assistance in gaining access offered great protection. Commission staff in one state told us that obtaining such information requires state commissions to be very specific in identifying the necessary information. However, this commission staff noted that it may be difficult to develop such detailed knowledge. According to this state commission staff, such a detailed requirement to access information may limit their ability to conduct adequate and timely affiliate transaction audits. A utility expert who has experience with both FERC and state commissions also noted that states often follow leads and do not always know the specific information to support a detailed request. As a result of the potential need to develop a series of detailed requests, it may take longer to complete an audit. He stated this creates significant risks for states and their ratepayers as the full scope of utility transactions cannot be understood without seeing the entire trail of these transactions through the holding company and affiliate books and records. States and other officials expressed concerns that the state commissions do not currently have sufficient resources and may need additional resources to respond to the changes from EPAct. Since states have gained over 2 years of experience since EPAct was passed, many believe they now need additional resources to carry out their responsibilities. Specifically, as seen in table 6, 44 percent of the states responded to our survey that they need additional staffing or funding, or both, to deal with the changes from EPAct. Further, 6 out of 30 states raised staffing as a key challenge in overseeing utilities since the passage of EPAct. One state, for example, noted monitoring of affiliate relationships as a key challenge, particularly in light of its current staff and resources. Since the passage of EPAct, 8 states have proposed or actually increased staffing. Staffing concerns were also mentioned as problems by officials at the commissions or by representatives of consumer groups in 3 of the 4 states we visited as well others. For example, an official from the one of these state’s commissions noted that the state, in response to tighter budgets, had reduced staffing levels across-the-board including the utility commission and that the median age of the commission staff was now 56 and could soon face a wave of retirements. In addition, representatives of two consumer groups in another state expressed concerns that the commission does not have enough resources to oversee or audit affiliate transactions. In addition an official from a national credit-rating agency expressed concern that some state commissions may not fully appreciate the degree of difficulty they could face with existing staffs in the years ahead. The repeal of PUHCA 1935 further opened the door for new and different corporate combinations, including the ownership of utilities by complex international companies or equity firms, potentially providing needed investment to the utility industry. However, this potential to increase investment comes at the potential cost of making regulation more difficult. Further, the introduction of new types of investors, with incentives that may be at odds with traditional utility company services, could change the utility industry into something quite different than the industry that FERC and the states have overseen for decades. Despite these evolving changes, FERC continues to rely to a considerable degree on companies to self- certify that they will not cross-subsidize and self-report when they do. On the basis of our discussions with industry, state regulators, and audit experts, this reliance on self-enforcement—backed up by a few audits— does little to convince consumers and other market stakeholders that FERC’s oversight is sufficiently vigilant. As FERC and states approve mergers, the responsibility for ensuring that cross-subsidization will not occur shifts to FERC’s Office of Enforcement and state commission staffs. However, in the case of FERC this presents a challenge because FERC lacks a formal way of allocating resources to the areas of highest potential risk—leaving audit resources deployed in an ad hoc manner. Without a risk-based audit approach, FERC may not allocate its scarce audit resources to the right areas, potentially allowing cross- subsidization to go undetected. In addition, since states generally review only a very small percent of affiliate transaction to identify potential cross- subsidization and many reported resource constraints, some states’ detection of cross-subsidization may be limited. By reassessing its audit approach, how it shares the results of its audits, and its resources, FERC could take important steps to demonstrate its commitment to ensure that companies are not engaged in cross- subsidization at the expense of consumers. Absent such a reassessment, the potential exists for FERC to approve the formation of companies that are difficult and costly for it and states to oversee and potentially risky for consumers and the broader market. We recommend that the Chairman of the Federal Energy Regulatory Commission (FERC) take the following actions: 1. Develop a comprehensive, risk-based approach to planning audits of affiliate transactions in holding companies and other corporations that it oversees to more efficiently target its resources to highest priority needs and to address the risk that affiliate transactions pose for utility customers, shareholders, bondholders, and other stakeholders. 2. As an aid to developing this risk-based approach, FERC should develop a better understanding of the risks posed by each company by doing the following: a. Monitoring the financial condition of utilities to detect significant changes in the financial health of the utility sector, as some state regulators have found it useful to do. To do this, FERC could leverage analyses done by the financial market and develop a standard set of performance indicators. b. Developing a better means of collaborating with state regulators to leverage resources already applied to enforcement efforts and to capitalize on state regulators’ unique knowledge. As part of this effort, FERC may want to consider identifying a liaison, or liaisons, for state regulators to contact and to serve as a focal point(s). 3. Develop an audit reporting approach to clearly identify the objectives, scope and methodology, and the specific findings of the audit, irrespective of whether FERC takes an enforcement action, in order to improve public confidence in FERC’s enforcement functions and the usefulness of audit reports on affiliate transactions for FERC, state regulators, affected utilities, and others. 4. After developing a more formal risk-based approach, reassess whether it has sufficient audit resources to perform these audits. If FERC believes that it does not have sufficient resources to conduct adequate auditing of the companies that it oversees within its existing staff and budget, FERC should provide this information to Congress and request additional resources. We provided a draft of our report to FERC for review and comment. We received written comments from FERC’s Chairman and that letter and our detailed response is presented in appendix II. In his comments, the Chairman strongly disagreed with the report finding that FERC does not have a strong basis for ensuring that utilities do not engage in harmful cross-subsidization and noted that he believed the report contained inaccuracies and misunderstandings. We disagree with the Chairman’s characterization of our report and note that the letter’s assertions about some aspects of FERC’s operations are, in fact, quite different than the views of numerous commission staff and experts with whom we met over the course of the past year as well as FERC’s own Policy Statement on Enforcement. In addition, we believe that the repeal of PUHCA 1935 represents an important change in the context of FERC’s regulation of the industry and, in light of this change, FERC should err on the side of a “vigilance first” approach to preventing potential cross-subsidization by enhancing its current approach to audit planning and reevaluating audit resources. Overall, we believe our report presents a fair and balanced presentation of the facts and issues associated with FERC’s oversight and, as a result, encourage the Chairman to fully consider our recommendations. FERC also provided technical comments, which we incorporated, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 14 days from the report date. At that time, we will send copies to the Chairman of the Federal Energy Regulatory Commission (FERC) and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841, or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. In this report, we agreed to determine: (1) the extent to which FERC changed its merger or acquisition review process and postmerger or acquisition oversight to ensure that potential harmful cross-subsidization by utilities does not occur, and (2) the views of state utility commissions regarding their current capacity, in terms of regulations and resources, to oversee utilities. Overall, to address the objectives we reviewed relevant reports, examined existing data, interviewed key officials and collected new data and information from 49 states and the District of Columbia. We interviewed and obtained documentation, when applicable, from a wide range of stakeholders including federal and state officials, industry officials, and various other special groups and organizations. We interviewed federal agency officials at FERC, the Department of Justice, the Federal Trade Commission, and the Securities and Exchange Commission (SEC). We obtained views from organizations including the National Association of Regulatory Utility Commissioners (NARUC), American Antitrust Institute, National Regulatory Research Institute, American Public Power Association, Electricity Consumers Resource Council, Edison Electric Institute, and Public Citizen. In addition, we obtained information and views on the effects of the Energy Policy Act of 2005 (EPAct) on investment in the utility industry from two national credit reporting agencies, Standard and Poor’s and Fitch Ratings, and the investment advisor Goldman Sachs Company. To specifically determine how FERC has changed its merger review processes and postmerger oversight to prevent cross-subsidization affecting utilities, we reviewed the Energy Policy Act of 2005 and the Public Utility Holding Company Act of 2005 (PUHCA 2005) provisions in EPAct related to FERC’s review of mergers and acquisitions, access to the books and records of companies in holding company systems, and assessment of civil penalties on companies that violate its rules. We reviewed information on the number, identity, and outcome of mergers that FERC has reviewed, audits of affiliate transactions that FERC has conducted, and civil penalties that FERC has assessed since passage of the 2005 legislation. We interviewed officials in FERC’s Office of Enforcement, Office of Energy Markets and Reliability, and Office of General Counsel concerning their plans to implement the statutory provisions of EPAct, including the PUHCA 2005 provisions and their development or update of new and existing rules, policies, and procedures regarding merger review, law enforcement, and audits. We performed a limited review of selected FERC merger orders and audit reports, including 18 completed audit reports the commission identified as pertaining to affiliate transactions, to assess FERC’s practices for reviewing mergers and conducting audits to prevent cross-subsidization. To address the second objective and gain insight into states’ views on their current capacities to oversee utilities, we visited four states, California, New Jersey, Oregon, and Wisconsin and conducted an Internet-based survey with staff from the public utility commissions in the 50 states and District of Columbia. In our site visits we met with officials from the public utility commissions, representatives of two utilities in each state, in some cases the utilities’ internal and external audit firms, and we also obtained views from representatives of consumer protection groups. We obtained information on the state’s authorities, actions, and resources relating to mergers, affiliate transactions, financial reporting, and access to company records. We gathered opinions relating to the federal regulatory changes and current or planned enforcement by FERC. We selected these states through a literature search, discussions with representatives of NARUC, a national organization representing state utility commissions, and from some initial discussions with selected states. We chose several states to visit that had strong protections related to holding companies/affiliates and utilities prior to the repeal of PUHCA 1935. We also selected two states of the four that were considering additional consumer protections directly due to the repeal of PUHCA 1935. We also discussed key issues with commission officials from Kansas and Montana. Since little detailed information existed that summarized the authorities, actions, and resources of all the states’ regulatory oversight related to utilities and holding companies, we supplemented our audit work with a survey of the staff of the 50 states’ and District of Columbia’s public utility commissions. The survey was developed between September and December 2006. Because we administered the survey to all of the state public utility commissions, our results are not subject to sampling error. However, the practical difficulties of conducting any survey may introduce other types of errors, commonly referred to as nonsampling errors. For example, differences in how a particular question is interpreted, the sources of information available to respondents in answering a question, or the types of people who do not respond can introduce unwanted variability into the survey results We included steps in the development of the survey to minimize such nonsampling error. To reduce nonsampling error, we had cognizant officials at NARUC review the survey to make sure they could clearly comprehend the questions. We also pretested the survey with two states to ensure that (1) the questions were clear and unambiguous, (2) terminology was used correctly, (3) the survey did not place an undue burden on commission officials, and (4) the survey was comprehensive and unbiased. In selecting the pretest sites, we sought the advice of NARUC and selected states that had different types of regulatory requirements. We made changes to the content and format of the final survey based on the pretests. We conducted the survey using a self-administered electronic questionnaire posted to GAO’s Web site on the Internet. To ensure that we would obtain information from commission staff most knowledgeable, we first obtained a list of key contacts from NARUC. We sent e-mail notifications to the Chairmen of the public utility commissions informing them of the purpose of our survey and requesting that they make any changes on the contact list provided to us by NARUC that would be most appropriate. After we made changes to our contact list, we sent e-mail notifications to alert the appropriate officials of the forthcoming survey. These were followed by another e-mail containing unique passwords and usernames that enabled officials to access and complete the survey and notifying officials that the survey was activated. Although the survey was available on the Web until June 30, 2007, we followed up with officials first through e-mail reminders and then by telephone to encourage them to respond. We received survey responses from 49 states plus the District of Columbia (each state could only provide one response). One state did not respond due to other high priorities at the time of our survey. We edited all completed surveys for consistency, but it was agreed we would not follow up with states relating to specific responses, but only to encourage them to send us their survey. Detailed survey results are available at: http://www.gao.gov/special.pubs/gao-08-290sp. The following are GAO’s responses to the Federal Energy Regulatory Commission’s comments on our draft report as outlined in its January 22, 2008, letter. 1. Our statement in the summary Highlights of the draft report referring to Energy Policy Act (EPAct) shifting sole responsibility from the Securities and Exchange Commission (SEC) to Federal Energy Regulatory Commission (FERC) was not intended to imply that, prior to the passage of EPAct, FERC had no role in regulating public utilities. We simply wanted to point out that, after EPAct, sole responsibility for oversight of potential cross-subsidies rested with FERC. We revised the Highlights text to clarify the historical roles of FERC and SEC. Other information in the draft report accurately reflected each agency’s role. 2. As a point of clarification, we make no explicit or implicit recommendation regarding “resurrecting” the Public Utility Holding Company Act of 1935 (PUHCA 1935). We share FERC’s apparent view that this was not the intent of Congress and the President in repealing PUHCA 1935. Our report focused on FERC’s new role as the sole federal agency responsible for enforcing prohibitions against cross- subsidization. 3. We acknowledge that FERC has executed the administrative steps to begin implementing EPAct, made changes such as adding a “code of conduct” for utilities and their affiliates as well as other changes discussed in the letter within the short time frames provided under law—and recognized this in our draft report. However, as we noted in our draft report, our view and the view expressed by FERC staff we met with during our investigation is that FERC’s overall merger review process remains largely unchanged except that FERC now requires companies to attest in writing that they will not engage in unauthorized cross-subsidization. We commend FERC for its ongoing outreach efforts, such as conferences to solicit stakeholders’ views, but we maintain that those efforts have, so far, resulted in few changes to FERC’s merger review process. Accordingly, we made no change to our draft report in response to this comment. 4. The Chairman of FERC said that we incorrectly conclude that the commission intends to rely on self-reporting as the primary enforcement mechanism to prevent cross-subsidization but did not explain what mechanism(s) FERC will use to detect potential cross- subsidization. To be clear, our draft report stated that once a merger has taken place, FERC intends to rely on its existing enforcement mechanisms—primarily (1) companies’ self-reporting and (2) compliance audits—to detect potential cross-subsidization. In addition, the draft report stated that FERC officials also said they used their “hotline” reporting system to identify potential violation of FERC rules. Throughout the course of our audit work, key FERC staff, including those involved in enforcement, noted that self-reporting was a central element in enforcing FERC’s overall enforcement approach, including all of the statutes, orders, rules, and regulations the commission enforces. FERC officials also provided a copy of FERC’s October 25, 2005, Policy Statement on Enforcement—which prominently features self-reporting—in the context of our discussion of how FERC planned to enforce the prohibitions on cross- subsidization. We share the views of the Chairman that self-reporting is not an effective method to reliably detect cross-subsidization. The Chairman also said that we may be confusing self-reports regarding standards of conduct violations with self-reports regarding cross- subsidization. We have not confused these two distinct reporting mechanisms as our report focuses on concerns related to potential cross-subsidization. As the draft report also discusses, the second key mechanism that FERC intends to use to detect potential cross- subsidization, and its only proactive enforcement component, is a limited number of compliance audits. We believe that audits provide tremendous potential value in enforcing the prohibitions against unauthorized cross-subsidization (delineated in detail by FERC on pages 3 through 7 of the Chairman’s letter and addressed in our comment 3), especially in light of FERC’s new role as the federal agency primarily responsible for the oversight of public utilities. We believe that audits of companies and transactions should play a key role in the FERC’s overall enforcement strategy, particularly in the area of cross-subsidization. With regard to preventing potential cross- subsidization through rate reviews, we are aware of this process and recognized in our draft report that FERC retains a limited ratemaking role and, as such, may have opportunities to establish cost recovery rules prospectively in these proceedings. We added additional language to our draft report to indicate that FERC may examine costs incurred by utilities for rates it still sets and, in so doing, decide which costs may be lawfully included in rates charged to customers. We also recognize that FERC allows third parties to report potential violations using its hotline or by filing a complaint that the terms of the approved rates are being violated. We revised our draft report to better reflect that such reports and complaints may lead to a FERC investigation. However, because we have no way of knowing (1) whether third parties will be a reliable enforcement tool, (2) how likely FERC is to conduct rate setting procedures, and (3) FERC’s plans currently reflect only 3 audits, we remain concerned that FERC is overly reliant on self- reporting. 5. We relied on FERC officials to identify the universe of companies it could audit and how many it planned to audit for the information contained in our draft report. In addition, we included suggestions from FERC staff regarding caveats to its audit responsibilities and overlaps raised in the Chairman’s letter. For example, the draft report noted that there was overlap between the various categories and that the Regional Reliability Organization, according to FERC, would be responsible for the initial audits of these 1,510 companies. Nonetheless, we moved our table note to the body of the report to emphasize these overlaps and the fact that the number of potential audit candidates could be lower than the universe of 4,700 companies identified by FERC. It is important to note, however, that some of the audits may be quite different and require different resources than audits of affiliate transactions. For example, audits of compliance with reliability rules may focus on whether companies have conducted sufficient training of staff, not addressing the unique accounting issues associated with affiliate transactions. While this change in the text of the report may help the reader better understand overlaps in the universe of companies, it is still not clear from the Chairman’s comments how many audits will ultimately be required of these companies, the nature of the audits or the resources needed, and how they would affect the resources available for audits of affiliate transactions. Regarding the frequency of audits, our draft report states, “At its planned 2008 audit rate of 3 companies, it would take FERC 12 years to audit each of these companies once.” We recognize that the current audit rate may change since such determinations are made annually, but we use these data—as provided by FERC—as the best available at the time of our review. We added an explicit notation that the number of audits may change to further clarify the statement already in the report. 6. The Chairman stated that the draft report incorrectly portrays FERC’s method of selecting audit candidates as informal and that FERC actually uses a variety of methods to assess the individual and collective risks posed by companies it oversees. However, during the course of our year-long engagement, including discussions with key FERC officials, the process was described as informal and did not mention the other mechanisms described in the Chairman’s letter. In addition, FERC staff, when we asked for a record of a risk-based analysis or the criteria FERC would have used to conduct such an analysis, were unable to provide them and told us audit selections were based on informal discussions with knowledgeable senior FERC staff. Although FERC officials may individually consider risk as they discussed audit planning in these informal discussions—and we noted in the draft report these officials believe their judgments provide a reasonable picture of risk—such considerations are not sufficiently formal or systematic and could change as staff in key positions change. In our view, a risk-based audit planning approach should be sufficiently rigorous and systematic to ensure that it reliably and consistently guides FERC in assessing individual company risks and the overall risks posed by the companies collectively and making audit selections accordingly. Furthermore such an approach should be flexible enough to meet FERC’s current and expected future auditing demands now that it is solely responsible for detecting potential cross- subsidization. We noted in our draft report that some federal agencies develop their own statistical measures of risk, derived in some cases from models although there are other methods. It may or may not be appropriate for FERC to use this type of tool but we want FERC to be aware that there are other ways of more formally considering risk in agency decision making. In any case, designing a formal risk-based approach will take time and effort and FERC may want to consider consulting with outside experts. It was our intent, by excluding these statistical methods from our recommendation, to provide the Chairman with flexibility on how best to implement a more formal, risk-based approach. With regard to FERC’s comment about its outreach to states during audits, we commend FERC for these efforts when conducting compliance audits, but also believe FERC could benefit from the states’ expertise and knowledge earlier in the process when determining which companies to audit. We continue to believe that our recommendation, if implemented, would improve the likelihood that the audits will be most effective. As such, we made no change to our draft report in response to these comments. 7. We are aware that FERC has established many expectations and rules—through both the company attestation process and its generic prohibitions on cross-subsidization—but we have concerns as to whether FERC has devoted enough attention to the formidable task of enforcing those rules by detecting violations. We recognize the importance of company attestations that they will not engage in cross- subsidization for use in developing a formal record from which FERC can potentially take enforcement actions. We share FERC’s view that companies should honor their commitments to the federal government, but know that staff turnover at these companies can be high, and that financial and other circumstances of companies can, and do, change. Because of this, and other factors, we believe that it is important to recognize the value of these company attestations in creating a record, but also believe that it is important to be vigilant and proactive in looking for potential violations. As a result, we made no change to the draft report in response to this comment. With regard to the Chairman’s related comment about FERC’s generic rules, we agree that these rules delineate FERC’s expectations for compliance; however, while these rules define potential violations, they do not detect them. Therefore, they must be coupled with vigilant enforcement mechanisms, such as audits to detect potential cross- subsidization. It is these mechanisms that the draft report concludes are inadequate in FERC’s approach. We made no change to our draft report for this comment. With regard to the Chairman’s comment about rate review, we discuss this point in our response to comment 4. 8. As noted above in comment 6, we are pleased that FERC includes discussions with state regulators when it conducts audits, however we believe FERC could further benefit from their expertise when selecting which companies to audit. With regard to financial indicators, as noted in the draft report, we believe that the deterioration of a company’s financial condition may raise the potential for financial abuses. In that regard, how the financial community values a company’s stocks or bonds is used as a high-level example of financial indicators that could be helpful to FERC. We do not suggest in our report that FERC should examine only stock and bond values; rather, we suggest that FERC should be gauging risk by, among other things “monitoring the financial condition of utilities.” Companies’ financial data is a window into their risks and an opportunity to leverage the financial community’s research. Such research is not strictly limited to stock and bond prices; it could include other appropriate metrics, such as financial ratios. In implementing our recommendation, FERC may wish to consult with financial experts to develop a set of useful metrics to monitor. We believe, as do others we spoke with in states and the financial community, that such indicators could provide additional insights into the risk posed by individual companies and the financial health of the overall industry. We made no change to our draft report in response to these comments. 9. As the Chairman indicates, FERC is in the process of implementing our recommendation to improve the usefulness of its audit reports. We discussed the need to improve the transparency of its audit requirements and actions during our discussions with FERC audit officials and encourage FERC to fully implement this recommendation. 10. As noted in the draft report, we believe that FERC should develop a formal risk-based audit planning approach to help inform its decisions about which companies to audit but also to assist it in better leveraging its resources. The development of such an approach could also help FERC determine whether it needs additional audit staff resources to fulfill its oversight responsibilities, particularly given that SEC no longer conducts such audits. We continue to encourage FERC to assess its resources for auditing and enforcement efforts and did not change our recommendation. 11. We agree that the Public Utility Holding Company Act of 2005 (PUHCA 2005) provisions in EPAct grant states the authority to obtain this information directly. Our statements related to state commissions’ access to books and records of utilities, holding companies, and affiliate companies was not intended to imply that states must go through FERC for access to this information. However, the draft report points out that this is the perception or experience in some states. For example, in response to our state survey, 14 states reported their state commission did not have access to these records at the holding company and 20 states reported this problem for affiliated nonutility companies. Further, as we reported, officials from companies that conduct audits for the states noted difficulties in obtaining access to out-of-state companies’ books and records. We did not evaluate states’ reasons for these views. Since there seem to be misunderstandings or misinformation about the access granted under the PUHCA 2005 provisions in EPAct, FERC could play an important role in clarifying these authorities or providing assistance in response to states’ concerns, or both. In response to this comment, we clarified the language related to states’ access to companies’ books and records. 12. The intent of our discussion of mergers in the draft report is not to criticize FERC’s merger review decisions or the conditions FERC placed on mergers. Rather, our intent is to provide some perspective on the number and status of FERC’s merger reviews and their disposition. Nonetheless, we note that FERC has been supportive of mergers—a point repeated by numerous FERC staff—and that FERC believes that it has certain obligations to approve mergers. Regarding FERC’s concern that the draft report does not recognize that “new types of investors” have acquired U.S. utilities before the repeal of PUHCA 1935, the draft report described such transactions in its discussion of changes to the strict limitations in this act. As such, we recognize that while PUHCA 1935 placed limitations on what types of companies could control utilities, some investors were allowed to invest into the utility industry if they met certain financial requirements (see GAO-05-617). Because these financial requirements placed limits on the companies outside the utility sector, the number of these types of investments was limited. In our discussions with financial experts, we found that, with the repeal of PUHCA 1935, more companies from outside the utility sector are considering utility mergers or acquisitions, or both, which could broaden the pool of potential investors. We revised the text of the report to better reflect these considerations. 13. As a point of clarification, our report conveys the views of state commission staff; we did not analyze state commissions’ auditing efforts or other state regulations or responsibilities. As such, we make no criticism of state commissions with regard to auditing, or any other areas of state regulation or responsibility. With this in mind, FERC should be aware that it is the view of state regulators––not based on evaluation by GAO––that state commissions are generally not conducting extensive compliance audits because of limited staff and other factors. On numerous occasions, FERC officials noted that state regulators, outside audit firms, and others are conducting audits of affiliate transactions; however, based on our discussions with each of these groups, we did not find this to be the case. We believe FERC should consider this information as it develops a formal risk-based audit planning approach, therefore we did not change the draft report in response to this comment. 14. With regard to accurately representing the percentage of companies that FERC plans to audit in 2008, FERC determined that 36 of 149 holding companies are subject to its authority under the PUHCA 2005 provisions in EPAct and told us it planned to audit 3. Although we agree that certain exemptions are required by statute, we did not conduct a legal analysis of these exceptions and waivers required by law nor did we review FERC’s evaluation of these applications to determine if the 36 holding companies (of the 149) accurately reflect the potential universe of companies to be audited. Because we did not make these evaluations, we revised the Highlights page of the draft report to reflect that FERC said it would audit 3 of the 36 companies it regulates, as we more fully described in the body of the report. 15. We revised footnote number 2 in the draft report to further clarify what authority FERC has with respect to Texas. 16. We disagree that the draft report suggests that, before the passage of EPAct 2005, the commission was not concerned with cross- subsidization. The draft explicitly stated that preventing cross- subsidization has been a long-standing responsibility of FERC and that preventing it at the point of merger review is new. As such, we made no change to the report in response to this comment. 17. We note that our draft report did not have an objective to determine the adequacy of FERC’s merger review and, as such, makes no finding regarding the quality of the FERC’s review. The draft report describes the record-based analysis noted in the Chairman’s comment, and participants’ possible roles, and states that FERC does not independently develop such information—a point that was repeatedly noted by FERC officials; rather, its review is limited to reviewing the record. We agree that FERC must make its decisions based on this record, and that it can take additional steps to make sure the evidence provided is sufficient. We clarified the language in the report to note that FERC can request that applicants provide additional information and perform its own independent analysis of record evidence. 18. During our review, we sought input from many stakeholders and involved parties. The report referenced by the Chairman’s comments provides one insight as to how industry perceives FERC’s actions but does not provide the sole insight, and we disclosed the report’s author and interest group affiliation so that the readers are aware of their interests. Similarly, the company official cited in the Chairman’s next comment reflects one example of concerns expressed by companies. In either case, we recognize—as should any reader of this report—that stakeholders have specific interests in FERC’s decisions and operations. However, it is important to note that some of the industries FERC regulates are expressing opinions similar to views we have developed independently during the course of our work in this area— namely that FERC needs to provide greater transparency of its enforcement functions. Furthermore, it is also worth noting that the need for greater transparency has been a theme over the last several years for GAO’s work regarding FERC, which has previously recognized this and made strides toward improving transparency. It is encouraging to point out that the Chairman recently acknowledged a similar view and committed FERC to improving the transparency of its enforcement functions. We made no change to our draft report in response to these comments. 19. The draft report contained language stating that EPAct provided FERC specific postmerger access to books, accounts, memos, and financial records of utility owners and their affiliates and subsidiaries, therefore we made no change to our draft report in response to this comment. Regarding the comment about “compliance with PUHCA 2005”, we deleted the language in the draft report related to company compliance. 20. We are not advocating that FERC allow nonfederal parties, such as FERC-regulated companies, to determine auditing priorities and agree that this would pose significant risks. We believe our recommendation that FERC seek input from stakeholders, such as the financial community and state commissions––many of whom have more frequent or more recent dealings with the utilities, or may have more recent audit experience with these companies, or both––may be an opportunity for FERC to better leverage these resources. Such input, along with the other information sources already at FERC’s disposal, could help inform FERC’s decisions but should not substitute for the risk-based decision-making criteria that we recommend FERC develop as part of a risk-based audit planning approach. We made no change to our draft report in response to these comments. 21. We recognize that the current FERC staffing choices, as they relate to auditing, leave few resources available to cover a broad range of potentially auditable entities. It is clear that the context within which the FERC audit staff are operating has changed in important ways and may require a reassessment of FERC resources, therefore we recommended that FERC seek additional resources, if needed. It is in this vein that we have outlined a path for FERC to make such a reassessment and to report its results to Congress so that it could potentially consider such a request. In addition, as noted in earlier comments, the development of a risk-based audit planning approach could also help FERC allocate its existing resources most efficiently and effectively. We made no change to our draft report in response to these comments. 22. Our draft report states that FERC has not yet completed any affiliate transaction audits under the PUHCA 2005 provisions of EPAct, but notes that FERC intends to rely on its existing, “exception-based,” reporting that it used for other types of audits. As noted in the draft report, our examination of FERC reports issued under this exception- based reporting policy raised concerns. As a point of clarification, our concern about this policy is meant to provide constructive criticism so that future reports on affiliate transactions could be more transparent and useful to FERC staff, states, and market participants. We made no change to our draft report in response to these comments. In addition to the contact named above, key contributors to this report included Dan Haas, Jon Ludwigson, Randy Jones, and Tony Padilla. Important assistance was also provided by Lee Carroll, Brad Dobbins, Kevin Dooley, Dan Egan, Gloria Hernandez-Saunders, Allison O’Neill, Glenn Slocum, Jay Smale, and Barbara Timmerman. | Under the Public Utility Holding Company Act of 1935 (PUHCA 1935) and other laws, federal agencies and state commissions have traditionally regulated utilities to protect consumers from supply disruptions and unfair pricing. The Energy Policy Act of 2005 (EPAct) repealed PUHCA 1935, removing some limitations on the companies that could merge with or invest in utilities, leaving the Federal Energy Regulatory Commission (FERC), which already regulated utilities, with primary federal responsibility for regulating them. Because of the potential for new mergers or acquisitions between utilities and companies previously restricted from investing in utilities, there has been considerable interest in whether cross-subsidization--unfairly passing on to consumers the cost of transactions between utility companies and their "affiliates"--could occur. GAO was asked to (1) examine the extent to which FERC changed its merger and acquisition and post merger review and oversight processes since EPAct to protect against cross-subsidization and (2) survey state utility commissions about their oversight. FERC has made few substantive changes to its merger review processes and does not have a strong basis for ensuring that utilities do not engage in harmful cross-subsidization. FERC officials told us that they plan to require merging companies to disclose existing or planned cross-subsidization and to certify in writing that they will not engage in cross-subsidization, but do not plan to independently verify such information. Once mergers have taken place, FERC intends to rely on its existing enforcement mechanisms--primarily companies' self-reporting noncompliance and a limited number of compliance audits--to detect potential cross-subsidization. FERC officials told us that they believe the threat of large fines, as allowed by EPAct, will encourage companies to investigate and self-report any non-compliance. In addition, FERC officials told us that, for 2008, FERC developed its plans to conduct compliance audits of 3 of the 36 holding companies it regulates based on informal discussions between senior agency officials and staffs in key offices. However, FERC does not formally use a risk based approach that considers factors, such as companies' financial condition or history of compliance. A risk-based audit approach is an important consideration in efficiently allocating its limited resources to detect non-compliance. In addition, we found that FERC's public audit reports often lacked a clear description of the audit objectives, scope, methodology, and findings--inhibiting their use in improving transparency with stakeholders or helping FERC staff improve their audit practices. State utility commissions' views of their oversight capacity varied, but many reported a need for additional resources, such as staff and funding, to respond to changes in their oversight after the repeal of PUHCA 1935. State regulators in all but a few states reported that utilities must seek state approval for proposed mergers. State regulators reported being mostly concerned about the impact of mergers on customer rates, but 25 of 45 reporting states also noted concerns that the resulting, potentially more complex company could be more difficult to regulate. Most states reported having some type of audit authority over the transactions between utilities and their affiliated companies, but many states currently review or audit only a small percentage of these transactions, with 28 of the 49 reporting states auditing 1 percent or less over the last five years. On the other hand, some states reported that they require periodic, specialized audits of affiliate transactions. In addition, although almost all states require financial reports from utilities and report they have access to utility companies' financial books and records, many states reported they do not have such direct access to the books and records of affiliated companies. While EPAct provides state regulators the ability to obtain such information, some states expressed concern that this access is narrow and could require them to be extremely specific in identifying needed information, thus potentially limiting their audit access. From a resources perspective, 22 of the 50 states reporting said that they needed additional staffing and funding to a carry out their oversight responsibilities. |
The pilot program was undertaken as part of the Air Force Materiel Command’s Manufacturing 2005 strategy, which envisions a future where an integrated military-commercial industrial base will ensure the Air Force access to superior technologies at dramatically reduced costs. As part of the strategy, the Air Force analyzed key military sectors, including electronics. It noted that electronic components are pervasive throughout weapon systems, accounting for more than 40 percent of the cost of aircraft, 70 percent of air launched missiles, and 80 percent of spacecraft. Therefore, reducing the cost of manufacturing electronics components through integrated production would be a major factor in controlling the costs of all Air Force systems. To move toward this vision, the Air Force’s Wright Laboratory awarded a 4-year, $21.5-million pilot research and development contract to TRW’s Avionics Systems (military) Division in May 1994. The goals of the TRW pilot are to (1) demonstrate that a military-unique product can be technically redesigned for manufacture on a commercial production line at lower cost and have equal or better quality; (2) identify barriers currently in place that limit integrated military-commercial efforts; and (3) transfer lessons learned in part through a “model” contract for future collaborative electronics production efforts. The objective is to develop solutions that are not “contract-specific” or “one-time waivers” but, rather, have broad applicability to other DOD contracts. TRW military is scheduled to produce the Communication, Navigation, and Identification (CNI) avionics components for the F-22 fighter aircraft. Similar components are used for the Comanche helicopter program. Under the pilot contract, TRW military has subcontracted a demonstration production effort for the manufacture of two CNI modules to its sister division, TRW’s Automotive Electronics Group (commercial division). While the TRW military division currently assembles electronic modules by hand, commercial production takes place on an automated assembly line. Under the pilot arrangement, the TRW military division will assume responsibility for some government requirements that could interfere with its commercial division’s production practices. According to the Pilot Program Manager at Wright Laboratory, the savings achieved by the pilot will depend partly on the efforts to modify the subcontract between the two TRW divisions. Greater savings are expected if commercial practices are used in place of military practices. The pilot is now in the second of three phases and is scheduled to be completed in May 1998. Generally, the pilot’s tasks are to (1) compare and document military and commercial business practices as well as recommend and demonstrate best business practices that are acceptable to both government and commercial producers; (2) redesign the modules for commercial automated production, while meeting the needs of the F-22; and (3) demonstrate production of military modules on a commercial line along with commercial products. Thirty of each module will be produced in late 1996 to validate the design. Based on the results of the test run, modifications will be made to the modules’ design and the production line. An additional 60 of each module will then be manufactured and available for F-22 qualifications testing. At the end of phase I, the pilot had successfully completed the conceptual redesign of the modules to allow integrated production. Integrated production is now possible through recent manufacturing advances. The low volume of military electronics purchases does not provide sufficient economic incentives for commercial manufacturers. Recent advances such as flexible manufacturing allow integrated production of small lots of military products with other production lots, thus maintaining a high utilization rate for the line. The redesign of the components should comply with the more stringent requirements for automated production rather than the manual manufacturing process used by the military. In redesigning the modules, one of the most significant changes is the use of plastic parts instead of the ceramic parts commonly used by the military. According to pilot officials, cumulative commercial experience with plastic electronic components has proven them to be reliable in nonmilitary applications. The transition to plastic is consistent with the need to design for manufacturing and incorporates more cost-effective materials used by commercial producers. Further, the redesigned components are expected to be assembled more quickly and to weigh 15 percent less than their military versions. The next step is to produce a sample of the modules to validate the redesign. The pilot modules will be tested to meet F-22 and Comanche requirements, such as durability requirements of 20 plus years. Pilot officials claim the redesigned modules can meet all the same functional requirements as the original design with the possible exception of one condition—a temperature requirement. However, they believe that additional analyses and tests will show that this condition can be successfully resolved. If the pilot program produces avionics modules on the commercial production line when planned, the F-22 schedule allows for testing and integrating the modules. According to an F-22 Program Office official, if the modules pass all ground test requirements, the office can instruct Lockheed Martin to substitute the pilot components for those produced by TRW military and actually perform validation and verification of the pilot modules on an F-22 experimental aircraft. One of the primary benefits of encouraging commercial producers to manufacture military products is that lower costs result from spreading overhead over greater quantities and taking advantage of other economies that come with large-scale manufacturing operations. For example, large volume discounts can be obtained when purchasing some materials. Pilot officials currently estimate that producing the modules commercially will save about 40 percent compared to the F-22 program cost estimates. About one-third of the estimated savings stems from reduced labor costs. TRW’s commercial division assembles over 15,000 electronics components per day, versus the few hundred per year that are manually produced by the military group. About 20 percent of the savings are expected from using less expensive materials. Another 20 percent of the pilot savings are expected to come from reduced administrative costs associated with statutory and regulatory compliance. Savings from eliminating military specifications and standards, such as for testing and screening and other material compliance requirements, make up the bulk of the remaining estimated savings. The pilot manager emphasized that the projected savings assumes the contract is modified to remove certain government requirements, and the estimate may change if requirements are not removed, or if material costs or the F-22 estimates change. The most important benefit foreseen from the pilot is not from lower costs for the specific pilot components, but from future electronics procurement. Even by saving 40 percent of the cost, the projected savings will not match the $21-million cost of the pilot, nor was this the pilot’s intention. The payoff will result from applying the lessons learned from this pilot to future Air Force electronics procurement. According to the pilot manager, TRW has estimated $126 million in savings by applying pilot concepts to all F-22 CNI modules. After working through the multitude of requirements with a profitable commercial company, pilot officials plan to develop recommendations and a model subcontract that will serve DOD purposes yet not impede commercial operations. In turn, wider participation by commercial entities in military production may reduce military-unique production costs. In addition, pilot officials see other benefits from demonstrating and promoting broader integration. DOD may be better able to take advantage of technological advances developed by commercial firms. For example, one pilot official noted that although military contractors could also adopt advanced automated manufacturing techniques, it might not be cost-effective, given the typically small size of military orders. However, since the investment in commercial production is spread over a large quantity of products, it makes good business sense for commercial companies to continuously incorporate state-of-the-art manufacturing processes. Other benefits that may occur with integrated production include more timely production of defense components, greater competition for defense business from a larger base of commercial manufacturers, and a greater surge capacity for defense items in the event of future conflict. Despite the climate of acquisition reform, this pilot program must overcome many hurdles. These hurdles have primarily resulted from reconciling major differences in business practices and procedures between the way the government operates and the way commercial businesses operate. Acquisition reform initiatives have not allowed this pilot to capitalize on technological advances that allow a small number of military items to be integrated with production at a commercial manufacturing facility. The pilot has identified large differences between the contracting and operating procedures of TRW’s commercial and military divisions. The pilot program offers a good opportunity for making such comparisons. Because the two divisions have the same corporate parent, they could share business-sensitive and proprietary information and, therefore, avoid some of the difficulties other companies might experience in sharing information. Based on their findings, the pilot program aims to highlight areas in the defense procurement system that can be streamlined to facilitate future collaboration with commercial companies. Pilot teams, including both TRW divisions, reviewed two sets of requirements that the commercial group found objectionable. One set of requirements includes Federal Acquisition Regulation (FAR) and Defense FAR supplement clauses, and the other set contains technical military specifications and standards for producing the items. For contractual requirements, the teams initially identified 55 clauses. (See app. I.) Many of the requirements targeted by the pilot, such as cost or pricing information, data rights, and quality standards are the same ones that have been identified in several major acquisition reform studies and that commercial firms claim deter them from competing for government projects. After the pilot teams analyze the origin and purpose of the requirements, they will then determine whether action should be taken to alleviate the defense-unique requirements they impose. This effort is projected to be completed at the end of 1996. This analysis is also a critical component of the pilot since a key objective is to develop a contract that allows TRW’s commercial division to maintain its normal business practices as much as possible. TRW’s commercial division does not want this pilot to adversely affect its highly successful commercial business. Unless waivers or workarounds are granted for many of these government-unique requirements, the pilot will be limited in demonstrating the benefits of commercial practices, including the savings associated with high-volume material purchases. The difference between commercial and military practices, according to a pilot report, is often not in the actual compliance with a requirement, but in the level of documentation required. For example, TRW’s commercial division agreed to the FAR clause on affirmative action for Vietnam veterans because the clause is consistent with standard commercial practices. However, FAR clause 52.222-37, “Employment Reports on Special Disabled Veterans and Veterans of the Vietnam Era,” is not consistent with those practices. This clause requires an annual report on the number of disabled and Vietnam veterans currently employed—by job category and location and of the number of new hires by category. TRW said that several contract clauses repeat requirements imposed by other public laws, although there is a wide gap between the detailed proof of compliance the government requires and commercial enterprises’ requirements. While analyzing the differences in requirements, pilot officials found that barriers to commercial production are not created by the Air Force alone. In examining the Lockheed Martin F-22 subcontract with TRW’s military division, officials noted that the Air Force originated 49 of the 204 contract requirements and Lockheed Martin added the remainder. For example, Lockheed Martin added part of Military Specification 2000a regarding documentation of soldering. To meet the specification conditions, TRW is required to add a reporting step for defects under the F-22 subcontract that it believes is unnecessary and incompatible with commercial operations. DOD officials said they recognize contractors adding detailed requirements can be a problem, but told us they can do little about it. One of the lessons of this pilot is that prime contractors need to consider removing some of their requirements. Although DOD has actively proposed and implemented acquisition reform measures, key reform efforts have not helped move the pilot forward. For example, the revised commercial item definition, intended to streamline government requirements, does not apply to the pilot components. DOD has reduced the use of military standards and allows DOD contractors to use uniform government requirements across a facility, but neither action benefits the pilot. The Defense Acquisition Pilot Program could provide some of the statutory relief needed to demonstrate that military products can be manufactured on commercial lines, but the pilot is not part of the program. After identifying an initial list of requirements not typically found in commercial contracts, pilot officials studied removing some of those requirements. Rather than approaching each requirement individually, pilot officials hoped that if the components could be considered commercial items as defined by the Office of Federal Procurement Policy Act as amended by the Federal Acquisition Streamlining Act of 1994, a number of government-unique requirements could be waived. Pilot officials reasoned in part that since the avionics components are being designed, developed, and produced on a commercial assembly line, the components could be considered “commercial items.” The Air Force concluded, and we agree, that the components do not qualify as commercial items because the commercial item definition does not apply to military-unique items. Thus, integrated production efforts such as the pilot do not benefit from the act’s definition. Over the course of this pilot, several other reforms have been instituted that may support integrated production in the long run, but do not further the pilot’s demonstration of integrated production benefits. For example, in June 1994, the Secretary of Defense directed that commercial performance standards be used in place of military specifications. However, this directive does not cover all government-unique requirements and focuses on new contracts. Many contracts for major weapons systems, such as the F-22, were awarded before the directive became effective. In December 1995, the Secretary moved to streamline existing requirements with the Single Process Initiative. This initiative allows a “block change” approach to modify contracts so that management and manufacturing processes can be consolidated across all contracts at a single facility. It does not provide relief for the pilot because it is directed toward defense contractor facilities. Congress enacted provisions under the National Defense Authorization Acts of 1991 and 1996 to allow DOD to conduct pilots to test ways to increase the efficiency and effectiveness of the acquisition process. The 1996 provisions allow DOD to designate two entire defense facilities that would operate under the rules that apply to commercial items. Specific facilities have not yet been authorized. The 1991 provisions permit pilot programs to be conducted in accordance with standard commercial, industrial practices, and provides some waiver authority, with the specific programs to be designated by law. Five pilots were authorized in 1994 under the 1991 provisions. The TRW pilot could show benefits of military-commercial production under the 1991 DOD Acquisition Pilot provisions, but it is not part of the program established under the provisions. Although the TRW pilot was developed as a result of the Air Force Manufacturing 2005 initiative, the initiative provided no authority to waive requirements. From the beginning, the pilot has had to undergo a lengthy and complex process just to get the contract negotiated for the TRW divisions to work together. Because of all the defense-unique requirements that had to be addressed, pilot program officials spent 3 months trying to negotiate contractual terms and conditions acceptable to the commercial division. To finally get the subcontract negotiated, the military division agreed to accept responsibility for complying with government requirements related to purchasing materials. To fully demonstrate the benefits of producing military items on commercial lines, the pilot subcontract must be modified. Under the existing agreement, the military group purchases materials to reduce the number of the military requirements passed on to the commercial group. Yet to take full advantage of the price and quality benefits from large volume discounts and long-standing supplier relationships, the commercial division must purchase the materials. The pilot must use standard procedures to request deviations or waivers from the military requirements in order to modify the subcontract so that the commercial division can purchase materials. The standard waiver process requires a detailed analysis of the original intent for a clause and a justification for the waiver. Similarly, the new rules for purchasing commercial items do not apply. According to a Judge Advocate General official, no policy exists that allows the pilot to be considered anything but an ordinary procurement. To move the pilot forward with a streamlined subcontract, pilot officials also have to contend with an acquisition culture that is resistant to change. The TRW pilot was initiated by working-level engineers and others at Wright Laboratory who saw opportunities to actually demonstrate the advantages of working with the commercial sector. While the Secretary of Defense’s demonstration initiatives have top DOD support and congressional waivers, the TRW pilot is a “grassroots” effort. Starting from the lower tiers, regulatory relief is obtained only by asking successively higher tiers to take responsibility for waivers to rules or for approving alternatives to accepted ways of operating. This is a time-consuming process and involves some risk, yet provides little incentive for approving deviations to traditional defense business procedures without specific directions from the highest levels. This pilot represents a low-risk effort to demonstrate the potential benefits of designing and producing a military component on a commercial line. Accordingly, we recommend that the Air Force, in consultation with TRW, identify those government-unique requirements that prevent the pilot from demonstrating that military items can be produced at equal or better quality on commercial production lines at substantially lower prices and then seek Secretary of Defense waivers. We recommend that the Secretary of Defense move quickly to waive those requirements within his authority that pilot officials believe impede the successful completion of the pilot. Further, we recommend that, where necessary, the Secretary seek legislative relief from those impediments he cannot waive. For example, the Secretary could request approval for the TRW pilot to proceed as part of the DOD Defense Acquisition Pilot Program. In commenting on a draft of this report, DOD indicated that it did not concur with our recommendations, stating the pilot has not identified any specific roadblock that the Secretary of Defense needs to remove or that requires a waiver. DOD indicated that (1) providing a waiver for the pilot would not necessarily accomplish the project’s objective of demonstrating the feasibility of building military products on commercial lines in the future and (2) designating this pilot as a DOD acquisition pilot would be contrary to one of the TRW pilot’s objectives, which is to identify barriers and then develop and demonstrate business practices to nullify those barriers. We disagree that the pilot has not identified specific roadblocks that need to be removed or that require a waiver. The pilot team, including both TRW divisions, has identified numerous government unique requirements that TRW’s commercial division found objectionable. Many of the requirements, such as cost or pricing information, data rights, and quality standards, are the same ones that have been identified in several major acquisition reform studies and that commercial firms claim deter them from competing for government projects. Unless the pilot can get beyond these requirements, the pilot will be limited in demonstrating the benefits of commercial production, including the savings that the Air Force recognizes are needed in order to control the costs of future weapons systems. The intent behind our recommendations is to allow the pilot to move beyond these well recognized and thoroughly studied barriers so that it can demonstrate a better and cheaper way to procure electronic components for the F-22 aircraft program. We believe the bottom-up approach taken by the pilot is an important step in changing the prevailing culture found in defense acquisition. We believe implementation of our recommendation will enhance the pilot’s chances for successfully demonstrating that a military item can be redesigned and produced on a commercial line at significant cost savings—a theme that underlies the Secretary of Defense’s “Mandate for Change” and the Air Force Manufacturing 2005 study. DOD’s comments in their entirety are reprinted in appendix II along with our specific evaluation of them. We interviewed and obtained information from pilot project officials at TRW, the Wright Patterson Pilot Program Manager, the TRW Program Manager, Wright Patterson contracting officials, the Judge Advocate General representative, an F-22 Program Office official, and the Air Force Office of the Assistant Secretary for Acquisition. We also reviewed documents such as the pilot contract and phase I contract reports and early recommendations, the Federal Acquisition Streamlining Act, implementing regulations, the Defense Authorization Acts from 1991 and 1996, and studies and reports related to acquisition reform. We observed manufacturing procedures at TRW’s military division. We conducted our review from September 1995 to January 1996 in accordance with generally accepted government auditing standards. We did not independently verify pilot estimates of savings from using commercial practices, nor did we verify that the clauses initially targeted by the pilot for possible waiver are impediments. We are sending copies of this report to the Secretaries of Defense and the Air Force; the Director, Office of Management and Budget; and other interested congressional committees. Copies will also be available to others on request. Please contact me at (202) 512-4587 if you or your staff have any questions concerning this report. The contributors to this report were Katherine Schinasi, Monica Kelly, Marguerite Mulhall, Gordon Lusby, William Woods, and John Brosnan. Examination of Records by Comptroller General Price Reduction for Defective Cost or Pricing Data Subcontractor Cost or Pricing Data Termination of Defined Benefit Pension Plans Revision or Adjustment of Plans for Postretirement Benefits Other Than Pensions Administration of Cost Accounting Standards Certification of Claims and Requests for Adjustment or Relief Inspection of Research and Development Duty Free Entry - Qualifying Country End Products and Supplies Transportation of Supplies by Sea Restrictions on Subcontractor Sales to the Government Requirement for Certificate of Procurement Integrity - Modification Limitation on Payments to Influence Certain Federal Transactions Protecting the Government’s Interest When Subcontracting With Contractors Debarred, Suspended or Proposed for Debarment Acquisition From Subcontractors Subject to On-site Inspection Under the Intermediate Range Nuclear Forces Treaty Notice and Assistance Regarding Patent and Copyright Infringement Rights in Technical Data and Computer Software (continued) FAR 52.222-35. The following are GAO’s comments on the Department of Defense’s (DOD) letter dated April 10, 1996. 1. Numerous studies document current regulatory and statutory barriers to military-commercial integration. In fact, DOD is pursuing a variety of initiatives, such as the single process initiative and reinvention laboratories, based on the results of those studies. As it gains experience from its acquisition reform efforts, DOD has learned that there is likely to be no one solution to overcoming barriers. However, we are not aware of any other initiatives that address what we believe is unique about the TRW pilot program, which is the production of a military-unique component in a commercial facility. We believe that pursuing the objective of identifying barriers in the TRW pilot at the risk of missing the schedule of producing and testing the F-22 module would represent a lost opportunity. 2. DOD’s comment does not address any information in the report. 3. According to pilot officials and program documents, the pilot is identifying all possible barriers that were in place when the contract was signed, regardless of their current status. This is also true, for example, for the military quality standard—MIL-Q-9858A—which has been abrogated by the Secretary of Defense. 4. We agree, and state in the report, that the commercial item definition does not apply to military-unique components such as those being produced in the TRW pilot. 5. This comment deals with minor modifications to a commercial item for military use. It is not relevant to the TRW pilot, which is attempting to produce a military-unique item in a commercial facility. 6. We agree. DOD’s comment supports our point that other DOD acquisition reform initiatives do not provide relief for this pilot. The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | GAO provided information on the Department of Defense's (DOD) Military Products from Commercial Lines Pilot Program, focusing on the: (1) program's potential for achieving benefits sought from acquisition reform; and (2) barriers to achieving these benefits. GAO found that: (1) the pilot program has demonstrated that redesigning military components for commercial production appears technically feasible; (2) pilot program officials believe that if the use of commercial practices and policies is permitted, military production costs could be reduced by an average of 40 percent and the Air Force's requirements for the F-22 could be met; (3) other expected benefits from the pilot program include accelerated assembly, a more technically advanced and lighter weight product, and valuable lessons learned for future large electronic procurements; (4) for the pilot program to be successful and to encourage commercial participation, significant differences in commercial and military business practices have to be overcome; (5) although the pilot program has been successful in identifying government-unique requirements that present barriers to the most efficient use of commercial production lines, acquisition reform measures have not removed these barriers; (6) DOD must also overcome an acquisition culture that has historically resisted change and does not provide sufficient incentives for acquiring products from commercial producers; and (7) unless waivers are granted for many of the defense-unique requirements or workarounds, the pilot program will be limited in demonstrating that military items can be produced commercially at substantially lower prices. |
Over the past 20 years, DOD has been engaged in an effort to modernize its aging tactical aircraft force. The F-22A and JSF, along with the F/A-18E/F, are the central elements of DOD’s overall recapitalization strategy for its tactical air forces. The F-22A was developed to replace the F-15 air superiority aircraft. The continued need for the F-22A, the quantities required, and modification costs to perform its mission have been the subject of a continuing debate within DOD and the Congress. Supporters cite its advanced features—stealth, supercruise speed, maneuverability, and integrated avionics—as integral to the Air Force’s Global Strike initiative and for maintaining air superiority over potential future adversaries. Critics argue that the Soviet threat it was originally designed to counter no longer exists and that its remaining budget dollars could be better invested in enhancing current air assets and acquiring new and more transformational capabilities that will allow DOD to meet evolving threats. Its fiscal year 2007 request includes $800 million for continuing development and modifications for aircraft enhancements such as equipping the F-22A with an improved ground attack capability and improving aircraft reliability. The request also includes about $2.0 billion for advance procurement of parts and funding of subassembly activities for the initial 20 aircraft of a 60-aircraft multiyear procurement. JSF is a replacement for a substantial number of aging fighter and attack aircraft currently in the DOD inventory. For the Air Force, it is intended to replace the F-16 and A-10 while complementing the F-22A. For the Marine Corps, the JSF is intended to replace the AV-8B and F/A-18 A/C/D; for the Navy, the JSF is intended to complement the F/A-18E/F. DOD estimates that as currently planned, it will cost $257 billion to develop and procure about 2,443 aircraft and related support equipment, with total costs to maintain and operate JSF aircraft adding $347 billion over the program’s life cycle. After 9 years in development, the program plans to deliver its first flight test aircraft later this year. The fiscal year 2007 budget request includes $4 billion for continuing development and $1.4 billion for the purchase of the first 5 procurement aircraft, initial spares, and advance procurement for 16 more aircraft to be purchased in 2008. We have frequently reported on the importance of using a sound, executable business case before committing resources to a new product development. In its simplest form, such a business case is evidence that (1) the warfighter’s needs are valid and can best be met with the chosen concept and quantities, and (2) the chosen concept can be developed and produced within existing resources—that is, proven technologies, design knowledge, adequate funding, and adequate time to deliver the needed product. At the heart of a good business case is a knowledge-based strategy to product development that demonstrates high levels of knowledge before significant commitments of time and money are made. The future of DOD’s tactical aircraft recapitalization depends largely on the outcomes of the F-22A and JSF programs—which represent about $245 billion in investments to be made in the future. Yet achieving expected outcomes for both these programs continues to be fraught with risk. We have reported that the F-22A’s original business case is unexecutable and does not reflect changing conditions over time. Currently, there is a significant mismatch between the Air Force’s stated need for F-22A aircraft and the resources the Office of the Secretary of Defense (OSD) is willing to commit. The business case for the JSF program, which has 90 percent of its investments still in the future, significantly overlaps production with development and system testing—a strategy that often results in cost and schedule increases. Both programs are at critical junctures that require DOD to make important business decisions. According to the Air Force, a minimum of 381 modernized F-22A aircraft are needed to satisfy today’s national strategic requirements—a buy that is roughly half the 750 aircraft originally planned, but more than double the 183 aircraft OSD states available funding can support. Since the Air Force began developing the F-22A in 1986, the business case for the program has changed radically— threats have changed, requirements have been added, costs have increased, funds have been added, planned quantities have been reduced, and deliveries of the aircraft to the warfighter have been delayed. There is a 198-aircraft capability gap today. Decisions in the last 2 years have worsened the mismatch between Air Force requirements and available resources, further weakening the F-22A program’s business case. Without a new business case, an agreement on an appropriate number of F-22As for our national defense, it is uncertain as to whether additional investments in the program are advisable. The original business case for the F-22A program was to develop air superiority fighters to counter a projected threat of significant quantities of advanced Soviet fighters. During the 19-year F-22A development program, that threat did not materialize to the degree expected. Today, the requirements for the F-22A have evolved to include what the Air Force has defined as a more robust ground attack capability to destroy expected air defense systems and other ground targets and an intelligence-gathering capability. However, the currently configured F-22A is not equipped to carry out these roles without further investments in its development. The F-22As modernization program is currently being planned for three basic blocks, or spirals, of increasing capability to be developed and delivered over time. Current Air Force estimates of modernization costs, from 2007 through 2016, are about $4.3 billion. Additional modernization is expected, but the content and costs have not been determined or included in the budget. OSD has restructured the acquisition program twice in the last 2 years to free up funds for other priorities. In December 2004, DOD reduced the program to 179 F-22As to save about $10.5 billion. This decision also terminated procurement in 2008. In December 2005, DOD changed the F-22A program again, adding $1 billion to extend production for 2 years to ensure a next-generation fighter aircraft production line would remain in operation in case JSF experienced delays or problems. It also added 4 aircraft for a total planned procurement of 183 F-22As. As part of the 2005 change, aircraft previously scheduled in 2007 will not be fully funded until 2008 or later. OSD and the Air Force plan to buy the remaining 60 F-22As in a multiyear procurement that would buy 20 aircraft a year for 3 years—2008 through 2010. The Air Force plans to fund these aircraft in four increments—an economic order quantity to buy things cheaper; advanced procurement for titanium and other materials and parts to protect the schedule; subassembly; and final assembly. The Air Force plans to provide Congress a justification for multiyear procurement in May 2006 and the fiscal year 2007 President’s Budget includes funds for multiyear procurement. The following table shows the Air Force’s plan for funding the multiyear procurement. Air Force officials have told us that an additional $400 million in funds are needed to complete the multiyear procurement and that the accelerated schedule to obtain approval and start the effort adds risk to the program, creating more weaknesses in the current F-22A business case. A 198-aircraft gap between what the Air Force needs and what is affordable raises questions about what additional capabilities need to be included in the F-22A program. In March 2005, we recommended that the Air Force develop a new business case that justified additional investments in modernizing the aircraft to include greater ground attack and intelligence-gathering capabilities before moving forward. DOD responded to our report that business case decisions were handled annually in the budget decisions and that the QDR would analyze requirements for the F-22A and make program decisions. However, it is not clear from the QDR report, issued last month, what analyses were conducted to determine the gaps in capability, the alternatives considered, the quantities needed, or the costs and benefits of the F-22A program. Therefore, questions about the F-22A program remain: What capability gaps exist today and will exist in the future (air superiority, ground attack, electronic attack, intelligence gathering)? What alternatives besides the F-22A can meet these needs? What are the costs and benefits of each alternative? How many F-22As are needed? What capabilities should be included? Until these questions are answered and differences are reconciled, further investments in the program—for either the procurement of new aircraft or modernization—cannot be justified. The JSF program appears to be on the same path as the F-22A program. After being in development for 9 years, the JSF program has not produced the first test aircraft, has experienced substantial cost growth, has reduced the number of planned aircraft, and has delayed delivery of the aircraft to the warfighter. Moreover, the JSF program remains committed to a business case that invests heavily in production before testing has demonstrated acceptable performance of the aircraft. At the same time, the JSF program has contracted to develop and deliver the aircraft’s full capability in a single-step, 12-year development program—a daunting task given the need to incorporate the technological advances that, according to DOD, represent a quantum leap in capability. The business case is a clear departure from the DOD policy preference that calls for adopting an evolutionary approach to acquisitions. Furthermore, the length and cost of the remaining development are exceedingly difficult to accurately estimate, thereby increasing DOD’s risks in contracting for production. With this risky approach, it is likely that the program will continue to experience significant cost and schedule overruns. The JSF program expects to begin low-rate initial procurement in 2007 with less than 1 percent of the flight test program completed and no production representative prototypes built for the three JSF variants. Technologies and features critical to JSF’s operational success, such as a low observable and highly common airframe, advanced mission systems, and maintenance prognostics systems, will not have been demonstrated in a flight test environment when production begins. Other key demonstrations that will have not been either started or only in the initial stages before production begins include testing with a fully integrated aircraft—mission systems and full software, structural and fatigue testing of the airframe, and shipboard testing of Navy and Marine Corps aircraft. When the first fully integrated and capable development JSF is expected to fly in 2011, DOD will already have committed to buy 190 aircraft at an estimated cost of $26 billion. According to JSF program plans, DOD’s low- rate initial production quantities will increase from 5 aircraft a year in 2007 to 133 a year in 2013, when development and initial operational testing are completed. By then, DOD will have procured more than double that amount—424 aircraft at an estimated cost of about $49 billion, and spending for monthly production activities is expected to be about $1 billion, an increase from $100 million a month when production is scheduled to begin in 2007. Figure 1 shows the significant overlap in development and testing and the major investments in production. The overlap in testing and production is the result of a business case and acquisition strategy that has proven to be risky in past programs like F-22A, Comanche, and B-2A, which far exceeded the cost and delivery goals set at the start of their development programs. JSF has already increased its cost estimate and delayed deliveries despite a lengthy replanning effort that added over $7 billion and 18 months to the development program. JSF officials have stated that the restructured program has little or no flexibility for future changes or unanticipated risks. The program has planned about 8 years to complete significant remaining activities of the system development and demonstration phase, including fully maturing 7 of the 8 critical technologies; completing the designs and releasing the engineering drawings for all manufacturing and delivering 15 flight test aircraft and 7 ground test developing 19 million lines of software code; and completing a 7-year, 12,000-hour flight test program. The JSF program’s latest planned funding profile for development and procurement, produced in December 2004 by the JSF program office, assumes annual funding rates to hover close to $13 billion between 2012 and 2022, peaking at $13.8 billion in 2013. If the program fails to achieve its current estimated costs, funding challenges could be even greater than that. The Office of Secretary of Defense Cost Analysis Improvement Group was to update its formal independent cost estimate in the spring of 2005. The group now does not expect to formally complete its estimate until spring 2006, but its preliminary estimate was substantially higher than the program office’s. A modest cost increase would have dramatic impacts on funding. For example, a 10 percent increase in production costs would amount to over $21 billion (see fig. 2). DOD has recently made decisions to reduce near-term funding requirements that could cause future JSF costs to increase. It had begun to invest in the program to develop an alternative engine for the aircraft, but now plans to cancel further investments in order to make the remaining funds available for other priorities. According to DOD, it believes that there is no cost benefit or savings with an engine competition for the JSF and there is low operational risk with going solely with a single engine supplier. DOD has already invested $1.2 billion in funding for this development effort through fiscal year 2006. By canceling the program, it expects to save $1.8 billion through fiscal year 2011. Developing alternative engines is a practice that has been used in past fighter aircraft development programs like the F-16 and F-15 programs. An alternative engine program may help maintain the industrial base for fighter engine technology, result in price competition in the future for engine acquisition and spare parts, instill incentives to develop a more reliable engine, and ensure an operational alternative should the current engine develop a problem that would ground the entire fleet of JSF aircraft. As result, the JSF decision should be supported by a sound business case analysis. To date, we have not seen such an analysis. Finally, the uncertainties inherent in concurrently developing, testing, and producing the JSF aircraft prevent the pricing of initial production orders on a fixed price basis. Consequently, the program office plans to place initial procurement orders on cost reimbursement contracts. These contracts will provide for payment of allowable incurred costs, to the extent prescribed in the contract. With cost reimbursement contracts a greater cost risk is placed on the buyer—in this case, DOD. For the JSF, procurement should start when risk is low enough to enter into a fixed price agreement with the contractor based on demonstrations of the fully configured aircraft and manufacturing processes. DOD has not been able to achieve its recapitalization goals for its tactical aircraft forces. Originally, DOD had planned to buy a total of 4,500 tactical aircraft to replace the aging legacy force. Today, because of delays in the acquisition programs, increased development and procurement costs, and affordability pressures, it plans to buy almost one-third fewer tactical aircraft (see fig. 3). The delivery of these new aircraft has also been delayed past original plans. DOD has spent nearly $75 billion on the F-22A and JSF programs since they began, but this accounts for only 122 new operational aircraft. Because DOD’s recapitalization efforts have not materialized as planned, many aircraft acquired in the 1980s will have to remain in the inventory longer than originally expected, incurring higher investment costs to keep them operational. According to DOD officials, these aging aircraft are approaching the end of their service lives and are costly to maintain at a high readiness level. While Air Force officials assert that aircraft readiness rates are steady, they agree that the costs to operate and maintain its aircraft over the last decade have risen substantially. Regardless, the military utility of the aging aircraft is decreasing. The funds used to operate, support, and upgrade the current inventory of legacy aircraft represent opportunity costs that could be used to develop and buy new aircraft. From fiscal years 2006 to 2011, DOD plans to spend about $57 billion for operations and maintenance and military personnel for legacy tactical fighter aircraft. Some of these funds could be invested in newer aircraft that would be more capable and less costly to operate. For example, the Air Force Independent Cost Estimate Summary shows that the F-22A will be less expensive to operate than the F-15. The F-22A will require fewer maintenance personnel for each squadron, and one squadron of F-22As can replace two squadrons of F-15. This saves about 780 maintenance personnel as well as about $148 million in annual operating and support cost according to the independent cost estimate. Over the same time frame, DOD also plans to spend an average of $1.5 billion each year—-or $8.8 billion total—to modernize or improve legacy tactical fighter aircraft (see fig. 4). Further delays or changes in the F-22A or JSF programs could require additional funding to keep legacy aircraft in the inventory and relevant to the warfighter’s needs. In testimony last year, we suggested that the QDR would provide an opportunity for DOD to assess its tactical aircraft recapitalization plans and weigh options for accomplishing its specific and overarching goals. In February 2006, the Secretary of Defense testified that recapitalization of DOD’s tactical aircraft is important to maintain America’s air dominance. Despite this continued declaration about recapitalizing tactical aircraft, DOD’s 2006 QDR report did not present a detailed investment strategy that addressed needs and gaps, identified alternatives, and assessed costs and benefits. With limited information contained in the QDR report, many questions are still unanswered about the future of DOD’s tactical aircraft modernization efforts. As DOD moves forward with its efforts to recapitalize its tactical aircraft force, it has the opportunity to reduce operating costs and deliver needed capabilities to the warfighter more quickly. To take advantage of this opportunity, however, DOD must fundamentally change the way it buys weapon systems. Specifically, the department must change how it selects weapon systems to buy, and how it establishes and executes the business case. Although the F-22A program has progressed further in the acquisition process than the JSF program, both programs are at critical decision-making junctures, and the time for DOD to implement change is now. Before additional investments in the F-22A program are made, DOD and the Air Force must agree on the aircraft’s capabilities and quantities and the resources that can be made available to meet these requirements. A cost and benefit analysis of F-22A capabilities and alternative solutions weighed against current and expected threats is needed to determine whether a sound business case for the F-22A is possible and whether investing an additional $13.8 billion over the next 5 years to procure or modernize these aircraft is justified. With more than 90 percent of investment decisions to develop, test, and buy JSF aircraft remaining, DOD could implement significant changes in its business case before investing further in the JSF program. The JSF program should delay production and investments in production capability until the aircraft design qualities and integrated mission capabilities of the fully configured and integrated JSF aircraft variants have been proven to work in flight testing. Also, an evolutionary acquisition strategy to limit requirements for the aircraft’s first increment of capabilities that can be achieved with proven technologies and available resources could significantly reduce the JSF program’s cost and schedule risks. Such a strategy would allow the program to begin testing and low-rate production sooner and, ultimately, to deliver a useful product in sufficient quantities to the warfighter sooner. Once the JSF is delivered, DOD could begin retiring its aging and costly tactical aircraft. Capabilities that demand as yet undemonstrated technologies would be included as requirements in future JSF aircraft increments that would be separately managed. An evolutionary, knowledge-based acquisition approach would not only help significantly minimize risk and deliver capabilities to the warfighter sooner, it would be in line with current DOD policy preferences. DOD’s use of an evolutionary, knowledge-based approach is not unprecedented. The F-16 program successfully evolved capabilities over the span of 30 years, with an initial F-16 capability delivered to the warfighter about 4 years after development started. Figure 5 illustrates the F-16 incremental development approach. The F-16 program provides a good acquisition model for the JSF program. For JSF, an evolutionary approach could entail delivering a first increment aircraft with at least as much capability as legacy aircraft with sufficient quantities to allow DOD to retire its aging tactical aircraft sooner and reduce operating inefficiencies. Limiting development to 5-year increments or less, as suggested in DOD’s acquisition policy, would force smaller, more manageable commitments in capabilities and make costs and schedules more predictable. Some of the more challenging JSF capabilities, such as advanced mission systems or prognostics technologies, would be deferred and added to follow-on efforts once they are demonstrated in the technology development environment—a more conducive environment to maturing and proving new technologies. A shorter system development phase would have other important benefits. It would allow DOD to align a program manager’s tenure to the completion of the phase, which would enable program managers to be held accountable for decisions. It also would allow DOD to use fixed-price-type contracts for production, and thereby reduce the government’s cost risk. Additionally, DOD should do a more comprehensive business case analysis of the costs, benefits and risks before terminating the alternative engine effort. A competitive engine program may (1) incentivize contractors’ to minimize life cycle costs; (2) improve engine reliability and quality in the future; (3) provide operational options; and (4) maintain the industrial base. At a broader level, DOD needs to make more substantive changes to its requirements, funding, and acquisition processes to improve weapon system program outcomes. We have recommended these changes in past reports and DOD has agreed with them. The January 2006 Defense Acquisition Performance Assessment report, based on a study directed by the Deputy Secretary of Defense, made some important observations regarding DOD acquisitions. The report concluded that the current acquisition process is slow, overly complex, and incompatible with meeting the needs of DOD in a diverse marketplace. Notably, the report confirmed that a successful acquisition process must be based on requirements that are relevant, timely, informed by the combatant commanders, and supported by mature technologies and resources necessary to realize development. The report also pointed out that DOD’s acquisition process currently operates under a “conspiracy of hope,” striving to achieve full capability in a single step and consistently underestimating what it would cost to attain this capability. The report makes a number of key recommendations for changing DOD’s acquisition process including the following: develop a new requirements process that has greater combatant commander involvement and is time-phased, fiscally informed, and jointly prioritized; change the current acquisition policy to ensure a time-constrained development program is strictly followed; keep program managers from the start of development through delivery of the “Beyond Low-Rate Initial Production Report”; and move the start of a development program to the point in time that a successful preliminary design review is completed. Our work in weapons acquisition and best practices over the past several years has drawn similar conclusions. We have made numerous recommendations on DOD’s acquisition processes and policy—as well as recommendations on specific major weapon system programs—to improve cost, schedule, and performance outcomes and to increase accountability for investment decisions. In 2000, DOD revised its acquisition policy to address some of our recommendations. Specifically, DOD has written into its policy an approach that emphasizes the importance of knowledge at critical junctures before managers agree to invest more money in the next phase of weapon system development. Theoretically, a knowledge-based approach results in evolutionary—that is, incremental, manageable, predictable—development and uses controls to help managers gauge progress in meeting cost, schedule, and performance goals. However, DOD policy lacks the controls needed to ensure effective implementation of this approach. Furthermore, decision makers have not consistently applied the necessary discipline to implement its acquisition policy and assign much-needed accountability for decisions and outcomes. Some of key elements of acquisition that we believe DOD needs to focus on include the following: constraining individual program requirements by working within available resources and by leveraging systems engineering; establishing clear business cases for each individual investment; enabling science and technology organizations to shoulder the ensuring that the workforce is capable of managing requirements trades, source selection, and knowledge-based acquisition strategies; establishing and enforcing controls to ensure appropriate knowledge is captured and used at critical junctures before moving programs forward and investing more money; and aligning tenure for program managers that matches the program’s acquisition time to ensure greater accountability for outcomes. In conclusion, despite DOD’s repeated declaration that recapitalizing its aging tactical aircraft fleet is a top priority, the department continues to follow an acquisition strategy that consistently results in escalating costs that undercut DOD’s buying power, forces DOD to reduce aircraft purchases, and delays delivering needed capabilities to the warfighter. Continuing to follow a strategy that results in disappointing outcomes cannot be encouraged—particularly given our current fiscal and national security realities. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or other members of the subcommittee may have. Joint Strike Fighter: DOD Plans to Enter Production before Testing Demonstrates Acceptable Performance, GAO-06-356 (Washington D.C.: March 15, 2006). Defense Acquisitions: Business Case and Business Arrangements Key for Future Combat System’s Success, GAO-06-478T (Washington D.C.: March 1, 2006). Defense Acquisitions: DOD Management Approach and Processes Not Well-Suited to Support Development of Global Information Grid, GAO-06-211, (Washington D.C.: January 30, 2006). Defense Acquisitions: DOD Has Paid Billions in Award and Incentive Fees Regardless of Acquisition Outcomes, GAO-06-66, (Washington D.C.: December 19, 2005). Unmanned Aircraft Systems: Global Hawk Cost Increase Understated in Nunn-McCurdy Report, GAO-06-222R, (Washington D.C.: December 15, 2005) DOD Acquisition Outcomes: A Case for Change, GAO-06-257T, (Washington D.C.: November 15, 2005). Defense Acquisitions: Progress and Challenges Facing the DD(X) Surface Combatant Program GAO-05-924T. (Washington D.C.: 07/19/2005). Defense Acquisitions: Incentives and Pressures That Drive Problems Affecting Satellite and Related Acquisitions. GAO-05-570R. (Washington D.C.: 06/23/2005). Defense Acquisitions: Resolving Development Risks in the Army’s Networked Communications Capabilities is Key Fielding Future Force. GAO-05-669 (Washington D.C.: 06/15/2005). Progress of the DD(X) Destroyer Program. GAO-05-752R. (Washington D.C.: 06/14/2005) Tactical Aircraft: F/A-22 and JSF Acquisition Plans and Implications for Tactical Aircraft Modernization. GAO-05-519T. (Washington D.C.: 04/06/2005). Defense Acquisitions: Assessments of Selected Major Weapon Programs. GAO-05-301 (Washington D.C.: 03/31/2005). Defense Acquisitions: Future Combat Systems Challenges and Prospects for Success. GAO-05-428T. (Washington D.C.: 03/16/2005). Defense Acquisitions: Changes in E-10A Acquisition Strategy Needed Before Development Starts. GAO-05-273 (Washington D.C.: 03/15/2005). Defense Acquisitions: Future Combat Systems Challenges and Prospects for Success. GAO-05-442T (Washington D.C.: 03/15/2005). Tactical Aircraft: Air Force Still Needs Business Case to Support F/A-22 Quantities and Increased Capabilities. GAO-05-304. (Washington D.C.: 03/15/2005). Tactical Aircraft: Opportunity to Reduce Risks in the Joint Strike Fighter Program with Different Acquisition Strategy. GAO-05-271. (Washington D.C.: 03/15/2005). Tactical Aircraft: Status of F/A-22 and JSF Acquisition Programs and Implications for Tactical Aircraft Modernization. GAO-05-390T (Washington D.C.: 03/03/2005). Defense Acquisitions: Plans Need to Allow Enough Time to Demonstrate Capability of First Littoral Combat Ships. GAO-05-255 (Washington D.C.: 03/01/2005). Defense Acquisitions: Improved Management Practices Could Help Minimize Cost Growth in Navy Shipbuilding Programs. GAO-05-183 (Washington D.C.: 02/28/2005). Unmanned Aerial Vehicles: Changes in Global Hawk’s Acquisition Strategy Are Needed to Reduce Program Risks. GAO-05-06 (Washington D.C.: 11/05/2004). This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Department of Defense's (DOD) F-22A and Joint Strike Fighter (JSF) programs aim to replace many of the Department's aging tactical fighter aircraft--many of which have been in DOD's inventory for more than 20 years. Together, the F-22A and JSF programs represent a significant investment for DOD--currently estimated at almost $320 billion. GAO has reported on the poor outcomes in DOD's acquisitions of tactical aircraft and other major weapon systems. Cost and schedule overruns have diminished DOD's buying power and delayed the delivery of needed capabilities to the warfighter. Last year, GAO testified that weaknesses in the F-22A and JSF programs raised questions as to whether DOD's overarching tactical aircraft recapitalization goals were achievable. GAO is providing updated testimony on (1) the extent to which the current F-22A and JSF business cases are executable, (2) the current status of DOD's tactical aircraft recapitalization efforts, and (3) potential options for recapitalizing the air forces as DOD moves forward with its tactical aircraft recapitalization efforts. The future of DOD's tactical aircraft recapitalization depends largely on the outcomes of the F-22A and JSF programs--which represent about $245 billion in investments to be made in the future. Both programs continue to be burdened with risk. The F-22A business case is unexecutable in part because of a 198 aircraft gap between the Air Force requirement and what DOD estimates it can afford. The JSF program, which has 90 percent of its investments still in the future, plans to concurrently test and produce aircraft thus weakening DOD's business case and jeopardizing its recapitalization efforts. It plans to begin producing aircraft in 2007 with less than 1 percent of the flight test program completed. DOD's current plan to buy about 3,100 new major tactical systems to replace its legacy aircraft represents a 33-percent reduction in quantities from original plans. With reduced buys and delays in delivery of the new systems, costs to keep legacy aircraft operational and relevant have increased. While the Secretary of Defense maintains that continued U.S. air dominance depends on a recapitalized force, DOD has not presented an investment strategy for tactical aircraft systems that measures needs, capability gaps, alternatives, and affordability. Without such a strategy, DOD cannot reasonably ensure it will recapitalize the force and deliver needed capabilities to the warfighter within cost and schedule targets. As DOD moves forward with its efforts to recapitalize its tactical aircraft, it needs to rethink the current business cases for the F-22A and JSF programs. This means matching needs and resources before more F-22A aircraft are procured and ensuring the JSF program demonstrates acceptable aircraft performance before it enters initial production. |
Since our last high-risk update, while progress has varied, many of the 32 high-risk areas on our 2015 list have shown solid progress. One area related to sharing and managing terrorism-related information is now being removed from the list. Agencies can show progress by addressing our five criteria for removal from the list: leadership commitment, capacity, action plan, monitoring, and demonstrated progress. As shown in table 1, 23 high-risk areas, or two-thirds of all the areas, have met or partially met all five criteria for removal from our High-Risk List; 15 of these areas fully met at least one criterion. Compared with our last assessment, 11 high-risk areas showed progress in one or more of the five criteria. Two areas declined since 2015. These changes are indicated by the up and down arrows in table 1. Of the 11 high-risk areas showing progress between 2015 and 2017, sufficient progress was made in 1 area—Establishing Effective Mechanisms for Sharing and Managing Terrorism-Related Information to Protect the Homeland—to be removed from the list. In two other areas, enough progress was made that we removed a segment of the high-risk area—Mitigating Gaps in Weather Satellite Data and Department of Defense (DOD) Supply Chain Management. The other eight areas improved in at least one criterion rating by either moving from “not met” to “partially met” or from “partially met” to “met.” We removed the area of Establishing Effective Mechanisms for Sharing and Managing Terrorism-Related Information to Protect the Homeland from the High-Risk List because the Program Manager for the Information Sharing Environment (ISE) and key departments and agencies have made significant progress to strengthen how intelligence on terrorism, homeland security, and law enforcement, as well as other information (collectively referred to in this section as terrorism-related information), is shared among federal, state, local, tribal, international, and private-sector partners. As a result, the Program Manager and key stakeholders have met all five criteria for addressing our high-risk designation, and we are removing this issue from our High-Risk List. While this progress is commendable, it does not mean the government has eliminated all risk associated with sharing terrorism-related information. It remains imperative that the Program Manager and key departments and agencies continue their efforts to advance and sustain ISE. Continued oversight and attention is also warranted given the issue’s direct relevance to homeland security as well as the constant evolution of terrorist threats and changing technology. The Program Manager, the individual responsible for planning, overseeing, and managing ISE, along with the key departments and agencies—the Departments of Homeland Security (DHS), Justice (DOJ), State (State), and Defense (DOD), and the Office of the Director of National Intelligence (ODNI)—are critical to implementing and sustaining ISE. Following the terrorist attacks of 2001, Congress and the executive branch took numerous actions aimed explicitly at establishing a range of new measures to strengthen the nation’s ability to identify, detect, and deter terrorism-related activities. For example, ISE was established in accordance with the Intelligence Reform and Terrorism Prevention Act of 2004 (Intelligence Reform Act) to facilitate the sharing of terrorism-related information. Figure 1 depicts the relationship between the various stakeholders and disciplines involved with the sharing and safeguarding of terrorism-related information through ISE. The Program Manager and key departments and agencies met the leadership commitment and capacity criteria in 2015, and have subsequently sustained efforts in both these areas. For example, the Program Manager clearly articulated a vision for ISE that reflects the government’s terrorism-related information sharing priorities. Key departments and agencies also continued to allocate resources to operations that improve information sharing, including developing better technical capabilities. The Program Manager and key departments and agencies also developed, generally agreed upon, and executed the 2013 Strategic Implementation Plan (Implementation Plan), which includes the overall strategy and more specific planning steps to achieve ISE. Further, they have demonstrated that various information-sharing initiatives are being used across multiple agencies as well as state, local, and private sector stakeholders. For example, the project manager has developed a comprehensive framework for managing enterprise architecture to help share and integrate terrorism-related information among multiple stakeholders in ISE. Specifically, the Project Interoperability initiative includes technical resources and other guidance that promote greater information system compatibility and performance. Furthermore, the key departments and agencies have applied the concepts of the Project Interoperability Initiative to improve mission operations by better linking different law enforcement databases, and facilitating better geospatial analysis, among other things. In addition, the Program Manager and key departments and agencies have continued to devise and implement ways to measure the effect of ISE on information sharing to address terrorist and other threats to the homeland. They developed performance metrics for specific information- sharing initiatives (e.g., fusion centers) used by various stakeholders to receive and share information. The Program Manager and key departments and agencies have also documented mission-specific accomplishments (e.g., related to maritime domain awareness) where the Program Manager helped connect previously incompatible information systems. The Program Manager has also partnered with DHS to create an Information Sharing Measure Development Pilot that intends to better measure the effectiveness of information sharing across all levels of ISE. Further, the Program Manager and key departments and agencies have used the Implementation Plan to track progress, address challenges, and substantially achieve the objectives in the National Strategy for Information Sharing and Safeguarding. The Implementation Plan contains 16 priority objectives, and by the end of fiscal year 2016, 13 of the 16 priority objectives were completed. The Program Manager transferred the remaining three objectives, which were all underway, to other entities with the appropriate technical expertise to continue implementation through fiscal year 2019. In our 2013 high-risk update, we listed nine action items that were critical for moving ISE forward. In that report, we determined that two of those action items—demonstrating that the leadership structure has the needed authority to leverage participating departments, and updating the vision for ISE—had been completed. In our 2015 update, we determined that the Program Manager and key departments had achieved four of the seven remaining action items—demonstrating that departments are defining incremental costs and funding; continuing to identify technological capabilities and services that can be shared collaboratively; demonstrating that initiatives within individual departments are, or will be, leveraged to benefit all stakeholders; and demonstrating that stakeholders generally agree with the strategy, plans, time frames, responsibilities, and activities for substantially achieving ISE. For the 2017 update, we determined that the remaining three action items have been completed: establishing an enterprise architecture management capability; demonstrating that the federal government can show, or is more fully developing a set of metrics to measure, the extent to which sharing has improved under ISE; and demonstrating that established milestones and time frames are being used as baselines to track and monitor progress. Achieving all nine action items has, in effect, addressed our high-risk criteria. While this demonstrates significant and important progress, sharing terrorism-related information remains a constantly evolving work in progress that requires continued effort and attention from the Program Manager, departments, and agencies. Although no longer a high-risk issue, sharing terrorism-related information remains an area with some risk, and continues to be vitally important to homeland security, requiring ongoing oversight as well as continuous improvement to identify and respond to changing threats and technology. Table 2 summarizes the Program Manager’s and key departments’ and agencies’ progress in achieving the action items. As we have with areas previously removed from the High-Risk List, we will continue to monitor this area, as appropriate, to ensure that the improvements we have noted are sustained. If significant problems again arise, we will consider reapplying the high-risk designation. Additional Information on Establishing Effective Mechanisms for Sharing and Managing Terrorism-Related Information to Protect the Homeland is provided on page 653 of this report. In the 2 years since our last high-risk update, sufficient progress has been made in two areas—DOD Supply Chain Management and Mitigating Gaps in Weather Satellite Data—that we are narrowing their scope. DOD manages about 4.9 million secondary inventory items, such as spare parts, with a reported value of approximately $91 billion as of September 2015. Since 1990, DOD’s inventory management has been included on our High-Risk List due to the accumulation of excess inventory and weaknesses in demand forecasting for spare parts. In addition to DOD’s inventory management, the supply chain management high-risk area focuses on materiel distribution and asset visibility within DOD. Based on DOD’s leadership commitment and demonstrated progress to address weaknesses since 2010, we are removing the inventory management component from the supply chain management high-risk area. Specifically, DOD has taken the following actions: Implemented a congressionally-mandated inventory management corrective action plan and institutionalized a performance management framework, including regular performance reviews and standardized metrics. DOD has also developed and begun implementing a follow-on improvement plan. Reduced the percentage and value of its “on-order excess inventory” (i.e., items already purchased that may be excess due to subsequent changes in requirements) and “on-hand excess inventory” (i.e., items categorized for potential reuse or disposal). DOD’s data show that the proportion of on-order excess inventory to the total amount of on- order inventory decreased from 9.5 percent at the end of fiscal year 2009 to 7 percent at the end of fiscal year 2015, the most recent fiscal year for which data are available. During these years, the value of on- order excess inventory also decreased from $1.3 billion to $701 million. DOD’s data show that the proportion of on-hand excess inventory to the total amount of on-hand inventory dropped from 9.4 percent at the end of fiscal year 2009 to 7.3 percent at the end of fiscal year 2015. The value of on-hand excess inventory also decreased during these years from $8.8 billion to $6.8 billion. Implemented numerous actions to improve demand forecasting and began tracking department-wide forecasting accuracy metrics in 2013, resulting in forecast accuracy improving from 46.7 percent in fiscal year 2013 to 57.4 percent in fiscal year 2015, the latest fiscal year for which complete data are available. Implemented 42 of our recommendations since 2006 and is taking actions to implement an additional 13 recommendations, which are focused generally on reassessing inventory goals, improving collaborative forecasting, and making changes to information technology (IT) systems used to manage inventory. Additional information on DOD Supply Chain Management is provided on page 248 of this report. Mitigating Gaps in Weather Satellite Data The United States relies on two complementary types of satellite systems for weather observations and forecasts: (1) polar-orbiting satellites that provide a global perspective every morning and afternoon, and (2) geostationary satellites that maintain a fixed view of the United States. Both types of systems are critical to weather forecasters, climatologists, and the military, who map and monitor changes in weather, climate, the oceans, and the environment. Federal agencies are planning or executing major satellite acquisition programs to replace existing polar and geostationary satellite systems that are nearing or beyond the end of their expected life spans. The Department of Commerce’s National Oceanic and Atmospheric Administration (NOAA) is responsible for the polar satellite program that crosses the equator in the afternoon and for the nation’s geostationary weather satellite program; DOD is responsible for the polar satellite program that crosses the equator in the early morning orbit. Over the last several years, we have reported on the potential for a gap in satellite data between the time that the current satellites are expected to reach the end of their lifespans, and the time when the next satellites are expected to be in orbit and operational. We added this area to our High- Risk List in 2013. According to NOAA program officials, a satellite data gap would result in less accurate and timely weather forecasts and warnings of extreme events—such as hurricanes, storm surges, and floods. Such degraded forecasts and warnings would endanger lives, property, and our nation’s critical infrastructures. Similarly, according to DOD officials, a gap in space-based weather monitoring capabilities could affect the planning, execution, and sustainment of U.S. military operations around the world. In our prior high-risk updates, we reported on NOAA’s efforts to mitigate the risk of a gap in its polar and geostationary satellite programs. With strong congressional support and oversight, NOAA has made significant progress in its efforts to mitigate the potential for gaps in weather satellite data on its geostationary weather satellite program. Specifically, the agency demonstrated strong leadership commitment to mitigating potential gaps in geostationary satellite data by revising and improving its gap mitigation/contingency plans. Previously, in December 2014, we reported on shortfalls in the satellite program’s gap mitigation/contingency plans and made recommendations to NOAA to address these shortfalls. For example, we noted that the plan did not sufficiently address strategies for preventing a launch delay, timelines and triggers to prevent a launch delay, and whether any of its mitigation strategies would meet minimum performance levels. NOAA agreed with these recommendations and released a new version of its geostationary satellite contingency plan in February 2015 that addressed the recommendations, thereby meeting the criterion for having an action plan. We rated capacity as partially met in our 2015 report due to concerns about NOAA’s ability to complete critical testing activities because it was already conducting testing on a round-the-clock, accelerated schedule. Since then, NOAA adjusted its launch schedule to allow time to complete critical integration and testing activities. In doing so, the agency demonstrated that it met the capacity criterion. NOAA has also met the criterion for demonstrating progress by mitigating schedule risks and successfully launching the satellite. In September 2013, we reported that the agency had weaknesses in its schedule- management practices on its core ground system and spacecraft. We made recommendations to address those weaknesses, which included sequencing all activities, ensuring there are adequate resources for the activities, and analyzing schedule risks. NOAA agreed with the recommendations and the Geostationary Operational Environmental Satellite-R series (GOES-R) program improved its schedule management practices. By early 2016, the program had improved the links between remaining activities on the spacecraft schedule, included needed schedule logic for a greater number of activities on the ground schedule, and included indications on the ground schedule that the results of a schedule risk analysis were used in calculating its durations. In addition, the program successfully launched the GOES-R satellite in November 2016. Oversight by Congress has been instrumental in reducing the risk of geostationary weather satellite gaps. For example, Subcommittees of the House Science, Space, and Technology committee held multiple hearings to provide oversight of the satellite acquisition and the risk of gaps in satellite coverage. As a result, the agency now has a robust constellation of operational and backup satellites in orbit and has made significant progress in addressing the risk of a gap in geostationary data coverage. Accordingly, there is sufficient progress to remove this segment from the high-risk area. Additional information on Mitigating Gaps in Weather Satellite Data is provided on pages 19 and 430 of this report. Below are selected examples of areas where progress has been made. Strengthening Department of Homeland Security Management Functions. The Department of Homeland Security (DHS) continues to strengthen and integrate its management functions and progressed from partially met to met for the monitoring criterion. Since our 2015 high-risk update, DHS has strengthened its monitoring efforts for financial system modernization programs by entering into a contract for independent verification and validation services to help ensure that the modernization projects meet key requirements. These programs are key to effectively supporting the department’s financial management operations. Additionally, DHS continued to meet the criteria for leadership commitment and a corrective action plan. DHS’s top leadership has demonstrated exemplary support and a continued focus on addressing the department’s management challenges by, among other things, issuing 10 updated versions of DHS’s initial January 2011 Integrated Strategy for High Risk Management. The National Defense Authorization Act for Fiscal Year 2017 reinforces this focus with the inclusion of a mandate that the DHS Under Secretary for Management report to us every 6 months to demonstrate measurable, sustainable progress made in implementing DHS’s corrective action plans to address the high-risk area, until we submit written notification of the area’s removal from the High-Risk List to the appropriate congressional committees. Similar provisions were included in the DHS Headquarters Reform and Improvement Act of 2015, the DHS Accountability Act of 2016, and the DHS Reform and Improvement Act. Additional information on this high-risk area is provided on page 354 of this report. Strategic Human Capital Management. This area progressed from partially met to met on leadership commitment. The Office of Personnel Management (OPM), agencies, and Congress have taken actions to improve efforts to address mission critical skills gaps. Specifically, OPM has demonstrated leadership commitment by publishing revisions to its human capital regulations in December 2016 that require agencies to, among other things, implement human capital policies and programs that address and monitor government- wide and agency-specific skills gaps. This initiative has increased the likelihood that skills gaps with the greatest operational effect will be addressed in future efforts. At the same time, Congress has provided agencies with authorities and flexibilities to manage the federal workforce and make the federal government a more accountable employer. For example, Congress included a provision in the National Defense Authorization Act for Fiscal Year 2016 to extend the probationary period for newly-hired civilian DOD employees from 1 to 2 years. This action is consistent with our 2015 reporting that better use of probationary periods gives agencies the ability to ensure an employee’s skills are a good fit for all critical areas of a particular job. Additional information on this high-risk area is provided on page 61 of this report. Transforming the Environmental Protection Agency’s Process for Assessing and Controlling Toxic Chemicals. Overall, this high- risk area progressed from not met to partially met on two criteria— capacity and demonstrated progress—and continued to partially meet the criterion for monitoring due to progress in one program area. The Environmental Protection Agency’s (EPA) ability to effectively implement its mission of protecting public health and the environment is critically dependent on assessing the risks posed by chemicals in a credible and timely manner. EPA assesses these risks under a variety of actions, including the Integrated Risk Information System (IRIS) program and EPA’s Toxic Substances Control Act (TSCA) program. The IRIS program has made some progress on the capacity, monitoring, and demonstrated progress criteria. In terms of IRIS capacity, EPA has partially met this criterion by finalizing a Multi-Year Agenda to better assess how many people and resources should be dedicated to the IRIS program. In terms of IRIS monitoring, EPA has met this criterion in part by using a Chemical Assessment Advisory Committee to review IRIS assessments, among other actions. In terms of IRIS demonstrated progress, EPA has partially met this criterion as of January 2017 by issuing five assessments since fiscal year 2015. The Frank R. Lautenberg Chemical Safety for the 21st Century Act amended TSCA and was enacted on June 22, 2016. Passing TSCA reform may facilitate EPA’s effort to improve its processes for assessing and controlling toxic chemicals in the years ahead. The new law provides EPA with greater authority and the ability to take actions that could help EPA implement its mission of protecting human health and the environment. EPA officials stated that the agency is better positioned to take action to require chemical companies to report chemical toxicity and exposure data. Officials also stated that the new law gives the agency additional authorities, including the authority to require companies to develop new information relating to a chemical as necessary for prioritization and risk evaluation. Using both new and previously existing TSCA authorities should enhance the agency’s ability to gather new information as necessary to evaluate hazard and exposure risks. Continued leadership commitment from EPA officials and Congress will be needed to fully implement reforms. Additional work will also be needed to issue a workload analysis to demonstrate capacity, complete a corrective action plan, and demonstrate progress implementing the new legislation. Additional information on this high-risk area is provided on page 417 of this report. Managing Federal Real Property. The federal government continued to meet the criteria for leadership commitment, now partially meets the criterion for demonstrated progress, and made some progress in each of the other high-risk criteria. The Office of Management and Budget (OMB) issued the National Strategy for the Efficient Use of Real Property (National Strategy) on March 25, 2015, which directs Chief Financial Officer (CFO) Act agencies to take actions to reduce the size of the federal real property portfolio, as we recommended in 2012. In addition, in December 2016, two real property reform bills were enacted that could address the long-standing problem of federal excess and underutilized property. The Federal Assets Sale and Transfer Act of 2016 may help address stakeholder influence by establishing an independent board to identify and recommend five high-value civilian federal buildings for disposal within 180 days after the board members are appointed, as well as develop recommendations to dispose and redevelop federal civilian real properties. Additionally, the Federal Property Management Reform Act of 2016 codified the Federal Real Property Council (FRPC) for the purpose of ensuring efficient and effective real property management while reducing costs to the federal government. FRPC is required to establish a real property management plan template, which must include performance measures, and strategies and government-wide goals to reduce surplus property or to achieve better utilization of underutilized property. In addition, federal agencies are required to annually provide FRPC a report on all excess and underutilized property, and identify leased space that is not fully used or occupied. In addressing our 2016 recommendation to improve the reliability of real property data, GSA conducted an in-depth survey that focused on key real property data elements maintained in the Federal Real Property Profile, formed a working group of CFO Act agencies to analyze the survey results and reach consensus on reforms, and issued a memorandum to CFO Act agencies designed to improve the consistency and quality of real property data. The Federal Protective Service, which protects about 9,500 federal facilities, implemented our recommendation aimed at improving physical security by issuing a plan that identifies goals and describes resources that support its risk management approach. In addition, the Interagency Security Committee, a DHS-chaired organization, issued new guidance intended to make the most effective use of physical security resources. Additional information on this high-risk area is provided on page 77 of this report. Enforcement of Tax Laws. The Internal Revenue Service’s (IRS) continued efforts to enforce tax laws and address identity theft refund fraud (IDT) have resulted in the agency meeting one criterion for removal from the High-Risk List (leadership commitment) and partially meeting the remaining four criteria (capacity, action plan, monitoring, and demonstrating progress). IDT is a persistent and evolving threat that burdens legitimate taxpayers who are victims of the crime. It cost the U.S. Treasury an estimated minimum of $2.2 billion during the 2015 tax year. Congress and IRS have taken steps to address this challenge. IRS has deployed new tools and increased resources dedicated to identifying and combating IDT refund fraud. In addition, the Consolidated Appropriations Act, 2016, amended the tax code to accelerate Wage and Tax Statement (W-2) filing deadlines to January 31. We had previously reported that the wage information that employers report on Form W-2 was not available to IRS until after it issues most refunds. With earlier access to W-2 wage data, IRS could match such information to taxpayers’ returns and identify discrepancies before issuing billions of dollars of fraudulent IDT refunds. Such matching could also provide potential benefits for other IRS enforcement programs, such as preventing improper payments via the Earned Income Tax Credit. Additional information on this high- risk area is provided on page 500 of this report. In addition to being instrumental in supporting progress in individual high- risk areas, Congress also has taken actions to enact various statutes that, if implemented effectively, will help foster progress on high-risk issues government-wide. These include the: Program Management Improvement Accountability Act: Enacted in December 2016, the act seeks to improve program and project management in federal agencies. Among other things, the act requires the Deputy Director of the Office of Management and Budget (OMB) to adopt and oversee implementation of government-wide standards, policies, and guidelines for program and project management in executive agencies. The act also requires the Deputy Director to conduct portfolio reviews to address programs on our High-Risk List. It further creates a Program Management Policy Council to act as an interagency forum for improving practices related to program and project management. The Council is to review programs on the High-Risk List and make recommendations to the Deputy Director or designee. We are to review the effectiveness of key efforts under the act to improve federal program management. Fraud Reduction and Data Analytics Act of 2015 (FRDA): FRDA, enacted in June 2016, is intended to strengthen federal anti-fraud controls, while also addressing improper payments. FRDA requires OMB to use our Fraud Risk Framework to create guidelines for federal agencies to identify and assess fraud risks, and then design and implement control activities to prevent, detect, and respond to fraud. Agencies, as part of their annual financial reports beginning in fiscal year 2017, are further required to report on their fraud risks and their implementation of fraud reduction strategies, which should help Congress monitor agencies’ progress in addressing and reducing fraud risks. To aid federal agencies in better analyzing fraud risks, FRDA requires OMB to establish a working group tasked with developing a plan for the creation of an interagency library of data analytics and data sets to facilitate the detection of fraud and the recovery of improper payments. This working group and the library should help agencies to coordinate their fraud detection efforts and improve their ability to use data analytics to monitor databases for potential improper payments. The billions of dollars of improper payments are a central part of the Medicare Program, Medicaid Program, and Enforcement of Tax Laws (Earned Income Tax Credit) high-risk areas. IT Acquisition Reform, Legislation known as the Federal Information Technology Acquisition Reform Act (FITARA): FITARA, enacted in December 2014, was intended to improve how agencies acquire IT and enable Congress to monitor agencies’ progress and hold them accountable for reducing duplication and achieving cost savings. FITARA includes specific requirements related to seven areas: the federal data center consolidation initiative, enhanced transparency and improved risk management, agency Chief Information Officer authority enhancements, portfolio review, expansion of training and use of IT acquisition cadres, government- wide software purchasing, and maximizing the benefit of the federal strategic sourcing initiative. Effective implementation of FITARA is central to making progress in the Improving the Management of IT Acquisitions and Operations government-wide area we added to the High-Risk List in 2015. In the 2 years since the last high-risk update, two areas—Mitigating Gaps in Weather Satellite Data and Management of Federal Oil and Gas Resources—have expanded in scope because of emerging challenges related to these overall high-risk areas. In addition, while progress is needed across all high-risk areas, particular areas need significant attention. While NOAA has made significant progress, as described earlier, in its geostationary weather satellite program, DOD has made limited progress in meeting its requirements for the polar satellite program. In 2010, when the Executive Office of the President decided to disband a tri-agency polar weather satellite program, DOD was given responsibility for providing polar-orbiting weather satellite capabilities in the early morning orbit. This information is used to provide updated information for weather observations and models. However, the department was slow to develop plans to replace the existing satellites that provide this coverage. Because DOD delayed establishing plans for its next generation of weather satellites, there is a risk of a satellite data gap in the early morning orbit. The last satellite that the department launched in 2014 called Defense Meteorological Satellite Program (DMSP)-19, stopped providing recorded data used in weather models in February 2016. A prior satellite, called DMSP-17, is now the primary satellite operating in the early morning orbit. However, this satellite, which was launched in 2006, is operating with limitations due to the age of its instruments. DOD had developed another satellite, called DMSP-20, but plans to launch that satellite were canceled after the department did not certify that it would launch the satellite by the end of calendar year 2016. The department conducted a requirements review and analysis of alternatives from February 2012 through September 2014 to determine the best way forward for providing needed polar-orbiting satellite environmental capabilities in the early morning orbit. In October 2016, DOD approved plans for its next generation of weather satellites, called the Weather System Follow-on—Microwave program, which will meet the department’s needs for satellite information on oceanic wind speed and direction to protect ships on the ocean’s surface. The department plans to launch a demonstration satellite in 2017 and to launch its first operational satellite developed under this program in 2022. However, DOD’s plans for the early morning orbit are not comprehensive. The department did not thoroughly assess options for providing its two highest-priority capabilities, cloud descriptions and area-specific weather imagery. These capabilities were not addressed due to an incorrect assumption about the capabilities that would be provided by international partners. The Weather System Follow-on—Microwave program does not address these two highest-priority capabilities and the department has not yet determined its long-term plans for providing these capabilities. As a result, the department will need to continue to rely on the older DMSP-17 satellite until its new satellite becomes operational in 2022, and it establishes and implements plans to address the high-priority capabilities that the new satellite will not address. Given the age of the DMSP-17 satellite and uncertainty on how much longer it will last, the department could face a gap in critical satellite data. In August 2016, DOD reported to Congress its near-term plans to address potential satellite data gaps. These plans include a greater reliance on international partner capabilities, exploring options to move a geostationary satellite over an affected region, and plans to explore options for acquiring and fielding new equipment, such as satellites and satellite components to provide the capabilities. In addition, the department anticipates that the demonstration satellite to be developed as a precursor to the Weather System Follow-on—Microwave program could help mitigate a potential gap by providing some useable data. However, these proposed solutions may not be available in time or be comprehensive enough to avoid near-term coverage gaps. Such a gap could negatively affect military operations that depend on weather data, such as long-range strike capabilities and aerial refueling. DOD needs to demonstrate progress on its new Weather Satellite Follow- on—Microwave program, and to establish and implement plans to address the high-priority capabilities that are not included in the program. Additional information on Mitigating Gaps in Weather Satellite Data is provided on page 430 of this report. On April 20, 2010, the Deepwater Horizon drilling rig exploded in the Gulf of Mexico, resulting in 11 deaths, serious injuries, and the largest marine oil spill in U.S. history. In response, in May 2010, the Department of the Interior (Interior) first reorganized its offshore oil and gas management activities into separate offices for revenue collection, under the Office of Natural Resources Revenue, and energy development and regulatory oversight, under the Bureau of Ocean Energy Management, Regulation and Enforcement. Later, in October 2011, Interior further reorganized its energy development and regulatory oversight activities when it established two new bureaus to oversee offshore resources and operational compliance with environmental and safety requirements. The new Bureau of Ocean Energy Management (BOEM) is responsible for leasing and approving offshore development plans while the new Bureau of Safety and Environmental Enforcement (BSEE) is responsible for lease operations, safety, and enforcement. In 2011, we added Interior’s management of federal oil and gas resources to the High-Risk List based on three concerns: (1) Interior did not have reasonable assurance that it was collecting its share of billions of dollars of revenue from federal oil and gas resources; (2) Interior continued to experience problems hiring, training, and retaining sufficient staff to oversee and manage federal oil and gas resources; and (3) Interior was engaged in restructuring its oil and gas program, which is inherently challenging, and there were questions about whether Interior had the capacity to reorganize while carrying out its range of responsibilities, especially in a constrained resource environment. Immediately after reorganizing, Interior developed memorandums and standard operating procedures to define roles and responsibilities, and facilitate and formalize coordination between BOEM and BSEE. Interior also revised polices intended to improve its oversight of offshore oil and gas activities, such as new requirements designed to mitigate the risk of a subsea well blowout or spill. In 2013, we determined that progress had been made, because Interior had fundamentally completed reorganizing its oversight of offshore oil and gas activities. As a result, in 2013, we removed the reorganization segment from this high-risk area. However, in February 2016, we reported that BSEE had undertaken various reform efforts since its creation in 2011, but had not fully addressed deficiencies in its investigative, environmental compliance, and enforcement capabilities identified by investigations after the Deepwater Horizon incident. BSEE’s ongoing restructuring has made limited progress enhancing the bureau’s investigative capabilities. BSEE continues to use pre– Deepwater Horizon incident policies and procedures. Specifically, BSEE has not completed a policy outlining investigative responsibilities or updated procedures for investigating incidents—among the goals of BSEE’s restructuring, according to restructuring planning documents, and consistent with federal standards for internal control. The use of outdated investigative policies and procedures is a long-standing deficiency. Post– Deepwater Horizon incident investigations found that Interior’s policies and procedures did not require it to plan investigations, gather and document evidence, and ensure quality control, and determined that continuing to use them posed a risk to the effectiveness of bureau investigations. Without completing and updating its investigative policies and procedures, BSEE continues to face this risk. BSEE’s ongoing restructuring of its environmental compliance program reverses actions taken to address post–Deepwater Horizon incident concerns, and risks weakening the bureau’s environmental compliance oversight capabilities. In 2011, in response to two post–Deepwater Horizon incident investigations that found that BSEE’s predecessor’s focus on oil and gas development might have been at the expense of protecting the environment, BSEE created an environmental oversight division with region-based staff reporting directly to the headquarters- based division chief instead of regional management. This reporting structure was to help ensure that environmental issues received appropriate weight and consideration within the bureau. Under the restructuring, since February 2015, field-based environmental compliance staff again report to their regional directors. BSEE’s rationale for this action is unclear, as it was not documented or analyzed as part of the bureau’s restructuring planning. Under federal standards for internal control, management is to assess the risks posed by external and internal sources and decide what actions to take to mitigate them. Without assessing the risk of reversing its reporting structure, Interior cannot be sure that BSEE will have reasonable assurance that environmental issues are receiving the appropriate weight and consideration, as called for by post–Deepwater Horizon incident investigations. When we reviewed BSEE’s environmental compliance program, we found that the interagency agreements between Interior and EPA designed to coordinate water quality monitoring under the National Pollutant Discharge Elimination System were decades old. According to BSEE annual environmental compliance activity reports, the agreements may not reflect the agency’s current resources and needs. For example, a 1989 agreement stipulates that Interior shall inspect no more than 50 facilities on behalf of EPA per year, and shall not conduct water sampling on behalf of EPA. Almost 30 years later, after numerous changes in drilling practices and technologies, it is unclear whether inspecting no more than 50 facilities per year is sufficient to monitor water quality. Nevertheless, senior BSEE officials told us that the bureau has no plans to update its agreements with EPA, and some officials said that a previous headquarters-led effort to update the agreements was not completed because it did not sufficiently describe the bureau’s offshore oil and gas responsibilities. According to Standards for Internal Control in the Federal Government, as programs change and agencies strive to improve operational processes and adopt new technologies, management officials must continually assess and evaluate internal controls to ensure that control activities are effective and updated when necessary. BSEE’s ongoing restructuring has made limited progress in enhancing its enforcement capabilities. In particular, BSEE has not developed procedures with criteria to guide how it uses enforcement tools—such as warnings and fines—which are among the goals of BSEE’s restructuring, according to planning documents, and consistent with federal standards for internal control. BSEE restructuring plans state that the current lack of criteria causes BSEE to act inconsistently, which makes oil and gas industry operators uncertain about BSEE’s oversight approach and expectations. The absence of enforcement climate criteria is a long- standing deficiency. For example, post–Deepwater Horizon incident investigations recommended BSEE assess its enforcement tools and how to employ them to deter safety and environmental violations. Without developing procedures with defined criteria for taking enforcement actions, BSEE continues to face risks to the effectiveness of its enforcement capabilities. To enhance Interior’s oversight of oil and gas development, we recommended in February 2016 that the Secretary of the Interior direct the Director of BSEE to take the following nine actions as it continues to restructure. To address risks to the effectiveness of BSEE’s investigations, environmental compliance, and enforcement capabilities, we recommended that BSEE complete policies outlining the responsibilities of investigations, environmental compliance, and enforcement programs, and update and develop procedures to guide them. To enhance its investigative capabilities, we recommended that establish a capability to review investigation policy and collect and analyze incidents to identify trends in safety and environmental hazards; develop a plan with milestones for implementing the case management system for investigations; clearly communicate the purpose of BSEE’s investigations program to industry operators; and clarify policies and procedures for assigning panel investigation membership and referring cases of suspected criminal wrongdoing to the Inspector General. To enhance its environmental compliance capabilities, we recommend conduct and document a risk analysis of the regional-based reporting structure of its Environmental Compliance Division, including actions to mitigate any identified risks; coordinate with the Administrator of the Environmental Protection Agency to consider the relevance of existing interagency agreements for monitoring operator compliance with National Pollutant Discharge Elimination System permits on the Outer Continental Shelf and, if necessary, update agreements to reflect current oversight needs; and develop a plan to address documented environmental oversight staffing needs. To enhance its enforcement capabilities, we recommended that BSEE develop a mechanism to ensure that it reviews the maximum daily civil penalty and adjusts it to reflect changes in the Consumer Price Index within the time frames established by statute. In its written comments, Interior agreed that additional reforms—such as documented policies and procedures—are needed to address offshore oil and gas oversight deficiencies, but Interior neither agreed nor disagreed with our specific recommendations. Additional information on Management of Federal Oil and Gas Resources is provided on page 136 of this report. Managing Risks and Improving VA Health Care. Since we added Department of Veterans Affairs (VA) health care to our High-Risk List in 2015, VA has acknowledged the significant scope of the work that lies ahead in each of the five areas of concern we identified: (1) ambiguous policies and inconsistent processes; (2) inadequate oversight and accountability; (3) information technology (IT) challenges; (4) inadequate training for VA staff; and (5) unclear resource needs and allocation priorities. It is imperative that VA maintain strong leadership support, and as the new administration sets its priorities, VA will need to integrate those priorities with its high-risk related actions. VA developed an action plan for addressing its high-risk designation, but the plan describes many planned outcomes with overly ambitious deadlines for completion. We are concerned about the lack of root cause analyses for most areas of concern, and the lack of clear metrics and needed resources for achieving stated outcomes. In addition, with the increased use of community care programs, it is imperative that VA’s action plan discuss the role of community care in decisions related to policies, oversight, IT, training, and resource needs. Finally, to help address its high-risk designation, VA should continue to implement our recommendations, as well as recommendations from others. While VA’s leadership has increased its focus on implementing our recommendations in the last 2 years, additional work is needed. We made 66 VA health care-related recommendations in products issued since the VA health care high- risk designation in February 2015, for a total of 244 recommendations from January 1, 2010, through December 31, 2016. VA has implemented 122 (about 50 percent) of the 244 recommendations, but over 100 recommendations remain open as of December 31, 2016 (with about 25 percent being open for 3 or more years). It is critical that VA implement our recommendations in a timely manner. Additional information on Managing Risks and Improving VA Health Care is provided on page 627 of this report. DOD Financial Management. The effects of DOD’s financial management problems extend beyond financial reporting and negatively affect DOD’s ability to manage the department and make sound decisions on mission and operations. In addition, DOD remains one of the few federal entities that cannot demonstrate its ability to accurately account for and reliably report its spending or assets. DOD’s financial management problems continue as one of three major impediments preventing us from expressing an opinion on the consolidated financial statements of the federal government. Sustained leadership commitment will be critical to DOD’s success in achieving financial accountability, and in providing reliable information for day-to-day management decision making as well as financial audit readiness. DOD needs to assure the sustained involvement of leadership at all levels of the department in addressing financial management reform and business transformation. In addition, further action is needed in the areas of capacity and action planning. Specifically, DOD needs to continue building a workforce with the level of training and experience needed to support and sustain sound financial management; continue to develop and deploy enterprise resource planning systems as a critical component of DOD’s financial improvement and audit readiness strategy, as well as strengthen automated controls or design manual workarounds for the remaining legacy systems to satisfy audit requirements and improve data used for day-to-day decision making; and effectively implement its Financial Improvement and Audit Readiness Plan and related guidance to focus on strengthening processes, controls, and systems to improve the accuracy, reliability, and reporting for its priority areas, including budgetary information and mission-critical assets. Further, DOD needs to monitor and assess the progress the department is making to remediate its internal control deficiencies. DOD should (1) require the military services to improve their policies and procedures for monitoring their corrective action plans for financial management-related findings and recommendations, and (2) improve its process for monitoring the military services’ audit remediation efforts by preparing a consolidated management summary that provides a comprehensive picture of the status of corrective actions throughout the department. DOD is continuing to work toward undergoing a full financial statement audit by fiscal year 2018; however, it expects to receive disclaimers of opinion on its financial statements for a number of years. A lack of comprehensive information on the corrective action plans limits the ability of DOD and Congress to evaluate DOD’s progress toward achieving audit readiness, especially given the short amount of time remaining before DOD is required to undergo an audit of the department-wide financial statements for fiscal year 2018. Being able to demonstrate progress in remediating its financial management deficiencies will be useful as the department works toward implementing lasting financial management reform to ensure that it can generate reliable, useful, and timely information for financial reporting as well as for decision making and effective operations. Moreover, stronger financial management would show DOD’s accountability for funds and would help it operate more efficiently. Additional information on DOD Financial Management is provided on page 280 of this report. Modernizing the U.S. Financial Regulatory System and the Federal Role in Housing Finance. Resolving the role of the federal government in housing finance will require leadership commitment and action by Congress and the administration. The federal government has directly or indirectly supported more than two-thirds of the value of new mortgage originations in the single-family housing market since the beginning of the 2007-2009 financial crisis. Mortgages with federal support include those backed by Fannie Mae and Freddie Mac, two large government-sponsored enterprises (the enterprises). Out of concern that their deteriorating financial condition threatened the stability of financial markets, the Federal Housing Finance Agency (FHFA) placed the enterprises into federal conservatorship in 2008, creating an explicit fiscal exposure for the federal government. As of September 2016, the Department of the Treasury (Treasury) had provided about $187.5 billion in funds as capital support to the enterprises, with an additional $258.1 billion available to the enterprises should they need further assistance. In accordance with the terms of agreements with Treasury, the enterprises had paid dividends to Treasury totaling about $250.5 billion through September 2016. More than 8 years after entering conservatorship, the enterprises’ futures remain uncertain and billions of federal dollars remain at risk. The enterprises have a reduced capacity to absorb future losses due to a capital reserve amount that falls to $0 by 2018. Without a capital reserve, any quarterly losses—including those due to market fluctuations and not necessarily to economic conditions—would require the enterprises to draw additional funds from Treasury. Additionally, prolonged conservatorships and a change in leadership at FHFA could shift priorities for the conservatorships, which in turn could send mixed messages and create uncertainties for market participants and hinder the development of the broader secondary mortgage market. For this reason, we said in November 2016 that Congress should consider legislation establishing objectives for the future federal role in housing finance, including the structure of the enterprises, and a transition plan to a reformed housing finance system that enables the enterprises to exit conservatorship. The federal government also supports mortgages through insurance or guarantee programs, the largest of which is administered by the Department of Housing and Urban Development’s Federal Housing Administration (FHA). During the financial crisis, FHA served its traditional role of helping to stabilize the housing market, but also experienced financial difficulties from which it only recently recovered. Maintaining FHA’s long-term financial health and defining its future role also will be critical to any effort to overhaul the housing finance system. We previously recommended that Congress or FHA specify the economic conditions that FHA’s Mutual Mortgage Insurance Fund would be expected to withstand without requiring supplemental funds. As evidenced by the $1.68 billion FHA received in 2013, the current 2 percent capital requirement for FHA’s fund may not always be adequate to avoid the need for supplemental funds under severe stress scenarios. Implementing our recommendation would be an important step not only in addressing FHA’s long-term financial viability, but also in clarifying FHA’s role. Additional information on Modernizing the U.S. Financial Regulatory System and the Federal Role in Housing Finance is provided on page 107 of this report. Pension Benefit Guaranty Corporation Insurance Programs. The Pension Benefit Guaranty Corporation (PBGC) is responsible for insuring the defined benefit pension plans of nearly 40 million American workers and retirees who participate in nearly 24,000 private sector plans. PBGC faces an uncertain financial future due, in part, to a long-term decline in the number of traditional defined benefit plans and the collective financial risk of the many underfunded pension plans that PBGC insures. PBGC’s financial portfolio is one of the largest of all federal government corporations and, at the end of fiscal year 2016, PBGC’s net accumulated financial deficit was over $79 billion—having more than doubled since fiscal year 2013. PBGC has estimated that, without additional funding, its multiemployer insurance program will likely be exhausted by 2025 as a result of current and projected pension plan insolvencies. The agency’s single- employer insurance program is also at risk due to the continuing decline of traditional defined benefit pension plans, increased financial risk and reduced premium payments. While Congress and PBGC have taken significant and positive steps to strengthen the agency over recent years, challenges related to PBGC’s funding and governance structure remain. Addressing the significant financial risk and governance challenges that PBGC faces requires additional congressional action. To improve the long-term financial stability of PBGC’s insurance programs, Congress should consider: (1) authorizing a redesign of PBGC’s single employer program premium structure to better align rates with sponsor risk; (2) adopting additional changes to PBGC’s governance structure—in particular, expanding the composition of its board of directors; (3) strengthening funding requirements for plan sponsors as appropriate given national economic conditions; (4) working with PBGC to develop a strategy for funding PBGC claims over the long term, as the defined benefit pension system continues to decline; and (5) enacting additional structural reforms to reinforce and stabilize the multiemployer system that balance the needs and potential sacrifices of contributing employers, participants and the federal government. Absent additional steps to improve PBGC’s finances, the long-term financial stability of the agency remains uncertain and the retirement benefits of millions of American workers and retirees could be at risk of dramatic reductions. Additional information on Pension Benefit Guaranty Corporation Insurance Programs is provided on page 609 of this report. Ensuring the Security of Federal Information Systems and Cyber Critical Infrastructure and Protecting the Privacy of Personally Identifiable Information. Federal agencies and our nation’s critical infrastructures—such as energy, transportation systems, communications, and financial services—are dependent on computerized (cyber) information systems and electronic data to carry out operations and to process, maintain, and report essential information. The security of these systems and data is vital to public confidence and the nation’s safety, prosperity, and well-being. However, safeguarding computer systems and data supporting the federal government and the nation’s critical infrastructure is a concern. We first designated information security as a government- wide high-risk area in 1997. This high-risk area was expanded to include the protection of critical cyber infrastructure in 2003 and protecting the privacy of personally identifiable information (PII) in 2015. Ineffectively protecting cyber assets can facilitate security incidents and cyberattacks that disrupt critical operations; lead to inappropriate access to and disclosure, modification, or destruction of sensitive information; and threaten national security, economic well-being, and public health and safety. In addition, the increasing sophistication of hackers and others with malicious intent, and the extent to which both federal agencies and private companies collect sensitive information about individuals, have increased the risk of PII being exposed and compromised. Over the past several years, we have made about 2,500 recommendations to agencies aimed at improving the security of federal systems and information. These recommendations would help agencies strengthen technical security controls over their computer networks and systems, fully implement aspects of their information security programs, and protect the privacy of PII held on their systems. As of October 2016, about 1,000 of our information security– related recommendations had not been implemented. In addition, the federal government needs, among other things, to improve its abilities to detect, respond to, and mitigate cyber incidents; expand efforts to protect cyber critical infrastructure; and oversee the protection of PII, among other things. Additional information on Ensuring the Security of Federal Information Systems and Cyber Critical Infrastructure and Protecting the Privacy of Personally Identifiable Information is provided on page 338 of this report. For 2017, we are adding three new areas to the High-Risk List. We, along with inspectors general, special commissions, and others, have reported that federal agencies have ineffectively administered Indian education and health care programs, and inefficiently fulfilled their responsibilities for managing the development of Indian energy resources. In particular, we have found numerous challenges facing Interior’s Bureau of Indian Education (BIE) and Bureau of Indian Affairs (BIA) and the Department of Health and Human Services’ (HHS) Indian Health Service (IHS) in administering education and health care services, which put the health and safety of American Indians served by these programs at risk. These challenges included poor conditions at BIE school facilities that endangered students, and inadequate oversight of health care that hindered IHS’s ability to ensure quality care to Indian communities. In addition, we have reported that BIA mismanages Indian energy resources held in trust and thereby limits opportunities for tribes and their members to use those resources to create economic benefits and improve the well-being of their communities. Congress recently noted, “through treaties, statutes, and historical relations with Indian tribes, the United States has undertaken a unique trust responsibility to protect and support Indian tribes and Indians.” In light of this unique trust responsibility and concerns about the federal government ineffectively administering Indian education and health care programs and mismanaging Indian energy resources, we are adding these programs as a high-risk issue because they uniquely affect tribal nations and their members. Federal agencies have performed poorly in the following broad areas: (1) oversight of federal activities; (2) collaboration and communication; (3) federal workforce planning; (4) equipment, technology, and infrastructure; and (5) federal agencies’ data. While federal agencies have taken some actions to address the 41 recommendations we made related to Indian programs, there are currently 39 that have yet to be fully resolved. We plan to continue monitoring federal efforts in these areas. To this end, we have ongoing work focusing on accountability for safe schools and school construction, and tribal control of energy delivery, management, and resource development. Education: We have identified weaknesses in how Indian Affairs oversees school safety and construction and in how it monitors the way schools use Interior funds. We have also found limited workforce planning in several key areas related to BIE schools. Moreover, aging BIE school facilities and equipment contribute to degraded and unsafe conditions for students and staff. Finally, a lack of internal controls and other weaknesses hinder Indian Affairs’ ability to collect complete and accurate information on the physical conditions of BIE schools. In the past 3 years, we issued three reports on challenges with Indian Affairs’ management of BIE schools in which we made 13 recommendations. Eleven recommendations below remain open. To help ensure that BIE schools provide safe and healthy facilities for students and staff, we made four recommendations which remain open, including that Indian Affairs ensure the inspection information it collects on BIE schools is complete and accurate; develop a plan to build schools’ capacity to promptly address safety and health deficiencies; and consistently monitor whether BIE schools have established required safety committees. To help ensure that BIE conducts more effective oversight of school spending, we made four recommendations which remain open, including that Indian Affairs develop a workforce plan to ensure that BIE has the staff to effectively oversee school spending; put in place written procedures and a risk-based approach to guide BIE in overseeing school spending; and improve information sharing to support the oversight of BIE school spending. To help ensure that Indian Affairs improves how it manages Indian education, we made five recommendations. Three recommendations remain open, including that Indian Affairs develop a strategic plan for BIE that includes goals and performance measures for how its offices are fulfilling their responsibilities to provide BIE with support; revise Indian Affairs’ strategic workforce plan to ensure that BIA regional offices have an appropriate number of staff with the right skills to support BIE schools in their regions; and develop and implement decision-making procedures for BIE to improve accountability for BIE schools. Health Care: IHS provides inadequate oversight of health care, both of its federally operated facilities and through the Purchase Referred Care program (PRC). Other issues include ineffective collaboration— specifically, IHS does not require its area offices to inform IHS headquarters if they distribute funds to local PRC programs using different criteria than the PRC allocation formula suggested by headquarters. As a result, IHS may be unaware of additional funding variation across areas. We have also reported that IHS officials told us that an insufficient workforce was the biggest impediment to ensuring patients could access timely primary care. In the past 6 years, we have made 12 recommendations related to Indian health care that remain open. Although IHS has taken several actions in response to our recommendations, such as improving the data collected for the PRC program and adopting Medicare-like rates for nonhospital services, much more needs to be done. To help ensure that Indian people receive quality health care, the Secretary of HHS should direct the Director of IHS to take the following two actions: (1) as part of implementing IHS’s quality framework, ensure that agency-wide standards for the quality of care provided in its federally operated facilities are developed, and systematically monitor facility performance in meeting these standards over time; and (2) develop contingency and succession plans for replacing key personnel, including area directors. To help ensure that timely primary care is available and accessible to Indians, IHS should: (1) develop and communicate specific agency- wide standards for wait times in federally-operated facilities, and (2) monitor patient wait times in federally-operated facilities and ensure that corrective actions are taken when standards are not met. To help ensure that IHS has meaningful information on the timeliness with which it issues purchase orders authorizing payment under the PRC program, and to improve the timeliness of payments to providers, we recommended that IHS: (1) modify IHS’s claims payment system to separately track IHS referrals and self-referrals, revise Government Performance and Results Act measures for the PRC program so that it distinguishes between these two types of referrals, and establish separate time frame targets for these referral types; and (2) better align PRC staffing levels and workloads by revising its current practices, where available, used to pay for PRC program staff. In addition, as HHS and IHS monitor the effect that new coverage options available to IHS beneficiaries through PPACA have on PRC funds, we recommend that IHS concurrently develop potential options to streamline requirements for program eligibility. To help ensure successful outreach efforts regarding PPACA coverage expansions, we recommended that IHS realign current resources and personnel to increase capacity to deal with enrollment in Medicaid and the exchanges, and prepare for increased billing to these payers. If payments for physician and other nonhospital services are capped, we recommended that IHS monitor patient access to these services. To help ensure a more equitable allocation of funds per capita across areas, we recommended that Congress consider requiring IHS to develop and use a new method for allocating PRC funds. To develop more accurate data for estimating the funds needed for the PRC program and improve IHS oversight, we recommended that IHS develop a written policy documenting how it evaluates the need for the PRC program, and disseminate it to area offices so they understand how unfunded services data are used to estimate overall program needs. We also recommended that IHS develop written guidance for PRC programs outlining a process to use when funds are depleted but recipients continue to need services. Energy: We have reported on issues with BIA oversight of federal activities, such as the length of time it takes to review energy-related documents. We also reported on challenges with collaboration—in particular, while working to form an Indian Energy Service Center, BIA did not coordinate with key regulatory agencies, including the Department of the Interior’s Fish and Wildlife Service, the U.S. Army Corps of Engineers, and the Environmental Protection Agency. In addition, we found workforce planning issues at BIA contribute to management shortcomings that have hindered Indian energy development. Lastly, we found issues with outdated and deteriorating equipment, technology, and infrastructure, as well as incomplete and inaccurate data. In the past 2 years, we issued three reports on developing Indian energy resources in which we made 14 recommendations to BIA. All recommendations remain open. To help ensure BIA can verify ownership in a timely manner and identify resources available for development, we made two recommendations, including that Interior take steps to improve its geographic information system mapping capabilities. To help ensure BIA’s review process is efficient and transparent, we made two recommendations, including that Interior take steps to develop a documented process to track review and response times for energy-related documents that must be approved before tribes can develop energy resources. To help improve clarity of tribal energy resource agreement regulations, we recommended BIA provide additional guidance to tribes on provisions that tribes have identified to Interior as unclear. To help ensure that BIA streamlines the review and approval process for revenue-sharing agreements, we made three recommendations, including that Interior establish time frames for the review and approval of Indian revenue-sharing agreements for oil and gas, and establish a system for tracking and monitoring the review and approval process to determine whether time frames are met. To help improve efficiencies in the federal regulatory process, we made four recommendations, including that BIA take steps to coordinate with other regulatory agencies so the Service Center can serve as a single point of contact or lead agency to navigate the regulatory process. To help ensure that BIA has a workforce with the right skills, appropriately aligned to meet the agency’s goals and tribal priorities, we made two recommendations, including that BIA establish a documented process for assessing BIA’s workforce composition at agency offices. Congressional Actions Needed: It is critical that Congress maintain its focus on improving the effectiveness with which federal agencies meet their responsibilities to serve tribes and their members. Since 2013, we testified at six hearings to address significant weaknesses we found in the federal management of programs that serve tribes and their members. Sustained congressional attention to these issues will highlight the challenges discussed here and could facilitate federal actions to improve Indian education and health care programs, and the development of Indian energy resources. See pages 200-219 for additional details on what we found. The federal government’s environmental liability has been growing for the past 20 years and is likely to continue to increase. For fiscal year 2016, the federal government’s estimated environmental liability was $447 billion—up from $212 billion for fiscal year 1997. However, this estimate does not reflect all of the future cleanup responsibilities facing federal agencies. Because of the lack of complete information and the often inconsistent approach to making cleanup decisions, federal agencies cannot always address their environmental liabilities in ways that maximize the reduction of health and safety risks to the public and the environment in a cost-effective manner. The federal government is financially liable for cleaning up areas where federal activities have contaminated the environment. Various federal laws, agreements with states, and court decisions require the federal government to clean up environmental hazards at federal sites and facilities—such as nuclear weapons production facilities and military installations. Such sites are contaminated by many types of waste, much of which is highly hazardous. Federal accounting standards require agencies responsible for cleaning up contamination to estimate future cleanup and waste disposal costs, and to report such costs in their annual financial statements as environmental liabilities. Per federal accounting standards, federal agencies’ environmental liability estimates are to include probable and reasonably estimable costs of cleanup work. Federal agencies’ environmental liability estimates do not include cost estimates for work for which reasonable estimates cannot currently be generated. Consequently, the ultimate cost of addressing the U.S. government’s environmental cleanup is likely greater than $447 billion. Federal agencies’ approaches to addressing their environmental liabilities and cleaning up the contamination from past activities are often influenced by numerous site-specific factors, stakeholder agreements, and legal provisions. We have also found that some agencies do not take a holistic, risk- informed approach to environmental cleanup that aligns limited funds with the greatest risks to human health and the environment. Since 1994, we have made at least 28 recommendations related to addressing the federal government’s environmental liability. These include 22 recommendations to the Departments of Energy (DOE) or Defense (DOD), 1 recommendation to OMB to consult with Congress on agencies’ environmental cleanup costs, and 4 recommendations to Congress to change the laws governing cleanup activities. Of these, 13 recommendations remain unimplemented. If implemented, these steps would improve the completeness and reliability of the estimated costs of future cleanup responsibilities, and lead to more risk-based management of the cleanup work. Of the federal government’s estimated $447 billion environmental liability, DOE is responsible for by far the largest share of the liability, and DOD is responsible for the second largest share. The rest of the federal government makes up the remaining 3 percent of the liability with agencies such as the National Aeronautics and Space Administration (NASA) and the Departments of Transportation, Veteran’s Affairs, Agriculture (USDA), and Interior holding large liabilities (see figure 2). Agencies spend billions each year on environmental cleanup efforts but the estimated environmental liability continues to rise. For example, despite billions spent on environmental cleanup, DOE’s environmental liability has roughly doubled from a low of $176 billion in fiscal year 1997 to the fiscal year 2016 estimate of $372 billion. In the last 6 years alone, DOE’s Office of Environmental Management (EM) has spent $35 billion, primarily to treat and dispose of nuclear and hazardous waste, and construct capital asset projects to treat the waste; however, EM’s portion of the environmental liability has grown over this same time period by over $90 billion, from $163 billion to $257 billion (see figure 3). Progress in addressing the U.S. government’s environmental liabilities depends on how effectively federal departments and agencies set priorities, under increasingly restrictive budgets, that maximize the risk reduction and cost-effectiveness of cleanup approaches. As a first step, some departments and agencies may need to improve the completeness of information about long-term cleanup responsibilities and their associated costs so that decision makers, including Congress, can consider the full scope of the federal government’s cleanup obligations. As a next step, certain departments, such as DOE, may need to change how they establish cleanup priorities. For example, DOE’s current practice of negotiating agreements with individual sites without considering other sites’ agreements or available resources may not ensure that limited resources will be allocated to reducing the greatest environmental risks, and costs will be minimized. In 1994, we recommended that Congress amend certain legislation to require agencies to report annually on progress in implementing plans for completing site inventories, estimates of the total costs to clean up their potential hazardous waste sites, and agencies’ progress toward completing their site inventories and on their latest estimates of total cleanup costs. We believe these recommendations are as relevant, if not more so, today. In 2015, we recommended that USDA develop plans and procedures for completing its inventories of potentially contaminated sites. USDA disagreed with this recommendation. However, we continue to believe that USDA’s inventory of contaminated and potentially contaminated sites—in particular, abandoned mines, primarily on Forest Service land—is insufficient for effectively managing USDA’s overall cleanup program. Interior is also faced with an incomplete inventory of abandoned mines that it is working to improve. In 2006, we recommended that DOD develop, document, and implement a program for financial management review, assessment, and monitoring of the processes for estimating and reporting environmental liabilities. This recommendation has not been implemented. We have found in the past that DOE’s cleanup strategy is not risk based and should be re-evaluated. DOE’s decisions are often driven by local stakeholders and certain requirements in federal facilities agreements and consent decrees. In 1995, we recommended that DOE set national priorities for cleaning up its contaminated sites using data gathered during ongoing risk evaluations. This recommendation has not been implemented. In 2003, we recommended that DOE ask Congress to clarify its authority for designating certain waste with relatively low levels of radioactivity as waste incidental to reprocessing, and therefore not managed as high-level waste. In 2004, DOE received this specific authority from Congress for the Savannah River and Idaho Sites, thereby allowing DOE to save billions of dollars in waste treatment costs. The law, however, excluded the Hanford Site. More recently, in 2015, we found that DOE is not comprehensively integrating risks posed by National Nuclear Security Administration’s (NNSA) nonoperational contaminated facilities with EM’s portfolio of cleanup work. By not integrating nonoperational facilities from NNSA, EM is not providing Congress with complete information about EM’s current and future cleanup obligations as Congress deliberates annually about appropriating funds for cleanup activities. We recommended that DOE integrate its lists of facilities prioritized for disposition with all NNSA facilities that meet EM’s transfer requirements, and that EM should include this integrated list as part of the Congressional Budget Justification for DOE. DOE neither agreed nor disagreed with this recommendation. See pages 232-247 for additional details on what we found. One of the most important functions of the U.S. Census Bureau (Bureau) is conducting the decennial census of the U.S. population, which is mandated by the Constitution and provides vital data for the nation. This information is used to apportion the seats of the U.S. House of Representatives; realign the boundaries of the legislative districts of each state; allocate billions of dollars in federal financial assistance; and provide social, demographic, and economic profiles of the nation’s people to guide policy decisions at each level of government. A complete count of the nation’s population is an enormous challenge as the Bureau seeks to control the cost of the census while it implements several new innovations and manages the processes of acquiring and developing new and modified IT systems supporting them. Over the past 3 years, we have made 30 recommendations to help the Bureau design and implement a more cost-effective census for 2020; however, only 6 of them had been fully implemented as of January 2017. The cost of the census, in terms of cost for counting each housing unit, has been escalating over the last several decennials. The 2010 Census was the costliest U.S. Census in history at about $12.3 billion, and was about 31 percent more costly than the $9.4 billion cost of the 2000 Census (in 2020 dollars). The average cost for counting a housing unit increased from about $16 in 1970 to around $92 in 2010 (in 2020 constant dollars). Meanwhile, the return of census questionnaires by mail (the primary mode of data collection) declined over this period from 78 percent in 1970 to 63 percent in 2010. Declining mail response rates—a key indicator of a cost-effective census—are significant and lead to higher costs. This is because the Bureau sends enumerators to each nonresponding household to obtain census data. As a result, nonresponse follow-up is the Bureau’s largest and most costly field operation. In many ways, the Bureau has had to invest substantially more resources each decade to match the results of prior enumerations. The Bureau plans to implement several new innovations in its design of the 2020 Census. In response to our recommendations regarding past decennial efforts and other assessments, the Bureau has fundamentally reexamined its approach for conducting the 2020 Census. Its plan for 2020 includes four broad innovation areas that it believes will save it over $5 billion (2020 constant dollars) when compared to what it estimates conducting the census with traditional methods would cost. The Bureau’s innovations include (1) using the Internet as a self-response option, which the Bureau has never done on a large scale before; (2) verifying most addresses using “in-office” procedures and on-screen imagery rather than street-by-street field canvassing; (3) re-engineering data collection methods such as by relying on an automated case management system; and (4) in certain instances, replacing enumerator collection of data with administrative records (information already provided to federal and state governments as they administer other programs). These innovations show promise for a more cost-effective head count. However, they also introduce new risks, in part, because they include new procedures and technology that have not been used extensively in earlier decennials, if at all. The Bureau is also managing the acquisition and development of new and modified IT systems, which add complexity to the design of the census. To help control census costs, the Bureau plans to significantly change the methods and technology it uses to count the population, such as offering an option for households to respond to the survey via the Internet or phone, providing mobile devices for field enumerators to collect survey data from households, and automating the management of field operations. This redesign relies on acquiring and developing many new and modified IT systems, which could add complexity to the design. These cost risks, new innovations, and acquisition and development of IT systems for the 2020 Census, along with other challenges we have identified in recent years, raise serious concerns about the Bureau’s ability to conduct a cost-effective enumeration. Based on these concerns, we have concluded that the 2020 Census is a high-risk area and have added it to the High-Risk List in 2017. To help the Bureau mitigate the risks associated with its fundamentally new and complex innovations for the 2020 Census, the commitment of top leadership is needed to ensure the Bureau’s management, culture, and business practices align with a cost-effective enumeration. For example, the Bureau needs to continue strategic workforce planning efforts to ensure it has the skills and competencies needed to support planning and executing the census. It must also rigorously test individual census-taking activities to provide information on their feasibility and performance, their potential for achieving desired results, and the extent to which they are able to function together under full operational conditions. We have recommended that the Bureau also ensure that its scheduling adheres to leading practices and be able to support a quantitative schedule risk assessment, such as by having all activities associated with the levels of resources and effort needed to complete them. The Bureau has stated that it has begun maturing project schedules to ensure that the logical relationships are in place and plans to conduct a quantitative risk assessment. We will continue to monitor the Bureau’s efforts. The Bureau must also improve its ability to manage, develop, and secure its IT systems. For example, the Bureau needs to prioritize its IT decisions and determine what information it needs in order to make those decisions. In addition, the Bureau needs to make key IT decisions for the 2020 Census in order to ensure they have enough time to have the production systems in place to support the end-to-end system test. To this end, we recommended the Bureau ensure that the methodologies for answering the Internet response rate and IT infrastructure research questions are determined and documented in time to inform key design decisions. Further, given the numerous and critical dependencies between the Census Enterprise Data Collection and Processing and 2020 Census programs, their parallel implementation tracks, and the 2020 Census’s immovable deadline, we recommended that the Bureau establish a comprehensive and integrated list of all interdependent risks facing the two programs, and clearly identify roles and responsibilities for managing this list. The Bureau stated that it plans to take actions to address our recommendations. It is also critical for the Bureau to have better oversight and control over its cost estimation process and we have recommended that the Bureau ensure its cost estimate is consistent with our leading practices. For example, the Bureau will need to, among other practices, document all cost-influencing assumptions; describe estimating methodologies used for each cost element; ensure that variances between planned and actual cost are documented, explained, and reviewed; and include a comprehensive sensitivity analysis, so that it can better estimate costs. We also recommended that the Bureau implement and institutionalize processes or methods for ensuring control over how risk and uncertainty are accounted for and communicated within its cost estimation process. The Bureau agreed with our recommendations, and we are currently conducting a follow-up audit of the Bureau’s most recent cost estimate and will determine whether the Bureau has implemented them. Sustained congressional oversight will be essential as well. In 2015 and 2016, congressional committees held five hearings focusing on the progress of the Bureau’s preparations for the decennial. Going forward, active oversight will be needed to ensure these efforts stay on track, the Bureau has needed resources, and Bureau officials are held accountable for implementing the enumeration as planned. We will continue monitoring the Bureau’s efforts to conduct a cost- effective enumeration. To this end, we have ongoing work focusing on such topics as the Bureau’s updated lifecycle cost estimate and the readiness of IT systems for the 2018 End-to-End Test. See pages 219 – 231 for additional details on what we found. After we remove areas from the High-Risk List we continue to monitor them, as appropriate, to determine if the improvements we have noted are sustained and whether new issues emerge. If significant problems again arise, we will consider reapplying the high-risk designation. DOD’s Personnel Security Clearance Program is one former high-risk area that we continue to closely monitor in light of government-wide reform efforts. The Office of the Director of National Intelligence (ODNI) estimates that approximately 4.2 million federal government and contractor employees held or were eligible to hold a security clearance as of October 1, 2015. Personnel security clearances provide personnel with access to classified information, the unauthorized disclosure of which could, in certain circumstances, cause exceptionally grave damage to national security. High profile security incidents, such as the disclosure of classified programs and documents by a National Security Agency contractor and the OPM data breach of 21.5 million records, demonstrate the continued need for high-quality background investigations and adjudications, strong oversight, and a secure IT process, which have been areas of long- standing challenges for the federal government. In 2005, we designated the DOD personnel security clearance program as a high-risk area because of delays in completing background investigations and adjudications. We continued the high-risk designation in the 2007 and 2009 updates to our High-Risk List because of issues with the quality of investigation and adjudication documentation, and because delays in the timely processing of security clearances continued. In our 2011 high-risk report, we removed DOD’s personnel security clearance program from the High-Risk List because DOD took actions to develop guidance to improve its adjudication process, develop and implement tools and metrics to assess quality of investigations and adjudications, and improve timeliness for processing clearances. We also noted that DOD continues to be a prominent player in the overall security clearance reform effort, which includes entities within the OMB, OPM, and ODNI that comprise the Performance Accountability Council (PAC) which oversees security clearance reform. The executive branch has also taken steps to monitor its security clearance reform efforts. The GPRA Modernization Act of 2010 requires OMB to report through a website—performance.gov—on long-term cross-agency priority goals, which are outcome-oriented goals covering a limited number of crosscutting policy areas, as well as goals to improve management across the federal government. Among the cross-agency priority goals, the executive branch identified security clearance reform as one of the key areas it is monitoring. Since removing DOD’s personnel security clearance program from the High-Risk List, the government’s overall reform efforts that began after passage of the Intelligence Reform and Terrorism Prevention Act of 2004 have had mixed progress, and key reform efforts have not yet been implemented. In the aftermath of the June 2013 disclosure of classified documents by a former National Security Agency contractor and the September 2013 shooting at the Washington Navy Yard, OMB issued, in February 2014, the Suitability and Security Processes Review Report to the President, a 120-day review of the government’s processes for granting security clearances, among other things. The 120-day review resulted in 37 recommendations, 65 percent of which have been implemented as of October 2016, including the issuance of executive branch-wide quality assessment standards for investigations in January 2015. Additionally, the recommendations led to expanding DOD’s ability to continuously evaluate the continued eligibility of cleared personnel. However, other recommendations from the 120-day review have not yet been implemented. For example, the reform effort is still trying to fully implement the revised background investigation standards issued in 2012 and improve data sharing between local, state, and federal entities. In addition, the 120-day review further found that performance measures for investigative quality are neither standardized nor implemented consistently across the government, and that measuring and ensuring quality continues to be a challenge. The review contained three recommendations to address the development of quality metrics, but the PAC has only partially implemented those recommendations. We previously reported that the executive branch had developed some metrics to assess quality at different phases of the personnel security clearance process; however, those metrics had not been fully developed and implemented. The development of metrics to assess quality throughout the security clearance process has been a long-standing concern. Since the late 1990s we have emphasized the need to build and monitor quality throughout the personnel security clearance process. In 2009, we again noted that clearly defined quality metrics can improve the security clearance process by enhancing oversight of the time required to process security clearances and the quality of the investigation and adjudicative decisions. We recommended that OMB provide Congress with results of metrics on comprehensive timeliness and the quality of investigations and adjudications. According to ODNI, in October 2016, ODNI began implementation of a Quality Assessment and Reporting Tool to document customer issues with background investigations. The tool will be used to report on the quality of 5 percent of each executive branch agency’s background investigations. ODNI officials stated that they plan to develop metrics in the future as data are gathered from the tool, but did not identify a completion date for these metrics. Separately, the NDAA for Fiscal Year 2017, among other things, requires DOD to institute a program to collect and maintain data and metrics on the background investigation process, in the context of developing a system for performance of background investigations. The PAC’s effort to fully address the 120-day review and our recommendations on establishing metrics on the quality of investigations as well as DOD’s efforts to address the broader requirements in the NDAA for Fiscal Year 2017 remain open and will need to be a continued focus of the department moving forward in its effort to improve its management of the security clearance process. Further, in response to the 2015 OPM data breach, the PAC completed a 90-day review which led to an executive order establishing the National Background Investigations Bureau, within OPM, to replace the Federal Investigative Services and transferred responsibility to develop, maintain and secure new IT systems for clearances to DOD. Additionally, the Executive Order made DOD a full principal member of the PAC. The Executive Order also directed the PAC to review authorities, roles, and responsibilities, including submitting recommendations related to revising, as appropriate, executive orders pertaining to security clearances. This effort is ongoing. In addition to addressing the quality of security clearances and other goals and recommendations outlined in the 120-day and 90-day reviews, and the government’s cross-agency priority goals, the PAC has the added challenge of addressing recent changes that may result from the NDAA for Fiscal Year 2017. Specifically, section 951 of the Act requires the Secretary of Defense to develop an implementation plan for the Defense Security Service to conduct background investigations for certain DOD personnel—presently conducted by OPM—after October 1, 2017. The Secretary of Defense must submit the plan to the congressional defense committees by August 1, 2017. It also requires the Secretary of Defense and Director of OPM to develop a plan by October 1, 2017, to transfer investigative personnel and contracted resources to DOD in proportion to the workload if the plan for DOD to conduct the background investigations were implemented. It is unknown if these potential changes will impact recent clearance reform efforts. Given the history and inherent challenges of reforming the government- wide security clearance process, coupled with recent amendments to a governing Executive Order and potential changes arising from the NDAA for Fiscal Year 2017, we will continue reviewing critical functions for personnel security clearance reform and monitor the government’s implementation of key reform efforts. We have ongoing work assessing progress being made on the overall security clearance reform effort and in implementing a continuous evaluation process, a key reform effort considered important to improving the timeliness and quality of investigations. We anticipate issuing a report on the status of the government’s continuous evaluation process in the fall of 2017. Additionally, we have previously reported on the importance of securing federal IT systems and anticipate issuing a report in early 2017 that examines IT security at OPM and efforts to secure these types of critical systems. Continued progress in reforming personnel security clearances is essential in helping to ensure a federal workforce entrusted to protect U.S. government information and property, promote a safe and secure work environment, and enhance the U.S. government’s risk management approach. The high-risk assessment continues to be a top priority and we will maintain our emphasis on identifying high-risk issues across government and on providing insights and sustained attention to help address them, by working collaboratively with Congress, agency leaders, and OMB. As part of this effort, with the new administration and Congress in 2017 we hope to continue to participate in regular meetings with the incoming OMB Deputy Director for Management and with top agency officials to discuss progress in addressing high-risk areas. Such efforts have been critical for the progress that has been made. This high-risk update is intended to help inform the oversight agenda for the 115th Congress and to guide efforts of the administration and agencies to improve government performance and reduce waste and risks. We are providing this update to the President and Vice President, congressional leadership, other Members of Congress, OMB, and the heads of major departments and agencies. In 1990, we began a program to report on government operations that we identified as “high risk.” Since then, generally coinciding with the start of each new Congress, we have reported on the status of progress addressing high-risk areas and have updated the High-Risk List. Our most recent high-risk update was in February 2015. That update identified 32 high-risk areas. Overall, this program has served to identify and help resolve serious weaknesses in areas that involve substantial resources and provide critical services to the public. Since our program began, the federal government has taken high-risk problems seriously and has made long- needed progress toward correcting them. In a number of cases, progress has been sufficient for us to remove the high-risk designation. A summary of changes to our High-Risk List over the past 27 years is shown in table 3. This 2017 update identifies 34 high-risk areas. To determine which federal government programs and functions should be designated high risk, we use our guidance document, Determining Performance and Accountability Challenges and High Risks. In making this determination, we consider whether the program or function is of national significance or is key to performance and accountability. Further, we consider qualitative factors, such as whether the risk involves public health or safety, service delivery, national security, national defense, economic growth, or privacy or citizens’ rights, or could result in significantly impaired service, program failure, injury or loss of life, or significantly reduced economy, efficiency, or effectiveness. We also consider the exposure to loss in monetary or other quantitative terms. At a minimum, $1 billion must be at risk, in areas such as the value of major assets being impaired; revenue sources not being realized; major agency assets being lost, stolen, damaged, wasted, or underutilized; potential for, or evidence of improper payments; and presence of contingencies or potential liabilities. Before making a high-risk designation, we also consider corrective measures planned or under way to resolve a material control weakness and the status and effectiveness of these actions. Our experience has shown that the key elements needed to make progress in high-risk areas are top-level attention by the administration and agency leaders grounded in the five criteria for removal from the High-Risk List, as well as any needed congressional action. The five criteria for removal that we issued in November 2000 are as follows: Leadership Commitment. Demonstrated strong commitment and top leadership support. Capacity. Agency has the capacity (i.e., people and resources) to resolve the risk(s). Action Plan. A corrective action plan exists that defines the root cause, solutions, and provides for substantially completing corrective measures, including steps necessary to implement solutions we recommended. Monitoring. A program has been instituted to monitor and independently validate the effectiveness and sustainability of corrective measures. Demonstrated Progress. Ability to demonstrate progress in implementing corrective measures and in resolving the high-risk area. The five criteria form a road map for efforts to improve and ultimately address high-risk issues. Addressing some of the criteria leads to progress, while satisfying all of the criteria is central to removal from the list. Our April 2016 report provided additional information drawn from our 2015 high-risk update on how agencies had made progress addressing high-risk issues. We provided illustrative actions that agencies took that led to progress or removal from our High-Risk List. This information provides additional guidance to agencies whose programs are on the High-Risk List. Figure 4 shows the five criteria and illustrative actions taken by agencies to address the criteria as cited in that report. Importantly, the actions listed are not “stand alone” efforts taken in isolation from other actions to address high-risk issues. That is, actions taken under one criterion may be important to meeting other criteria as well. For example, top leadership can demonstrate its commitment by establishing a corrective action plan including long-term priorities and goals to address the high-risk issue and using data to gauge progress—actions which are also vital to monitoring criteria. In each of our high-risk updates, for more than a decade, we have assessed progress to address the five criteria for removing a high-risk area from the list. In our 2015 update, we added clarity and specificity to our assessments by rating each high-risk area’s progress on the criteria and used the following definitions: Met. Actions have been taken that meet the criterion. There are no significant actions that need to be taken to further address this criterion. Partially Met. Some, but not all, actions necessary to meet the criterion have been taken. Not Met. Few, if any, actions towards meeting the criterion have been taken. Figure 5 shows a visual representation of varying degrees of progress in each of the five criteria for a high-risk area. Each point of the star represents one of the five criteria for removal from the High-Risk List and each ring represents one of the three designations: not met, partially met, or met. An unshaded point at the innermost ring means that the criterion has not been met, a partially shaded point at the middle ring means that the criterion has been partially met, and a fully shaded point at the outermost ring means that the criterion has been met. Further, a plus symbol inside the star indicates the rating for that criteria progressed since our last high-risk update in 2015. Likewise, a minus symbol inside the star indicates the rating for that criteria declined since our last update. At the bottom of the star graphic are summary statements showing the number of criteria that have been met as well as the number that progressed, declined, or both since the 2015 high-risk update. Some high-risk areas are comprised of segments or subareas that make up the overall high-risk area. For example, the high-risk area Transforming EPA’s Process for Assessing Toxic Chemicals includes two segments—EPA’s Integrated Risk Information System and the Toxic Substances Control Act—to reflect two interrelated parts of the overall high-risk area. Multidimensional high-risk areas such as these have separate ratings for each segment as well as a summary rating of the overall high-risk area that reflects a composite of the ratings received under the segment for each of the five high-risk criteria. A summary of areas removed from our High-Risk List over the past 27 years is shown in figure 6. The areas on our 2017 High-Risk List, and the year each was designated as high risk, are shown in table 4. The following pages provide overviews of the 34 high-risk areas on our updated list. Each overview discusses (1) why the area is high risk, (2) the actions that have been taken and that are under way to address the problem since our last update in 2015, and (3) what remains to be done. Each of these high-risk areas is also described on our High-Risk List website, http://www.gao.gov/highrisk/overview. We also provide additional details on the one area that was removed from the High-Risk List in 2017. Since we last reported on government-wide efforts to address skills gaps, the Office of Personnel Management (OPM), the Chief Human Capital Officers (CHCO) Council, and individual agencies have strengthened their leadership over this area; however, OPM and agencies have only partially met the criteria for removal from the High-Risk List. Mission- critical skills gaps within the federal workforce pose a high risk to the nation. Regardless of whether the shortfalls are in such government-wide occupations as cybersecurity and acquisitions, or in agency-specific occupations such as nurses at the Veterans Health Administration (VHA), skills gaps impede the federal government from cost-effectively serving the public and achieving results. Agencies can have skills gaps for different reasons: they may have an insufficient number of people or their people may not have the appropriate skills or abilities to accomplish mission-critical work. Moreover, current budget and long-term fiscal pressures, the changing nature of federal work, and a potential wave of employee retirements that could produce gaps in leadership and institutional knowledge, threaten to aggravate the problems created by existing skills gaps. Indeed, the government’s capacity to address complex challenges such as disaster response, national and homeland security, and rapidly-evolving technology and privacy security issues requires a skilled federal workforce able to work seamlessly with other agencies, with other levels of government, and across sectors. We first added strategic human capital management to the High-Risk List in 2001. In our 2015 update, we noted that while OPM and agencies had made strides in developing an infrastructure for identifying and addressing skills gaps, they needed to do additional work to more fully use workforce analytics to identify their gaps, implement specific strategies to address these gaps, and evaluate the results of actions taken so as to demonstrate progress in closing the gaps. Mission critical skills gaps were also a factor in making other areas across government high risk. Of the 34 other high-risk areas covered in this report, 15 areas—such as IT management, acquisitions, and management of oil and gas resources—had skills gaps playing a contributory role. Since we last reported on government-wide efforts to address skills gaps, OPM, the CHCO Council, and individual agencies have strengthened their leadership over this area, including establishing a new human capital framework to guide their efforts. In doing so, they have (1) taken important steps to institutionalize efforts to close skills gaps and (2) enhanced the analytical method used to identify skills gaps. However, OPM and agencies have only partially met the criteria for removal from the High-Risk List for developing the capacity to close skills gaps, designing and implementing action plan strategies for closing skills gaps, and monitoring efforts to close existing skills gaps as well as identify emerging ones. Additionally, OPM and agencies have not yet demonstrated sustainable progress in closing skills gaps. To date, Congress has provided agencies with authorities and flexibilities to manage the federal workforce and make the federal government a more accountable employer. For example, Congress included a provision in the National Defense Authorization Act for Fiscal Year 2016 to extend the probationary period for newly hired civilian Department of Defense (DOD) employees from 1 year to 2 years. As we noted in our 2015 report, better use of probationary periods gives agencies the ability to ensure an employee’s skills are a good fit for all critical areas of a particular job. Dismissing employees who cannot do the work becomes more difficult and time consuming after the probationary period because of the procedural requirements agencies must follow and the greater appeal rights afforded. Further, oversight hearings held by the House and Senate focusing on federal human capital management challenges have been important for ensuring that OPM and agencies continue to make progress in acquiring, developing, and retaining employees with the skills needed to carry out the government’s vital work. OPM and agencies can continue taking actions to address skills gaps with respect to capacity, action plan, monitoring, and demonstrated progress. In particular, we have identified several priority recommendations to OPM, in its role as leader for human capital management in the federal government: OPM needs to strengthen the approach and methodology for addressing skills gaps by working with agencies to develop targets that are clear, measurable, and outcome-oriented. OPM needs to establish a schedule specifying when it will modify its EHRI database to collect staffing data, in concert with agency CHCOs, and needs to help bolster agencies’ ability to assess workforce competencies, either by sharing competency surveys, disseminating lessons learned, or by other means. OPM, in consultation with the CHCO Council, should develop a core set of human capital metrics that agencies can use to monitor progress in closing skills gaps through HRstat reviews, and OPM should ensure that these efforts are coordinated with other agency skills gap initiatives. Individual agencies must also take steps to address skills gaps identified in our prior work. For example, we recommended that the Department of Veterans Affairs (VA) institute a system-wide evaluation of the initiatives to recruit and retain VHA nurses. Doing so could provide VHA with better data to identify resource needs across its medical centers and ensure that its nursing workforce is keeping pace with the health care needs of veterans. VA agreed with our recommendation and indicated in August 2016 that it had formed a working group that is charged with reporting on observations from data on recruitment and retention effectiveness by October 2017. Continued congressional attention to improving the government’s human capital policies and procedures will be essential going forward. For example, in our August 2016 report, to help improve the federal hiring process, we recommended that OPM assess the effectiveness of government hiring authorities to determine whether opportunities exist to refine, consolidate, eliminate, or expand them. In cases where legislation would be necessary to implement changes, we recommended that OPM should work with the CHCO Council to develop legislative proposals. OPM concurred with this recommendation and said it would work with the CHCO Council and others to develop proposals as appropriate. OPM and agencies have fully met the leadership criterion for removal from the High-Risk List. In December 2016, OPM finalized revisions to its strategic human capital management regulation that include the new Human Capital Framework. This framework is to be used by agencies to plan, implement, evaluate, and improve human capital policies and programs. Additionally, the revised regulation provides that agency human capital policies and programs must monitor and address skills gaps within government-wide and agency-specific mission-critical occupations by using comprehensive data analytic methods and gap closure strategies. The revised regulation also requires that agency leadership participate in a quarterly, data-driven review process known as HRstat, which, as we reported in 2015, could be an important tool in reviewing key performance metrics related to closing skills gaps. OPM and the CHCO Council also improved the method that agencies use to identify mission-critical occupations with skills gaps, in response to our recommendation. We previously reviewed the CHCO Council’s 2011- 2012 efforts to identify skills gaps. We reported that those efforts lacked a quantitative grounding and the CHCO Council did not use workforce analytics, such as employee attrition rates, until after it had already selected an initial set of occupations based on qualitative methods. In 2015, OPM and the CHCO Council worked with agencies to refine their inventory of government-wide and agency-specific skills gaps. They narrowed the scope for identifying skills gaps by using a quantitative multi-factor model—which included the 2-year retention rate, the quit rate, retirement rate, and average manager satisfaction with applicant quality. Using this model, OPM, the CHCO Council, and agencies identified six government-wide occupational areas with mission-critical skills gaps: Human Resources Specialist; The Science, Technology, Engineering, and Mathematics (STEM) functional area. OPM and the CHCO Council asked individual agencies to use the same process to identify 2 to 3 occupations within their own agency, resulting in 48 unique occupations with agency-specific skills gaps among the 24 Chief Financial Officers Act agencies. OPM also worked with the Office of Management and Budget (OMB) to issue guidance in November 2016 that outlined three broad objectives and seven practices agencies should use to achieve excellence in hiring. As part of OPM’s People and Culture Cross-Agency Priority goal, this memorandum encouraged agencies to, among other things, use data to inform workforce planning and strategic recruitment—as well as fully leverage relevant hiring authorities—consistent with our prior recommendations. With these actions, OPM, the CHCO Council, and agencies have built a framework to address skills gaps. It will be important for OPM to sustain this leadership commitment through budgetary challenges and the transition to a new administration so that institutional gains are not lost. OPM and agencies have partially met this criterion. After agencies identified sets of occupations with skills gaps, OPM and the CHCO Council worked with the agencies to establish working groups of occupational leaders and CHCO representatives—known as Federal Agency Skills Teams (FAST). According to OPM, the FASTs are to analyze root causes, develop strategies to address skills gaps through action plans, and monitor progress in closing skills gaps within each occupation. Beginning in January 2017, each FAST for both government- wide and agency-specific skills gaps is to report quarterly to OPM on progress and ensure that action plan strategies and performance metrics are aligned with the root cause analyses performed by the FASTs. These institutional resources can help sustain efforts to address skills gaps going forward. OPM has made less progress on other aspects of capacity building. For example, OPM has not finalized efforts to centralize collection of agency staffing data that could be used to detect emerging skills gaps. OPM officials have reported that modifying the Enterprise Human Resources Integration (EHRI) database to perform this function may not be feasible. Moreover, OPM officials reported that they were still working with stakeholders to develop a framework to assist agencies in assessing competencies. We reported, in 2015, that agencies vary in the extent to which they assess competencies, and thus some agencies have limited ability to respond to external workforce planning factors, despite the importance of conducting these assessments. Without more rigorous data collection across government on the number and skills of people filling mission-critical occupations, OPM and agencies may be unable to build the predictive capacity to identify and address emerging skills gaps. OPM and agencies have partially met this criterion. Working with the CHCO Council, OPM designed an action plan template that agency FASTs are to use as a model. In reviewing past efforts to address skills gaps, we found that agencies’ planning documents did not always adhere to best practices for project planning. We found that some plans did not consistently identify the root causes of the skills gaps, assign roles and responsibilities for implementing actions, or develop and use outcome- oriented performance metrics. OPM and the CHCO Council included all of these practices in their most recent template, which asks each agency FAST to identify key actions, responsible parties for those actions, milestones, time frames, and performance metrics for monitoring progress and skills gap risk reduction and closure. Moreover, the template asks FASTs to explain how the actions discussed in the document relate to the root cause of that skills gap. Going forward, OPM and the CHCO Council will need to ensure that agencies and their FASTs use the template appropriately and incorporate the best practices into their action plans. OPM has yet to show, however, whether agencies are consistently adopting these practices in their action plans. As of the end of 2016, nine agencies had not submitted action plans for closing skills gaps. OPM officials noted that they are still working with agencies on the submission of the outstanding plans. OPM and agencies have partially met this criterion. Agencies can take a number of actions to meet the monitoring criterion for removal from the High-Risk List, such as (1) holding frequent review meetings to assess status and performance, (2) reporting to senior managers on program progress and potential risks, and (3) tracking progress against goals. As noted, OPM’s revisions to its strategic human capital management regulations will require agency leadership to participate in quarterly, data- driven HRstat review sessions, and beginning in 2017 each FAST is to report quarterly to OPM and show that action plan strategies are aligned with monitored performance metrics. Together, these two actions could help ensure that skills gaps receive the visibility and attention of senior managers—as well as the accountability that comes from presenting quarterly results—that have been applied to other human capital challenges such as improving employee engagement. However, OPM could do more to assist agencies in developing consistent practices for HRstat and to improve the visibility of skills gaps to managers. In 2015, we recommended that OPM work with the CHCO Council to develop a core set of metrics that agencies should use in HRstat to track common skills gap challenges, while still allowing agencies discretion to include metrics that meet their specific needs. In response to our recommendation, OPM officials stated that they consider HRstat an agency-centric initiative and that, while OPM has no plans to prescribe a core set of skills gap metrics that all agencies must use for HRstat, OPM may recommend metrics for each type of skills gap challenge (e.g., training, recruitment, staffing, or competency assessments) that an agency may encounter. OPM has, however, used its November 2016 guidance to recommend specific metrics to be tracked in HRstat that are tailored to improving hiring practices. We maintain that this practice should be applied to skills gaps in general and that an appropriate core set of metrics would be beneficial because it would (1) help ensure agencies were monitoring skills gaps with a consistent set of robust metrics, (2) provide OPM and Congress greater visibility over government-wide progress in addressing skills gaps, and (3) help OPM and agencies target government-wide actions toward those areas where progress is lagging across agencies. OPM officials have also said that they have no plans to require agencies to integrate the work of their FASTs with their HRstat reviews. OPM officials again cited deference to agencies on identifying the most appropriate metrics to use for their HRstat reviews. The quarterly reporting mechanism that OPM has instituted with each agency FAST could be an effective monitoring tool going forward; however, requiring agencies to routinely monitor skills gap metrics as part of the mandatory HRstat reviews could increase the visibility and urgency of skills gaps for top agency management. OPM and agencies have not met this criterion because at present there are no government-wide targets or goals for closing skills gaps, and agencies are not reporting progress. In our 2015 review we reported that government-wide goals to close skills gaps lacked clarity and measurability. OPM previously had a Cross Agency Priority (CAP) goal to close skills gaps by 50 percent in at least 3 of the government-wide mission-critical occupations by the end of fiscal year 2013. The CAP Goal on skills gaps provided important visibility across the government. Following the expiration of this CAP Goal, the Fiscal Year 2015 Budget included a 4-year CAP Goal on People and Culture that included workforce planning elements related to skills gaps but had no government-wide performance targets for closing skills gaps. Currently there are no government-wide goals regarding skills gaps that have the same visibility that the prior CAP Goal provided. As a result, it is unclear what would be the appropriate yardstick for closing skills gaps across the government. OPM and agencies also have not reached the stage of reporting progress on strategies to close skills gaps. As part of the multi-year process OPM and the CHCO Council have developed with agency FASTs, OPM expects to see agencies reporting progress according to their performance metrics by September 2017. As noted above, not all agencies have even drafted action plans with performance metrics as of December 2016. Strengthening agencies’ abilities to identify and close skills gaps is critical because they can affect mission accomplishment across the government. Since our 2015 high-risk report, we have published over two dozen additional reports with findings related to skills gaps. Additionally, as noted above, 15 other sections in this report feature discussions related to skills gaps. Included in the examples below are issues found elsewhere in the 2017 high-risk report. Information Technology (IT) Workforce. We have underscored IT skills gaps in prior high-risk reports, and elements of the IT workforce– particularly cybersecurity– have been highlighted in OPM’s skills gap efforts since 2011. Challenges remain in this area. In November 2016, we reported that five selected agencies had not consistently applied key workforce planning steps and activities that help to ensure that program staff members have the knowledge and skills critical to successfully acquire IT investments. Moreover, we reported in April 2016 that the Federal Emergency Management Agency (FEMA) had not established time frames for completing its workforce planning activities and lacked an understanding of its regional IT workforce. In particular, FEMA’s 2014 competency assessment only covered part of its IT workforce, and multiple regional offices told us that they faced shortages in IT staff, such as computer and network engineers. Without a better understanding of its current IT workforce, FEMA will be unable to address its workforce planning needs and may not have the skills needed to respond to major disasters. The Department of Homeland Security (DHS) concurred in April 2016 with our recommendation to establish time frames for current and future workforce planning, and we will verify these efforts going forward. See Improving the Management of IT Acquisitions and Operations on page 180 for more information. Acquisition Management. Agencies have continued to face challenges in hiring sufficient staff and in monitoring the competencies of its workforce in acquisitions, an area we have highlighted in prior high-risk reports. For instance, DHS’s 2016 staffing assessments did not take into account all acquisition-related positions, potentially limiting DHS’s insight into the size and nature of potential staffing shortfalls. DHS announced plans in December 2016 to pilot new staffing assessment guidance to be more inclusive of acquisition positions, but the timing of full implementation is not yet known. Additionally, in December 2015, we found that while DOD has assessed workforce competencies for nearly all of its 13 career acquisition fields, the agency has not established a timeline for reassessing competencies in 10 of those fields to gauge progress addressing previously identified gaps. Officials agreed with our recommendation to work with functional leaders in setting timeframes for completing future career field competency assessments and, according to an October 2016 workforce strategic plan, intend to conduct career field competency assessments at a minimum of every 5 years. Doing so will better allow the agency to track improvements in the capability of a workforce that oversaw $273.5 billion in contracts for goods and services in fiscal year 2015. See Strengthening Department of Homeland Security Management Functions on page 354 and DOD Contract Management on page 483 for more information. Oil and Gas Management. In 2014, we recommended that The Department of the Interior (Interior) should collect data on hiring times and explore the expanded use of existing authorities to retain key oil and gas oversight positions, such as petroleum engineers, geologists, and geophysicists. In September 2016, we found that Interior continued to face challenges hiring and retaining staff for these positions and has taken steps to address low salaries and lengthy hiring times for certain occupations but has not evaluated the effectiveness of such measures. Moreover, Interior has not evaluated training needs or the effectiveness of existing training and has not promoted collaboration across its bureaus to discuss and address shared hiring and retention challenges. We recommended that Interior take steps to evaluate its training programs and promote cross-bureau hiring collaboration. In response to our recommendations, Interior officials indicated that their Office of Policy, Management, and Budget would monitor cross-bureau collaboration on a range of issues including hiring, retention, and training through ongoing quarterly performance reviews and that Interior’s bureaus would coordinate their training needs. See Management of Federal Oil and Gas Resources on page 136 for more information. Veterans Health Administration (VHA) Human Resources Personnel. In our December 2016 report on VHA’s human resources (HR) capacity, we recommended that VHA (1) develop its own comprehensive competency assessment tool for HR staff that evaluates knowledge of all three of VHA’s personnel systems and (2) ensure that all VHA HR staff complete it so that VHA may use the data to identify and address competency gaps among medical center HR staff. Without such a tool, VHA will have limited insights into the abilities of its HR staff and be ill-positioned to provide necessary support and training. The Department of Veterans Affairs (VA) agreed with both recommendations and indicated it has realigned its HR training office to ensure that a comprehensive competency assessment tool be developed and implemented. See Managing Risks and Improving VA Health Care on page 627 for more information. Oversight of Medical Products. As part of our December 2016 report, we found that vacancies at foreign Food and Drug Administration (FDA) offices persist. As of July 2016, 46 percent of foreign offices’ authorized positions, including those covering staff conducting medical product investigations, were vacant, and we found that FDA still faces challenges in recruiting staff to these positions. While FDA has set a goal for reducing this vacancy rate, the performance measure selected to track progress on this goal includes both foreign and domestic staff in FDA’s Office of International Programs. FDA could thus fulfill its overall vacancy goal without lowering vacancies in foreign offices. The Department of Health and Human Services (HHS) agreed with our December 2016 recommendation to establish staffing goals by position type at foreign offices, and FDA indicated that recruiting and hiring have long been challenges at these offices. We will monitor future developments in FDA’s foreign inspection staffing. See Protecting Public Health through Enhanced Oversight of Medical Products on page 400 for more information. In addition, our work published since the 2015 high-risk report has identified additional skills gaps that will require agencies’ attention because of their operational impact. For example, we reported in October 2015 that the Small Business Administration (SBA) did not have an up-to- date agency-wide competency assessment. Officials said that when SBA centralized its loan processing functions—and thus removed these functions from the agency’s district offices—as part of a 2004 reorganization, district offices had to take on new responsibilities, and certain staff no longer had skills that matched their day-to-day work. For example, employees with financial backgrounds—needed to process loans—were now asked to perform marketing and business development tasks. SBA also noted that the skills gap had been compounded by recent changes in job requirements and new initiatives that required new skill sets for its employees. SBA agreed with our recommendation to complete a workforce plan that includes a competency and skills gap assessment, and in October 2016 SBA indicated it had finalized such an assessment and would be incorporating it into its strategic workforce planning process. Going forward, agencies will need to continue to monitor these and other existing and newly emerging skills gap challenges. Managing these challenges is especially important because, as we have reported previously, agencies are facing a wave of potential retirements, as figure 7 shows. According to OPM data, government-wide over 34 percent of federal employees on board by the end of fiscal year 2015 will be eligible to retire by 2020. Some agencies, such as the Department of Housing and Urban Development, will have particularly high eligibility levels by 2020. Various factors can affect when individuals actually retire, and some amount of retirement and other forms of attrition can be beneficial because it creates opportunities to bring fresh skills on board and it allows organizations to restructure themselves to better meet program goals and fiscal realities. But if turnover is not strategically monitored and managed, gaps can develop in an organization’s institutional knowledge and leadership. For additional information about this high-risk area, contact Robert Goldenkoff at 202-512-6806 or [email protected] or Yvonne Jones at 202-512-6806 or [email protected]. Veterans Health Administration: Management Attention Is Needed to Address Systemic, Long-standing Human Capital Challenges. GAO-17-30. Washington, D.C.: December 23, 2016. Drug Safety: FDA Has Improved Its Foreign Drug Inspection Program, but Needs to Assess the Effectiveness and Staffing of Its Foreign Offices. GAO-17-143. Washington, D.C.: December 16, 2016. IT Workforce: Key Practices Help Ensure Strong Integrated Program Teams; Selected Departments Need to Assess Skill Gaps. GAO-17-8. Washington, D.C.: November 30, 2016. Oil and Gas Oversight: Interior Has Taken Steps to Address Staff Hiring, Retention, and Training but Needs a More Evaluative and Collaborative Approach. GAO-16-742. Washington, D.C.: September 29, 2016. Aviation Security: TSA Should Ensure Testing Data Are Complete and Fully Used to Improve Screener Training and Operations. GAO-16-704. Washington, D.C.: September 7, 2016. Federal Hiring: OPM Needs to Improve Management and Oversight of Hiring Authorities. GAO-16-521. Washington, D.C.: August 2, 2016. Information Technology: FEMA Needs to Address Management Weaknesses to Improve Its Systems. GAO-16-306. Washington, D.C.: April 5, 2016. Defense Acquisition Workforce: Actions Needed to Guide Planning Efforts and Improve Workforce Capability. GAO-16-80. Washington, D.C.: December 14, 2015. VA Health Care: Oversight Improvements Needed for Nurse Recruitment and Retention Initiatives. GAO-15-794. Washington, D.C.: October 30, 2015. Small Business Administration: Leadership Attention Needed to Overcome Management Challenges. GAO-15-347. Washington, D.C.: September 22, 2015. Federal Workforce: Improved Supervision and Better Use of Probationary Periods Are Needed to Address Substandard Employee Performance. GAO-15-191. Washington, D.C.: February 6, 2015. Federal Workforce: OPM and Agencies Need to Strengthen Efforts to Identify and Close Mission-Critical Skills Gaps. GAO-15-223. Washington, D.C.: January 30, 2015. The federal government’s real estate portfolio is vast and diverse— including approximately 273,000 buildings that are leased or owned in the United States and that cost billions of dollars annually to operate and maintain by civilian and defense agencies. Since federal real property management was placed on the High-Risk List in 2003, the federal government has given high-level attention to this issue, such as issuing the National Strategy for the Efficient Use of Real Property (National Strategy) in 2015, which provides a foundation to further assist agencies in strategically managing their real property inventories. However, federal agencies continue to face long-standing challenges in several areas of real property management, including: (1) disposing of excess and underutilized property effectively, (2) relying too heavily on leasing, (3) collecting reliable real property data to support decision making, and (4) protecting federal facilities. Issues with the reliability of the Federal Real Property Profile (FRPP) data—particularly the utilization variable—make it difficult to quantify the overall number of vacant and underutilized federal buildings. In September 2016, we reported on some vacant properties in the Washington, D.C., area that illustrate the challenges associated with disposing of or repurposing vacant property. Figure 8 illustrates the following examples: The Cotton Annex: This building, held by the General Services Administration (GSA), which serves as the federal government’s primary disposal agent, is located just a couple blocks off the National Mall in Washington, D.C., is approximately 118,000 gross square feet and has been vacant since 2007. In 2016, we found that GSA’s recent attempt to exchange the property for construction services failed when GSA was unable to obtain sufficient value from the exchange, making the fate of this unneeded building unclear. GSA Warehouses: In 2014, we found that some GSA warehouses listed in FRPP as used had been vacant for as long as 10 years. GSA only lists warehouses as unused if they are in the process of being disposed. Interpreting use this way in FRPP caused GSA to list as used some warehouses that had been vacant for years. We made a priority recommendation to GSA, to improve the way GSA manages its warehouses. According to GSA officials, they are in the process of developing a Guide for Strategic Warehouse Planning. St. Elizabeths: The west campus of St. Elizabeths, a National Historic landmark in Washington, D.C., is made up of 61 buildings on about 182 acres. Many buildings have been vacant for extended periods of time and are in badly deteriorated condition. As we reported in 2014, GSA developed a plan to establish a consolidated headquarters for the Department of Homeland Security (DHS) on the site in 2009. Since then, GSA has completed construction of a new headquarters building for the Coast Guard on the campus, but most of the project has been delayed. The estimated timeline for completing the project has been extended multiple times, from an initial estimated completion date of 2016, to an estimated completion date of 2021 based on a scaled back plan as of 2015. In addition, the federal government continues to face challenges in protecting federal facilities from potential attacks. For example, DHS’s Federal Protective Service (FPS), responsible for the physical protection of 9,500 federal facilities, continues to work to apply a risk-based approach for assessing facilities and ensuring that guards are adequately trained. In January 2017, we also reported that GSA is leasing from foreign owners about 3.3 million square feet in 20 buildings that require higher levels of security that could present security risks, such as espionage and unauthorized cyber and physical access. The federal government continues to meet the high-risk criterion for demonstrating leadership commitment to improving the management of real property by executing a number of reform efforts since the last high- risk update in 2015. For example, the Office of Management and Budget (OMB) has issued several key guidance documents since 2015. Most notably, OMB introduced the National Strategy in March 2015, and more recently issued a memo on Improving Federal Real Property Data Quality in January 2016. In response to OMB’s memo, GSA issued its Federal Real Property Data Validation and Verification (V&V) Guidance in May 2016. These actions represent key examples of the federal government’s continued commitment to improve its management of real property. The federal government has also continued to make progress toward increasing its capacity, developing an action plan, and monitoring its progress toward improving real property management and has made improvements in the demonstrating progress criterion to move it from a not met to a partially met rating. For example, in June 2016, OMB and GSA continued efforts to implement our March 2016 recommendation to improve FRPP data quality by conducting an in-depth survey of agencies and soliciting information on several data elements that have been known to be unreliable. GSA issued a memo in December 2016 to Chief Financial Officer (CFO) Act agencies that revised the definitions to improve the consistency and quality of several FRPP data elements. GSA also launched the Asset Consolidation Tool, a software application that allows federal agency users to generate geospatial information about assets in close proximity to identify potential candidates for colocation and consolidation. In addition, GSA implemented two priority recommendations since 2015 related to improving data reliability and is taking steps toward developing a 5-year capital plan. Although progress is evident, these reforms have not fully addressed the underlying challenges to manage real property efficiently. For example, we found that federal agencies have not demonstrated that they have the capacity to reduce their reliance on costly leases, particularly high-value leases where owning properties would be less costly in the long run. GSA has also made strides to improve data reliability, including but not limited to issuing new data validation and verification guidance that requires agencies to investigate anomalies and resolve them. However, GSA will not finish measuring and tracking the progress of its data reliability efforts until late in 2017; agencies submitted their first data under the new approach in December 2016 and address all data irregularities by October 2017. Related to physical security, we found that the federal government could do more to improve capacity, monitoring, action plans, and demonstrate progress. For example, FPS, GSA, and other agencies could improve the action plan criterion by collaborating and by clearly defining roles and responsibilities to adequately protect federal facilities. Further, FPS has taken some action to demonstrate progress but has yet to fully implement our March 2015 and September 2013 recommendations to improve security screening at federal buildings and guard training, respectively. In December 2016, Congress enacted two real property reform bills that could address the long-standing problem of federal excess and underutilized property. The Federal Assets Sale and Transfer Act of 2016 may help address stakeholder influence by establishing an independent board to identify and recommend at least five high-value civilian federal buildings for disposal within 180 days after the board members are appointed, as well as develop recommendations to dispose and redevelop federal civilian real properties. Additionally, the Federal Property Management Reform Act of 2016 codified the Federal Real Property Council (FRPC) for the purpose of ensuring efficient and effective real property management while reducing costs to the federal government. The FRPC is required to establish a real property management plan template, which must include performance measures, and strategies and government-wide goals to reduce surplus property or to achieve better utilization of underutilized property. In addition, federal agencies are required to annually provide FRPC a report on all excess and underutilized property and identify leased space that is not fully used or occupied. While the federal government has made progress on different aspects of managing federal real property, additional work is needed. In order to further improve the management of real property, OMB and GSA should implement our open recommendations to build upon the National Strategy and improve data reliability. Improving data reliability was also included as a priority recommendation in our August 2016 letter to the GSA Administrator. While the National Strategy mentions some underlying causes of the challenges that federal agencies face in managing their portfolios, it does not expound on the extent to which these challenges impede agencies’ ability to dispose of, better utilize, or repair their real property and offers discussion on how agencies can overcome these challenges by addressing the underlying causes, such as legal and budgetary limitations and competing stakeholder interests. OMB also could increase the usefulness of the National Strategy by discussing alternative funding mechanisms, such as retaining fees and enhanced-use leasing. Further, despite OMB’s efforts to focus agencies’ attention on measuring progress through the Reduce the Footprint policy, the government’s efforts to monitor progress remain limited without reliable real property data in the FRPP. In June 2016, OMB and GSA officials noted that they continue to implement our March 2016 recommendation to analyze the differences in how agencies collected and reported data by conducting a survey of agencies that contribute FRPP data on several key indicators such as status, utilization, and replacement value. GSA plans to convene an inter-agency working group in early 2017 to discuss each of the data elements and devise an action plan to address the findings of the survey. To further build capacity and develop action plans for reducing the federal government’s overreliance on costly leasing, GSA should implement our priority recommendation from 2013 to develop a strategy for the federal government to own rather than lease prioritized high-value properties such as agency headquarters buildings. While GSA has taken some steps to increase its capacity to make its existing leasing program less costly by increasing competition, further action is required to decrease leasing costs by reducing unneeded fees, which is one of our priority recommendations. Finally, FPS, GSA, and other agencies can take additional measures to increase capacity, develop action plans, and monitor as well as demonstrate progress in securing federal facilities and courthouses. For example, FPS can take additional action to address our March 2016 recommendation to improve human capital planning by developing performance measures with targets that are aligned to FPS goals. FPS and the Department of Justice’s (DOJ) U.S. Marshals Service (USMS) can continue work they have under way to implement our March 2015 recommendation to improve their security screening at federal buildings and courthouses. Further, FPS should implement our September 2013 recommendation to ensure that all guards have received screening and active-shooter training. Finally, the Administrator of GSA and the Secretary of Homeland Security should work jointly to implement our other open priority recommendation to improve the management of the Department of Homeland Security headquarters consolidation project. OMB continues to meet this criterion by demonstrating leadership commitment to reducing the amount of excess and underutilized federal real property. In March 2015, OMB implemented our recommendation by issuing government-wide guidance—the National Strategy—which identifies actions to reduce the size of the federal real property portfolio by prioritizing consolidation, colocation, and disposal actions. The strategy provides a foundation to further assist agencies strategically manage their real property. In conjunction with the National Strategy, OMB also issued the Reduce the Footprint policy, which requires all CFO Act agencies to implement a 5-year, rolling planning process that sets annual square-feet reduction targets to reduce their real property portfolios and to adopt space design standards to optimize domestic office space use. OMB and federal real property-holding agencies continue to partially meet the criterion for having the capacity to address the risks associated with managing excess and underutilized property. For example, GSA introduced the Asset Consolidation Tool in June 2016. It allows users to identify potential candidates for colocation and consolidation by generating geospatial information about assets in close proximity. In addition, GSA also introduced the Real Property Management Tool that uses multiple sources to help agencies identify opportunities for property consolidations, collocations, and disposals. While progress is evident, we have previously identified additional ways the federal government can strengthen its capacity to reduce excess and underutilized property. In 2016, we reported that the National Strategy mentions some of the causes underlying the challenges federal agencies face in managing their portfolios—such as limited funding—but it neither addresses the extent to which challenges impede agencies’ abilities to dispose of, better use, or repair their real property, nor does it offer guidance on how agencies can overcome these challenges by addressing the underlying causes. Furthermore, the strategy does not discuss alternative-funding mechanisms that we have previously identified to help manage budgetary constraints, such as retaining fees in real property and exploring enhanced use lease authority. OMB staff told us that their efforts are focused on identifying policy options within the current statutory framework to reduce excess and underutilized property while seeking legislative options to address the underlying challenges. We recommended that OMB expand the National Strategy to more clearly articulate planned actions and identify alternative approaches to address underlying causes of real property problems. In June 2016, OMB staff told us that they plan to expand the National Strategy since it is not a one-time policy but a living document that they plan to use to address long- standing challenges. As of December 2016, OMB had not made any changes to the National Strategy. OMB showed improvement and met the criterion of establishing an action plan for reducing excess and underutilized property. Under the Reduce the Footprint policy, OMB has, for the first time, established a government-wide action plan to use property as efficiently as possible and to reduce agency portfolios through annual reduction targets. For example, the Reduce the Footprint policy requires agencies to develop and submit annual Real Property Efficiency Plans, which describe the agency’s overall strategic and tactical approach in managing its real property, including measures to dispose of unneeded properties, improve efficiency, and save money. The policy also requires agencies to adopt space design standards to optimize how they use domestic office space and to set annual square foot reduction targets for their portfolio of office and warehouse space. OMB and federal real property-holding agencies continue to partially meet the criterion for monitoring progress toward reducing excess and underutilized real property. To implement the National Strategy, the Reduce the Footprint policy requires agencies to set annual reduction targets to measure agency performance. When agencies combine these reduction targets with the fiscal year 2014 benchmarking metrics developed under the President’s Management Agenda, the government has a 3-year set of performance measures to drive portfolio-wide efficiency improvements and property disposals. Despite multiple efforts outlined above, the government’s efforts remain limited without reliable real property data in the FRPP, which is necessary to effectively measure reductions in excess and underutilized property. For example, in our March 2016 report, we found that agencies tailored how they collect and report data to meet their mission needs and portfolio requirements, thus limiting OMB’s and GSA’s insight into the quality of the FRPP data and the extent to which agencies are following sound and comparable collection and reporting practices. For example, our review found that some of the agencies estimated, rather than determined, actual operating costs for each building, as these agencies do not maintain data on costs for specific buildings. As a result, standardizing data has been challenging since agencies have applied different approaches to collecting data that align closely with their mission but that in some cases are inconsistent with existing GSA guidance. In December 2016, GSA issued a memo to senior real property officers of the FRPC that revised the definitions to improve the consistency and quality of several FRPP data elements including replacement value, annual maintenance costs, and annual operating costs. Although a step in the right direction, agencies are not required to implement these revised definitions until the December 2018 FRPP reporting cycle. Since the last high-risk update, OMB and GSA have demonstrated some progress and partially met this criterion by taking a number of steps to reduce excess and underutilized properties. GSA implemented a new asset management tool, the Federal Real Property Profile Management System (FRPP MS), which helps agencies identify opportunities to consider new space and improves transparency by enabling agencies to access each other’s data. GSA officials said that the new platform will include capabilities to help identify underutilized properties and potential candidates for colocations and consolidations and address long-standing management challenges, while OMB staff noted that the new platform has the potential to improve real property data management. Further, OMB reported, in September 2016, that in fiscal years 2014 and 2015 the federal government disposed of over 12,000 buildings with 71.8 million square feet of space, saving $64 million in annual operation and maintenance costs. While progress is apparent, we testified in September 2016 that a lack of reliable data makes it difficult to accurately measure the amount of excess property and has undermined efforts to effectively reform real property management and judge progress. In two assessments of the federal government’s reported results of real property reforms, we identified problems with data reliability. While OMB and GSA have taken steps to address some of these data reliability issues such as revising FRPP definitions to improve data quality and consistency, more time is needed to determine the effectiveness of these measures and to demonstrate that the federal government’s real property data are reliable. OMB and GSA continue to meet this criterion and demonstrate leadership commitment in addressing its overreliance on leasing privately owned space in situations where owning buildings would be more cost efficient in the long run. As previously stated, OMB implemented our recommendation in March 2015 to issue a National Strategy, which requires agencies to identify opportunities to consolidate within their leased assets and to improve space utilization, steps that would reduce leasing. In addition, GSA could also save money by reducing the costs of the leases that remain. For example, GSA has implemented a number of measures, including leasing reform, and, at a June 2015 hearing, a top GSA manager stated that the agency’s ongoing lease reform efforts include plans to reduce costs by increasing competition for its leases. GSA still does not meet this criterion as it has not demonstrated that it has the capacity to reduce its reliance on costly leases, particularly high- value leases that represent a disproportionately large amount of the rent GSA pays. Although GSA has taken some actions to reduce the size of its leases, it has not addressed its overall reliance on high-value leases (defined as $2.85 million and over per year in rent) in situations where ownership would be less expensive in the long run. In particular, GSA has not implemented our 2013 recommendation to develop a strategy to increase ownership investments for a prioritized list of high-value leases where it would be less expensive in the long run to own. GSA has taken some steps to increase its capacity to reduce the cost of its existing leasing program by increasing competition for GSA leases but has not implemented our other recommendation to decrease leasing costs by reducing interest fees. For example, we found that GSA could potentially help tenant agencies save millions of dollars for some leases by loaning them the funds needed to improve newly leased spaces—that is, to make tenant improvements—instead of having the tenants finance these costs with private-sector owners at private-sector interest rates as high as 9 percent over the term of the lease. GSA showed improvement and partially met the action plan criterion by taking some steps to rank and prioritize long-term ownership solutions for current high-value leases. For example, GSA developed and provided us a list of criteria to rank and prioritize the space needs that are currently being met in high-value leases to determine which of those leases would benefit most from converting to a federally owned solution. GSA has also implemented a new software program for its 5-year capital-planning process that considers avoiding lease costs, among many other criteria, in prioritizing projects for approval. According to GSA officials, several of the projects approved in the capital plan covering fiscal years 2015-2019 would reduce lease costs by moving tenants out of leases into federally owned property. These efforts are producing incremental progress, but GSA has not implemented our recommendation to create a long-term, cross-agency strategy for considering targeted investments in ownership. In addition, we reported, in January 2016, that while GSA has taken steps to reform leasing and reduce leasing costs, certain factors—such as a tenant agency’s need for space in restricted geographic areas and specialized building requirements—may drive down competition and result in agencies obtaining leasing rates that are higher than local market rates. Developing additional plans to reduce barriers to competition, where possible, and identifying sources of capital to allow tenants to fund tenant improvements could decrease leasing costs and lead to millions in cost savings for some leases. OMB and GSA have shown improvement and partially met the criterion for monitoring progress toward reducing its overreliance on leasing privately owned space. By issuing the National Strategy, OMB instituted key property management reform by requiring agencies to measure the costs and utilization of individual real property assets to support more efficient use of federal space, which would include reducing the amount of space leased. However, GSA has not implemented our recommendation to set a long-term, cross-agency strategy for investing in ownership, which would improve the ability to monitor and track progress by defining success. As previously mentioned, adopting criteria to rank and prioritize potential long-term ownership alternatives to current high-value leases could help develop goals and a strategy to consider targeted investments in ownership specifically related to these costly leases. With regard to the costs of leasing, GSA is making progress by monitoring the extent to which its leases are competitive and signed at rates below the private sector. However, GSA should also implement our 2016 recommendations to reduce the costs to tenants by exploring strategies to enhance competition for GSA leases and reducing unneeded fees. OMB and GSA have demonstrated some progress since 2015 and partially met this criterion. OMB required agencies to reduce their overall footprint through the Reduce the Footprint policy and the National Strategy. Even though the National Strategy does not directly address the issue of leasing, it requires agencies to adopt space design standards to optimize how they use federal domestic office space, a step that would likely include reducing leased space by using space more efficiently and consolidating leases onto federally owned property. According to GSA data, the amount of space that GSA leases has fallen for 3 straight years, but only by 4 percent since 2013. GSA’s recent progress in reducing its reliance on leasing has been modest. GSA has outlined a number of actions that it has taken to implement our January 2016 recommendation to reduce leasing costs for federal agencies by increasing competition for GSA leases. Specifically, it has established a framework for broadening the delineated geographic areas agencies request—a key driver for competition. GSA officials said in 2016 that the agency has also implemented a performance measure to encourage competition. As a result, GSA said that 81 percent of its leases are competitive. However, these steps to reduce the costs of leases are still too recent to clearly demonstrate progress. Further, fully implementing our recommendation for GSA to develop and use criteria to rank and prioritize potential long- term ownership solutions to create a cross-agency strategy for making those investments is a needed first step in addressing its overreliance on leasing that could then lead to demonstrating progress in saving money in the long term. The federal government continued to demonstrate leadership commitment and met this criterion by taking a number of steps to improve data reliability within the FRPP. In addition to the National Strategy, which called for additional data quality improvements that support data-driven decision making, in January 2016, OMB issued a government-wide memo requiring all CFO Act agencies to implement standard data validation and verification checks when submitting their annual FRPP data to GSA beginning in fiscal year 2017. Subsequently, in May 2016, GSA issued its Federal Real Property Data Validation and Verification (V&V) Guidance, which establishes a new mandatory data validation and verification process and requires agencies to investigate data anomalies. OMB and GSA improved the government’s capacity to ensure that reliable data are available to inform real property decision making through a series of reforms to FRPP and now meet this criterion. For example, GSA upgraded FRPP from its legacy system to a new platform with several enhancements and tools. The new FRPP MS is an asset management tool that now supports the new Asset Consolidation Tool, which helps agencies identify opportunities to consider new space and improves transparency by enabling agencies to access each other’s data. GSA has also improved agencies’ capacity to submit accurate data by improving the clarity of variables and helping with data verification. GSA continues to partially meet this criterion by putting plans in place to continue implementing our recommendations aimed at addressing the reliability of federal real property data. In June 2016, OMB and GSA noted that they continue to implement our recommendation to improve FRPP data quality by conducting an in-depth survey focusing on several data elements including replacement value, status, owned and otherwise managed operating costs, repair needs, utilization, and lease costs. GSA officials told us that they implemented the survey to better understand the methods CFO Act agencies are employing to collect and prepare real property data submitted into the FRPP. Each survey question began with the FRPP definition for a specific data element, followed by a series of questions designed to elicit information about how each agency applies the FRPP reporting requirements. GSA completed its analysis of the survey results, and in December 2016, GSA issued a memorandum to senior real property officers of FRPC based on the survey results designed to improve the consistency and quality of real property data. In addition, GSA plans to convene an inter-agency working group—made up of GSA, OMB, and executive branch agencies that contribute data to the FRPP—in early 2017 to discuss each of the data elements and devise an action plan to address the findings of the survey. The working group will review the survey results in more detail and reach consensus on: (1) changes to the definitions and requirements for these data elements in the FRPP data dictionary; (2) limitations on the use of the data for cross- agency analysis, and (3) best practices and methodologies for reporting these data elements. The federal government continues to partially meet the criterion for monitoring progress toward improving FRPP data reliability. With OMB issuing its January 2016 memo on improving federal real property data quality and GSA issuing its recent V&V guidance, agencies will be required to adhere to a revised process for resolving data anomalies when they submit data into the FRPP. Specifically, the V&V guidance now includes a new mandate—referred to as anomaly resolution—that requires agencies to investigate whether the underlying data flagged by the anomalies are accurate or inaccurate. GSA’s updated information technology platform, FRPP MS, allows GSA and agencies to analyze the numbers and percentages of anomalies resolved versus total number of assets in a given anomaly category. The system will maintain records of data anomalies for each year that V&V is performed. Moreover, agencies will have year-to-year records of all data tagged as anomalous, as well as the reason for the tag. This has the potential to improve data quality, promote consistency among agencies, and enable OMB and other policymakers to measure how data quality improves over time. Although a step in the right direction, measuring and tracking the progress of these V&V checks will have to wait several years, as agencies submitted data under the new approach in December 2016, and will be required to address all data irregularities by October 2017. GSA showed improvement since 2015 and partially met the demonstrating progress criterion by improving the reliability of federal real property data, but challenges still remain. In March 2016, we reported that OMB and GSA took important steps to revise and modify several FRPP data definitions based upon user feedback and internal data evaluations. As previously mentioned, GSA issued its federal real property data validation and verification guidance, requiring agencies to confirm whether data flagged as anomalous are accurate or inaccurate, and has plans in place to address our recommendations through the recent survey it administered. However, until GSA acts on these survey findings and takes concrete steps to address differences in data collection and identify any limitations, the usefulness of FRPP data for decision making will remain unclear. For example, in our March 2016 report, we found that some of the agencies in our review estimated, rather than determined, actual operating costs into FRPP for each building, as these agencies do not maintain data on costs for each specific building. Estimating practices also varied by agency. As a result, it may be difficult for OMB or agencies to accurately determine aggregate cost savings from successfully reducing excess or underutilized property. Finally, it is unlikely that all of the data for 2 dozen variables submitted by agencies each year on over half a million buildings and structures will ever be completely correct and consistent. As a result, GSA should fully implement our 2016 recommendation to assess, analyze, and identify any limitations in how agencies collect and report data to FRPP. The federal government continued to meet the criterion for demonstrating leadership commitment to improving the physical security of federal facilities. In August 2013, the Interagency Security Committee (ISC), a DHS-chaired organization, showed leadership commitment by issuing a consolidated set of standards for physical security at federal facilities, called The Risk Management Process for Federal Facilities: An Interagency Security Committee Standard. In January 2016, it continued to show leadership commitment by updating the Risk Management Process elements related to current threats, countermeasures to mitigate the threats, and the protection level for federal child care centers. In 2015, FPS, which protects about 9,500 federal facilities in conjunction with GSA, implemented our recommendation by issuing a revised government facilities sector plan that identifies goals and describes resources that support the risk management approach. FPS and GSA continued to partially meet the criterion for having the capacity to address the risks associated with ensuring the safety of our federal facilities. For example, FPS developed a Strategic Human Capital Plan that included strategies tailored to address identified gaps and needs in its workforce and identified actions that build organizational capability to support those strategies. FPS also designed and plans to implement a staffing model—which identifies the federal workforce necessary to meet its mission—consistent with most key practices we identified. However, FPS has not fully developed performance measures to evaluate progress toward goals, which is also a key strategic workforce planning principle. For example, FPS has not identified performance measures for all of the Plan’s strategies, nor has it included performance targets. Additionally, FPS has made consistent progress in its efforts to conduct facility security assessments that are consistent with ISC standards. Specifically, in March 2012, FPS developed the Modified Infrastructure Survey Tool (MIST) to assess the vulnerabilities of federal facilities. In October 2016, FPS officials stated that FPS inspectors are currently using MIST augmented with external threat and consequence data to provide a more complete assessment for federal facilities than can be achieved by using MIST alone. As of October 2016, FPS had also developed a Mission Needs Assessment that outlines how FPS will enhance its ability to assess risks to federal facilities by incorporating threat, vulnerability, and consequence information in a single, integrated, and automated tool. FPS officials said that this new tool could improve FPS’s ability to better protect federal facilities and help minimize agencies’ duplicative risk assessment activities. FPS has shown improvement since our last high-risk update and partially met this criterion by developing action plans that should improve the physical security of federal facilities. We recommended, in December 2015, that FPS and GSA—two agencies that share responsibility for protecting federal facilities—take actions to improve their collaboration and finalize the two agencies’ memorandum of agreement (MOA) accordingly. As of August 2016, FPS reported that it has taken steps with GSA to resolve differences in agency opinions on security-related authorities for protecting federal real property. FPS also stated that once an agreement or an updated MOA has been established, both agencies would be better positioned to devise a plan with time frames for finalizing a joint strategy. However, progress toward an agreement is slow; the MOA has not been updated since 2006. Further, in September 2011, we recommended that FPS and DOJ work with other agencies to improve collaboration to address a number of courthouse security challenges. USMS and FPS formed a working group in 2015 to assess the costs and benefits of a pilot program that would enhance security. However, as of January 2017, FPS, USMS, the Administrative Office of the U.S. Courts, and GSA were still working to finalize the draft MOA on courthouse security. The federal government has shown improvement since our last high-risk update and partially met the criterion for monitoring progress in securing our nation’s federal facilities. For example, we reported, in March 2015, that action is needed to better assess cost-effectiveness of security enhancements at federal facilities. In December 2015, ISC implemented our recommendation that they help federal agencies implement the cost- effectiveness and performance measurements by amending the federal government’s risk management standard and published new guidance intended to help federal entities make the most effective use of resources available for physical security across their facilities. As a result, federal entities will be able to better determine the benefits of security investments and assess whether they have reduced federal facilities’ vulnerability to threats, including acts of terrorism or other forms of violence. With regard to FPS guard training, further action is required to monitor progress. FPS relies on 13,500 privately contracted guards to provide security to federal facilities under the custody and control of GSA. We recommended in September 2013 that FPS immediately determine which guards have not had screener (x-ray and magnetometer equipment) or active-shooter scenario training and ensure the training has been provided to them. FPS has taken some steps to build a monitoring and tracking system to identify guards who completed training but has not yet completed and implemented the tracking system. In addition, we reported in January 2017 that GSA is leasing from foreign owners about 3.3 million square feet in 20 buildings that require higher levels of security. Most of the tenant agencies we contacted were unaware that the space they occupy is in a foreign-owned building. Federal officials who assess foreign investments and some tenant agencies said that leasing space in foreign-owned buildings could present security risks, such as espionage and unauthorized cyber and physical access. We recommended that GSA identify foreign owners of high security space and inform the tenant agencies for any needed security mitigation. GSA agreed with the recommendations. Although FPS and other agencies have improved some areas of physical security, they have not yet met the criterion for demonstrated progress. To do so, FPS and USMS should continue work they have under way to implement our March 2015 recommendation related to security screening at federal buildings and courthouses. More specifically, we recommended that (1) FPS develop and implement a strategy for using covert-testing data and data on prohibited items to improve FPS’s security-screening efforts and (2) USMS develop and implement a strategy for using intrusion-testing data and data on prohibited items to improve security screening at federal courthouses held by GSA. Further, FPS must fully implement our September 2013 recommendations to ensure that its guards have met training and certification requirements and that contract guard companies’ instructors be certified to teach basic and refresher training courses to guards. As previously described, developing a tracking system that monitors guards’ training would also improve the way FPS oversees its contract guard program, which is central to effectively protecting employees and visitors in federal facilities. In July 2011, we recommended that FPS establish a process for verifying the accuracy of federal facility and guard training and certification data before entering them into the guard database. FPS developed and implemented procedures in 2014 to verify the accuracy of that data before entering it into its interim contract guard database. This step will help FPS in its continued efforts to verify the accuracy of federal facility and contract guard data. In June 2012, we recommended that OMB, in collaboration with Federal Real Property Council member agencies, develop and publish a national strategy for managing federal excess and underutilized real property. In the spring of 2015, OMB issued the National Strategy. By issuing the National Strategy, the federal government has taken a major step forward to increase the efficiency of federal real property management and address long-standing real property challenges. In March 2015, we recommended that the Secretary of Homeland Security direct ISC to develop guidance for helping federal entities meet the cost-effectiveness and performance measurement aspects of lSC’s risk management standard. In December 2015, ISC published new guidance that provides entities with an introduction and understanding of the most efficient processes and procedures to effectively allocate physical security resources across an entities’ portfolio of facilities, including discussions on how to determine cost- effectiveness and implement performance measures. As a result, federal entities will be able to better determine the benefits of security investments and whether they have reduced federal facilities’ vulnerability to acts of terrorism or other forms of violence. In August 2012, we recommended that DHS direct FPS to coordinate with GSA and other federal tenant agencies to reduce any unnecessary duplication in security assessments of facilities under the custody and control of GSA. In 2016, we determined that FPS had taken steps to coordinate with these agencies. For example, in 2014, FPS surveyed GSA and other federal agencies to determine why they were conducting their own risk assessments, among other things. As a result of both coordinating with and surveying GSA as well as other federal agencies, FPS has reduced or prevented the duplication of effort associated with its risk assessments. For additional information about this high-risk area, contact the following people. On real property management, contact Dave Wise at (202)512- 2834 or [email protected]. On issues related to physical security of federal facilities, contact Lori Rectanus at (202) 512-2834 or [email protected]. Federal Real Property: GSA Should Inform Tenant Agencies When Leasing High-Security Space from Foreign Owners. GAO-17-195. Washington, D.C.: January 3, 2017. Federal Real Property: Efforts Made, but Challenges Remain in Reducing Unneeded Facilities. GAO-16-869T. Washington, D.C.: September 23, 2016. Federal Real Property: Actions Needed to Enhance Information on and Coordination among Federal Entities with Leasing Authority. GAO-16-648. Washington, D.C.: July 6, 2016. Federal Real Property: Observations on GSA’s Canceled Swap Exchange Involving Buildings in the Federal Triangle South Area, GAO-16-571R. Washington, D.C.: June 16, 2016. Federal Real Property: Improving Data Transparency and Expanding the National Strategy Could Help Address Long-standing Challenges. GAO-16-275. Washington, D.C.: March 31, 2016. Federal Protective Service: Enhancements to Performance Measures and Data Quality Processes Could Improve Human Capital Planning. GAO-16-384. Washington, D.C.: March 24, 2016. Federal Real Property: GSA Could Decrease Leasing Costs by Encouraging Competition and Reducing Unneeded Fees. GAO-16-188. Washington, D.C.: January 13, 2016. Homeland Security: FPS and GSA Should Strengthen Collaboration to Enhance Facility Security. GAO-16-135. Washington, D.C.: December 16, 2015. Homeland Security: Actions Needed to Better Manage Security Screening at Federal Buildings and Courthouses. GAO-15-445. Washington, D.C.: March 31, 2015. Homeland Security: Action Needed to Better Assess Cost-Effectiveness of Security Enhancements at Federal Facilities. GAO-15-444. Washington, D.C.: March 24, 2015. Federal Real Property: Strategic Focus Needed to Help Manage Vast and Diverse Warehouse Portfolio. GAO-15-41. Washington, D.C.: November 12, 2014. Capital Financing: Alternative Approaches to Budgeting for Federal Real Property. GAO-14-239. Washington, D.C.: March 12, 2014. Federal Facility Security: Additional Actions Needed to Help Agencies Comply with Risk Assessment Methodology Standards. GAO-14-86. Washington, D.C.: March 5, 2014. Federal Real Property: Greater Transparency and Strategic Focus Needed for High-Value GSA Leases. GAO-13-744. Washington, D.C.: September 19, 2013. Federal Protective Service: Challenges with Oversight of Contract Guard Program Still Exist, and Additional Management Controls Are Needed. GAO-13-694. Washington, D.C.: September 17, 2013. Critical Infrastructure: DHS Needs to Refocus Its Efforts to Lead the Government Facilities Sector. GAO-12-852. Washington, D.C.: August 13, 2012. Federal Protective Service: Actions Needed to Assess Risk and Better Manage Contract Guards at Federal Facilities. GAO-12-739. Washington, D.C.: August 10, 2012. Federal Buildings Fund: Improved Transparency and Long-term Plan Needed to Clarify Capital Funding Priorities. GAO-12-646. Washington, D.C.: July 12, 2012. Federal Real Property: National Strategy and Better Data Needed to Improve Management of Excess and Underutilized Property. GAO-12-645. Washington, D.C.: June 20, 2012. Federal Courthouses: Improved Collaboration Needed to Meet Demands of a Complex Security Environment. GAO-11-857. Washington, D.C.: September 28, 2011. The nation’s surface transportation system—including highways, transit, maritime ports, and rail systems that move both people and freight—is critical to the economy and affects the daily lives of most Americans. However, the system is under growing strain, and the cost to repair and upgrade the system to meet current and future demands is estimated in the hundreds of billions of dollars. The oldest portions of the Interstate Highway System are approaching 60 years of age, and 10 percent of the nation’s bridges were rated as structurally deficient in 2015. While this percentage of bridges rated as structurally deficient improved from 13 percent in 2006, bridge conditions may become more challenging to address as a growing proportion approach the end of their 50-year design life. Challenges to the nation’s surface transportation system are amplified by shifting demographics, the need to transport the goods and services to support a growing economy, rapid development of new technologies, and other factors. The U.S. population is expected to increase by 70 million over the next 30 years. As the Department of Transportation (DOT) has reported, this projected increase includes a growing percentage of Americans over the age of 65 with limited ability to drive or use transit to access critical services, and millennials, many of whom drive less than previous generations and choose to live in urban areas where they can walk, bike, or use public transportation. Though employment options in suburban areas are increasing, poverty is also increasing in such areas. Collectively, these changes will complicate future infrastructure planning decisions. These trends are altering transportation investment decision making. The amount of freight moving through the country is expected to grow, a factor that will place strain on existing freight bottlenecks. Rapidly evolving vehicle technologies present new opportunities, but also pose challenges to creating a statutory and regulatory framework that will allow people to use these technologies while addressing privacy and other concerns they raise. Climate change also poses risks to existing transportation assets and presents opportunities and challenges to enhance resilience and reduce potential future losses, rather than simply pursuing a reactive approach of funding after a disaster occurs. financial condition and fiscal outlook. Funding the nation’s surface transportation system has been on GAO’s High-Risk List since 2007. There is no rating for this high-risk area because addressing it primarily involves congressional action and the high-risk criteria and subsequent ratings were developed to reflect the status of agencies’ actions and the additional steps they need to take. Motor fuel taxes and additional truck-related taxes that support the Highway Trust Fund—the major source of federal surface transportation funding—are eroding. Federal motor fuel tax rates have not increased since 1993, and drivers of passenger vehicles with average fuel efficiency currently pay about $96 per year in federal gasoline taxes. Because of inflation, the 18.4 cent-per-gallon tax on gasoline enacted in 1993 is worth about 11 cents today. The tax base will likely continue to erode as demand for gasoline decreases with the introduction and adoption of more fuel-efficient and alternative fuel vehicles. To maintain spending levels of about $45-50 billion a year for highway and transit programs and to cover revenue shortfalls, Congress transferred a total of about $141 billion in general revenues to the Highway Trust Fund on eight occasions from 2008 through 2015. This funding approach has effectively ended the long-standing principle of “users pay” in highway finance, breaking the link between the taxes paid and the benefits received by highway users. The most recent surface transportation reauthorization measure, enacted in December 2015 and which authorized funding through 2020, was the Fixing America’s Surface Transportation (FAST) Act. In addition to funds authorized from the Highway Trust Fund, the FAST Act provided around $70 billion of the $141 billion in transfers from general revenues. The general revenues provided in the FAST Act represented a one-time transfer of funding, not a sustainable long-term source of revenues. After 2020, the gap between projected revenues and spending will recur. In March 2016, the Congressional Budget Office estimated that $107 billion in additional funding would be required to maintain current spending levels plus inflation from 2021 through 2026, as shown in figure 9. Congress and the administration need to agree on a long-term plan for funding surface transportation. Continuing to augment the Highway Trust Fund with general revenues may not be sustainable, given competing demands and the federal government’s fiscal challenges. A sustainable solution would balance revenues to and spending from the Highway Trust Fund. New revenues from users can come only from taxes and fees; ultimately, major changes in transportation spending or in revenues, or in both, will be needed to bring the two into balance. enhancing the management of discretionary grant programs. These actions are essential to maximizing the use of available resources. The challenge of funding the nation’s surface transportation system is magnified by the fact that spending for surface transportation programs has not commensurately improved system performance. Many programs have not effectively addressed key challenges—such as deteriorating infrastructure conditions and increasing congestion and freight demand— because federal goals and roles have been unclear, programs have lacked links to performance, and programs have not used the best tools and approaches to ensure effective investment decisions. Beginning in 2008, we recommended that Congress consider a fundamental reexamination of these programs to clarify federal goals and roles, establish performance links, and improve investment decision making. More recently, we found that it can be difficult to determine the extent to which federal funding has improved system performance. Specifically, in 2016, we found that while the Federal Highway Administration (FHWA) collects and maintains data on both federal funding for bridge projects and bridge conditions, it lacks a means of demonstrating the link between such funding and changes in bridge conditions. We recommended that the FHWA Administrator develop an efficiency measure to demonstrate the link between funding and bridge infrastructure outcomes, and report that information to Congress. DOT concurred with our recommendation and we are awaiting information on what steps DOT plans to take to implement it. Congress passed provisions in MAP-21 in 2012 to help address the key challenges we identified in 2008. Among other things, the act included provisions to move toward a more performance-based highway and transit program. Specifically, MAP-21 established national performance goals in areas such as infrastructure condition, safety, and system performance; MAP-21 also outlined a three-stage process in which (1) DOT establishes performance measures for these national goals, (2) states and other grantees set targets based on these performance measures and report annually on their progress, and (3) DOT evaluates whether grantees have met their targets and reports to Congress. bridge conditions, and system performance. For example, the System Performance Measure rule includes measures for freight movement, traffic congestion, and air quality and received over 8,800 public comments. MAP-21 also required states to report on their progress in implementing the transportation performance management requirements to DOT by October 2016 and required DOT to report to Congress on progress made by October 2017. Because several of the final rules were recently issued, it is too early for states to report on progress, and thus DOT provided guidance to states, requesting that they instead report on their general performance management activities. We plan to report on DOT and state progress and anticipated challenges implementing the new national transportation performance management framework in the summer of 2017. Congress and DOT have also taken steps to more strategically address freight congestion, though many of DOT’s actions are in the early stages. For example, MAP-21 established national goals and directed the Secretary of Transportation to establish a national freight network, develop a strategic freight plan, and provide the tools necessary to support a performance-based approach for evaluating and selecting new freight projects. The 2015 FAST Act made some changes to, and built upon, some of MAP-21’s freight provisions. Specifically, it extended the deadline for DOT to finalize the National Freight Strategic plan from October 2015 to December 2017. The public comment period for the draft plan closed on April 2016 and, according to DOT, it is on track to finalize the plan by the new deadline. The FAST Act also directed DOT to establish for the first time a National Multimodal Freight Network and also a National Highway Freight Network. The National Highway Freight Network is to be used to strategically direct federal resources and policies toward improved performance of highway portions of the U.S. freight transportation system. Finally, the FAST Act established a competitive grant program to fund freight and highway projects of regional or national importance. In 2016, DOT awarded approximately $760 million for the Fostering Advancements in Shipping and Transportation for the Long-term Achievement of National Efficiencies (FASTLANE) grant program to 18 freight projects. outcome—that of returning revenues to their attributed state of origin. For three highway programs designed to meet national and regional transportation priorities, we recommended that Congress consider a competitive, criteria-based process for distributing federal funds. The FAST Act authorized about a dozen new discretionary grant programs, some of which DOT is already implementing, including the FASTLANE program. While over 90 percent of funds will continue to be distributed by formula, the FAST Act represents a promising development to address national and regional transportation priorities. Nevertheless, we have found challenges with DOT’s implementation of discretionary grant programs, including problems documenting key evaluation and project selection decisions. For example, in May 2014, we found that DOT did not document key decisions—such as accepting and reviewing project applications received after the published deadline, or changes to projects’ technical ratings— and deviated from established procedures and recognized internal control practices in awarding Transportation Investment Generating Economic Recovery (TIGER) discretionary grants. We recommended that the Secretary of Transportation establish additional accountability measures by, among other things, issuing a decision memorandum or similar mechanism to document and approve major decisions in the application evaluation and project-selection process. DOT generally agreed with, but has not fully implemented, this recommendation. In addition, in December 2016, we found that the Federal Transit Administration (FTA) did not document key decisions in awarding $3.6 billion in discretionary, competitive grants for projects to increase the resilience of transit systems to withstand future disasters in areas affected by Hurricane Sandy. For example, FTA did not document how it addressed reviewers’ concerns that some of the proposed—and ultimately funded—projects were outside the scope of the grant program. We also found that because FTA did not incorporate information collected from applicants and reviewers into its selection process, it may have funded projects that may no longer be needed if other resilience projects in the same region are implemented. We recommended that FTA examine its funded projects for potential duplication with other resilience efforts and determine if realigning or rescinding those funds is appropriate. DOT concurred with our recommendation and we are awaiting information on what steps DOT plans to take to implement it. we recommended in December 2016 that the Secretary of Transportation issue a directive governing department-wide and modal administration discretionary grant programs. Such a directive should include requirements to, among other things, (1) develop an up-front plan for evaluating project proposals to ensure DOT reviews applications consistently; and (2) document key decisions, including the reason for any rating changes, as well as how high-level concerns raised during the process were addressed. Developing such a directive would help to ensure the integrity of future DOT discretionary grant programs. DOT concurred with our recommendation and we are awaiting information on what steps DOT plans to take to implement it. For additional information about this high-risk area, contact Susan Fleming at (202) 512-2834 or [email protected]. DOT Discretionary Grants: Problems with Hurricane Sandy Transit Grant Selection Process Highlight the Need for Additional Accountability. GAO-17-20. Washington, D.C.: December 14, 2016. West Coast Ports: Better Supply Chain Information Could Improve DOT’s Freight Efforts. GAO-17-23. Washington, D.C.: October 31, 2016. Highway Bridges: Linking Funding to Conditions May Help Demonstrate Impact of Federal Investment. GAO-16-779. Washington, D.C.: September 14, 2016. U.S. Border Communities: Ongoing DOT Efforts Could Help Address Impacts of International Freight Rail. GAO-16-274. Washington, D.C.: January 28, 2016. Surface Transportation: DOT Is Progressing Toward a Performance- Based Approach, but States and Grantees Report Potential Implementation Challenges. GAO-15-217. Washington, D.C.: January 16, 2015. Surface Transportation: Department of Transportation Should Measure the Overall Performance and Outcomes of the TIGER Discretionary Grant Program. GAO-14-766. Washington, D.C.: September 23, 2014. Freight Transportation: Developing National Strategy Would Benefit from Added Focus on Community Congestion Impacts. GAO-14-740. Washington, D.C.: September 19, 2014. Surface Transportation: Actions Needed to Improve Documentation of Key Decisions in the TIGER Discretionary Grant Program. GAO-14-628R. Washington, D.C.: May 28, 2014. Highway Trust Fund: Pilot Program Could Help Determine the Viability of Mileage Fees for Certain Vehicles. GAO-13-77. Washington, D.C.: December 13, 2012. Highway Trust Fund: All States Received More Funding Than They Contributed in Highway Taxes from 2005 to 2009. GAO-11-918. Washington, D.C.: September 8, 2011. Surface Transportation: Clear Federal Role and Criteria-Based Selection Process Could Improve Three National and Regional Infrastructure Programs. GAO-09-219. Washington, D.C.: February 6, 2009. Surface Transportation: Restructured Federal Approach Needed for More Focused, Performance-Based, and Sustainable Programs. GAO-08-400. Washington, D.C.: March 6, 2008. Congress and financial regulators have made progress in meeting criteria for removing the issue area of reforming the U.S. financial regulatory system from our High-Risk List. However, definitive steps have yet to be taken to address the federal government’s role in housing finance. As the worst financial crisis in more than 75 years unfolded, unprecedented federal support was provided to many firms, including Fannie Mae and Freddie Mac, two large, housing-related government-sponsored enterprises (the enterprises). Many households suffered as a result of falling asset prices, tightening credit, and increasing unemployment. These events clearly demonstrated that the U.S. financial regulatory system had failed to respond effectively to developments in the markets and to the increase in systemic risks that contributed to the crisis. Given the challenges that regulators would face in identifying and implementing changes to reduce the potential for such events to occur again, we designated reform of the financial regulatory system as a high-risk area in 2009. developments at the enterprises and FHA, we added this issue to the scope of this high-risk area in 2013. Congress and financial regulators have made progress in meeting criteria for removing the issue area of reforming the U.S. financial regulatory system from our High-Risk List, but additional steps are needed to improve the structure of the financial regulatory system and the implementation of some reforms. Demonstrating leadership commitment and capacity, Congress enacted sweeping reforms in 2010 through the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd- Frank Act) and regulators have worked to implement the act’s numerous reforms. Continued leadership commitment from financial regulators and Congress will be needed to fully implement the reforms and additional work will be needed to exhibit capacity to complete oversight and monitoring plans, monitor progress, and demonstrate the effectiveness of the new oversight bodies and regulations. Policymakers have made proposals to overhaul the federal role in the housing finance system, but additional leadership commitment will be needed to reach consensus and enact changes to the system. The ongoing federal conservatorship of the enterprises and FHA’s need for supplemental funds in 2013 underscore the need to reconsider the federal role. Federal agencies have taken some steps to develop plans, build capacity, and provide monitoring mechanisms that could help build a more robust housing finance system. However, progress toward resolving the federal role within that system will be difficult to achieve without an overall blueprint for change. new and more complex financial products for consumers and investors. Taking steps to better position regulators to oversee firms and products that pose risks to the financial system and consumers, and to adapt to new products and participants as they arise, could reduce the likelihood that the financial markets will experience another financial crisis similar to the one in 2007–2009. Losses from risky mortgage products also resulted in the enterprises being placed into federal conservatorship in 2008, creating an explicit fiscal exposure for the federal government. The enterprises received more than $187 billion in financial assistance from the Department of the Treasury (Treasury) through purchases of senior preferred stock, but have paid more than $250 billion in dividends to Treasury under the stock purchase agreements. Distressed housing and mortgage markets also expanded FHA’s role in the mortgage market, while leading to deterioration in the agency’s financial condition from which it has taken years to recover. In 2015, mortgages directly or indirectly supported by the federal government accounted for more than 70 percent of the dollar value of new single-family mortgage originations, according to data from Inside Mortgage Finance. Although more needs to be done to address this high-risk issue, there have been several benefits achieved by implementing our recommendations. In a March 2016, we reported that Treasury had not instituted a system to review the extent to which it would use the available program balance for the Making Home Affordable (MHA) program. Consistent with our recommendations, Treasury updated estimates of future MHA program expenditures, deobligated $2 billion from the MHA program, and announced a $2 billion increase in funding for the Hardest Hit Fund. In June 2013, we made recommendations intended to increase FHA’s returns on sales of foreclosed properties with FHA-insured mortgages. FHA’s actions in response to our recommendations improved its returns and led to financial benefits totaling more than $3.4 billion in fiscal years 2013–2016. approximately $7.1 billion dollars, which was returned to the general fund in fiscal year 2013. In November 2005, we recommended that FHA take a number of steps to mitigate the risks associated with mortgages with down payment assistance from nonprofit organizations funded by property sellers. Citing our work, Congress prohibited seller-funded down- payment assistance, effective October 1, 2008. In fiscal year 2013, the financial benefit to the federal government of not insuring such loans was approximately $2.5 billion. Continued leadership commitment is needed to ensure that financial regulations foster stable, competitive and well-functioning markets. Our review of selected major rules—that is, those likely to result in an annual impact on the economy of $100 million or more, among other things— found that regulators generally quantified some of the costs but not always the benefits of each rule, noting data and other limitations. Although the federal financial regulators—as independent agencies—are not subject to executive orders requiring detailed cost-benefit analysis in accordance with Office of Management and Budget (OMB) guidance, we have recommended that the regulators more fully incorporate OMB’s regulatory guidance into their written rulemaking policies. However, not all regulators have implemented this recommendation. The Administration and members of Congress have expressed intentions to reduce financial regulatory burdens. Such actions would be most effective if they largely preserve the benefits sought by the regulations while allowing institutions to comply with the requirements in less costly ways. requirements that regulators adopted for banks in October 2013 have some provisions that will not be fully effective until January 2019. Additional leadership from Congress is also needed to improve the inefficiencies that hamper the current financial regulatory system. Although the Dodd-Frank Act implemented a number of key reforms intended to address significant weaknesses and gaps in the regulatory system, the U.S. financial regulatory structure remains complex, with responsibilities fragmented among a number of regulators that have overlapping authorities. We have noted that this fragmentation, overlap, and duplication introduce significant challenges for efficient and effective oversight of financial institutions and activities. The framework we developed in 2009 for evaluating regulatory reform proposals noted that an effective regulatory system would address certain structural shortcomings created by fragmentation and overlap. To help achieve this, we have suggested that Congress consider whether additional changes to the financial regulatory structure are needed to reduce or better manage fragmentation and overlap in the oversight of financial institutions and activities to improve the efficiency and effectiveness of oversight. For example, Congress could consider consolidating the number of federal agencies involved in overseeing the safety and soundness of depository institutions, combining the entities involved in overseeing the securities and derivatives markets, transferring the remaining prudential regulators’ consumer protection authorities over large depository institutions to the Consumer Financial Protection Bureau (CFPB), and determining the optimal federal role in insurance regulation. Congressional leadership also could improve the ability of the U.S. regulatory system to address systemic risks. Although the Financial Stability Oversight Council (FSOC) represents advancement in addressing systemic risk threats to the U.S. financial system, its legal authorities may not be broad enough to ensure that it can address all threats effectively. Under the Dodd-Frank Act, FSOC can respond to certain potential systemic risks primarily through its authority to designate certain entities or activities that pose a threat to financial stability for enhanced supervision by a specific federal regulator. We reported in February 2016 that FSOC’s designation authorities, by statute, cannot be used to address certain types of risks, such as specific industry-wide activities involving nonbank financial institutions, and the full scope of FSOC’s designation authority remains untested and unclear to date. FSOC has other nondesignation authorities that allow it to recommend that individual regulators address specific risks, but these recommendations are nonbinding. As a result, we suggested that Congress consider whether legislative changes would be necessary to align FSOC’s authorities with its mission to respond to systemic risks. Such actions could include changes to FSOC’s mission, its authorities, or both, or to the missions and authorities of one or more of the FSOC member agencies to support a stronger link between its responsibility and capacity to respond to systemic risks. Additional leadership, planning, capacity, and monitoring activities by U.S. financial regulators also could improve systemic risk oversight. While the newly created systemic risk and financial research bodies have been established, we have continued to identify additional steps they need to take to fully meet their envisioned missions. The Dodd-Frank Act maintained the independence of the system’s multiple regulators but created FSOC to identify and respond to systemic risks. We noted in February 2016 that this approach to systemic risk oversight requires consistent and highly effective interagency collaboration and the use of good quantitative and qualitative information. However, we reported then that FSOC’s Systemic Risk Committee is not fully and consistently informed by the Office of Financial Research (OFR) and the Federal Reserve’s monitoring tools or other outputs, and we recommended this be done. In addition, we found that both OFR and the Federal Reserve conduct broad-based systemic risk monitoring activities that aim to identify threats across the financial system and recommended that the two agencies jointly articulate individual and common goals for their systemic risk monitoring activities, including a plan to monitor progress toward articulated goals, and formalize regular strategic and technical discussions around their activities and outputs to support those goals. Such efforts could help ensure that FSOC more accurately measures the effect of significant Dodd-Frank Act regulations but also more efficiently coordinates with its members to leverage retrospective reviews. agencies, to better ensure that the monitoring and analysis of the financial system are comprehensive and not unnecessarily duplicative. In addition, to improve the data that council members need to conduct their responsibilities, FSOC should direct OFR to work with its members to identify and collect the data necessary to assess the effect of the Dodd- Frank Act regulations on, among other things, the stability, efficiency, and competitiveness of the U.S. financial markets. Financial regulators need to demonstrate further progress by taking additional actions. Although FSOC’s ability to identify firms whose financial difficulties could pose threats to the overall financial system is an important oversight tool, we reported in November 2014 that the transparency of its process for designating systemically important nonbank entities could be improved. Designating these entities in a way that supports public and market confidence could help mitigate the potential for such entities to endanger the stability of the U.S. financial system. Thus, we recommended that FSOC take various steps to improve the tracking of its process and disclose the rationales for its designations in greater detail. Since then, FSOC has issued supplemental procedures for nonbank financial company designations that stated its commitment to continuing to provide the public with an understanding of the council’s analysis and a subsequent designation document included additional information compared to prior ones. However, that document did not fully explain how FSOC concluded that a company’s characteristics were sufficiently large or significant enough, or had other attributes, to meet a determination standard. Corporation address these weaknesses. In addition, we recommended in 2016 numerous steps the Federal Reserve could take to improve the stress tests that assess how large financial institutions would be affected by changes in economic or other conditions. Additional progress is needed to address other risks. Although the Federal Reserve has worked with the two clearing banks for the repurchase (repo) market to reduce their problematic credit exposures, the FSOC 2015 annual report notes that the risk of fire sales of collateral by creditors of a defaulted broker-dealer remains an important financial stability concern. For instance, many of the creditors may themselves be vulnerable to runs in a stress event. As a result, the council expressed the need for market participants to continue to improve the settlement processes for these transactions. Resolving the role of the federal government in housing finance will require continued leadership commitment by Congress and the administration. Prolonged conservatorships and a change in leadership at FHFA could shift priorities for the conservatorships, which in turn could send mixed messages and create uncertainties for market participants and hinder the development of the broader secondary mortgage market. For this reason, we said in November 2016 that Congress should consider legislation establishing objectives for the future federal role in housing finance, including the structure of the enterprises, and a transition plan to a reformed housing finance system that enables the enterprises to exit conservatorship. Maintaining FHA’s long-term financial health and defining its future role also will be critical to any effort to overhaul the housing finance system. We previously recommended that Congress or FHA specify the economic conditions that FHA’s Mutual Mortgage Insurance (MMI) Fund would be expected to withstand without requiring supplemental funds. As evidenced by the $1.68 billion FHA received in 2013, the 2 percent capital requirement for FHA’s MMI Fund may not always be adequate to avoid the need for supplemental funds under severe stress scenarios. Implementing our recommendation would be an important step not only in addressing FHA’s long-term financial viability, but also in clarifying FHA’s role. FHA also will need to sustain the progress it made in strengthening the health of the MMI Fund and implementing sound risk-management practices. Furthermore, it will be important for FHA and other agencies with housing finance-related responsibilities to fully implement our recommendations on evaluating the effectiveness of foreclosure mitigation actions, opportunities for consolidating similar housing programs, and the effect of recent mortgage market regulations. Due to the interconnected nature of the housing finance system and the central role homeownership plays in the U.S. economy, changes will need to be carefully designed and implemented. In October 2014, we issued a framework consisting of nine elements that Congress and others can use as they consider changes to the housing finance system. The framework has the following elements: clearly defined and prioritized goals for the housing finance system; policies and mechanisms that are aligned with goals and other adherence to an appropriate financial regulatory framework; government entities with the capacity to manage risks; protections for mortgage borrowers and actions to address barriers to protection for mortgage securities investors; consideration of the cyclical nature of housing finance and the effect of housing finance on financial stability; recognition and control of fiscal exposure and mitigation of moral hazard; and emphasis on implications of the transition. Each element in the framework is critically important in establishing the most effective and efficient housing finance system. Applying the elements of this framework would help policymakers identify the relative strengths and weaknesses of any proposals they consider. Similarly, the framework can be used to craft proposals or to identify changes to existing proposals to make them more effective and appropriate for addressing any limitations of the current system. However, any viable proposal for change must recognize that sometimes tradeoffs will exist among and within the nine elements. If Congress enacts changes to the housing finance system, relevant federal agencies will need to develop the capacity and action plans necessary to effectively implement the changes and monitor progress. FHA needs to complete or build on steps it has taken in response to two priority recommendations that were not fully implemented as of October 2016. First, FHA has partially addressed recommendations from our June 2012 report on reducing losses from troubled mortgages, but needs to finish analyzing and reevaluating its loss mitigation approaches in order to optimize these efforts. Second, FHA and other agencies that are part of a single-family housing task force need to evaluate and report on the opportunities for consolidating similar housing programs, as we recommended in an August 2012 report. federal role in housing finance, including the structure of the enterprises, and a transition plan to a reformed housing finance system that enables the enterprises to exit conservatorship. U.S. financial system and acting to mitigate risks that might destabilize the system. In addition, the act consolidated responsibility for consumer financial protection laws into a new agency, CFPB. However, some reforms, including several rules addressing over-the-counter derivatives reforms, have yet to be fully implemented. Additional leadership is needed from Congress to address the limitations that hamper the current financial regulatory structure. Although the Dodd- Frank Act made changes that were consistent with some of the characteristics we have identified for an effective financial regulatory framework, the existing regulatory structure does not always ensure (1) efficient and effective oversight, (2) consistent consumer protections, and (3) consistent financial oversight. As a result, negative effects of fragmented and overlapping authorities persist throughout the system. Without congressional action it is unlikely that remaining fragmentation and overlap in the U.S. financial regulatory system can be reduced or that policymakers and regulators can more effectively and efficiently oversee financial institutions. Members of Congress have also expressed concerns about the burdens that the new regulations may have created for financial institutions and have indicated plans to reduce these burdens. they continue to face such constraints they are taking steps to address their obligations to finalize the remaining rules. Regulators have made some progress in developing action plans for completing reforms and have partially met this criterion for removal from the High-Risk List. Since 2010, regulators have taken steps to prioritize rulemakings, including FSOC issuing an integrated implementation road map for required rules and publishing a consultation framework for guiding rulemaking coordination activities among agencies. FSOC’s annual reports serve as the council’s key accountability document, as each report discusses the progress regulators have made in implementing reforms, identifies newly emerging threats, and includes recommendations to address them. We also reported in February 2016 that the work of FSOC’s Systemic Risk Committee has become better integrated into the council’s annual reports. over time, may be useful to these regulators in monitoring the effect of regulations on banks and credit unions. Regulators have partially met the demonstrated progress criterion for removal from the High-Risk List. The new regulatory bodies have been taking actions to carry out their missions. For example, FSOC meets regularly to discuss issues related to risks to the U.S. financial system and issues an annual report that addresses market and regulatory developments across the financial system. As a result of FSOC determining that the activities or characteristics of some entities are systemically important, various financial market utilities (which perform key functions in the financial system) were designated to be subject to prescribed risk management standards and four nonbank financial companies were designated to be subjected to enhanced prudential standards and supervision by the Board of Governors of the Federal Reserve (Federal Reserve), although the United States District Court for the District of Columbia rescinded the designation applicable to one company and FSOC rescinded the designation of another after the company changed its operations to reduce its systemic importance. As part of making progress in demonstrating the effectiveness of implemented reforms, FSOC also issued a mandated report in March 2016 that addressed the effect regulatory changes are having on firm sizes, diversification, and other issues. CFPB has implemented rules and taken enforcement actions that resulted in billions of dollars of relief to consumers. With the recent crisis demonstrating the importance of efficiently resolving systemically important financial institutions that fail, the Federal Reserve and the Federal Deposit Insurance Corporation completed several annual reviews of resolution plans that the Dodd-Frank Act mandates large systemically important financial institutions prepare. And in response to one of our recommendations, the agencies made additional information public about the criteria they use to evaluate the plans. Regulators also made progress reducing the potential systemic implications of certain concentrations of credit risks the Dodd-Frank Act had not addressed. Regulators have been working to reduce the potential for serious problems arising from the failure of one of the two clearing banks that provide credit to facilitate transactions in the tri-party repurchase (repo) market that provides short-term funding to many financial institutions. FSOC’s 2015 annual report noted that market participants have reduced their reliance on intraday credit from the clearing banks, which reduces the risks posed by these activities. housing finance system. As of December 2016, none of the proposals had passed the Senate or the House of Representatives. Housing and regulatory agencies also have demonstrated commitment to strengthening the housing finance system. FHA has enhanced its risk- management practices in response to our recommendations, including creating credit and operational risk committees, and has taken actions to recapitalize its MMI Fund. FHFA has continued efforts to develop a single security for the enterprises—which may enhance market liquidity for mortgaged-backed securities—and put in place a common securitization platform for the enterprises. Additionally, as we reported in our 2015 high-risk update, financial regulators have finalized rules defining qualified mortgages and qualified residential mortgages that are designed to prevent a recurrence of risky mortgage origination and securitization practices. Agencies have partially met this criterion for removal from the High-Risk List. FHA has made progress in strengthening its financial capacity. In fiscal years 2009–2014, FHA’s MMI Fund was out of compliance with its statutory 2 percent minimum capital requirement. And at the end of fiscal year 2013, FHA drew on $1.68 billion in permanent and indefinite budget authority to ensure the MMI Fund had sufficient resources to pay for expected future losses on existing insurance obligations. However, as of September 30, 2016, the MMI Fund’s capital ratio was in compliance with the statutory requirement and stood at 2.32 percent. scores. FHA took steps to mitigate losses by revising guidelines on home retention options for struggling borrowers and by implementing cost- effective alternatives for disposing of nonperforming loans and foreclosed properties. FHA also acted on our recommendations for increasing returns on foreclosed properties, which could help strengthen its financial position. Under FHFA’s conservatorship, the enterprises generally have operated profitably since 2012, and, through September 2016, paid more than $250 billion to Treasury in dividends. However, FHFA’s Inspector General warned in March 2015 that the continued profitability of the enterprises was not assured and that the enterprises faced many financial challenges. These challenges included lower earnings on their retained investment portfolios and a reduced capacity to absorb future losses due to a capital reserve amount that falls to $0 by 2018. Without a capital reserve, any quarterly losses—including those due to market fluctuations and not necessarily to economic conditions—would require the enterprises to draw additional funds from Treasury. Treasury has provided about $187.5 billion in funds as capital support to the enterprises, with an additional $258.1 billion available to the enterprises should they need further assistance. Congress should consider granting FHFA the authority to examine third parties, including nonbank mortgage servicers doing business with the enterprises. As of December 2016, Congress had not yet acted on that recommendation. Although fundamental changes to the housing finance system have yet to be enacted, federal agencies have taken some planning steps in relation to resolving the federal role in housing finance and have therefore partially met this criterion for removal from the High-Risk List. As we noted in our 2015 high-risk update, these steps included a 2011 Treasury-HUD plan outlining a vision for the federal role, a 2014 FHFA plan identifying strategic goals for enterprise conservatorship, and a 2014 Treasury initiative to obtain public comments on the role of the private- label securities market in the current and future housing finance system. As we found in November 2016, FHFA’s 2014 strategic plan shifted emphasis away from contracting the enterprises’ operations, which was a goal in the 2012 plan developed under FHFA’s previous director. Since launching its initiative in 2014, Treasury has provided a forum for stakeholders in the private-label market to identify the structural reforms needed to bring back capital into that market in a responsible way. Additionally, in July 2016, Treasury, FHFA, and HUD issued a report with guiding principles for future efforts to mitigate mortgage losses based on lessons from the financial crisis. through their housing market scorecard. Furthermore, FHFA and FHA have continued to monitor and report on the financial condition of the enterprises and FHA’s MMI Fund. A number of agencies—such as CFPB and HUD—have begun planning required retrospective reviews of mortgage market reforms—specifically, the qualified mortgage and qualified residential mortgage rules noted previously. However, in June 2015, we found the agencies had not yet developed sufficient metrics, baselines, and analytical methods to effectively conduct the retrospective reviews. We recommended that they complete plans for the reviews and include the three elements we identified. As of December 2016, some of the agencies reported making progress to develop these improvements but had not yet completed them. Policymakers and regulators have not met this criterion for removal from the High-Risk List. Overall progress on resolving the federal role in housing finance will be difficult to achieve until Congress provides further direction by enacting changes to the housing finance system. Federal agencies have begun taking some planning, capacity building, and monitoring steps. Among these are actions mentioned above to strengthen the financial condition of FHA and mitigate risks of the housing enterprises. FHFA and FHA have also taken steps to monitor progress in these areas by reporting on their financial condition and activities. Furthermore, Treasury and HUD have combined to report regularly on the condition of the housing market. Nonetheless, assessing progress against specific goals is not yet possible because Congress has not provided an overall blueprint for the future federal role in housing finance or determined the specific roles federal agencies will play. to the TARP-funded Hardest Hit Fund, as authorized. Consistent with our recommendations, Treasury updated estimates of future MHA program expenditures, deobligated $2 billion from the MHA program, and announced a $2 billion increase in funding for the Hardest Hit Fund. In June 2013, we found that HUD’s performance in selling foreclosed properties with FHA-insured mortgages lagged the performance of Fannie Mae and Freddie Mac. We made recommendations intended to increase FHA’s returns on such property dispositions. FHA’s actions in response to our recommendations improved its returns and led to financial benefits totaling more than $3.4 billion in fiscal years 2013–2016. In a June 2012 report on federal foreclosure mitigation efforts, we found that Treasury had not reassessed its need for the $8 billion letter of credit facility for FHA’s Refinance for Borrowers in Negative Equity Positions program. We recommended that Treasury and FHA update their estimates of program participation and use the updated estimates to reassess the terms of the letter of credit facility. The agencies implemented our recommendation. As a result, Treasury amended the purchase agreement and deobligated approximately $7.1 billion dollars, which was returned to the general fund in fiscal year 2013. training for its staff and obtained assurance from the Office of Management and Budget that its collection of credit card data complied with federal requirements. These steps should help ensure CFPB collects and protects consumer financial data in accordance with federal requirements. After the Dodd-Frank Act prohibited certain types of proprietary trading that had caused large losses for banks, regulators implemented our recommendation to improve their oversight by reviewing trading data before issuing final rules to implement the restriction in December 2013. These rules also identified trading data some firms will have to report to regulators. As a result, regulators should have better information to help them reduce the risk that banks will incur large trading losses. FHA takes possession of thousands of homes as a result of foreclosures on FHA-insured mortgages. In June 2013, we found FHA generally did not take market conditions into account when reducing list prices for unsold foreclosed properties, but instead generally followed standardized schedules. We recommended that FHA adopt practices used by other federally related housing entities, which base price reduction decisions on property-level information and market conditions. FHA implemented our recommendations in June 2016, which could reduce holding times for and improve returns on foreclosed properties. Additionally, in response to our November 2011 recommendation that FHA establish ongoing mechanisms for anticipating potential risks presented by changing conditions, FHA created credit and operational risk committees, which have specified tools they use to address emerging risks. Taking these steps should help FHA more effectively identify, plan for, and address risks facing the agency. For additional information about this high-risk area, contact Lawrance Evans at (202) 512-8678 or [email protected]. Resolution Plans: Regulators Have Refined Their Review Processes but Could Improve Transparency and Timeliness. GAO-16-341. Washington, D.C: April 12, 2016. Financial Regulation: Complex and Fragmented Structure Could Be Streamlined to Improve Effectiveness. GAO-16-175. Washington, D.C: February 25, 2016. Dodd-Frank Regulations: Impacts on Community Banks, Credit Unions and Systemically Important Institutions. GAO-16-169. Washington, D.C: December 30, 2015. Bank Regulation: Lessons Learned and a Framework for Monitoring Emerging Risks and Regulatory Response. GAO-15-365. Washington, D.C: June 25, 2015. Financial Stability Oversight Council: Further Actions Could Improve the Nonbank Designation Process. GAO-15-51. Washington, D.C: November 20, 2014. Financial Stability: New Council and Research Office Should Strengthen the Accountability and Transparency of Their Decisions. GAO-12-886. Washington, D.C: September 11, 2012. Dodd-Frank Act Regulations: Implementation Could Benefit from Additional Analyses and Coordination. GAO-12-151. Washington, D.C: November 10, 2011. Financial Regulation: A Framework for Crafting and Assessing Proposals to Modernize the Outdated U.S. Financial Regulatory System. GAO-09-216. Washington, D.C.: January 8, 2009. Federal Housing Finance Agency: Objectives Needed for the Future of Fannie Mae and Freddie Mac After Conservatorships. GAO-17-92. Washington, D.C.: November 17, 2016. Nonbank Mortgage Servicers: Existing Regulatory Oversight Could Be Strengthened. GAO-16-278. Washington, D.C.: March 10, 2016. Mortgage Reforms: Actions Needed to Help Assess Effects of New Regulations. GAO-15-185. Washington, D.C.: June 25, 2015. Housing Finance System: A Framework for Assessing Potential Changes. GAO-15-131. Washington, D.C.: October 7, 2014. Mortgage Financing: FHA’s Fund Has Grown, but Options for Drawing on the Fund Have Uncertain Outcomes. GAO-01-460. Washington, D.C.: February 28, 2001. The U.S. Postal Service (USPS) faces a serious financial situation that is putting its mission of providing prompt, reliable, and efficient universal mail services at risk. It reported a net loss of $5.6 billion in fiscal year 2016—its 10th consecutive year of net losses. Additionally, it continues to face unfunded liabilities that have grown from 99 percent of USPS revenues in fiscal year 2007 to 169 percent of revenues in fiscal year 2016. These unfunded liabilities—totaling about $121 billion at the end of fiscal year 2016—consist mostly of retiree health and pension benefit obligations for which USPS has not set aside sufficient funds to cover. For example, since September 2010, USPS has not made almost $34 billion in required prefunding retiree health payments, which has led to an unfunded liability of about $52 billion. USPS’s ability to make payments to cover its unfunded liabilities is challenged due to (1) continued expected declines in mail volumes; (2) growing expenses; (3) expiration of a temporary rate surcharge (which generated $4.6 billion in additional revenue from its January 2014 inception to its April 2016 discontinuation); and (4) no planned new major cost-savings initiatives. As a result, it is not likely that USPS will be able to make all of its required health and pension payments in fiscal year 2017. of USPS by not saddling it with bills after employees have retired. USPS retirees participate in the same health and pension benefit programs as other federal retirees. Thus, if USPS ultimately does not adequately fund these benefits and if Congress wants these benefits to be maintained at current levels, funding from the U.S. Treasury and hence the taxpayer would be needed to continue the benefit at the same levels. Alternatively, unfunded benefits could pressure USPS to reduce benefits or pay for postal workers. In July 2009, we added USPS’s financial condition to the list of high-risk areas needing attention by Congress and the executive branch to achieve broad-based restructuring. USPS has partially met all five of the criteria for removal from the High- Risk List. Although USPS has taken some steps to improve its financial situation, it has limited ability to resolve its financial difficulties, in part due to statutorily defined requirements, such as requirements to maintain 6- day delivery and resistance from external groups. USPS has made efforts to reduce its physical footprint, grow its shipping and package services, raise revenue, and reduce the gap between expenses and revenue. However, these initiatives are insufficient to restore USPS’s financial viability. USPS has no plans to initiate new major initiatives that would achieve necessary cost savings—USPS has previously faced resistance to such efforts from customers and Congress. USPS’s Five Year Strategic Plan for fiscal years 2017 to 2021 identified specific legislative changes needed for USPS to return to long-term financial health. Furthermore, USPS continued to monitor its situation through public quarterly and annual financial reports that discuss its financial status and performance, but has also reported that it cannot secure its near- or long-term financial outlook without the passage of targeted postal reform legislation. The House Committee on Oversight and Government Reform approved a bill that addressed some of USPS’s solvency challenges; however, the bill was not enacted and there continues to be a lack of consensus about how to address the trade-offs that are inherent with resolving USPS’s financial difficulties. USPS needs to continue taking action to reduce costs related to its operations, workforce, and facilities, and to increase revenues so that it can reduce its net losses, fully make its required payments to fund employee benefits, repay its debt, and generate capital for investments, such as replacing its aging vehicle fleet. Congress and USPS need to agree on a comprehensive package of actions to improve USPS’s financial viability. These actions include (1) modifying USPS’s retiree health benefit payments in a fiscally responsible manner; (2) facilitating USPS’s ability to better align costs with revenues; and (3) requiring any binding arbitration in the negotiation process for USPS labor contracts to take USPS’s financial condition into account. While USPS’s leadership has been committed to increasing revenue and reducing expenses in an effort to put USPS on a more stable financial path, USPS has no plans to initiate new major initiatives that would achieve necessary cost savings. Although USPS has previously faced resistance to such efforts from customers and Congress, committing to major cost-saving initiatives may serve to reiterate the need for broad- based restructuring. The efforts USPS has implemented thus far have been insufficient to eliminate net losses. For example, a temporary 4.3 percent “exigent” surcharge was implemented to address losses from decreased mail volume during the Great Recession, which occurred between December 2007 and June 2009. The surcharge began in January 2014 and was discontinued in April 2016, generating $4.6 billion in additional revenue during this period—including $1.1 billion in fiscal year 2016, $2.1 billion in fiscal year 2015, and $1.4 billion in fiscal year 2014. Furthermore, starting in fiscal year 2011, USPS established Delivering Results, Innovation, Value, and Efficiency initiatives to reduce the large gap between revenue and costs, and to implement strategic initiatives with measurable outcomes. and its overall workforce increased in fiscal years 2015 and 2016 due, in part, to significant volume-growth in shipping and packages (14.1 percent in fiscal year 2015 and 13.8 percent in fiscal year 2016), which are more labor intensive to process. USPS reported that although the 15.8 percent growth in shipping and packages revenue helped generate additional total revenue of $2.6 billion (a 3.7 percent increase), package growth also contributed to an increase of 18,000 employees in fiscal year 2016, and an increase in total expenses of about $3.1 billion (about 4.2 percent). In addition, although it experienced net losses, USPS’s compensation expenses increased by 2 percent in fiscal year 2016 due to salary increases and additional work hours. Furthermore, as part of its efforts to reduce excess capacity, USPS revised its standards for on-time mail delivery in January 2015 by increasing the number of days for some mail to be delivered and still be considered on time. Even with the revised standards, on-time delivery performance declined significantly, particularly for the second quarter of fiscal year 2015, a decline USPS attributed to operational changes enacted in January 2015 and adverse winter weather. Performance has rebounded since then, but with the rebound came increases in workforce and mail transportation costs. USPS’s Five-Year Strategic Plan for fiscal years 2017 to 2021 outlines its strategy for achieving financial viability. USPS’s plan summarizes changes that USPS has made or plans to make, and those that it would like Congress to address in postal reform legislation. We continue to believe that legislative action is needed to address USPS’s financial challenges, and in the interim, as previously noted, USPS has no current plans to undertake additional major initiatives to achieve significant cost savings in its operations—USPS has previously faced resistance to such efforts from customers and Congress. USPS continued to monitor its situation through public quarterly and annual financial reports that discuss its financial status and performance, including trends USPS expects to become more pronounced and will significantly impact its current business model. USPS, however, has also reported that it cannot secure its near- or long-term financial outlook without the enactment of targeted postal reform legislation. USPS’s actions have demonstrated some progress in achieving cost savings, as noted above. USPS has reported, however, that despite these efforts, statutory restrictions on its business model have left it unable to cover its total costs. We have issued a number of reports that included strategies and options for USPS to generate revenue, reduce costs, increase the efficiency of its delivery operations, and restructure the funding of pension and retiree health benefits. USPS has already acted on some of these strategies and options. Nonetheless, we have also reported that USPS’s actions alone under its existing authority will be insufficient to achieve sustainable financial viability and that comprehensive legislation is urgently needed to position USPS to be a sustainable entity. USPS improved the usefulness and transparency of its delivery performance information. USPS updated its website in June 2016 to include trend data for on-time delivery performance for all 67 postal districts beginning in the second quarter of fiscal year 2015 to the current quarter. While this accomplishment will not lead to financial benefits, the updated website will lead to more transparent and effective oversight of delivery performance to hold USPS accountable for meeting its statutory mission to provide service in all areas of the nation. As a result, USPS performance information is easily accessible and Postal stakeholders can determine whether delivery performance is a problem in rural areas. Congress has taken limited action over the past year to address the need for postal reform including the following: A January 2016 hearing titled, “Laying out the Reality of the United States Postal Service,” held by the Senate Committee on Homeland Security and Governmental Affairs. A May 2016 hearing regarding USPS’s ongoing financial challenges held by the House Committee on Oversight and Government Reform. The House Committee on Oversight and Government Reform approved a bill that addressed some of USPS’s solvency challenges; however, this bill was not enacted. For additional information about this high-risk area, contact Lori Rectanus at (202) 512-2834 or [email protected]. U.S. Postal Service: Continuing Financial Challenges and the Need for Postal Reform. GAO-16-651T. Washington, D.C.: May 11, 2016. U.S. Postal Service: Post Office Changes Suggest Cost Savings, but Improved Guidance, Data, and Analysis Can Inform Future Savings Efforts. GAO-16-385. Washington, D.C.: April 29, 2016. U.S. Postal Service: Financial Challenges Continue. GAO-16-268T. Washington, D.C.: January 21, 2016. U.S. Postal Service: Actions Needed to Make Delivery Performance Information More Complete, Useful, and Transparent. GAO-15-756. Washington, D.C.: September 30, 2015. U.S. Postal Service: Status, Financial Outlook, and Alternative Approaches to Fund Retiree Health Benefits. GAO-13-112. Washington, D.C.: December 4, 2012. U.S. Postal Service: Strategies and Options to Facilitate Progress toward Financial Viability. GAO-10-455. Washington, D.C.: April 12, 2010. The Department of the Interior (Interior) has taken some steps to strengthen how it manages federal oil and gas resources, but has not met the criteria for removal from our High-Risk List. Interior has not implemented four of our recommendations to improve the verification of oil and gas produced from federal leases, and the reasonableness and completeness of royalty data. Management of federal oil and gas resources was added it to the High-Risk List in 2011. We identified challenges in Interior’s management of oil and gas on leased federal lands and waters. We found that Interior (1) lacked reasonable assurance that it was collecting its share of revenue from oil and gas produced on federal lands and waters; (2) continued to experience problems hiring, training, and retaining sufficient staff to oversee and manage oil and gas operations on federal lands and waters; and (3) was undertaking a major reorganization of its oversight of offshore oil and gas management and revenue collection functions. In 2013, after concluding that Interior had fundamentally completed its reorganization, we narrowed the high-risk area to Interior’s revenue collection and human capital challenges. For this update, we are reopening the third segment based on our February 2016 report, in which we found that Interior’s restructuring of the Bureau of Safety and Environmental Enforcement (BSEE) has made limited progress addressing long-standing deficiencies in the bureau’s investigative, environmental compliance, and enforcement capabilities. Federal oil and gas resources provide an important source of energy for the United States; create jobs in the oil and gas industry; and generate billions of dollars annually in revenues that are shared between federal, state, and tribal governments. Interior reported collecting over $49 billion from fiscal years 2011 through 2015 from royalties and other payments. This makes oil and gas resources one of the federal government’s largest sources of nontax revenue. Moreover, the April 2010 explosion onboard the Deepwater Horizon and subsequent oil spill in the Gulf of Mexico highlighted the importance of Interior’s management of permitting and inspection processes to ensure operational and environmental safety. oversight responsibilities to two new bureaus—the Bureau of Ocean Energy Management (BOEM) and BSEE—and assigning the revenue collection function to a new Office of Natural Resources Revenue (ONRR). BLM did not restructure its management of onshore federal oil and gas activities. BSEE’s mission is to promote safety, protect the environment, and conserve offshore resources through regulatory oversight and enforcement. It oversees offshore operations, which includes the authority to investigate incidents that occur on the outer continental shelf, monitor operator compliance with environmental stipulations, and take enforcement actions against operators that violate safety or environmental standards. Yet more than 5 years after its creation, BSEE continues to use investigative policies and procedures that predate the Deepwater Horizon explosion. BSEE’s outdated policies and procedures do not require planning investigations, gathering and documenting evidence, and ensuring quality control, potentially undermining the effectiveness of investigations. Moreover, BSEE’s ongoing restructuring of its environmental compliance program reverses steps taken to address post–Deepwater Horizon incident concerns, risking the bureau’s abilities to oversee environmental compliance. Additionally, BSEE did not review its maximum daily civil penalty as required by the Outer Continental Shelf Lands Act. management, we are expanding the Management of Federal Oil and Gas Resources high-risk area to again include a segment on Interior’s restructuring of offshore oil and gas oversight. Interior has partially met the criteria to address the revenue collection and human capital challenges we identified, and has implemented some of the recommendations we made. However, Interior needs to do more to meet its responsibilities to manage federal oil and gas resources, and to maintain leadership commitment in addressing the remaining four criteria. Leadership Commitment: To address its human capital challenges, Interior needs to evaluate the effectiveness of incentives such as special salary rates, analyze hiring time data, and evaluate the bureaus’ training programs. To enhance Interior’s oversight of oil and gas development, and fully implement the bureau’s restructuring and effectively oversee offshore oil and gas development, BSEE leadership needs to take several steps, such as completing draft policies outlining the responsibilities of its divisions, and updating and developing procedures to guide them. BSEE leadership also needs to conduct a risk analysis of its environmental compliance program. Capacity: To address its revenue collection challenges, Interior will need to identify the staffing resources necessary to consistently meet its annual goals for inspecting and verifying oil and gas production. To address its human capital challenges, Interior needs to evaluate whether its efforts to increase compensation paid to key oil and gas staff were effective in hiring and retaining staff. Interior also needs to fully evaluate the bureaus’ training programs and look for potential opportunities to share training resources. Action Plan: To address its revenue collection challenges, Interior needs to continue its efforts related to its study on automating data collection from production metering systems. To address its human capital challenges, Interior needs to track, monitor, and analyze the effectiveness of the incentives paid to key oil and gas staff. Interior also needs to analyze data from its new human resources software system in order to identify steps in the hiring process that may be causing delays. Regarding training, Interior needs to review training and identify opportunities to share training resources. measured, and that the federal government is collecting an appropriate share of oil and gas revenues. To address its human capital challenges, Interior needs to track and monitor performance metrics for incentive payments and special salary rates, capture accurate data on hiring time from a new human resources software system, and evaluate training programs. Demonstrated Progress: To address its revenue collection challenges, Interior needs to continue to effectively implement our related recommendations as outlined in the areas above. To address its human capital challenges, Interior must continue to show progress in hiring, retaining, and training its key oil and gas staff. Overall, Interior has partially met the criteria for leadership commitment, capacity, action planning, monitoring, and demonstrated progress. All of the 2017 ratings are the same as the 2015 ratings except for leadership commitment, which dropped from met to partially met for the human capital challenges segment, discussed below. Interior has demonstrated leadership commitment to address revenue collection weaknesses and partially met the remaining four criteria. Mining Services Group to help identify potentially erroneous data submitted by companies paying royalties. ONRR is also studying whether it can use automated data collection from metering systems to more efficiently obtain oil and gas production data used to determine royalties from companies. Interior’s capacity to address weaknesses in revenue collection is uneven. In recent years, Interior has hired offshore inspection staff to focus primarily on oil and gas measurement inspections. We found in April 2015 that BSEE came close to meeting its annual inspection goals for verifying oil and gas production in the Gulf of Mexico for fiscal years 2009 through 2013. On the other hand, for the same time frame, we found that BLM did not meet its oil and gas production inspection goals, which officials attributed, in part, to insufficient inspection staff. Interior has plans in place to continue implementing our recommendations aimed at correcting weaknesses in its revenue collection policies and practices. In November 2014, Interior provided a briefing document specifying goals and time frames for several areas related to these weaknesses. For example, in December 2013, we recommended that BLM issue revised regulations to provide it with greater flexibility in setting royalty rates and better ensure that the public receives a fair return from the oil and gas produced from federal leases. In November 2014, Interior stated that it planned to begin addressing this issue in fiscal year 2015 by issuing an advanced notice for proposed rulemaking. In November 2016, Interior amended its regulations to, among other things, allow for greater flexibility in setting royalty rates. Interior’s briefing document also specified other goals and time frames for completing a study on automating data collection from production metering systems, and for establishing procedures on when to periodically assess its fiscal system. Interior completed the latter of these two actions in August 2016. implemented the guidance. The new guidance outlines criteria for approving “commingling” requests—requests to combine oil or gas from public, state, or private leases prior to royalty measurement—and identifies considerations for determining whether commingling is in the public interest. This includes ensuring that BLM has the ability to verify that production is accurately measured and properly reported. Because it has not scheduled and completed a review of the effectiveness of the new commingling guidance after its implementation, BLM does not have reasonable assurance that its staff are consistently applying the new guidance, and that staff are able to verify production. Interior has demonstrated progress addressing weaknesses in its revenue collection policies and practices. As of January 2017, we found that Interior implemented 42 of 46 recommendations we had made since September 2008 addressing revenue collection weaknesses, including those related to oil and gas production verification and royalty data. However, as mentioned above, Interior has not completed reviewing the effectiveness of the new commingling guidance. Additionally, in March 2010, we found that Interior’s production accountability program did not sufficiently address key factors that could affect gas measurement accuracy, and recommended that Interior establish goals for particular types of measurement inspections. Interior agreed with the recommendation, but as of October 2016, it has not fully implemented it. Without completing this action, Interior cannot be assured that oil and gas are being reasonably measured and associated royalty payments are correct. Interior has partially met the five criteria below. The rating for leadership commitment dropped from ‘met’ in 2015 to ‘partially met’ in 2017. In January 2014, we recommended that Interior explore expanding its use of hiring incentives and systematically collect and analyze hiring data. Interior agreed with our recommendations and began to more systematically collect and analyze hiring data to identify causes for delays and expedite the hiring process. In November 2014, Interior senior officials briefed us on planned actions to address the department’s human capital challenges. As of September 2016, however, some of these planned actions had not yet been implemented or completed, as we reported. For example, Interior senior officials told us that they would implement a performance measure framework to evaluate the effectiveness of incentives on a quarterly basis beginning in April 2015. However, as of July 2016, a senior official from the Office of Policy, Management and Budget said these quarterly reviews had not yet begun. had provided limited leadership to facilitate the bureaus sharing training resources. We also reported that BSEE has not implemented a certification program for its inspectors, although the Outer Continental Shelf Safety Oversight Board and Interior Inspector General recommended it in 2010. Interior continues to partially meet this criterion. In 2010, we found that Interior’s bureaus experienced high turnover rates in key oil and gas inspection and engineering positions. In January 2014, we found that Interior’s hiring and retention challenges were largely due to lower salaries and a slow hiring process compared with similar positions in industry. The fiscal year 2012 attrition rate for petroleum engineers at BLM was more than 20 percent, or more than double the average federal attrition rate of 9.1 percent. The attrition rate for other key oil and gas staff was lower, but still a challenge because some field offices had only a few employees in any given position, and a single separation could significantly affect operations. According to Interior officials, these challenges made it more difficult for some field offices to conduct oversight activities, including inspecting production facilities. Since fiscal year 2012, Interior has increased compensation for certain key oil and gas staff by using special salary rates, incentive payments, and student loan repayments. During fiscal years 2012 through 2016, Interior had special salary rates—authorized by Congress in annual appropriations acts—that allowed it to pay certain staff up to 25 percent more than their basic pay. In addition, some of the bureaus increased compensation through other tools, such as incentive payments and student loan repayments. For example, for fiscal years 2012 through 2014, BLM and BSEE substantially increased the number of employees receiving a retention incentive payment from 14 to 346 employees. During the same period, BSEE and BOEM increased the number of staff receiving a student loan repayment from 25 to 66 employees. Officials from the three bureaus said that anecdotally they know that efforts to increase the compensation paid to key oil and gas staff, along with an industry downturn that reduced private sector hiring, had likely helped them fill vacancies. Outside of these anecdotal observations, however, Interior and the bureaus have not evaluated whether their efforts, and the specific tools they used, were effective in hiring and retaining staff. them information about the overall effectiveness of their training efforts by measuring the effect on staff’s job performance and comparing program benefits to training costs. Interior continues to partially meet this criterion. Interior does not have a written action plan summarizing how it will address its human capital challenges; however, agency officials have described some actions it plans to take to address these challenges. To evaluate the effectiveness of the agency’s efforts to increase compensation paid to key oil and gas staff, such as the use of incentive payments and special salary rates, officials said in September 2016, that they had developed initial performance metrics and gathered data for the first three quarters of fiscal year 2016. Officials said they would continue to track and monitor the data on a quarterly basis. To address the lengthy hiring process, officials from the three bureaus said in June 2016 that they had started analyzing data extracted from a new human resources software system in order to identify steps in the hiring process that may be causing delays. Regarding training, a senior Interior official we interviewed told us in January 2016, that their Interior Training Directors Council—composed of senior training officials across Interior—would begin reviewing training across the bureaus and seek to identify opportunities to share training resources. However, as of June 2016, officials had not reported any progress made by the council, and it is unclear what, if any, steps the office has taken to review training and identify opportunities to share training resources. In addition, it is unclear what, if any, actions the agency will take in response to the recommendations we issued in September 2016 directing the agency to develop technical competencies for all key oil and gas staff, and annually evaluate the bureaus’ training programs and viability of a certification program for BSEE inspectors. Interior continues to partially meet this criterion. Interior and the three bureaus have taken some steps to reduce hiring times, but did not have complete and accurate data to identify the causes of delays in the hiring process. Without reliable data, Interior’s bureaus cannot effectively implement changes to expedite the hiring process. We recommended in January 2014 that Interior systematically collect data on hiring times for key oil and gas positions, ensure the accuracy of the data, and analyze the data to identify the causes of delays and expedite the hiring process. In June 2016, officials from the three bureaus said that they had started analyzing data extracted from a new human resources software system in order to identify steps in the hiring process that may be causing delays. Once Interior has the systems in place to capture accurate data on hiring, the department will be able to monitor hiring times and the causes of delays in the hiring process. In addition, Interior officials said in September 2016 that they had developed initial performance metrics to track and monitor on a quarterly basis the effectiveness of incentive payments and special salary rates that the agency has used to try to increase compensation paid to its key oil and gas staff. These officials also said they had gathered data for the first three quarters of fiscal year 2016, and would continue to track and monitor the data on a quarterly basis. However, the agency had not yet used these data to evaluate the effectiveness of incentives. We recommended that Interior regularly evaluate the effectiveness of available incentives, such as special salary rates, the student loan repayment program, and other incentives in hiring and retaining key oil and gas staff. In regards to training, we reported in September 2016 that Interior had not evaluated training needs or effectiveness as required by law and regulations, according to officials, and we recommended the agency annually evaluate the bureaus’ training programs. We also reported that Interior’s bureaus have not evaluated training needs or effectiveness as directed by departmental policy. We recommended in September 2016 that the agency develop technical competencies for all key oil and gas staff, and annually evaluate the bureaus’ training programs and the viability of a certification program for BSEE inspectors. It is unclear what, if any, actions the agency will take in response to these recommendations. Interior continues to partially meet this criterion. In 2015, we reported that Interior and the three bureaus had taken some actions to address these hiring and retention challenges, but had not fully used their existing authorities to supplement salaries and provide other recruitment, relocation, and retention incentives. staff up to 25 percent more than their basic pay. In September 2016, Interior described its plans to collect data on the three incentives and special salary rates in order to measure effectiveness. Regarding their lengthy hiring process, in January 2014, we reported that Interior records showed that the average time to hire petroleum engineers and inspectors generally exceeded 120 calendar days—much longer than OPM’s target of 80 calendar days. We also found in September 2016 that each of the three bureaus has taken steps to begin to address their lengthy hiring process. In 2015, the three bureaus adopted new human resources software that officials said will provide them with better data to track their hiring process. In June 2016, officials from the three bureaus said that they had started analyzing data extracted from this new system to identify steps in the hiring process that may be causing delays. Regarding training, we found in March 2010 that Interior had not consistently and appropriately trained offshore inspection and engineering staff. In July 2012, we reported that Interior was creating a new training program for its offshore inspection and engineering staff. However, in September 2015, BSEE inspectors at four local offices told us that the offshore training courses BSEE provided them, which were primarily led by contractors, did not adequately prepare them to perform inspections because the courses focused on how equipment operates, and did not teach them how to inspect the equipment. More broadly, we found in September 2016 that none of the three bureaus had evaluated training needs or effectiveness as directed by departmental policy. Without evaluating its bureaus’ training efforts, Interior may not be able to ensure that its key oil and gas staff are being adequately trained to conduct oversight, and may be ineffectively and inefficiently spending training funds. capabilities. Moreover, BSEE’s deficient oversight capabilities continue to undermine its ability to effectively oversee offshore oil and gas development. In response to recommendations we made in April, 2015, Interior issued updated onshore (1) gas measurement, (2) oil measurement, and (3) oil and gas site security regulations. These new regulations should help ensure that oil and gas produced from federal leases are accurately measured. Accurate measurement is critical for calculating the royalty payments operators pay the government. In response to a recommendation we made in July 2012, Interior reported that the two bureaus, BOEM and BSEE, jointly approved an information technology plan. This plan, according to Interior documents, is a roadmap that outlines a framework for deploying technology resources throughout the organizations in support of bureau missions, goals, and program priorities. In response to a recommendation we made in July 2012, BSEE in August 2013 and BOEM in September 2016 issued human capital plans. In response to a recommendation we made in January 2014, Interior took several actions to bridge the salary gap for key oil and gas oversight staff. Specifically, BLM, BSEE, and BOEM increased the number of staff receiving retention, recruitment, or relocation incentive payments in fiscal year 2014 and in fiscal year 2015 issued guidance describing which staff should receive these incentives. In addition, in September 2016, Interior outlined steps it will take to assess the effectiveness of these incentives by tracking measures such as turnover and acceptance rates. Interior also implemented recommendations that we identified as priority recommendations to the Secretary of Interior. In response to a recommendation we made in December 2013, Interior took steps within its authority to revise BLM’s regulations to provide for flexibility to the bureau to make changes to onshore royalty rates, similar to that which is already available for offshore leases, to enhance Interior’s ability to make timely adjustments to the terms for federal onshore leases. fiscal system. These procedures identified generally when such an assessment should be done or what changes in the market or industry would signal that such an assessment should be done. In response to a recommendation we made in December 2013, the Secretary of the Interior established documented procedures for determining whether and how to adjust lease terms for new offshore leases, including documenting the justification and analysis supporting any adjustments. For additional information about this high-risk area, contact Frank Rusco at (202) 512-3841 or [email protected]. Oil and Gas Oversight: Interior Has Taken Steps to Address Staff Hiring, Retention, and Training but Needs a More Evaluative and Collaborative Approach. GAO-16-742. Washington, D.C.: September 29, 2016. Oil and Gas Management: Interior’s Bureau of Safety and Environmental Enforcement has Not Addressed Long-Standing Oversight Deficiencies. GAO-16-245. Washington, D.C.: February 10, 2016. Oil and Gas Resources: Interior’s Production Verification Efforts and Royalty Data Have Improved, but Further Actions Needed. GAO-15-39. Washington, D.C.: April 7, 2015. Oil and Gas: Updated Guidance, Increased Coordination, and Comprehensive Data Could Improve BLM’s Management and Oversight. GAO-14-238. Washington, D.C.: May 5, 2014. Oil and Gas Management: Continued Attention to Interior’s Human Capital Challenges Is Needed. GAO-14-394T. Washington, D.C.: February 27, 2014. Oil and Gas: Interior Has Begun to Address Hiring and Retention Challenges but Needs to Do More. GAO-14-205. Washington, D.C.: January 31, 2014. Oil and Gas Resources: Actions Needed for Interior to Better Ensure a Fair Return. GAO-14-50. Washington, D.C.: December 6, 2013. Oil and Gas Management: Interior’s Reorganization Complete, but Challenges Remain in Implementing New Requirements. GAO-12-423. Washington, D.C.: July 30, 2012. Climate change is considered by many to be a complex, crosscutting issue that poses risks to many environmental and economic systems and presents a significant financial risk to the federal government. According to the National Research Council (NRC), although the exact details cannot be predicted with certainty, there is clear scientific understanding that climate change poses serious risks to human society and many of the physical and ecological systems upon which society depends. According to the United States Global Change Research Program (USGCRP), among other reported impacts, climate change could threaten coastal areas with rising sea levels, alter agricultural productivity, and increase the costs of severe weather events as these once “rare” events potentially become more common and intense due to climate change. appropriations by the Congressional Research Service, the amount of inflation-adjusted disaster relief per fiscal year increased from a median of $6.2 billion for the years 2000 to 2006, to a median of $9.1 billion for the years 2007 to 2013 (46 percent). These impacts call attention to areas where government-wide action is needed to reduce fiscal exposure, because, among other roles, the federal government (1) leads a strategic plan that coordinates federal efforts and also informs state, local, and private-sector action; (2) owns or operates extensive infrastructure vulnerable to climate impacts, such as defense facilities and federal property; (3) insures property and crops vulnerable to climate effects; (4) provides data and technical assistance to federal, state, local, and private-sector decision makers responsible for managing the impacts of climate change on their activities; and (5) provides disaster relief aid. As a result, we added Limiting the Federal Government’s Fiscal Exposure by Better Managing Climate Change Risks to the High-Risk List in 2013. climate can be viewed as an insurance policy against climate change risks. Furthermore, according to NRC and USGCRP, the nation can reduce its vulnerability by limiting the magnitude of climate change through actions to limit greenhouse gas emissions. We recognize that (1) the federal government has a number of efforts underway to decrease domestic greenhouse gas emissions, and (2) the success of efforts to reduce greenhouse gas emissions depends in large part on cooperative international efforts. However, limiting the federal government’s fiscal exposure to climate change risks will be challenging no matter the outcome of efforts to reduce emissions, in part because greenhouse gases already in the atmosphere will continue altering the climate system for many decades, according to NRC and USGCRP. As of December 2016, the federal government has taken additional steps since our 2015 update and partially met four of the five criteria for removal from our High-Risk List—leadership commitment, capacity, action plan, and monitoring. Specifically, the federal government partially met the monitoring criterion, which had been rated not met in the 2015 report, and has taken further action in three criteria that remain partially met— leadership commitment, capacity, and action plan. However, the demonstrated progress criterion remains not met because it is too early to determine whether the federal government has made progress. Various executive orders (E.O.), task forces, and strategic planning documents identify climate change as a priority and demonstrate leadership commitment. This leadership commitment needs to be sustained and enhanced to address all aspects of the federal fiscal exposure to climate change in a cohesive manner. As we reported in 2015, the federal government has some capacity to address the federal fiscal exposure to climate change. However, across its actions and strategies, the federal government has yet to clearly define the roles, responsibilities, and working relationships among federal, state, local, and private-sector entities, or how these efforts will be funded, staffed, and sustained over time. The federal government has taken further action by establishing a monitoring mechanism to review certain federal agencies’ efforts to reduce some aspects of their fiscal exposure to climate change, such as building efficiency. However, it is too early to determine the new mechanism’s effectiveness at demonstrating progress in implementing corrective measures, or whether the federal government will apply a similar mechanism across all areas of federal fiscal exposure to climate change. strategic climate change priorities and develop roles, responsibilities, and working relationships among federal, state, and local entities. The federal government has had many climate-related strategic planning activities that demonstrated leadership commitment, such as the President’s June 2013 Climate Action Plan and the March 2015 E.O.13693 Planning for Federal Sustainability in the Next Decade. However, it was unclear how the various planning efforts related to each other or whether they amounted to a government-wide approach for reducing federal fiscal exposures. Accordingly, leadership commitment needs to be enhanced, with increased focus on developing a cohesive strategy to reduce fiscal exposure across the full range of related federal activities. Further, the federal government will need to focus on implementing this strategy—by developing measurable goals; identifying the roles, responsibilities, and working relationships among federal, state, and local entities; identifying how such efforts will be funded and staffed over time; and establishing mechanisms to track and monitor progress. 2017 and 2018 budget requests; and (4) actions to achieve the government-wide goals for improving the climate resilience of federal facilities established by E.O. 13693. Federal flood and crop insurance programs: This entails building climate resilience into the requirements for federal crop and flood insurance programs. Although the Federal Emergency Management Agency (FEMA) has plans to provide updated hazard products and tools that incorporate climate science on an advisory basis, and the U.S. Department of Agriculture (USDA) provides information on voluntary resilience-building actions for producers—policyholders are not required to use the information to improve their resilience and reduce federal fiscal exposure. As such, the federal government needs to address our October 2014 recommendations to incorporate, as appropriate, forward-looking standards into required minimum flood elevation standards for insured properties and long-term agricultural resilience into the allowable agricultural practices required for crop insurance by the federal government. Technical assistance to federal, state, local, and private-sector decision makers: This involves the Executive Office of the President (EOP) helping federal, state, local, and private sector decision makers access and use the best available climate information by designating a federal entity to (1) develop and periodically update a set of authoritative climate observations and projections for use in federal decision making, which state, local, and private sector decision makers could also access to obtain the best available climate information; and (2) create a national climate information system with defined roles for federal agencies and nonfederal entities, such as academic institutions, with existing statutory authority. Additionally, to assist standards-developing organizations incorporate forward-looking climate information into building codes and other standards, we recommended in November 2016 that the Secretary of Commerce should direct the National Institute of Standards and Technology (NIST) to convene federal agencies for an ongoing effort to provide the best available forward-looking climate information to these standards-developing organizations. Disaster aid: This involves implementing adequate budgeting and forecasting procedures to account for the costs of disasters. Additionally, the federal government has not yet defined the resources and government-wide structure to implement existing plans for reducing the federal fiscal exposure to disaster relief by improving resilience—with clear roles, responsibilities, and working relationships among federal, state, local, and private-sector entities. Recognizing that each department and agency operates under its own authorities and responsibilities—and can therefore be expected to address climate change in different ways relevant to its own mission— federal efforts have encouraged a decentralized approach, with federal agencies incorporating climate-related information into their planning, operations, policies, and programs. While individual agency actions are necessary, a centralized national strategy driven by a government-wide plan is also needed to reduce the federal fiscal exposure to climate change, maximize investments, achieve efficiencies, and better position the government for success. Even then, such approaches will not be sufficient unless also coordinated with state, local, and private-sector decisions that drive much of the federal government’s fiscal exposure. The challenge is to develop a cohesive approach at the federal level that also informs state, local, and private-sector action. The interagency Council on Climate Preparedness and Resilience (Resilience Council) established by E.O. 13653 recommended many of the same actions to future administrations in its October 2016 report Opportunities to Enhance the Nation’s Resilience to Climate Change. Among other actions, the Resilience Council called on the federal government to strengthen resilience coordination across federal agencies and increase the capacity for climate resilience efforts government-wide, expand incentives and requirements to increase resilience of infrastructure and buildings, improve awareness and dissemination of climate information, and enhance the usability of climate tools for decision making. Importantly, the Resilience Council recognized the need to coordinate resilience among multiple stakeholders—including all levels of government, academic institutions, and the private sector—through partnerships, shared knowledge and resources, and coordinated strategies, and to evaluate government-wide progress and performance of resilience investments. These are key elements of our criteria for removal from the High-Risk List. For its climate strategic planning efforts, the federal government partially met four of the five criteria—leadership commitment, capacity, action plan, and monitoring—and received a not met rating for the demonstrating progress criterion. The federal government is not well organized to address the fiscal risks to which climate change exposes it, partly because of the inherently complicated, crosscutting nature of the issue. The federal government would be better positioned to respond to the risks posed by climate change if federal efforts were more coordinated and were directed toward common goals. As we reported in our 2015 update, the federal government had partially met our leadership commitment, capacity, and action plan criteria through several climate-related strategic planning activities, such as the President’s June 2013 Climate Action Plan and agency adaptation plans, but it was unclear how the various planning efforts related to each other or what they amount to as a government-wide approach for reducing federal fiscal exposures. Additionally, existing planning activities partially met our capacity criterion because they did not clearly define the roles and responsibilities among federal, state, and local entities, or the resources needed to implement these plans. Furthermore, we reported that the federal government had not met our monitoring and demonstrated progress criteria because there were no programs to monitor the effectiveness of strategic planning efforts. among other things, address resilience planning in coordination with state, local, and tribal communities. Additionally, in April 2016, CEQ and OMB issued a joint memo that expands their annual review of agency adaptation plans, to include agency self-assessments and annual, in- person discussions with OMB and CEQ to evaluate certain agencies’ progress implementing their adaptation plans. Furthermore, the October 2016 report Opportunities to Enhance the Nation’s Resilience to Climate Change from the interagency Resilience Council identified a set of key opportunities to guide sustained and coordinated action among federal agencies and invited stakeholders to work with these agencies on a shared climate resilience agenda. For its strategic planning efforts, the federal government’s ratings are as follows. The federal government has partially met this criterion and has taken additional steps since our last high-risk update. Specifically, E.O. 13693 continues to demonstrate leadership commitment by establishing a government-wide approach and long-term goals for reducing some aspects of federal fiscal exposure to climate change. Further, the October 2016 Resilience Council report identified key opportunities to guide sustained and coordinated action among federal agencies and invited stakeholders to advance a shared climate resilience agenda. However, the EOP has yet to implement our May 2011 recommendation to clearly establish federal strategic climate change priorities that take into consideration the full range of climate-related activities within the federal government. Additionally, because of the potential long-term effects of climate change, leadership needs to be sustained well into the future. specified federal agencies to convene regional interagency working groups to, among other things, address resilience planning in coordination with state, local, and tribal communities. Further, the October 2016 Resilience Council report identifies opportunities to enhance capacity within the federal government and in local communities, among others. However, neither the October 2016 Resilience Council report nor the July 2015 E.O. 13693 implementing guidance specifically addresses the roles and responsibilities among federal, state, and local entities. Furthermore, neither the Resilience Council report nor the E.O. 13693 implementing guidance indicates how these efforts will be funded, staffed, and sustained over time. The federal government has partially met this criterion and has taken additional steps since our last high-risk update. In particular, the implementing guidance for E.O. 13693 directs agencies to annually measure and report their progress on, among other things, reducing greenhouse gas emissions and incorporating climate-resilient design into new agency buildings in their strategic sustainability performance plans, starting in June 2016. Additionally, the October 2016 Resilience Council report identified key opportunities that future administrations could take to improve climate resilience across three themes: (1) advancing and applying science-based information, technology, and tools to address climate risk; (2) integrating climate resilience into federal agency missions, operations, and culture; and (3) supporting community efforts to enhance climate resilience. However, it is too early to determine how effective agency strategic sustainability performance plans under E.O. 13693 will be at reducing aspects of the federal fiscal exposure to climate change. Moreover, the October 2016 Resilience Council report provides a broad overview of key opportunities to improve climate resilience, but does not require implementation of specific actions to address these opportunities. As a result, it is unclear to what extent the Resilience Council report will help the government substantially complete actions to reduce federal fiscal exposure to climate change across the entire range of related federal activities. responsible for implementing E.O. 13693 to advise OMB and CEQ on agencies’ performance of their E.O. responsibilities. Furthermore, the April 2016 joint CEQ and OMB memo established a monitoring mechanism to evaluate agencies’ progress on implementing their adaptation plans. However, it is too early to determine the effectiveness of the monitoring mechanisms. Additionally, the federal government has yet to establish a monitoring mechanism that addresses reducing federal fiscal exposure to climate change across the entire range of related federal activities. The federal government has not met the criterion for demonstrating progress. Fiscal year 2016 is the first year agencies will include addressing aspects of fiscal exposure to climate change as part of the annual strategic sustainability performance plan process under E.O. 13693. Therefore, it is too early to determine whether the federal government has demonstrated progress. Additionally, E.O. 13693 does not address reducing federal fiscal exposure to climate change across the entire range of related federal activities, such as federal disaster aid programs. For its role as property owner, the federal government partially met four of the five criteria—leadership commitment, capacity, action plan, and monitoring—and received a not met rating for the demonstrating progress criterion. The federal government owns and operates hundreds of thousands of facilities and manages millions of acres of land that could be affected by climate change. For example, DOD oversees more than 555,000 defense facilities and 28 million acres of land, with a replacement value DOD estimates at close to $850 billion. Federally funded and managed energy and water infrastructure, and federally managed land— about 650 million acres—are also vulnerable to changes in the climate, including more frequent and severe droughts and wildfires. For example, in a November 2016 assessment of federal fiscal risks related to climate change, OMB and the Council of Economic Advisers (CEA) reported that 18,000 facilities and structures with a replacement value of about $83 billion were in the 100-year floodplain and susceptible to future changes in flood risk. Further, OMB and CEA reported that annual federal wildland fire suppression expenditures could increase by about $2.3 billion by 2090. As of our 2015 update, the federal government had partially met the criteria for leadership commitment, capacity, and action plan through various directives for agencies to develop climate change adaptation plans to integrate consideration of climate change into agency operations and missions, but leadership needed to be sustained over time and most agencies had yet to identify specific actions and the resources necessary to implement these plans. Additionally, we reported that the federal government had not met our monitoring and demonstrated progress criteria because there were no programs to monitor the effectiveness and sustainability of agency adaptation plans. federal projects. Moreover, DOD had yet to implement our May 2014 recommendations to develop a plan for completing climate change vulnerability assessments and clarifying how to account for climate change in planning as well as when comparing construction projects for funding. Since our 2015 update, the federal government has made progress on our April 2013 NEPA recommendation, the May 2014 DOD recommendations, and in other areas. Specifically, in August 2016, CEQ issued final guidance for agencies on how to consider the effects of climate change when implementing NEPA. Also, among other actions responsive to our May 2014 recommendations, DOD issued a January 2016 directive on climate change adaptation and resilience that calls for DOD components to assess and manage climate change risks to build DOD’s resilience, when developing plans and implementing procedures. In addition, the March 2015 E.O.13693 directed certain agencies to develop and annually update agency strategic sustainability performance plans, which, among other things, evaluate past performance toward achieving certain government wide sustainability performance goals— including incorporating climate-resilient design and management elements into the operation, repair, and renovation of existing agency buildings and the design of new agency buildings. Finally, the April 2016 joint CEQ and OMB memo expanded their annual review of agency adaptation plans to include agency self-assessments and annual, in- person discussions with OMB and CEQ to evaluate agencies’ progress implementing their adaptation plans. Further, in July 2015, we reported that the January 2015 E.O. 13690, Establishing a Federal Flood Risk Management Standard and a Process for Further Soliciting and Considering Stakeholder Input requires all future federal investments in, and affecting, floodplains to meet a certain elevation level, as established by the standard. According to E.O. 13690, implementing the standard will ensure that agencies address current and future flood risk and ensure that projects funded with taxpayer dollars last as long as intended. Furthermore, since June 2015, OMB Circular A-11—government-wide guidance to agencies for developing their annual budgets—has directed agencies to include funding for resilience in construction and renovation of federal facilities in their fiscal year 2017 and 2018 budget requests, although the 2018 budget requests have not been finalized. For its role as property owner, the federal government’s ratings are as follows. The rating for this criterion remains at partially met, but the federal government has taken additional steps since our 2015 update. E.O. 13693 and E.O.13690 reflect continued leadership commitment by establishing a government-wide approach for reducing fiscal exposure to climate change for federal facilities and federally-funded infrastructure in and affecting floodplains. However, because of the potential long-term effects of climate change, leadership needs to be sustained well into the future. The rating for this criterion remains at partially met, but the federal government has taken additional steps since our 2015 update. Under E.O. 13693 agencies must, where life-cycle cost effective, incorporate climate-resilient design and management elements into agency building operation, renovation, and design of new buildings. Furthermore, OMB’s revised Circular A-11 directs agencies to include funding for resilience in construction and renovation of federal facilities in their fiscal year 2017 and 2018 budget requests—although the budget requests for fiscal year 2018 have not been finalized. Moreover, the August 2016 CEQ final guidance for agencies on how to consider climate change when implementing NEPA may increase the consistency with which agencies address climate change in implementing the law. However, it is too early to determine whether these efforts will effectively build the capacity of the federal government to reduce its fiscal exposure as a property owner. Standard. Moreover, DOD fully implemented one of our May 2014 recommendations by developing a plan and milestones for completing climate change vulnerability assessments. DOD has also made progress implementing components of our other recommendations for considering climate change impacts when planning installations and comparing construction projects for funding. However, it is too early to determine whether these plans will effectively reduce federal facilities’ fiscal exposure to climate change. The rating for this criterion was upgraded from not met in our 2015 update to partially met. E.O. 13693 establishes a mechanism for OMB and an interagency steering committee to monitor agency progress toward sustainability goals—which include incorporation of climate-resilient design and management elements into the operation, repair and renovation of existing agency buildings. Additionally, the April 2016 joint CEQ and OMB memo to federal agencies established a monitoring mechanism to evaluate agencies’ efforts to implement their adaptation plans as part of their annual reviews of the plans. However, it is too early to determine the effectiveness of these monitoring mechanisms. The federal government has not met the criterion for demonstrating progress. Fiscal year 2016 is the first year agencies will include “incorporating climate resilient design and management elements” as a measurable goal within their annual strategic sustainability performance plan under E.O. 13693. In addition, fiscal year 2017 is the first year of agencies’ implementation plans for the Federal Flood Risk Management Standard. Therefore, it is too early to determine whether the federal government has demonstrated progress. As the insurer of crops and property, the federal government partially met three of the five criteria—leadership commitment, capacity, and action plan—and received a not met rating for the monitoring and demonstrating progress criteria. Two important federal insurance efforts— the FEMA National Flood Insurance Program (NFIP) and USDA’s Federal Crop Insurance Corporation (FCIC)—face climate change and other challenges that increase federal fiscal exposure and send inaccurate price signals about risk to policyholders. For example, a November 2016 OMB and CEA report found that total annual premium subsidies for crop insurance could increase by about $4.2 billion in 2080 due to the effects of unmitigated climate change. In our 2015 update, we reported that the federal government had partially met our leadership commitment criterion by commissioning climate change studies and incorporating climate change adaptation into their planning, which recognized climate change risks to federal insurers, but needed to sustain top leadership support and enhance it over time. We also reported that the federal government had not met the other four criteria because federal insurers had yet to identify specific actions and the resources necessary to address challenges inherent to federal insurance programs—such as how to encourage policyholders to reduce their long-term exposure to climate change given the short-term nature of insurance contracts—that may impede the ability of these programs to minimize long-term federal fiscal exposure to climate change. climate change. USDA did not specify its agreement or disagreement with our recommendation. Since our 2015 update, FEMA and USDA have taken additional actions to understand and respond to climate change risks. For flood insurance, in February 2016, FEMA publicly released the 2015 Future Conditions Risk Assessment and Modeling report by the Technical Mapping Advisory Council (TMAC)—an advisory body created to review the national flood mapping program and make recommendations to FEMA. The report, which was required by law, has several recommendations on how FEMA could incorporate the best-available climate science to assess flood risk and incorporate such information into its advisory hazard products, tools, and information for local decision makers. For crop insurance, in May 2016, USDA publicly issued Building Blocks for Climate Smart Agriculture and Forestry: Implementation Plan and Progress Report for USDA’s framework for helping farmers, ranchers, and forestland owners respond to climate change, through voluntary and incentive-based actions. For its role as the insurer of crops and property, the federal government’s ratings are as follows. Blocks for Climate Smart Agriculture and Forestry implementation plan continues leadership commitment by establishing long-term goals for reducing agricultural GHG emissions by improving producers’ soil health, nitrogen management, and land management practices, among others— practices that may also reduce federal fiscal exposure for insured crops by improving agricultural resilience to climate change. However, because of the potential long-term effects of climate change, leadership needs to be sustained well into the future. The rating for this criterion was upgraded from not met in our 2015 update to partially met. For flood insurance, a senior FEMA official has publicly stated that the agency will engage with stakeholders and partners to implement the recommendations of the TMAC report on incorporating climate science into its products and tools for decision makers. Additionally, the agency has begun conducting sea level rise pilot studies and work to identify related research gaps for additional pilot studies, according to the FEMA official. If FEMA implements the TMAC recommendations, it could improve climate change–related decision making capacity at federal, state, and local levels. For crop insurance, through its 2016 implementation plan, USDA has identified lead agencies and potential partnerships with public and private sector organizations to implement certain actions that could also improve agriculture’s resilience to climate change. Additionally, the USDA Regional Climate Hubs—which deliver science-based knowledge, practical information, and program support to farmers, ranchers, and forest landowners—may help improve producers’ capacity to understand and respond to climate change impacts. However, neither FEMA nor USDA has identified the resources necessary to implement the actions outlined in the TMAC report or USDA’s implementation plan. Additionally FEMA has not identified the roles, responsibilities, and working relationships among federal, state, and local entities for its effort to incorporate climate science into its products and tools. actions to address aspects of climate change in federal insurance programs and have made these actions publicly available. In particular, for flood insurance, the publicly available TMAC report identified short- and long-term actions to incorporate climate change science into its products and tools for decision makers. However, FEMA has yet to establish milestones and metrics for implementing the recommendations—although a senior FEMA official stated that the agency plans to do so. For crop insurance, in its 2016 publicly available report, USDA has developed clear milestones and metrics to assess its progress implementing certain actions that could also improve agricultural resilience to climate change. However, neither federal insurance program has taken action to implement our October 2014 recommendations to improve the long-term resiliency of insured structures and crops—through changes to flood insurance standards or allowable growing practices for crop insurance. The rating for this criterion remains at not met, but the federal government has taken some steps since our 2015 update. For crop insurance, USDA established milestones for certain actions from 2016 to 2018 in its 2016 implementation plan, and the plan indicates that USDA is developing a framework to estimate the adoption of conservation practices and technologies. However, it is unclear from the plan what mechanisms are in place for USDA to assess its overall progress toward the department- wide goals, or the frequency of assessment. For flood insurance, FEMA has yet to establish metrics and milestones within an action plan to monitor its progress implementing the TMAC recommendations for addressing climate change in flood insurance. The federal government has not met the criterion for demonstrating progress. Without clear monitoring mechanisms for FEMA and USDA to assess their overall progress addressing aspects of climate change in federal insurance programs, it is unclear how either agency will be able to demonstrate progress. Additionally, FEMA has indicated that—consistent with the TMAC recommendations—it should provide its updated hazard products and tools that incorporate climate science on an advisory—not regulatory—basis. USDA has also framed its resilience-building actions for producers as voluntary. As a result, it is unclear to what extent policyholders in either federal insurance program will use the information provided to improve their resilience and reduce federal fiscal exposure. As the provider of technical assistance, the federal government partially met two of the five criteria—leadership commitment and action plan—and received a not met rating for the capacity, monitoring, and demonstrating progress criteria. Climate change has the potential to directly affect a wide range of federal services, operations, programs, and assets, as well as national security, increasing federal fiscal exposure in many ways. State, local, and private-sector decision makers can also drive federal climate-related fiscal exposures because they are responsible for planning, constructing, and maintaining certain types of vulnerable infrastructure paid for with federal funds, insured by federal programs, or eligible for federal disaster assistance. To reduce fiscal exposure, the federal government has a role to play in providing information to these decision makers so they can make more informed choices about how to manage the risks posed by climate change. As reported in our 2015 update, the federal government had partially met our leadership commitment and action plan criteria through various strategic plans and E.O.s that directed certain federal agencies to work together to provide authoritative and readily accessible climate-related information, but the roles, responsibilities, and working relationships among federal, state, local, and private-sector entities were still unclear. We also reported that the federal government had not met our criteria for capacity, monitoring, and demonstrated progress because the resources and government-wide structure necessary to implement plans were not yet defined, and that because no monitoring programs existed, the ability to demonstrate progress was limited. to identify the best available climate-related information for state and local infrastructure planning. Since our 2015 update, we have completed work related to federal climate-related technical assistance across several areas—including federal supply chain climate risk; government-wide options to provide climate information to federal, state, local, and private sector decision makers; fisheries management; and private sector use of climate information in design standards and building codes—and found that although the federal government had taken some steps, additional efforts are needed to address the High-Risk List criteria. As a result, the federal government’s ratings for the High-Risk List criteria under technical assistance have not changed. of such effects for specific fish stocks. Lastly, in November 2016, we reported on the use of climate information in design standards and building codes and found that standards-developing organizations such as professional engineering societies generally use historical data to develop standards and face institutional and technical challenges to using forward-looking climate information, including difficulty identifying the best available climate information. We found that government-wide coordination to help address these challenges could present a benefit by reducing the federal fiscal exposure to the effects of climate change. For its efforts to provide technical assistance, the federal government’s ratings are as follows. The rating for this criterion remains at partially met. Top leadership support for providing climate-related technical assistance has continued since 2009 through various E.O.s and planning documents, such as the President’s June 2013 Climate Action Plan, the U.S. Global Change Research Program’s 2012-2021 strategic plan for climate change science, and, more recently, the October 2016 Resilience Council report. However, because of the potential long-term effects of climate change, leadership needs to be sustained well into the future. agencies and nonfederal entities with existing statutory authority. The EOP did not agree or disagree with this recommendation. We also recently recommended that the EOP and other agencies provide guidance to help federal agencies and others use climate information. Specifically, in October 2015, we recommended that, within the EOP, the CEQ clarify the guidance to federal agencies on developing adaptation plans, to better assist agencies to include climate-related risks to their supply chains in their plans. CEQ agreed with this recommendation and implemented it in April 2016 by issuing a joint memo with OMB which, among other things, clarified the guidance to federal agencies for the November 2013 E.O. 13653 on Preparing the United States for the Impacts of Climate Change. Specifically, the joint memo directs agencies to include climate-related risks to supply chains in agency adaptation plans. In September 2016, we recommended that the Secretary of Commerce direct the National Marine Fisheries Service to develop guidance on how fisheries managers should incorporate climate information into different parts of the fisheries management process, such as fish stock assessments. Commerce agreed with this recommendation, but has yet to implement it. Lastly, in November 2016, we reported on using climate information in design standards and building codes. We found that standards-developing organizations, such as professional engineering societies, do not generally use forward-looking climate information and that they face institutional and technical challenges to doing so, including difficulty identifying the best available climate information. We also found that government-wide coordination to help address these challenges could present a benefit by reducing the federal fiscal exposure to the effects of climate change, and recommended that the Department of Commerce’s NIST convene federal agencies for an ongoing effort to provide the best available forward- looking climate information to standards-developing organizations. The Department of Commerce neither agreed nor disagreed with our recommendation. Implementing these recommendations would improve the federal government’s capacity as a provider of technical assistance. plans and an E.O. that directed certain federal agencies to work together to develop and provide authoritative, easily accessible and useable information on climate preparedness and resilience. Additionally, the October 2016 Resilience Council report identified several opportunities to improve aspects of federal technical assistance government-wide, such as making climate tools easier for decision makers to use. However, existing plans and reports do not amount to a government-wide plan with clear milestones and metrics to address the challenges we’ve identified related to the federal government’s role in providing climate-related technical assistance, and government and private sector decision makers accessing and using such information. The rating for this criterion remains at not met. The April 2016 joint memo by CEQ and OMB clarifies the process to monitor progress for certain agencies on several areas, including technical assistance. However, there are still no programs or mechanisms to monitor government-wide progress in addressing the challenges we’ve identified related to the federal government’s role in providing climate-related technical assistance. These challenges include clarifying the roles, responsibilities, and working relationships among federal, state, local, and private-sector entities; identifying the necessary resources and establishing the government-wide structure necessary to implement plans; and addressing the fragmentation of federal climate information across individual agencies that use the information in different ways to meet their missions. The rating for this criterion remains at not met. Without a program or mechanism to monitor government-wide action addressing relevant challenges, it is unclear how the federal government can demonstrate progress. As the provider of disaster aid, the federal government partially met two of the five criteria—leadership commitment, and capacity—and received a not met rating for the action plan, monitoring, and demonstrating progress criteria. Multiple factors, including increased disaster declarations, climate change effects, and changing development patterns increase federal fiscal exposure to severe weather events, which have cost the nation hundreds of billions of dollars over the past decade. For example, from fiscal years 2005 through 2014, the federal government obligated at least $277.6 billion across 17 federal department and agencies for disaster assistance programs and activities. Such federal disaster aid functions as the insurance of last resort in certain circumstances because whatever is not covered by insurance or built to be resilient to extreme weather increases the federal government’s implicit fiscal exposure through disaster relief programs. For example, a November 2016 OMB and CEA report found that total annual expected disaster relief for hurricane damage could increase by about $50 billion by 2075. the risk of facing a large fiscal exposure at any time. Moreover, fiscal constraints would make it more difficult for the federal government to respond effectively in the future and such expenses could affect resources available for other key government programs. Since our 2015 update, the federal government has made some progress addressing its federal fiscal exposure to disaster relief by improving resilience. Specifically, in our July 2015 report that examined disaster resilience efforts following Hurricane Sandy, we found that the President and Congress had taken multiple steps to enhance the federal government’s focus on disaster resilience through E.O.s, presidential policy directives, and enacted legislation. For example, we reported that E.O. 13690, Establishing a Federal Flood Risk Management Standard and a Process for Further Soliciting and Considering Stakeholder Input requires all future federal investments in, and affecting, floodplains to meet a certain elevation level, as established by the standard. Specifically, the standard provides 3 approaches that federal agencies can now use to establish the flood elevation and floodplain for consideration in their decision making: (1) climate-informed science approach, (2) adding 2-3 feet of elevation to the 100-year floodplain, and (3) using the 500-year floodplain. lifelines—such as communications, energy, transportation, and water management systems. As a result, we recommended that the Mitigation Framework Leadership Group (MitFLG)—an intergovernmental body to help coordinate hazard mitigation efforts of relevant local, state, tribal, and federal organizations—establish an investment strategy to identify, prioritize, and implement federal investments in disaster resilience. As part of its response to this priority recommendation, FEMA developed a high-level work plan to guide MitFLG’s development of a disaster resilience investment strategy. Additionally, in May 2016, MitFLG solicited stakeholder input on its design of a new Federal Mitigation Investment Strategy. According to MitFLG, the strategy will identify, prioritize, and guide federal investments in disaster resilience and hazard mitigation- related activities and include recommendations to the President and Congress on how the nation should prioritize future investments. Additionally, the October 2016 Resilience Council report identified several opportunities to further integrate climate resilience into federal agency missions and improve federal support for communities’ resilience-building efforts, such as expanding incentives and requirements to increase the resilience of infrastructure and building communities’ capacity for climate resilience efforts. For its role as the provider of disaster aid, the federal government’s ratings are as follows. The rating for this criterion remains at partially met. Top leadership has sustained support since 2009 through various E.O.s, such as E.O. 13690, and other documents, such as the October 2016 report on opportunities to enhance the nation’s resilience. However, because of the potential long-term effects of climate change, leadership needs to be sustained well into the future. identified three potential options for determining how a state, territory, or tribal government qualifies for federal disaster assistance. Additionally, in January 2016, FEMA solicited comments on implementing individualized deductibles for states, territories, and Indian tribes to qualify for disaster assistance under its Public Assistance program. FEMA is considering requiring states, territories, and Indian tribes to demonstrate satisfaction of a predetermined level of financial or other commitment before FEMA would provide financial assistance to them through this program. As of October 2016, FEMA was considering comments received on its proposal. Further, in March 2015, FEMA updated its guidance for state hazard mitigation plans to include a summary of the likelihood of future hazard events and changing future conditions, such as climate change, as a condition for receiving certain types of non-emergency disaster assistance. However, the federal government has yet to implement adequate budgeting and forecasting procedures to account for the costs of disasters. Additionally, the federal government has not yet defined the resources and government-wide structure to implement existing plans for reducing the federal fiscal exposure by improving resilience—with clear roles, responsibilities, and working relationships among federal, state, local, and private-sector entities. The rating for this criterion remains at not met. As we mentioned previously, the federal government has taken steps to develop an action plan for improving resilience through developing the Federal Mitigation Investment Strategy. However, because a draft of this strategy is not yet available, it is too soon to evaluate it as an action plan to address federal fiscal exposure through disaster aid. Additionally, although the October 2016 Resilience Council report identifies several opportunities to improve federal and local climate resilience, it does not meet several action plan characteristics from our high-risk criterion, such as establishing goals and performance measures, developing a plan with clear milestones and metrics, and ensuring there are processes for reporting results, among others. As a result, it is unclear to what extent the October 2016 report will help the government substantially complete actions to reduce federal fiscal exposure to climate change as the provider of disaster aid. The rating for this criterion remains at not met. The federal government has yet to implement programs or mechanisms to monitor the effectiveness of the measures identified across existing plans and standards. plans and standards, the federal government cannot demonstrate progress in implementing corrective measures. In response to a recommendation we made in May 2014, the Office of the Secretary of Defense (OSD) and the services took a number of actions from September 2014 to July 2015 to develop a project plan and milestones for completing DOD’s screening-level climate change vulnerability assessment. OSD also took action to direct the services to develop plans and milestones that describe how they intend to use the data collected through the assessment to support climate change adaptation planning. By implementing our recommendation, OSD and the services can now inform the department’s decision makers about the vulnerabilities of DOD facilities and missions to the potential impacts of climate change. (GAO-14-446) In response to a recommendation we made in October 2015, CEQ and OMB issued an April 2016 joint memo on climate adaptation planning that clarified the guidance for E.O. 13653 to include climate- related risks to supply chains in agency adaptation plans, among other things. (GAO-16-32) For additional information about this high-risk area, contact Alfredo Gómez Director, Natural Resources and Environment, (202)512-3841 or [email protected]. Climate Change: Improved Federal Coordination Could Facilitate Use of Forward-Looking Climate Information in Design Standards, Building Codes, and Certification. GAO-17-3. Washington, D.C.: November 30, 2016. Federal Fisheries Management: Additional Actions Could Advance Efforts to Incorporate Climate Information into Management Decisions. GAO-16-827. Washington, D.C.: September 28, 2016. Federal Disaster Assistance: Federal Departments and Agencies Obligated at Least $277.6 Billion during Fiscal Years 2005 through 2014. GAO-16-797. Washington, D.C.: September 22, 2016. Polar Weather Satellites: NOAA Is Working to Ensure Continuity but Needs to Quickly Address Information Security Weaknesses and Future Program Uncertainties. GAO-16-359. Washington, D.C.: May 17, 2016. Climate Information: A National System Could Help Federal, State, Local, and Private Sector Decision Makers Use Climate Information. GAO-16-37. Washington, D.C.: December 8, 2015. Federal Supply Chains: Opportunities to Improve the Management of Climate-Related Risks. GAO-16-32. Washington, D.C.: October 27, 2015. Hurricane Sandy: An Investment Strategy Could Help the Federal Government Enhance National Resilience for Future Disasters. GAO-15-515. Washington, D.C.: July 30, 2015. Climate Change: Better Management of Exposure to Potential Future Losses Is Needed for Federal Flood and Crop Insurance. GAO-15-28. Washington, D.C.: November 20, 2014. Climate Change Adaptation: DOD Can Improve Infrastructure Planning and Processes to Better Account for Potential Impacts, GAO-14-446. Washington, D.C.: May 30, 2014. Although the executive branch has undertaken numerous initiatives to better manage the more than $80 billion that is annually invested in information technology (IT), federal IT investments too frequently fail or incur cost overruns and schedule slippages while contributing little to mission-related outcomes. We have previously testified that the federal government has spent billions of dollars on failed IT investments. These investments often suffered from a lack of disciplined and effective management, such as project planning, requirements definition, and program oversight and governance. In many instances, agencies have not consistently applied best practices that are critical to successfully acquiring IT. In this regard, we have identified nine critical factors underlying successful major acquisitions, such as program officials actively engaging with stakeholders and staff having the necessary knowledge and skills. Nonetheless, agencies continue to have IT projects that perform poorly. Such projects have often used a “big bang” approach—that is, projects are broadly scoped and aim to deliver functionality several years after initiation. According to the Defense Science Board, this approach is often too long, ineffective, and unaccommodating of the rapid evolution of IT. Further, it is inconsistent with Office of Management and Budget (OMB) guidance directing that IT investments deliver functionality in 6-month increments. In August 2016, we reported that approximately half of the software projects across selected agencies were following this guidance. Federal IT projects have also failed due to a lack of oversight and governance. Executive-level governance and oversight across the government has often been ineffective, specifically from chief information officers (CIO). However, we have reported that some CIOs’ authority is limited in that not all CIOs have the authority to review and approve the entire agency IT portfolio. Recognizing the severity of issues related to the government-wide management of IT, in December 2014, Congress enacted IT acquisition reform provisions (commonly referred to as the Federal Information Technology Acquisition Reform Act or FITARA) as part of the Carl Levin and Howard P. ‘Buck’ McKeon National Defense Authorization Act for Fiscal Year 2015. Among other things, the law requires action to: (1) consolidate federal data centers, (2) enhance transparency and improve risk management, (3) enhance agency CIO authority, (4) review IT investment portfolios, (5) expand training and use of IT acquisition cadres, (6) purchase software government-wide, and (7) maximize the benefit of federal strategic sourcing. OMB and federal agencies’ efforts to improve the management of IT acquisitions and operations have resulted in meeting one of the five criteria for removal from our High-Risk List—leadership commitment— and partially meeting the remaining four criteria—capacity, action plan, monitoring, and demonstrated progress. Specifically, OMB, in its leadership role in addressing this high-risk area, has demonstrated its commitment by issuing guidance for agencies implementing FITARA, optimizing federal data centers, and acquiring and managing software licenses. investments by fully implementing the CIO authorities described in FITARA and ensuring that program staff have the necessary knowledge and skills to acquire IT. Further work is also needed to establish action plans to modernize or replace obsolete IT investments. Regarding monitoring of IT investments, agencies need to improve how their CIOs assess investment risk and how they report incremental development status. Finally, additional demonstrated progress is needed by OMB and agencies to (1) address our open recommendations related to IT acquisitions and operations, (2) deliver functionality every 12 months on major acquisitions, and (3) achieve planned IT portfolio and data center consolidation savings. To help address the management of IT investments, OMB and federal agencies should continue to expeditiously implement the requirements of FITARA. While OMB’s June 2015 FITARA implementation guidance provides a solid foundation for implementing the law and addresses the actions agencies are to take in regard to several initiatives that we have identified as high risk, OMB will need to provide consistent oversight to ensure that agency actions are completed and the desired results are achieved. Doing so should continue to improve the transparency and management of IT acquisitions and operations, as well as increase the authority of CIOs to provide needed direction and oversight. Beyond implementing FITARA and OMB’s guidance to improve the capacity to address our high-risk area, selected agencies will also need to implement our recent recommendations related to improving their IT workforce planning practices. When fully implemented, these key practices should better position agencies to efficiently make decisions that cross lines of expertise and improve their ability to assess and address gaps in knowledge and skills that are critical to the success of major IT acquisitions. Further, agencies will need to establish action plans to modernize or replace obsolete IT investments. By establishing such plans, agencies can reduce the risk of continuing to maintain investments that have outlived their effectiveness and are consuming resources that outweigh their benefits. To improve how they monitor the acquisition and operations of IT investments, federal agencies will need to implement our recommendations to address weaknesses in their reporting of investment risk and incremental development implementation on the IT Dashboard. Doing so will provide OMB and agencies with increased transparency and oversight of the government’s billions of dollars in IT investments. Finally, initial progress has been made in addressing this high-risk area, including implementation of 46 percent of our prior recommendations. However, the remaining recommendations include 17 priority recommendations to agencies to, among other things, report all data center consolidation cost savings to OMB, address weaknesses in their management of software licenses, and improve their implementation of PortfolioStat. OMB and agencies need to take additional actions to (1) implement at least 80 percent of our recommendations related to the management of IT acquisitions and operations, (2) ensure that a minimum of 80 percent of the government’s major acquisitions deliver functionality every 12 months, and (3) achieve at least 80 percent of the over $6 billion in planned PortfolioStat savings and 80 percent of the more than $5 billion in savings planned for data center consolidation. It will be important for OMB and agencies to continue to make demonstrated progress against these metrics in order to more effectively and efficiently invest in IT, reduce the risk of major acquisitions, and achieve additional cost savings. OMB and the Federal CIO have demonstrated leadership commitment. Specifically, OMB’s June 2015 guidance for implementing FITARA addresses actions for agencies to take in several IT management areas we have identified as high risk, such as reviewing of poorly performing investments, reporting on investment risk, consolidating data centers, managing agencies’ IT portfolios, and purchasing government-wide software licenses. For example, OMB’s guidance reiterates the requirement for agencies to hold TechStat sessions—face-to-face meetings between OMB and agency leadership to terminate or turn around IT investments that are failing or are not producing results—and also requires agencies to report quarterly on the root causes of performance issues, to develop corrective action plans, and to establish a timeline for implementing the corrective actions. OMB also released more specific guidance on acquiring and managing software licenses and operating federal data centers—two areas that we identified in our 2015 high-risk report as needing attention. Specifically, in June 2016, OMB issued guidance that requires agencies to maintain and analyze an agency-wide inventory of software licenses to ensure compliance with software licensing agreements, consolidate redundant applications, and identify other cost savings opportunities. Regarding federal data centers, in August 2016, OMB issued a memorandum that established the Data Center Optimization Initiative, noting that this new initiative would supersede the Federal Data Center Consolidation Initiative started in 2010. Among other things, OMB’s guidance requires agencies to develop and report on data center strategies to consolidate inefficient infrastructure, optimize existing facilities, improve security posture, save money, and transition to more efficient infrastructure. OMB’s memorandum also establishes metrics for data center optimization and targets to be achieved by the end of fiscal year 2018. In addition, the Federal CIO and OMB senior staff members have routinely met with us over the last 2 years to discuss their plans and progress in addressing this high-risk area. According to these officials, and as indicated through its actions, OMB is committed to demonstrating sustained progress in addressing this high-risk area. Going forward, it will be important for OMB to maintain its current level of top leadership support and commitment to ensure that agencies continue to successfully execute OMB’s guidance on implementing FITARA and related IT initiatives. OMB and federal agencies partially met the criterion for having the capacity to improve the management of IT acquisitions and operations. Specifically, OMB’s June 2015 guidance addresses how agencies are to implement FITARA’s provisions related to enhancing the authority of federal CIOs. Among other things, OMB provided direction on enabling the CIOs’ role to integrate IT with the capabilities they support wherever IT may affect functions, missions, or operations; strengthening agency CIOs’ accountability for IT cost, schedule, performance, and security; and strengthening the relationship between agency CIOs and bureau CIOs. Further, OMB’s guidance includes several actions that agencies are to take to establish a basic set of roles and responsibilities (referred to as the “common baseline”) for CIOs and other senior agency officials that are needed to implement the authorities described in the law. For example, agencies are to conduct a self-assessment to identify where they conform to the common baseline and where they deviate. OMB guidance also requires agencies to annually update their self-assessment and report their progress reaching FITARA implementation milestones. Agencies’ first updates were due by April 30, 2016, and additional updates are due on an annual basis thereafter. As of December 2016, 19 of 24 major federal agencies had made their FITARA milestone status information publicly available, as required by OMB; however, all 19 agencies had milestones that were still in progress or not yet started. In addition, another area where agencies can improve their capacity to acquire IT investments is in assessing IT workforce skills gaps. Specifically, in November 2016, we reported that five selected agencies had not consistently applied key workforce planning steps and activities that help to ensure that program staff members have the knowledge and skills critical to successfully acquire IT investments. For example, four agencies had not demonstrated an established IT workforce planning process. The weaknesses identified were due, in part, to agencies lacking comprehensive policies that required such activities, or failing to apply the policies to IT workforce planning. We concluded that, until these weaknesses are addressed, the agencies risk not adequately assessing and addressing gaps in knowledge and skills that are critical to the success of major acquisitions. Accordingly, we recommended that the five selected agencies address the IT workforce planning practices that we identified as having weaknesses. OMB and federal agencies have partially met the criterion for establishing an action plan to address this high-risk area. In addition to requiring agencies to conduct self-assessments, OMB’s June 2015 FITARA implementation guidance required agencies to submit a plan describing the changes they will make to ensure that common baseline responsibilities are implemented. These plans are to address the areas of IT management that we have identified as high risk, such as reviewing poorly performing investments, managing agencies’ IT portfolios, and implementing incremental development. For example, according to OMB’s June 2015 guidance, agencies’ plans are required to define IT processes and policies which ensure that the CIO certifies that IT investments are adequately implementing incremental development. consistently meet OMB’s FITARA implementation deadlines going forward. Further, effectively implementing these plans will be critical to ensuring that agencies are able to effectively manage their IT investments and that CIOs have the authorities required under FITARA. We have ongoing work reviewing agency self-assessments and FITARA implementation plans, including the extent to which agencies have defined the role of the CIO in accordance with federal law and guidance. Significant work also remains for federal agencies to establish action plans to modernize or replace obsolete IT investments. Specifically, in May 2016, we reported that many agencies were using systems which had components that were, in some cases, at least 50 years old. For example, we determined that the Department of Defense (DOD) was using 8-inch floppy disks in a legacy system that coordinates the operational functions of the nation’s nuclear forces. In addition, the Department of the Treasury was using assembly language code—a computer language initially used in the 1950s and typically tied to the hardware for which it was developed. Table 5 provides examples of legacy systems across the federal government that agencies report are 30 years old or older and use obsolete software or hardware, and identifies those that do not have specific plans with time frames to modernize or replace these investments. To address this issue, we recommended that 12 agencies identify and plan to modernize or replace legacy systems, including establishing time frames, activities to be performed, and functions to be replaced or enhanced. Most agencies agreed with our recommendations or had no comment. OMB and federal agencies have partially met the criterion for monitoring efforts to address this high-risk area. Specifically, OMB took action to improve its use of TechStat sessions, which are intended to increase accountability and transparency and to improve investment performance. We previously reported that the number of TechStats that OMB and selected agencies had performed represented only a small percentage (33 percent) of the number of IT investments with a medium- or high-risk CIO rating. OMB’s June 2015 FITARA implementation guidance strengthened the TechStat process by requiring agencies to hold a TechStat session on any investment that has a high-risk CIO rating for 3 consecutive months, beginning on July 1, 2015. As a result, OMB and agencies will be able to more quickly intervene to turn around, halt, or terminate troubled IT projects. government-wide and agency-specific progress towards meeting applicable optimization targets, and cumulative cost savings and cost avoidance realized. OMB’s efforts to expand the IT Dashboard should continue to increase transparency into government-wide and agency-specific progress on this important IT initiative. However, significant work still remains for federal agencies to improve their monitoring of IT investments through their CIO risk assessments on the IT Dashboard. Specifically, in June 2016, we reported that our assessments of the risk ratings showed more risk than did the associated CIO ratings. In particular, of the 95 investments reviewed, our assessments matched the CIO ratings 22 times, showed more risk 60 times, and showed less risk 13 times. Figure 10 summarizes how our assessments compared to the select investments’ CIO ratings. in IT are not receiving the appropriate levels of oversight. Accordingly, we made 25 recommendations to 15 agencies to improve the quality and frequency of their CIO ratings. Most agencies agreed with our recommendations or had no comment. Another area of concern regarding the monitoring of IT acquisitions is agencies’ reported use of incremental development. In August 2016, we reported on 7 selected agencies’ software development projects and determined that the percentage delivering functionality every 6 months was reported at 45 percent for fiscal year 2015 and planned for 54 percent in fiscal year 2016. However, significant differences existed between the delivery rates that the agencies reported to us and what they reported on the IT Dashboard. For example, the percentage of software projects delivering every 6 months that was reported to us by the Department of Commerce was about a 42 percentage point decrease from what was reported on the IT Dashboard. In contrast, DOD reported to us a 55 percentage point increase from what was reported on the IT Dashboard. Figure 11 compares what the 7 agencies reported on the IT Dashboard and what numbers they reported to us. Improving the Management of IT Acquisitions and Operations The Department of Defense did not provide requested information in time to verify the information reported for a sample of projects. We reported that the significant differences in delivery rates were due, in part, to agencies having different interpretations of OMB’s guidance on reporting software development projects and because the information reported to us was generally more current than the information reported on the IT Dashboard. We concluded that, until the inconsistences in the information reported to us versus the information provided on the IT Dashboard are addressed, the seven agencies we reviewed are at risk that OMB and key stakeholders may make decisions regarding agency investments without the most current and accurate information. Accordingly, we made 12 recommendations to 8 agencies to improve their reporting of incremental data on the IT Dashboard, among other things. Most agencies agreed with our recommendations or did not comment. OMB and federal agencies partially met the criterion for demonstrating progress in improving the management of IT acquisitions and operations. In our 2015 high-risk report, we noted that OMB and agencies would need to demonstrate government-wide progress in the following key areas: OMB and agencies should, within 4 years, implement at least 80 percent of our recommendations related to managing IT acquisitions and operations. Agencies should ensure that a minimum of 80 percent of the government’s major acquisitions deliver functionality every 12 months. Agencies should achieve no less than 80 percent of the over $6 billion in planned IT portfolio savings and 80 percent of the more than $5 billion in savings planned for data center consolidation. Between fiscal years 2010 and 2015, we made 803 recommendations to OMB and federal agencies to address shortcomings in IT acquisitions and operations, including many to improve the implementation of the recent initiatives and other government-wide, cross-cutting efforts. As of December 2016, about 46 percent of these recommendations had been fully implemented. This is an additional 23 percent compared to the percentage we reported in our 2015 high-risk report. For example, in August 2016, the National Aeronautics and Space Administration (NASA) addressed our priority recommendation to report its data center consolidation cost savings and avoidances—totaling approximately $42 million between fiscal years 2012 through 2016—to OMB. In fiscal year 2016, we made 202 new recommendations, thus further reinforcing the need for OMB and agencies to address the shortcomings in IT acquisitions and operations. Table 6 summarizes OMB’s and agencies’ implementation of our recommendations. Following the table, figure 12 summarizes OMB’s and agencies’ implementation of our recommendations against the 80 percent target. functions. In November 2013, we reported that agencies continued to identify duplicative spending as part of PortfolioStat; however, weaknesses existed in agencies’ implementation of the initiative, such as limitations in the CIOs’ authority. In April 2015, we reported that, although agencies had achieved approximately $1.1 billion in PortfolioStat savings, inconsistencies in OMB’s and agencies’ reporting made it difficult to reliably measure progress in achieving savings. In total, our 2 reports made 69 recommendations to improve OMB and agencies’ implementation of PortfolioStat; and as of December 2016, 7 of our recommendations had been implemented. In addition, while agencies have made progress on efforts to ensure that the government’s major acquisitions deliver functionality every 12 months, additional work is needed. Specifically, in August 2016, we determined that 7 selected agencies reported delivering functionality at least every 12 months on 77 percent of their projects for fiscal year 2015. However, as previously stated, there were also inconsistencies with the selected agencies’ reporting of their incremental development status and we made recommendations to the agencies to address these issues. It will be critical for agencies to continue to improve their use of incremental development in order to reduce the risk that their projects will not meet cost, schedule, and performance goals and improve their reporting to better ensure that project decision making is based on current and accurate information. operational IT investments. Regarding the $6 billion in planned PortfolioStat savings identified in our 2015 high-risk report, agencies reported achieving approximately $1.4 billion in savings from fiscal years 2012 through 2015, or approximately 24 percent of planned PortfolioStat savings. Further, in March 2016, we reported that agencies had achieved an estimated $2.8 billion in cost savings and avoidances related to their data center consolidation efforts from fiscal years 2011 to 2015. This is approximately 51 percent of the $5.3 billion planned savings identified in our 2015 high-risk report. In July 2016, Congress enacted the MEGABYTE Act of 2016, which contained provisions to improve the management of software licenses. The act requires OMB to direct agency CIOs to, among other things, establish a comprehensive inventory of software license agreements and analyze software usage and other data to make cost-effective decisions. For additional information about this high-risk area, contact David A. Powner at (202) 512-9286 or [email protected] or Carol Harris at (202) 512-4456 or [email protected]. IT Workforce: Key Practices Help Ensure Strong Integrated Program Teams; Selected Departments Need to Assess Skill Gaps. GAO-17-8. Washington, D.C.: November 30, 2016. Information Technology: Agencies Need to Improve Their Application Inventories to Achieve Additional Savings. GAO-16-511. Washington, D.C.: September 29, 2016. Information Technology Reform: Agencies Need to Increase Their Use of Incremental Development Practices. GAO-16-469. Washington, D.C.: August 16, 2016. Digital Service Programs: Assessing Results and Coordinating with Chief Information Officers Can Improve Delivery of Federal Projects. GAO-16-602. Washington, D.C.: August 15, 2016. Information Technology: Better Management of Interdependencies between Programs Supporting 2020 Census Is Needed. GAO-16-623. Washington, D.C.: August 9, 2016. IT Dashboard: Agencies Need to Fully Consider Risks When Rating Their Major Investments. GAO-16-494. Washington, D.C.: June 2, 2016. Information Technology: Federal Agencies Need to Address Aging Legacy Systems, GAO-16-468. Washington, D.C.: May 25, 2016. DOD Major Automated Information Systems: Improvements Can Be Made in Reporting Critical Changes and Clarifying Leadership Responsibility. GAO-16-336. Washington, D.C.: March 30, 2016. Data Center Consolidation: Agencies Making Progress, but Planned Savings Goals Need to Be Established . GAO-16-323. Washington, D.C.: March 3, 2016. Information Technology Reform: Billions of Dollars in Savings Have Been Realized, but Agencies Need to Complete Reinvestment Plans. GAO-15-617. Washington, D.C.: September 15, 2015. For nearly a decade, we, along with inspectors general, special commissions, and others, have reported that federal agencies have ineffectively administered Indian education and health care programs and inefficiently fulfilled their responsibilities for managing the development of Indian energy resources. In particular, we have found numerous challenges facing the Department of the Interior’s (Interior) Bureau of Indian Education (BIE) and Bureau of Indian Affairs (BIA)—both under the Office of the Assistant Secretary for Indian Affairs (Indian Affairs)—and the Department of Health and Human Services’ (HHS) Indian Health Service (IHS), in administering education and health care services, which put the health and safety of American Indians served by these programs at risk. These challenges included poor conditions at BIE school facilities that endangered students and inadequate oversight of health care that hindered IHS’s ability to ensure quality care to Indian communities. In addition, we have reported that BIA mismanages Indian energy resources held in trust and thereby limits opportunities for tribes and their members to use those resources to create economic benefits and improve the well- being of their communities. Congress recently noted, “through treaties, statutes, and historical relations with Indian tribes, the United States has undertaken a unique trust responsibility to protect and support Indian tribes and Indians.” In light of this unique trust responsibility and concerns about the federal government ineffectively administering Indian education and health care programs and mismanaging Indian energy resources, we are adding these programs as a high-risk issue because they uniquely affect tribal nations and their members. Federal agencies have ineffectively administered and implemented Indian education and health care programs and mismanaged Indian energy resources in the following broad areas: (1) oversight of federal activities; (2) collaboration and communication; (3) federal workforce planning; (4) equipment, technology, and infrastructure; and (5) federal agencies’ data. Although federal agencies have taken some actions to address the 41 recommendations we made related to Indian programs, there are currently 39 that have yet to be fully resolved. We plan to continue monitoring federal efforts to address the 39 recommendations that have yet to be fully resolved. To this end, we have ongoing work focusing on accountability for safe schools and school construction and tribal control of energy delivery, management, and resource development. In the past 3 years, we issued 3 reports on challenges with Indian Affairs’ management of BIE schools in which we made 13 recommendations. Eleven recommendations below remain open. To help ensure that BIE schools provide safe and healthy facilities for students and staff, we made 4 recommendations which remain open, including that Indian Affairs ensure the inspection information it collects on BIE schools is complete and accurate; develop a plan to build schools’ capacity to promptly address safety and health deficiencies; and consistently monitor whether BIE schools have established required safety committees. To help ensure that BIE conducts more effective oversight of school spending, we made 4 recommendations which remain open, including that Indian Affairs develop a workforce plan to ensure that BIE has the staff to effectively oversee school spending; put in place written procedures and a risk-based approach to guide BIE in overseeing school spending; and improve information sharing to support the oversight of BIE school spending. To help ensure that Indian Affairs improves how it manages Indian education, we made 5 recommendations. Three recommendations remain open, including that Indian Affairs develop a strategic plan for BIE that includes goals and performance measures for how its offices are fulfilling their responsibilities to provide BIE with support; revise Indian Affairs’ strategic workforce plan to ensure that BIA regional offices have an appropriate number of staff with the right skills to support BIE schools in their regions; and develop and implement decision-making procedures for BIE to improve accountability for BIE schools. IHS beneficiaries through the Patient Protection and Affordable Care Act (PPACA) have on PRC funds, we recommend that IHS concurrently develop potential options to streamline requirements for program eligibility. To help ensure successful outreach efforts regarding PPACA coverage expansions, we recommend that IHS realign current resources and personnel to increase capacity to deal with enrollment in Medicaid and the exchanges and prepare for increased billing to these payers. If payments for physician and other nonhospital services are capped, we recommend that IHS monitor patient access to these services. To help ensure a more equitable allocation of funds per capita across areas, we recommended that Congress consider requiring IHS to develop and use a new method for allocating PRC funds. To make IHS’s allocation of PRC program funds more equitable, we recommended that IHS develop (1) written policies and procedures to require area offices to notify IHS when changes are made to the allocation of funds to PRC programs; (2) use actual counts of PRC users in any formula allocating PRC funds that relies on the number of active users; and (3) use variations in levels of available hospital services, rather than just the existence of a qualifying hospital, in any formula for allocating PRC funds that contain a hospital access component. To develop more accurate data for estimating the funds needed for the PRC program and improve IHS oversight, we recommended that IHS develop a written policy documenting how it evaluates need for the PRC program, and disseminate it to area offices so they understand how unfunded services data are used to estimate overall program needs. We also recommend that IHS develop written guidance for PRC programs outlining a process to use when funds are depleted but recipients continue to need services. In the past 2 years, we issued 3 reports on developing Indian energy resources in which we made 14 recommendations to BIA. All recommendations remain open. To help ensure BIA can verify ownership in a timely manner and identify resources available for development, we made 2 recommendations, including that Interior take steps to improve its geographic information system mapping capabilities. To help ensure BIA’s review process is efficient and transparent, we made 2 recommendations, including that Interior take steps to develop a documented process to track review and response times for energy-related documents that must be approved before tribes can develop energy resources. To help improve clarity of tribal energy resource agreement regulations, we recommended BIA provide additional guidance to tribes on provisions that tribes have identified to Interior as unclear. To help ensure that BIA’s effort to streamline the review and approval process for revenue-sharing agreements achieves its objectives, we made 3 recommendations, including that Interior establish time frames for the review and approval of Indian revenue-sharing agreements for oil and gas, and establish a system for tracking and monitoring the review and approval process to determine whether time frames are met. To help improve efficiencies in the federal regulatory process, we made 4 recommendations, including that BIA take steps to coordinate with other regulatory agencies so the Indian Energy Service Center can serve as a single point of contact or lead agency to navigate the regulatory process. To help ensure that it has a workforce with the right skills, appropriately aligned to meet the agency’s goals and tribal priorities, we made 2 recommendations, including that BIA establish a documented process for assessing BIA’s workforce composition at agency offices. It is critical that Congress maintain its focus on improving the effectiveness with which federal agencies meet their responsibilities to serve tribes and their members. Since 2013, we testified at 6 hearings to address significant weaknesses we found in the federal management of programs that serve tribes and their members. Sustained congressional attention to these issues will highlight the challenges discussed here and could facilitate federal actions to improve Indian education and health care programs and the development of Indian energy resources. Indian Affairs, through BIE, is responsible for providing quality education opportunities to Indian students and oversees 185 elementary and secondary schools that serve approximately 41,000 students on or near Indian reservations in 23 states, often in rural areas and small towns. About two-thirds of these schools are operated by tribes, primarily through federal grants, and about one-third are operated directly by BIE. BIE’s Indian education programs originate from the federal government’s trust responsibility to Indian tribes, a responsibility established in federal statutes, treaties, court decisions, and executive actions. It is the policy of the United States to fulfill this trust responsibility for educating Indian children by working with tribes to ensure that education programs are of the highest quality and that children are provided a safe and healthy environment in which to learn. Students attending BIE schools generally must be members of federally recognized Indian tribes, or descendants of members of such tribes, and reside on or near federal Indian reservations. All BIE schools—both tribally- and BIE-operated—receive almost all of their operational funding from federal sources, namely, Interior and the Department of Education, totaling about $1.2 billion in 2016. Indian Affairs considers many BIE schools to be in poor condition. BIE is primarily responsible for its schools’ educational functions, while their administrative functions—such as safety, facilities, and property management—are divided mainly between two other Indian Affairs’ offices, BIA and the Office of the Deputy Assistant Secretary of Management. However, frequent turnover of leadership in these offices has hampered efforts to improve Indian education over the years. For example, in September 2013, we reported that from 2000 through 2013 there were repeated changes in the tenure of acting and permanent assistant secretaries of Indian Affairs as well as acting and permanent directors of BIE. Since that time, leadership turnover has continued in these offices. For example, in March 2016, the previous BIE director was removed for violating federal hiring practices. ensure that its regional offices annually inspect the safety and health of all BIE school campuses, as required, or that the information it collects through inspections is complete and accurate, and we recommended that it take such actions. Specifically, we found that Indian Affairs did not conduct annual inspections at about 1 in 3 BIE schools from fiscal years 2012 through 2015. Further, 4 out of 10 regions did not conduct any inspections during this period. We also found that Indian Affairs did not systematically evaluate the thoroughness of the school safety inspections it conducted or monitor the extent to which inspection procedures varied within and across regions. Without Indian Affairs monitoring whether safety inspectors in each of its regions are consistently following appropriate procedures and guidance, inspections in different regions may continue to vary in completeness and miss important safety and health deficiencies at schools that could pose dangers to students and staff. In September 2016, Indian Affairs provided documentation that it had conducted fiscal year 2016 annual safety inspections at all BIE schools, but it did not include evidence that it had taken steps to ensure that its inspection information was complete and accurate. As of January 2017, we had not received further updates from Indian Affairs. We will continue to monitor its efforts in this area. In a February 2015 testimony, we reported that Indian Affairs did not consistently oversee some BIE school construction projects. For example, we found that at 1 BIE school Indian Affairs managed a $3.5 million project to replace roofs, but the new roofs had leaked continually since they were installed, causing mold and ceiling damage in classrooms, according to agency documents. At another school, Indian Affairs funded construction of a $1.5 million building for school bus maintenance and bus storage, but the size of the building did not allow a large school bus to fit on the lift when the exterior door was closed. documentation demonstrating it has developed a system for overseeing Department of Education formula grants provided to BIE schools to provide services for children with special needs and to expand and improve educational programs for students from low-income families. However, Indian Affairs was unable to provide documentation showing that it has developed written procedures to oversee funds BIE schools receive from their largest funding source— Interior’s Indian School Equalization Program. Further, as of late September 2016, BIE still had not hired additional staff to oversee school spending, among other duties. Indian Affairs also reported that it developed a risk-based approach to oversee BIE school expenditures, but we found it has not taken steps to fully implement this approach. Specifically, Interior reported that its risk- based approach was to post schools’ single audits on a website to enable officials responsible for fiscal monitoring to be able to target those at greatest risk of misusing federal funds. However, in reviewing the site, we found that audits for fewer than half of the schools had been posted on the site during each of the past 2 fiscal years. Access to all or at least the vast majority of these audits is critical for Indian Affairs to be able to conduct risk-based fiscal monitoring activities. Limited federal workforce planning. We have found limited workforce planning in several key areas related to BIE schools. In a February 2015 testimony, we noted that the capacity of Indian Affairs and BIE school staff to address school facility needs is limited due to gaps in expertise, steady declines in staffing levels, and limited institutional knowledge. that the agency develop a comprehensive workforce plan to ensure that BIE has an adequate number of staff with the requisite knowledge and skills to effectively oversee BIE school expenditures. Interior agreed to implement this recommendation, but as of January 2017, it had not provided documentation that it had done so. In a September 2013 report, we found that Indian Affairs could not ensure that staffing levels at Indian Affairs’ regional offices were adjusted to meet the needs of BIE schools in regions with varying numbers of schools, ranging from 2 to 65, because it had not updated its strategic workforce plan. We recommended that Indian Affairs revise its strategic workforce plan to ensure that its employees providing administrative support to BIE are placed in the appropriate offices to ensure that regions with a large number of schools have sufficient support. Indian Affairs agreed to implement this recommendation. In September 2016, Interior provided us with a revised workforce plan for Indian Affairs. However, this plan did not include information about the workforce needs related to the Indian Affairs offices that provide administrative support to BIE and its schools and therefore did not address the recommendation. As of January 2017, we had not received further updates from Indian Affairs. We will continue to monitor its efforts in this area. Outdated and deteriorating equipment, technology, and infrastructure. Aging BIE school facilities and equipment contribute to degraded and unsafe conditions for students and staff. In a March 2016 report, we found at one school 7 boilers that failed inspection because of multiple high-risk safety deficiencies, including elevated levels of carbon monoxide and a natural gas leak. Four of the boilers were located in a student dormitory, and 3 were located in classroom buildings. All but one of the boilers were about 50 years old. While the poor condition of the boilers posed an imminent danger to the safety of students and staff, most of the boilers were not repaired until about 8 months after failing their inspection, prolonging safety risks to students and staff. In a February 2015 testimony, we reported that BIE schools face a variety of challenges with their facilities, such as aging buildings and problems that result from years of deferred maintenance. For example, at one school built in 1959 we observed extensive cracks in concrete block walls and supports, which a BIA official said resulted from a shifting foundation. report, we found that Indian Affairs lacks sound information on safety and health conditions of all BIE schools. Specifically, we found that its nationwide information on safety and health deficiencies at schools is not complete and accurate because of key weaknesses in its inspection program. Without inspection information that is complete and accurate, Indian Affairs cannot effectively determine the magnitude and severity of safety and health deficiencies at schools. As a result, it cannot ensure BIE school facilities are safe for students and staff and currently meet safety and health requirements. We recommended that Indian Affairs take steps to ensure that the inspection information it collects on BIE schools is complete and accurate, among other things. As of January 2017, the agency had not provided documentation that it had done so. In a February 2015 testimony, we reported that issues with the quality of data on BIE school conditions—such as inconsistent data entry by schools and insufficient quality controls—makes it difficult to determine the actual number of schools in poor condition and undermines Indian Affairs’ ability to effectively track and address problems at school facilities. The Indian Health Service (IHS), an agency within HHS, is charged with providing health care to approximately 2.2 million Indians. In fiscal year 2016, IHS allocated about $1.9 billion for health services provided by federally and tribally operated hospitals, health centers, and health stations. Federally operated facilities provide mostly primary and emergency care, in addition to some ancillary or specialty services. The federally operated system consists of 26 hospitals, 56 health centers, and 32 health stations. IHS hospitals range in size from 4 to 133 beds. exacerbate the severity of a patient’s condition and necessitate more intensive treatment. PPACA expanded or created new health care coverage options that may benefit Indians, including a state option to expand Medicaid eligibility to individuals with incomes at or below 138 percent of the federal poverty level (FPL), federal premium tax credits for individuals obtaining insurance through health insurance exchanges with incomes between 100 and 400 percent of the FPL, and cost sharing exemptions for Indians who are members of federally recognized tribes with incomes at or below 300 percent of the FPL who purchase insurance through the exchanges. In September 2013, we estimated that PPACA’s new coverage options may allow hundreds of thousands of Indians to obtain health care benefits for which they were not previously eligible, assuming all states expanded their Medicaid programs. We reported that, if Indians enroll in one of these options and choose to receive care through IHS, increased revenue from third party payers such as Medicaid could free up IHS resources and help alleviate pressure on the IHS budget. Inadequate oversight of federal activities. IHS provides inadequate oversight of health care, both of its federally operated facilities and through the PRC program. In January 2017, we reported that IHS provided limited and inconsistent oversight of the quality of care provided in its federally operated facilities. As a result, the agency cannot ensure that patients receive quality care. IHS has recently finalized a quality framework designed to address these deficiencies and improve its oversight. We recommended that, as part of implementing the quality framework, IHS ensure that agency-wide standards for the quality of care provided in its federally operated facilities are developed, and that facility performance in meeting these standards is systematically monitored over time. HHS agreed with our recommendation and cited steps it already has underway to improve the quality of care in IHS’s federally-operated facilities. HHS described the development of the IHS Quality Framework and Implementation Plan released in November 2016. However, as of January 2017, IHS has not developed agency-wide standards for the quality of care provided in its federally operated facilities. weeks for an initial exam with a family medicine physician, and new patients in internal medicine may wait 3 to 4 months for an initial exam. IHS has delegated this responsibility to its area offices and has not conducted any systematic, agency-wide oversight of the timeliness of primary care. Without these standards, IHS cannot know whether it is providing sufficient primary care to meet the needs of its patients. We recommended that IHS develop and communicate specific agency-wide standards for patient wait times in federally operated facilities, monitor patient wait times, and take corrective actions when standards are not met. HHS stated that it agreed with the need to improve patient wait times at IHS federally-operated facilities to ensure that primary care is available and accessible to Indians. HHS described its plan to establish an Office of Quality Health Care at IHS Headquarters to provide for national policy and oversight of critical quality improvement strategies and ensure their success and accountability. As of January 2017, IHS has not established the Office of Quality Health Care, and has not developed agency-wide standards for patient wait times in federally operated facilities. specified allocation formula that may vary across areas. Neither bill became law. Ineffective collaboration and limited communication. In a June 2012 report, we found that IHS does not require its area offices to inform IHS headquarters if they distribute program increase funds to local PRC programs using different criteria than the PRC allocation formula suggested by headquarters. As a result, IHS may be unaware of additional funding variation across areas. We recommended that IHS develop written policies and procedures to require area offices to notify IHS when they diverge from the formula for allocating funds to PRC programs. HHS concurred with this recommendation and noted that guidance requiring area offices to report these changes to IHS headquarters would be added to the PRC manual, but did not specify a date for doing so. As of January 2017, IHS has not added this guidance to the manual. Limited federal workforce planning. In a March 2016 report, we reported that IHS officials told us that an insufficient workforce was the biggest impediment to ensuring patients could access timely primary care. According to IHS’s 2016 budget justification, there were over 1,550 vacancies for health care professionals throughout the IHS health care system including: physicians, dentists, nurses, pharmacists, physician assistants, and nurse practitioners. According to IHS officials, staffing vacancies have created obstacles for facilities working to provide primary care. In September 2013, we found that IHS did not have an effective plan in place to ensure that sufficient staff would be in place to assist with increased enrollment and third party billing under expanded Medicaid or the exchanges beginning in 2014 under PPACA. Without a plan, IHS may not be able to ensure that a sufficient number of staff are available to assist with enrollment and to process increased third-party payments. We recommended that IHS realign current resources and personnel to increase capacity to assist with these efforts. HHS neither agreed nor disagreed with this recommendation. As of January 2017, IHS has not implemented this recommendation. facility, and some PRC program officials noted that their number of staff was below these standards, contributing to delays in determining eligibility for the program and processing payments to providers. We recommended that IHS use available PRC funds to pay for PRC program staff. HHS disagreed with this recommendation, stating its intent to use PRC funds to pay only for services, not staff, since PRC funding was not sufficient to pay for all needed services. We acknowledged the difficult challenges and choices faced by PRC programs when program funds are not available to pay for all needed services, but maintained that without using funds to pay for staff, some PRC programs would continue to have staffing levels below IHS’s staffing standards model, which contributes to delays in administering the program. As of January 2017, IHS has not implemented this recommendation. Outdated and deteriorating equipment, technology, and infrastructure. In March 2016, we reported that IHS officials told us that access to timely primary care at some health care facilities serving Indian communities is hindered by outdated medical and telecommunications equipment, such as analog mammography machines and telephones with an insufficient number of lines for scheduling patient appointments. Incomplete and inaccurate data. In a June 2012 report, we found that IHS officials do not believe that its PRC program data are complete or that areas collect these data in the same manner. Without accurate data, IHS cannot know if the proportion of actual PRC users is consistent across areas. We made three recommendations to improve the accuracy of the PRC data for future allocations, including using actual counts of PRC users, using variation in levels of available hospital services in the funding formula, and, as mentioned above, requiring area offices to notify headquarters when they diverge from the formula for allocating funds to PRC programs. HHS did not concur with our recommendation to use actual counts of PRC users, rather than all IHS users, in any formula for allocating PRC funds that relies on the number of active users, stating that IHS’s combined count of all users is intended to reflect the health care needs of PRC users. HHS concurred with our recommendation that IHS use variations in levels of available hospital services to allocate PRC funds. As of January 2017, IHS has not implemented these recommendations. that IHS take steps to improve its ability to measure timeliness by modifying its claims data system to distinguish between two types of referrals and establish separate timeframe targets for each type. HHS concurred with this recommendation, but as of January 2017, IHS has not implemented it. Developing energy resources is vital for the livelihood and long-term economic wellbeing of some Indian tribes and their members. More specifically, energy development provides opportunities to improve poor living conditions and decrease high levels of poverty. Tribes and their members determine how to use Indian energy resources to meet the needs of the community. However, if the resources are held in trust or restricted status, BIA—through its 12 regional offices, 85 agency offices, and other supporting offices—generally must review and approve leases, permits, and other documents required to develop the resources. In 2014, in response to tribal requests for increased coordination and efficient management of their resources from the numerous federal regulatory agencies involved with Indian energy development, Interior took initial steps to form a new office, the Indian Energy Service Center (Service Center)—with BIA as the lead agency. According to Interior’s fiscal year 2016 budget justification, the Service Center is intended to, among other things, help expedite the leasing and permitting processes associated with Indian energy development. we reviewed identified that BIA’s review and approval process can be lengthy and increase development costs and project development times, resulting in missed development opportunities, lost revenue, and jeopardized viability of projects. For example, according to a tribal official, BIA took as long as 8 years to review some of its energy-related documents. In the meantime, the tribe estimates it lost $95 million in revenues it could have earned from tribal permitting fees, oil and gas severance taxes, and royalties. In another example, one lease for a proposed utility-scale wind project took BIA more than 3 years to review and approve. According to a tribal official, the long review time has contributed to uncertainty about the continued viability of the project because data used to support the economic feasibility and environmental impact of the project became too old to accurately reflect current conditions. We recommended that Interior direct BIA to develop a documented process to track its review and response times. In response, Interior stated it would try to implement a tracking and monitoring mechanism by the end of fiscal year 2017 for oil and gas leases. However, it did not indicate whether it intends to track and monitor its review of other energy-related documents that must be approved before tribes can develop resources. Without comprehensively tracking and monitoring its review process, BIA cannot ensure that documents are moving forward in a timely manner, and lengthy review times may continue to contribute to lost revenue and missed development opportunities for Indian tribes. In a June 2016 report, we found that BIA took steps to improve its process for reviewing revenue-sharing agreements, but still had not established a systematic mechanism for monitoring or tracking. With respect to revenue sharing agreements, we recommended, among other things, that BIA develop a systematic mechanism for tracking these agreements through the review and approval process. Interior concurred with these recommendations and stated that BIA will develop such a mechanism and in the meantime use a centralized tracking spreadsheet. serve as a single point of contact for permitting requirements. Without serving in these capacities, the Service Center will be limited in its ability to improve efficiencies in the federal regulatory process. We also found that in forming the Service Center, BIA did not involve key stakeholders, such as the Department of Energy—an agency with significant energy expertise—and BIA employees from agency offices. By not involving key stakeholders, BIA has missed an opportunity to incorporate their expertise into its efforts. We recommended that BIA include other regulatory agencies in the Service Center so that it can act as a single point of contact or a lead agency to coordinate and navigate the regulatory process. We also recommended BIA establish formal agreements with key stakeholders, such as DOE, that identify the advisory or support role of the office, and establish a process for seeking and obtaining input from key stakeholders, such as BIA employees, on the Service Center activities. Interior agreed with our recommendations and described plans to address them. In 2005, Congress provided an option for tribes to enter into an agreement with the Secretary of the Interior that allows the tribe, at its discretion, to enter into leases, business agreements, and rights-of-way agreements for energy resource development on tribal lands without review and approval by the Secretary. However, in a June 2015 report, we found that uncertainties about Interior’s regulations for implementing this option have contributed to deter a tribe from pursuing an agreement. We recommended that Interior provide clarifying guidance. In August 2015, Interior stated the agency is considering further guidance. As of December 2016, Interior had not provided additional guidance. Limited federal workforce planning. In November 2016, we found BIA had high vacancy rates at some agency offices and that the agency had not conducted key workforce planning activities, such as identifying the key workforce skills needed to achieve agency goals, and assessing any skill gaps. These workforce issues contribute to BIA’s management shortcomings that have hindered Indian energy development. Until BIA undertakes necessary workforce planning activities, it cannot ensure that it has a workforce with the right skills, appropriately aligned to meet the agency’s goals and tribal priorities. We recommended that BIA assess critical skills and competencies needed to fulfill its responsibilities related to energy development and identify potential gaps. We also recommended BIA establish a documented process for assessing BIA’s workforce composition at agency offices taking into account BIA’s mission, goals, and tribal priorities. Interior agreed with our recommendations and stated it is taking steps to implement them. Outdated and deteriorating equipment, technology, and infrastructure. In June 2015, we found that BIA does not have the necessary geographic information system (GIS) mapping data for identifying who owns and uses resources, such as existing leases. Interior guidance states that efficient management of oil and gas resources relies, in part, on GIS mapping technology because it allows managers to easily identify resources available for lease and where leases are in effect. According to a BIA official, without GIS data, the process of identifying transactions, such as leases and access agreements for Indian land and resources, can take significant time and staff resources to search paper records stored in multiple locations. We recommended BIA should take steps to improve its GIS capabilities to ensure it can verify ownership in a timely manner. Interior stated it will enhance mapping capabilities by developing a national dataset composed of all Indian land tracts and boundaries in the next 4 years. Incomplete and inaccurate data. In June 2015, we found that BIA did not have the data it needs to verify who owns some Indian oil and gas resources or identify where leases are in effect. In some cases, BIA cannot verify ownership because federal cadastral surveys—the means by which land is defined, divided, traced, and recorded—cannot be found or are outdated. The ability to account for Indian resources would assist BIA in fulfilling its federal trust responsibility, and determining ownership is a necessary step for BIA to approve leases and other energy-related documents. We recommended that Interior direct BIA to identify land survey needs. Interior stated it will develop a data collection tool to identify the extent of its survey needs in fiscal year 2016. As of December 2016, Interior had not provided information on the status of its efforts to develop a data collection tool. For additional information about this high-risk area related to our Indian Education work, contact Melissa Emrey-Arras at (617) 788-0534 or [email protected]. For additional information about this high-risk area related to our Indian Health work, contact Kathleen King at (202) 512-7114 or [email protected]. For additional information about this high- risk area related to our Indian Energy work, contact Frank Rusco at (202) 512-3841 or [email protected]. Indian Affairs: Key Actions Needed to Ensure Safety and Health at Indian School Facilities. GAO-16-313. Washington, D.C.: March 10, 2016. Indian Affairs: Preliminary Results Show Continued Challenges to the Oversight and Support of Education Facilities. GAO-15-389T. Washington, D.C.: February 27, 2015. Indian Affairs: Bureau of Indian Education Needs to Improve Oversight of School Spending. GAO-15-121. Washington, D.C.: November 13, 2014. Indian Affairs: Better Management and Accountability Needed to Improve Indian Education. GAO-13-774. Washington, D.C.: September 24, 2013. Indian Health Service: Actions Needed to Improve Oversight of Quality of Care. GAO-17-181. Washington, D.C.: January 9, 2017. Indian Health Service: Actions Needed to Improve Oversight of Patient Wait Times. GAO-16-333. Washington, D.C.: March 29, 2016. Indian Health Service: Opportunities May Exist to Improve the Contract Health Services Program. GAO-14-57. Washington, D.C.: December 11, 2013. Indian Health Service: Most American Indians and Alaska Natives Potentially Eligible for Expanded Health Coverage, but Action Needed to Increase Enrollment. GAO-13-553. Washington, D.C.: September 5, 2013. Indian Health Service: Capping Payment Rates for Nonhospital Services Could Save Millions of Dollars for Contract Health Services. GAO-13-272. Washington, D.C.: April 11, 2013. Indian Health Service: Action Needed to Ensure Equitable Allocation of Resources for the Contract Health Services Program. GAO-12-446. Washington, D.C.: June 15, 2012. Indian Health Service: Increased Oversight Needed to Ensure Accuracy of Data for Estimating Contract Health Service Need. GAO-11-767. Washington, D.C.: September 23, 2011. Indian Energy Development: Additional Actions by Federal Agencies Are Needed to Overcome Factors Hindering Development. GAO-17-43. Washington, D.C.: November 10, 2016. Indian Energy Development: Interior Could Do More to Improve Its Process for Approving Revenue-Sharing Agreements. GAO-16-553. Washington, D.C.: June 13, 2016. Indian Energy Development: Poor Management by BIA Has Hindered Energy Development on Indian Lands. GAO-15-502. Washington, D.C.: June 8, 2015. One of the most important functions of the U.S. Census Bureau (Bureau) is conducting the decennial census of the U.S. population, which is mandated by the Constitution and provides vital data for the nation. This information is used to apportion the seats of the U.S. House of Representatives; realign the boundaries of the legislative districts of each state; allocate billions of dollars in federal financial assistance; and provide social, demographic, and economic profiles of the nation’s people to guide policy decisions at each level of government. A complete count of the nation’s population is an enormous challenge as the Bureau seeks to control the cost of the census while it implements several new innovations and manages the processes of acquiring and developing new and modified information technology (IT) systems supporting them. Over the past 3 years, we have made 30 recommendations to help the Bureau design and implement a more cost-effective census for 2020; however, only 6 of them had been fully implemented as of January 2017. The cost of the census, in terms of cost for counting each housing unit, has been escalating over the last several decennials. The 2010 Census was the costliest U.S. Census in history at about $12.3 billion, and was about 31 percent more costly than the $9.4 billion 2000 Census (in 2020 dollars). The average cost for counting a housing unit increased from about $16 in 1970 to around $92 in 2010 (in 2020 constant dollars). Meanwhile, the return of census questionnaires by mail (the primary mode of data collection) declined over this period from 78 percent in 1970 to 63 percent in 2010. Declining mail response rates—a key indicator of a cost-effective census—are significant and lead to higher costs. This is because the Bureau sends enumerators to each non-responding household to obtain census data. As a result, non-response follow-up (NRFU) is the Bureau’s largest and most costly field operation. In many ways, the Bureau has had to invest substantially more resources each decade to match the results of prior enumerations. The Bureau plans to implement several new innovations in its design of the 2020 Census. In response to our recommendations regarding past decennial efforts and other assessments, the Bureau has fundamentally reexamined its approach for conducting the 2020 Census. Its plan for 2020 includes four broad innovation areas that it believes will save it over $5 billion (2020 constant dollars) when compared to what it estimates conducting the census with traditional methods would cost. The Bureau’s innovations include (1) using the Internet as a self-response option, which the Bureau has never done on a large scale before; (2) verifying most addresses using “in-office” procedures and on-screen imagery rather than street-by-street field canvassing; (3) re-engineering data collection methods such as by relying on an automated case management system; and (4) in certain instances, replacing enumerator collection of data with administrative records (information already provided to federal and state governments as they administer other programs). These innovations show promise for a more cost-effective head count. However, they also introduce new risks, in part, because they include new procedures and technology that have not been used extensively in earlier decennials, if at all. The Bureau is also managing the acquisition and development of new and modified IT systems, which add complexity to the design of the census. To help control census costs, the Bureau plans to significantly change the methods and technology it uses to count the population, such as offering an option for households to respond to the survey via the Internet or phone, providing mobile devices for field enumerators to collect survey data from households, and automating the management of field operations. This redesign relies on acquiring and developing many new and modified IT systems, which could add complexity to the design. These cost risks, new innovations, and the acquisition and development of IT systems for the 2020 Census, along with other challenges we have identified in recent years, raise serious concerns about the Bureau’s ability to conduct a cost-effective enumeration. Based on these concerns, we have concluded that the 2020 Census is a high-risk area and have added it to the High-Risk List in 2017. To help the Bureau mitigate the risks associated with its fundamentally new and complex innovations for the 2020 Census, the commitment of top leadership is needed to ensure the Bureau’s management, culture, and business practices align with a cost-effective enumeration. For example, the Bureau needs to continue strategic workforce planning efforts to ensure it has the skills and competencies needed to support planning and executing the census. It must also rigorously test individual census-taking activities to provide information on their feasibility and performance, their potential for achieving desired results, and the extent to which they are able to function together under full operational conditions. We have recommended that the Bureau also ensure that its scheduling adheres to leading practices and be able to support a quantitative schedule risk assessment, such as by having all activities associated with the levels of resources and effort needed to complete them. The Bureau has stated that it has begun maturing project schedules to ensure that the logical relationships are in place and plans to conduct a quantitative risk assessment. We will continue to monitor the Bureau’s efforts. The Bureau must also improve its ability to manage, develop, and secure its IT systems. For example, the Bureau needs to prioritize its IT decisions and determine what information it needs in order to make those decisions. In addition, the Bureau needs to make key IT decisions for the 2020 Census in order to ensure they have enough time to have the production systems in place to support the end-to-end system test. To this end, we recommended the Bureau ensure that the methodologies for answering the Internet response rate and IT infrastructure research questions are determined and documented in time to inform key design decisions. Further, given the numerous and critical dependencies between the Census Enterprise Data Collection and Processing (CEDCaP) program—a large and complex modernization program within the IT Directorate—and 2020 Census programs, their parallel implementation tracks, and the 2020 Census’s immovable deadline, we recommended that the Bureau establish a comprehensive and integrated list of all interdependent risks facing the two programs, and clearly identify roles and responsibilities for managing this list. The Bureau stated that it plans to take actions to address our recommendations. It is also critical for the Bureau to have better oversight and control over its cost estimation process and we have recommended that the Bureau ensure its cost estimate is consistent with our leading practices. For example, the Bureau will need to, among other practices, document all cost-influencing assumptions; describe estimating methodologies used for each cost element; ensure that variances between planned and actual cost are documented, explained, and reviewed; and include a comprehensive sensitivity analysis, so that it can better estimate costs. We also recommended that the Bureau implement and institutionalize processes or methods for ensuring control over how risk and uncertainty are accounted for and communicated within its cost estimation process. The Bureau agreed with our recommendations, and we are currently conducting a follow-up audit of the Bureau’s most recent cost estimate and will determine whether the Bureau has implemented them. Sustained congressional oversight will be essential as well. In 2015 and 2016, congressional committees held five hearings focusing on the progress of the Bureau’s preparations for the decennial. Going forward, active oversight will be needed to ensure these efforts stay on track, the Bureau has needed resources, and Bureau officials are held accountable for implementing the enumeration as planned. We will continue monitoring the Bureau’s efforts to conduct a cost- effective enumeration. To this end, we have ongoing work focusing on such topics as the Bureau’s updated life-cycle cost estimate and the readiness of IT systems for the 2018 End-to-End Test, which is essentially a dress rehearsal for the decennial. The Bureau is planning many previously unused innovations for the 2020 Census: The decennial census is an inherently challenging undertaking, requiring many moving parts to come together in a short time and be completed according to a prescribed schedule. To help control costs and maintain accuracy, the Bureau is introducing significant change to how it conducts the decennial census in 2020. Its planned innovations include (1) making greater use of local data, imagery, and other office procedures to build its address list; (2) improving self- response by encouraging respondents to use the Internet and telephone; (3) using administrative records to reduce field work; and (4) reengineering field operations using technology to reduce manual effort and improve productivity. While the census is under way, the tolerance for any breakdowns is quite small. As a result, given the new four innovation areas for the 2020 Census, it will be imperative that the Bureau have systems and operations in place for the 2018 End-to-End Test. Using administrative records is promising but introduces challenges: Although administrative records—information already provided to the government as it administers other programs—have been discussed and used for the decennial census since the 1970s, the Bureau plans a more significant role for them to reduce the amount of data collection fieldwork, which has the potential to help significantly limit the cost increases of the 2020 Census. The Bureau has estimated that using these records could save up to $1.4 billion compared to traditional census methods. In 2015, we found that while the Bureau has already demonstrated the feasibility of using administrative records, it still faces challenges with using them for the 2020 Census. For example, although the Bureau has no control over the accuracy of data provided to it by other agencies, it is responsible for ensuring that data it uses for 2020 Census are of sufficient quality for their planned uses. Another challenge we identified is the extent to which the public will accept government agencies sharing personal data for the purposes of the census. Related concerns involve trust in the government and perceptions about burden on respondents as well the social benefits of agencies sharing data. Moreover, in addition to using administrative records to reduce fieldwork, the Bureau is considering several additional opportunities to leverage administrative records to help improve the cost and quality of the 2020 Census. It will be important for the Bureau to set deadlines for deciding which records it will use and for which purpose to help the Bureau monitor its progress and prioritize which activities—or records—to continue pursuing, or to abandon, if time becomes a constraint. The Bureau needs to identify and analyze root causes of non- interviews during testing: When households do not respond to the census and when the Bureau does not obtain information about the household while knocking on doors during its NRFU operation, the Bureau may have to impute attributes of the household based on the demographic characteristics of surrounding housing units as well as on administrative records. We reported in 2016 that during the Bureau’s 2016 Census Site Test, the Bureau experienced about 20 and 30 percent of its test workload as non-interviews at its two test sites in Harris County, Texas, and Los Angeles County, California, respectively. According to the Bureau, non-interviews are cases where no data or insufficient data are collected, either because enumerators make six attempted visits without success (the maximum number the Bureau allows), or are not completed due to, for example, language barriers or dangerous situations. Identifying root causes of problems is something we look for when determining progress within a high-risk area. Accordingly, while the 2016 Census Test non-interview rate is not necessarily a precursor to the 2020 non-interview rate, because of its relationship to the cost and quality of the census, it will be important for the Bureau to better understand the factors contributing to it. Bureau cancelled field tests for 2017: The Bureau plans to conduct additional research through 2018 in order to further refine the design of the 2020 Census, but recently had to alter its approach. On October 18, 2016, the Bureau decided to stop two field test operations planned for fiscal year 2017 in order to mitigate risks from funding uncertainty. Specifically, the Bureau said it would stop all planned field activity, including local outreach and hiring, at its test sites in Puerto Rico, North and South Dakota, and Washington State. The Bureau will not carry out planned field tests of its mail-out strategy and follow up for non-response in Puerto Rico or its door-to-door enumeration. The Bureau also cancelled plans to update its address list in the Indian lands and surrounding areas in the three states. However, the Bureau will continue with other planned testing in fiscal year 2017, such as those focusing on systems readiness and Internet response. Further, the Bureau said it would consider incorporating the cancelled field activities elements within the 2018 End-to-End Test. The Bureau maintains that stopping the 2017 Field Test will help prioritize readiness for the 2018 End-to-End Test, and mitigate risk. Nevertheless, as we reported in November 2016, it also represents a lost opportunity to test, refine, and integrate operations and systems, and it puts more pressure on the 2018 Test to demonstrate that enumeration activities will function as needed for 2020. The Bureau needs to strengthen the management and oversight of all IT programs, systems, and contractors supporting the decennial: The redesign of the 2020 Census relies on many new and modified IT systems. In addition to those systems that are being managed and developed within the 2020 Census Directorate, the 2020 program is also heavily dependent upon 11 systems that are being delivered by the CEDCaP program—a large and complex modernization program within the IT Directorate. Importantly, as a result of the Bureau’s challenges in key IT internal controls and its rapidly approaching deadline, we identified CEDCaP as an IT investment in need of attention in the February 2015 high-risk report. In addition, in August 2016, we reported that the 2020 program and CEDCaP program lacked effective processes for managing their schedule, risk, and requirements interdependencies. For example, among tens of thousands of schedule activities, the two programs were expected to manually identify activities that are dependent on each other, and rather than establishing one integrated dependency schedule, the programs maintained two separate dependency schedules. We reported that this contributed to misaligning milestones between the programs. We stated that until the two programs establish schedules that are completely aligned, develop an integrated list of all interdependent risks, and finalize processes for managing requirements, both programs are at risk of not delivering their programs as expected. The Bureau is also relying on contractor support in many key areas, including technically integrating all of the key systems and infrastructure, and developing many of the key data collection systems. Specifically, in August 2016, the Bureau hired a contractor to technically integrate the 2020 Census systems and infrastructure, to include evaluating the systems and infrastructure, developing the infrastructure (e.g., cloud or data center) to meet the Bureau’s scalability and performance needs, integrating all of the systems, and supporting testing activities. In addition, the Bureau is relying on contractors to develop a number of key systems and infrastructure; these activities include (1) developing the IT platform that will be used to collect data from a majority of respondents—by using the Internet, telephone, and NRFU activities; (2) procuring the mobile devices and cellular service to be used for NRFU; and (3) developing the IT infrastructure in the field offices. A greater reliance on contractors for these key components of the 2020 Census requires the Bureau to focus on sound management and oversight of the key contracts, projects, and systems. Key IT decisions need to be prioritized and made in time for full end- to-end testing in 2017: We have issued a series of reports and testimonies that have discussed the Bureau’s challenges in prioritizing and making IT decisions. In April 2014, we reported that the Bureau had not prioritized key IT research and testing needed for its 2020 Census design decisions. In February 2015, we reported that the Bureau had not determined how key IT research questions would be answered—such as the expected rate of respondents using its Internet response option or the IT infrastructure that would be needed to support this option. Further, we testified, in November 2015, that key IT decisions needed to be made soon because the Bureau was less than 2 years away from preparing for end-to-end testing of all systems and operations, and there was limited time to implement them. We emphasized that the Bureau had deferred key IT-related decisions, and that it was running out of time to develop, acquire, and implement the systems it will need to deliver the redesign. In October 2016, Bureau officials stated that they had 16 IT-related and 32 partially IT-related decisions left to make, including the uses of cloud- based solutions, the tools and test materials to be used during integration testing, and the expected scale of the system workload for those respondents who do not use the Bureau-provided Census ID. It will be important to make these decisions in enough time to develop solutions before the End-to-End Test begins in August 2017. Information security risks and challenges need to be addressed to secure the Bureau’s systems and data: In August 2016, we described the significant challenges that the Bureau faces in securing systems and data, such as developing policies and procedures to minimize the threat of phishing aimed at stealing personal information and ensuring that individuals gain only limited and appropriate access to 2020 Census data. Because many of the systems to be used in the 2018 End-to-End Test are not yet fully developed, the Bureau has not finalized all of the controls to be implemented, completed an assessment of those controls, developed plans to remediate any control weaknesses, and determined whether there is time to fully remediate any weaknesses before the system test. Estimation does not conform to best practices: We reviewed the Bureau’s October 2015 estimated comprehensive life-cycle cost for the 2020 Census and reported in 2016 that it did not conform to best practices, and, as a result, the estimate was unreliable. Cost estimates that appropriately account for risks facing an agency can help an agency manage large, complex activities like the 2020 Census, as well as help Congress make funding decisions and provide oversight. Cost estimates are also necessary to inform decisions to fund one program over another, to develop annual budget requests, to determine what resources are needed, and to develop baselines for measuring performance. We found that although the Bureau had taken significant steps to improve its capacity to carry out an effective cost estimate, its estimate for the 2020 Census partially met the characteristics of two best practices (comprehensive and accurate) and minimally met the other two (well- documented and credible), where all four need to be substantially met in order for an estimate to be deemed high-quality. According to best practices, to be comprehensive an estimate has to have enough detail to ensure that cost elements are neither omitted nor double-counted, and all cost-influencing assumptions are detailed in the estimate’s documentation, among other things. While Bureau officials were able to provide us with several documents that included projections and assumptions that were used in the cost estimate, we found the estimate to be partially comprehensive because it is unclear if all life-cycle costs are included in the estimate or if the cost estimate completely defines the program. Credible cost estimates clearly identify limitations due to uncertainty or bias surrounding the data or assumptions, according to best practices. We found the estimate minimally met best practices for this characteristic in part because the Bureau carried out its risk and uncertainty analysis only for about $4.6 billion (37 percent) of the $12.5 billion total estimated life-cycle cost, excluding, for example, consideration of uncertainty over what the decennial census’s estimated part will be of the total cost of CEDCaP. Accurate estimates are unbiased and contain few mathematical mistakes. We found the estimate partially met best practices for this characteristic, in part because we could not independently verify the calculations the Bureau used within its cost model, which the Bureau did not have documented or explained outside its limited access cost estimation software. Finally, the Bureau’s cost-estimate was not well-documented. Improving cost estimation practices will increase the reliability of the Bureau’s cost estimate, which will, among other things, help improve decision making, budget formulation, progress measurement, and accountability for results. The Bureau’s cost estimate had other shortcomings as well. For example, in 2016 we found that the Bureau’s cost estimation team did not record how and why it changed assumptions that were provided to it, and the Bureau lacked written guidance and procedures for the cost estimation team to follow. Moreover, key risks were not accounted for in the cost estimate although this is an important best practice. For additional information about this high-risk area, contact Robert Goldenkoff at (202) 512-2757 or [email protected]; or David Powner at (202) 512-9286 or [email protected]. 2020 Census: Additional Actions Could Strengthen Field Data Collection Efforts. GAO-17-191. Washington, D.C.: January 26, 2017. Information Technology: Better Management of Interdependencies between Programs Supporting 2020 Census Is Needed. GAO-16-623. Washington, D.C.: August 9, 2016. 2020 Census: Census Bureau Needs to Improve Its Life-Cycle Cost Estimating Process. GAO-16-628. Washington, D.C.: June 30, 2016. 2020 Census: Additional Actions Would Help the Bureau Realize Potential Administrative Records Cost Savings. GAO-16-48. Washington, D.C.: October 20, 2015. 2020 Census: Key Challenges Need to Be Addressed to Successfully Enable Internet Response. GAO-15-225. Washington, D.C.: February 5, 2015. 2020 Census: Census Bureau Can Improve Use of Leading Practices When Choosing Address and Mapping Sources. GAO-15-21. Washington, D.C.: October 2, 2014. 2020 Census: Bureau Needs to Improve Scheduling Practices to Enhance Ability to Meet Address List Development Deadlines. GAO-14-59. Washington, D.C.: November 21, 2013. 2020 Census: Additional Steps Are Needed to Build on Early Planning. GAO-12-626. Washington, D.C.: May 17, 2012. Decennial Census: Additional Actions Could Improve the Census Bureau’s Ability to Control Costs for the 2020 Census. GAO-12-80. Washington, D.C.: January 24, 2012. 2010 Census: Census Bureau Has Made Progress on Schedule and Operational Control Tools, but Needs to Prioritize Remaining System Requirements. GAO-10-59. Washington, D.C.: November 13, 2009. The federal government’s environmental liability has been growing for the past 20 years and is likely to continue to increase. For fiscal year 2016, the federal government’s estimated environmental liability was $447 billion—up from $212 billion for fiscal year 1997. However, this estimate does not reflect all of the future cleanup responsibilities federal agencies may face. Because of the lack of complete information and the often inconsistent approach to making cleanup decisions, federal agencies cannot always address their environmental liabilities in ways that maximize the reduction of health and safety risks to the public and the environment in a cost effective manner. The federal government is financially liable for cleaning up areas where federal activities have contaminated the environment. Various federal laws, agreements with states, and court decisions require the federal government to clean up environmental hazards at federal sites and facilities—such as nuclear weapons production facilities and military installations. Such sites are contaminated by many types of waste. numerous site-specific factors, stakeholder agreements, and legal provisions. We have also found that some agencies do not take a holistic, risk- informed approach to environmental cleanup that aligns limited funds with the greatest risks to human health and the environment. Since 1994, we have made at least 28 recommendations related to addressing the federal government’s environmental liability. These include 22 recommendations to the Department of Energy (DOE) or the Department of Defense (DOD), 1 recommendation to the Office of Management and Budget to consult with Congress on agencies’ environmental cleanup costs, 1 recommendation to the Department of Agriculture (USDA), and 4 recommendations to Congress to change the law governing cleanup activities. Of these, 13 recommendations remain unimplemented. If implemented, these steps would improve the completeness and reliability of the estimated costs of future cleanup responsibilities and lead to more risk-based management of the cleanup work. Future progress in addressing the U.S. government’s environmental liabilities depends, among other things, on how effectively federal departments and agencies set priorities, under increasingly restrictive budgets, that maximize the risk reduction and cost-effectiveness of cleanup approaches. As a first step, some departments and agencies may need to improve the completeness of information about long-term cleanup responsibilities and their associated costs so that decision makers, including Congress, can consider the full scope of the federal government’s cleanup obligations. As a next step, certain departments, such as DOE, may need to change how they establish cleanup priorities. For example, DOE’s current practice of negotiating agreements with individual sites without considering other sites’ agreements or available resources may not ensure that limited resources will be allocated to reducing the greatest environmental risks, and costs will be minimized. We have recommended actions to federal agencies that, if implemented, would improve the completeness and reliability of the estimated costs of future cleanup responsibilities and lead to more risk-based management of the cleanup work. In 1994, we recommended that Congress amend certain legislation to require agencies to report annually on progress in implementing plans for completing site inventories, estimates of the total costs to clean up their potential hazardous waste sites, and agencies’ progress toward completing their site inventories and on their latest estimates of total cleanup costs. We believe these recommendations are as relevant, if not more so, today. In 2015, we recommended that the USDA develop plans and procedures for completing their inventories of potentially contaminated sites. USDA disagreed with this recommendation. However, we continue to believe that USDA’s inventory of contaminated and potentially contaminated sites—in particular, abandoned mines, primarily on Forest Service land—is insufficient for effectively managing USDA’s overall cleanup program. Interior is also faced with an incomplete inventory of abandoned mines that they are working to improve. In 2006, we recommended that DOD develop, document, and implement a program for financial management review, assessment, and monitoring of the processes for estimating and reporting environmental liabilities. This recommendation has not been implemented. We have found in the past that DOE’s cleanup strategy is not risk- based and should be re-evaluated. DOE’s decisions are often driven by local stakeholders and certain requirements in federal facilities agreements and consent decrees. In 1995, we recommended that DOE set national priorities for cleaning up its contaminated sites using data gathered during ongoing risk evaluations. This recommendation has not been implemented. In 2003, we recommended that DOE ask Congress to clarify its authority for designating certain waste with relatively low levels of radioactivity as waste incidental to reprocessing, and therefore not managed as high-level waste. In 2004, DOE received this specific authority from Congress for the Savannah River and Idaho Sites, thereby allowing DOE to save billions of dollars in waste treatment costs. The law, however, excluded the Hanford Site. More recently, in 2015 we found that DOE is not comprehensively integrating risks posed by National Nuclear Security Administration’s (NNSA) nonoperational contaminated facilities with EM’s portfolio of cleanup work. By not integrating nonoperational facilities from NNSA, EM is not providing Congress with complete information about EM’s current and future cleanup obligations as Congress deliberates annually about appropriating funds for cleanup activities. We recommended that DOE integrate its lists of facilities prioritized for disposition with all NNSA facilities that meet EM’s transfer requirements, and that EM should include this integrated list as part of the Congressional Budget Justification for DOE. DOE neither agreed nor disagreed with this recommendation. Of the federal government’s estimated $447 billion environmental liability—up from $212 billion for fiscal year 1997—DOE is responsible for by far the largest share of the liability and DOD is responsible for the second largest share. The rest of the federal government makes up the remaining 3 percent of the liability with agencies such as the National Aeronautics and Space Administration (NASA) and the Departments of Transportation, Veterans Affairs, USDA, and Interior holding large liabilities (see figure 13). DOE was responsible for over 80 percent ($372 billion) of the U.S. government’s fiscal year 2016 reported environmental liability, mostly related to nuclear waste cleanup. DOE’s total reported environmental liability has generally increased since fiscal year 2000 (see figure 14). According to audit documentation related to DOE’s fiscal year 2016 financial statements, 50 percent of the DOE’s environmental liability resides at two cleanup sites: the Hanford Site in Washington State and the Savannah River Site in South Carolina. program —and delays and scope changes for major construction projects at the Hanford and Savannah River sites. We testified in February 2016 that DOE’s estimated liability does not include billions in expected costs. According to government accounting standards, environmental liability estimates include costs that are probable and reasonably estimable, meaning that costs that cannot yet be reasonably estimated are not included in total environmental liability. Examples of costs that DOE cannot yet estimate include the following: DOE has not yet developed a cleanup plan or cost estimate for the Nevada National Security Site and, as a result, the cost of future cleanup of this site was not included in DOE’s fiscal year 2015 reported environmental liability. The nearly 1,400-square-mile site has been used for hundreds of nuclear weapons tests since 1951. These activities have resulted in more than 45 million cubic feet of radioactive waste at the site. According to DOE’s financial statement, since DOE is not yet required to establish a plan to clean up the site, the costs for this work are excluded from DOE’s annually reported environmental liability. DOE’s reported environmental liability includes an estimate for the cost of a permanent nuclear waste repository, but these estimates are highly uncertain and likely to increase. In response to the termination of the Yucca Mountain repository program, DOE proposed separate repositories for defense high-level and commercial waste in March 2015. In January 2017, we reported that the cost estimate for DOE’s new approach excluded the costs and time frames for key activities. As a result, the full cost of these activities is likely more than what is reflected in DOE’s environmental liability. There are several possible causes for the large and growing amount of money that DOE will need to meet its cleanup responsibilities. First, as our and other organizations’ reports issued over the last 2 decades have found, DOE’s environmental cleanup decisions are not risk-based and its risk-based decision making is sometimes impeded by selection of cleanup remedies that are not appropriately tailored to the risks presented, and inconsistencies in the regulatory approaches followed at different sites. We and others have pointed out that DOE needs to take a nation-wide, risk-based approach to cleaning up these sites, which could reduce costs while also reducing environmental risks more quickly. Examples include the following: In 1995, we found that DOE’s cleanup strategy had been shaped by site-specific environmental agreements whose priorities and requirements had not always been consistent with technical or fiscal realities and that, under severe budgetary constraints, using many separately-negotiated agreements is not well suited to setting priorities among sites. We recommended that DOE set national priorities for cleaning up its contaminated sites. DOE responded at that time that because of limitations on the science of risk assessment, it had no intention of developing national, risk-based priorities for its cleanup work. In a later report, we found that DOE’s compliance agreements did not provide a means of prioritizing among sites and, therefore, DOE had not developed a comprehensive, relative ranking of the risks that it faces across its sites. DOE has been unsuccessful in its attempts to develop such a methodology in the past and, as a result, DOE has no systematic way to make cleanup decisions among sites based on risk. the waste’s origins rather than on its actual radiological risks. The Academy concluded that by working with regulators, public authorities, and local citizens to implement risk-informed practices, waste cleanup efforts can be done more cost-effectively. The report also suggested that statutory changes were likely needed. In 2011, the Academy also reported that DOE could realize significant benefits by providing more realistic safety- and risk-informed analyses. In 2015, a review organized by the Consortium for Risk Evaluation with Stakeholder Participation reported that DOE is not optimally using available resources to reduce risk. According to the report, factors such as inconsistent regulatory approaches and certain requirements in federal facility agreements cause disproportionate resources to be directed at lower priority risks. The report called for a more systematic effort to assess and rank risks within and among sites, including through headquarters guidance to sites, and to allocate federal taxpayer monies to remedy the highest priority risks through the most efficient means. Second, DOE’s cleanup approach is based primarily on a series of compliance agreements and consent orders between DOE, the Environmental Protection Agency (EPA), and state regulators. According to one DOE official, 40 such agreements establish the requirements for DOE’s cleanup work. We have reported in the past that these agreements include thousands of associated milestones. Some of the 40 agreements were made decades ago and may be based on outdated information about the effectiveness of certain cleanup technologies. Third, DOE may have insufficient controls in place to accurately account for its environmental liabilities. In January 2017, the DOE Inspector General reported a significant deficiency in internal control related to the reconciliation of environmental liabilities. its sites. In July 2010, we reported that DOD spent almost $30 billion from 1986 to 2008 across its environmental cleanup and restoration activities at its installations. More recently, in its July 2016 annual report to Congress on environmental cleanup, DOD reported spending an average of about $1.8 billion each year for its environmental cleanup activities from fiscal years 2011 to 2016. DOD’s inability to estimate with assurance key components of its environmental liabilities was a material weakness. We reported in January 2017 that this weakness still exists. Examples of uncertainties in DOD reported environmental liabilities include the following: DOD’s current environmental liability estimate does not include additional costs that will likely be needed for DOD to complete the cleanup for BRAC activities. We reported in January 2017 that DOD estimates it will need about $3.4 billion in addition to the $11.5 billion it has already spent to manage and complete environmental cleanup of BRAC installations. We also found that DOD’s annual report on its environmental cleanup program does not include significant costs associated with cleanup of contaminants at its installations, including those closed under BRAC. DOD’s estimate does not include the total costs associated with cleaning up weapons sites. According to DOD’s fiscal year 2015 Agency Financial Report (AFR), DOD is unable to estimate and report a liability for the environmental restoration that is needed to clean up buried chemical munitions and agents at certain sites, among other things, because the extent of the buried chemical munitions and agents is unknown. DOD may also incur costs not currently included in its environmental liability estimate for restoration initiatives in conjunction with returning overseas DOD facilities to host nations. According to DOD’s fiscal year 2015 AFR, DOD is unable to provide a reasonable estimate because the extent of required restoration is unknown. The remainder of the U.S. government’s estimated environmental liability (about $12 billion in fiscal year 2016) was managed by numerous departments and agencies and, similar to the DOE and DOD portions, is likely to increase. Federal agencies with large reported environmental liabilities in fiscal year 2016 included NASA, USDA, and the Departments of Transportation, Veterans Affairs, and Interior. Since 2000, the reported environmental liability for these agencies has also increased (see figure 17). which the federal government will pay cleanup costs may depend on whether or not financially viable responsible parties, including current and former mine owners and operators, can be identified. Additionally, neither department has a complete inventory of its cleanup responsibilities. For example, USDA: For fiscal year 2016, USDA reported an environmental liability of $196 million. As of April 2014, USDA had identified 1,491 contaminated sites but this list is incomplete as many more potentially contaminated sites, including abandoned mines, have not yet been identified. In 2015, we found that USDA does not have a reliable, centralized site inventory or plans and procedures for completing one, in particular for abandoned mines. For example, in fiscal year 2013, USDA reported $3 million for the Forest Service’s environmental liability. In 2015, we found that this figure did not include any cleanup costs for abandoned mines. The Forest Service estimates that there could be from 27,000 to 39,000 abandoned mines on its lands— approximately 20 percent of which may pose some level of risk to human health or the environment—and the federal government may have to pay for cleanup of some of these mines. USDA’s Forest Service has not developed a complete, consistent, or usable inventory of abandoned mines and had no plans and procedures for developing such an inventory. Without a reliable inventory, USDA cannot effectively estimate its ultimate cost to cleanup these sites. Interior: For fiscal year 2016, Interior reported an environmental liability of about $830 million. We found in 2015 that Interior had an inventory of 4,722 sites, including 85 abandoned mines, with confirmed or likely contamination. However, Interior may have future cleanup responsibilities and, as a result, ultimate cleanup costs may exceed the currently reported environmental liability. Specifically, Interior’s Bureau of Land Management (BLM) has identified over 30,000 abandoned mines—some of which will the federal government may have to pay to clean up—that have not yet been assessed for contamination. Furthermore, this inventory is not complete as BLM estimated that there are at least 100,000 abandoned mines that have not yet been inventoried. While cost estimates for addressing these mines are not currently included in Interior’s liability, information for certain types of mines indicates that the ultimate cost of Interior’s future cleanup responsibilities are greater than what is reflected in the reported environmental liability. BLM is working to improve the completeness and accuracy of its inventory. For additional information about this high-risk area, contact David Trimble, Director, Natural Resources and Environment, 202-512-3841 or [email protected]. Military Base Realignments and Closures: DOD Has Improved Environmental Cleanup Reporting but Should Obtain and Share More Information. GAO-17-151. Washington, D.C.: January 19, 2017. Department of Energy: Observations on Efforts by NNSA and the Office of Environmental Management to Manage and Oversee the Nuclear Security Enterprise. GAO-16-422T. Washington, D.C.: February 23, 2016. DOE Facilities: Better Prioritization and Life Cycle Cost Analysis Would Improve Disposition Planning. GAO-15-272. Washington, D.C.: March 19, 2015. Hazardous Waste: Agencies Should Take Steps to Improve Information on USDA’s and Interior’s Potentially Contaminated Sites. GAO-15-35. Washington, D.C.: January 16, 2015. DOD Financial Management: Effect of Continuing Weaknesses on Management and Operations and Status of Key Challenges. GAO-14-576T. Washington, D.C.: May 13, 2014. Uranium Mining: Opportunities Exist to Improve Oversight of Financial Assurances. GAO-12-544. Washington, D.C.: May 17, 2012. Superfund: Interagency Agreements and Improved Project Management Needed to Achieve Cleanup Progress at Key Defense Installations. GAO-10-348. Washington, D.C.: July 15, 2010. Military Base Closures: Opportunities Exist to Improve Environmental Cleanup Cost Reporting and to Expedite Transfer of Unneeded Property. GAO-07-166. Washington, D.C.: January 30, 2007. Environmental Liabilities: Long-Term Fiscal Planning Hampered by Control Weaknesses and Uncertainties in the Federal Government’s Estimates. GAO-06-427. Washington, D.C.: March 31, 2006. Nuclear Waste: Challenges to Achieving Potential Savings in DOE’s High-Level Waste Cleanup Program. GAO-03-593. Washington, D.C.: June 17, 2003. Long-Term Commitments: Improving the Budgetary Focus on Environmental Liabilities. GAO-03-219. Washington, D.C.: January 24, 2003. Environmental Liabilities: Cleanup Costs From Certain DOD Operations Are Not Being Reported. GAO-02-117. Washington, D.C.: December 14, 2001. Environmental Liabilities: DOD Training Range Cleanup Cost Estimates Are Likely Understated. GAO-01-479. Washington, D.C.: April 11, 2001. Department of Energy: National Priorities Needed for Meeting Environmental Agreements. GAO/RCED-95-1. Washington, D.C.: March 3, 1995. Federal Facilities: Agencies Slow to Define the Scope and Cost of Hazardous Waste Site Cleanups. GAO/RCED-94-73. Washington, D.C.: April 15, 1994. The Department of Defense (DOD) manages about 4.9 million secondary inventory items, such as spare parts, with a reported value of $91.7 billion as of September 2015. Effective and efficient supply chain management is critical for supporting the readiness and capabilities of the force and for helping to ensure that DOD avoids spending resources on unneeded inventory that could be better applied to other defense and national priorities. However, DOD has experienced weaknesses in the management of its supply chain, particularly in the following areas: Inventory management. DOD’s inventory management practices and procedures have been ineffective and inefficient. DOD has experienced high levels of inventory that were in excess of requirements and weaknesses in accurately forecasting the demand for inventory items. Materiel distribution. DOD has faced challenges in delivering supplies and equipment, including not meeting delivery standards and timelines for cargo shipments as well as not maintaining complete delivery data for surface shipments. Asset visibility. DOD has had weaknesses in maintaining visibility of supplies, such as problems with inadequate radio-frequency identification information to track all cargo movements. We added supply chain management to the High-Risk List in 1990. In our February 2015 update, we reported that DOD had made moderate progress in addressing weaknesses in supply chain management, but had not resolved several long-standing problems. For example, DOD had not developed a corrective action plan to address materiel distribution weaknesses or performance metrics based on reliable data to assess performance across the entire distribution pipeline. With respect to asset visibility, DOD had not fully developed performance measures that will effectively ensure that the department’s initiatives improve asset visibility. Since our February 2015 high-risk update, DOD has made progress in addressing all three dimensions of its supply chain management: inventory management, materiel distribution, and asset visibility. For inventory management, DOD has met all five high-risk criteria. For this reason, we are removing inventory management from the supply chain management high-risk area. For materiel distribution, DOD has continued to demonstrate leadership commitment and capacity and has developed a corrective action plan to guide and direct the department’s efforts to improve materiel distribution support to the warfighter. However, work remains to fully meet the monitoring and demonstrated progress high-risk criteria. For asset visibility, DOD has continued to meet the leadership commitment criteria and has met the capacity and corrective action plan criteria—the latter in fiscal year 2015 by updating and implementing the Strategy for Improving DOD Asset Visibility (Strategy). However, additional actions are needed to fully meet the remaining two criteria— monitoring and demonstrated progress. In a December 2016 letter from the Under Secretary of Defense for Acquisition, Technology, and Logistics to the Chairman of the Committee on Oversight and Government Reform, U.S. House of Representatives, the department generally agreed with our assessment of progress made and outlined ongoing and planned actions to address the remaining issues. In October 2014, we provided DOD with a letter that outlined six actions and outcomes that we believe it should address in order to mitigate or resolve long-standing weaknesses in materiel distribution and address the criteria for removal from the High-Risk List. Based on discussions with DOD officials and recent efforts across the department as of November 2016, we believe that DOD has addressed three of the six actions and outcomes. Specifically, DOD has addressed the actions and outcomes associated with the action plan criterion by developing the Materiel Distribution Improvement Plan (Improvement Plan) that contains implementation goals and timelines that will guide its effort to identify gaps and root causes with respect to the performance of the entire distribution pipeline. However, DOD still needs to address the three remaining actions and outcomes from the October 2014 letter that are related to monitoring and demonstrating progress. Additionally, based on our review of DOD’s efforts to improve materiel distribution, we are adding an additional action focused on ensuring DOD refines and updates its actions in the Improvement Plan based on interim progress and results, which results in four remaining actions and outcomes that need to be addressed for removal of materiel distribution from the High- Risk List. Going forward, DOD needs to show measureable and sustained positive outcomes addressing the remaining four actions and outcomes. make progress in developing its suite of distribution performance metrics, improving the quality of data underlying those metrics, and sharing metrics information among stakeholders; integrate distribution metrics data, including cost data, from the combatant commands and other DOD components, as appropriate, on the performance of all legs of the distribution system, including the tactical leg; and refine existing actions in the Improvement Plan or incorporate additional actions based on interim progress and results, and update the Improvement Plan accordingly. demonstrate that the actions implemented under its Improvement Plan improve its capability to comprehensively measure distribution performance, identify distribution problems and root causes, and identify and implement solutions. Our October 2014 letter to DOD outlined seven actions and outcomes that we believe it should address in order to mitigate or resolve long- standing weaknesses in asset visibility and address the criteria for removal from the High-Risk List. Based on discussions with DOD officials and recent efforts across the department as of January 2017, we believe that DOD has addressed five of the seven actions and outcomes. Specifically, DOD has addressed the actions and outcomes associated with the capacity and action plan criteria by the department providing additional direction to the components on formulating cost estimates and the components implementing that direction in developing its cost estimates for the asset visibility initiatives. Additionally, DOD linked the goals and objectives of the Strategy with the specific initiatives intended to implement the Strategy, established a mechanism for periodically assessing the initiatives, and implemented numerous initiatives. Based on our review of DOD’s efforts to improve asset visibility, we are adding an additional action aimed at improving the monitoring of the individual improvement initiatives, which results in three remaining actions and outcomes that need to be addressed for removal of asset visibility from the High-Risk List. Going forward, DOD needs to show measureable and sustained positive outcomes in addressing these remaining three actions and outcomes. assess, and refine as appropriate, performance measures by, for example, incorporating the attributes (e.g., clear, quantifiable, objective, and reliable) of successful performance measures; and take steps to incorporate into after-action reports information relating to performance measures for the asset visibility initiatives. DOD should demonstrate sustained progress in having implemented the initiatives that result in measurable outcomes and progress towards realizing the goals and objectives in the Strategy. Senior officials, such as the Deputy Assistant Secretary of Defense for Supply Chain Integration (DASD(SCI)), have continued to demonstrate commitment and top leadership support for addressing the department’s inventory management challenges. These officials have taken actions, such as establishing a performance management framework to monitor and implement its corrective action plan since 2010 and revising inventory management policy and guidance, to institutionalize this commitment to help ensure the long-term success of the department’s efforts. In addition, senior DOD officials have met with us to discuss the department’s plans and progress in addressing inventory management challenges, and we have provided feedback on the department’s efforts. DOD has continued to demonstrate that it has the capacity—personnel and resources—to strengthen inventory management. DOD has continued to use structured working groups, which include representatives from each of the military services and the Defense Logistics Agency (DLA), to address inventory management weaknesses. Furthermore, DOD has dedicated financial resources to evaluating aspects of inventory management that need improvement, such as commissioning studies designed to improve forecasting for spare parts. DOD has continued to implement its corrective action plan, established in fiscal year 2010, that had actions and goals scheduled through fiscal year 2016, and has developed a follow-on improvement plan to guide efforts through 2020. As noted in our February 2015 update, DOD established overarching goals to reduce “on-order excess inventory” (i.e., items that have already been purchased but may be excess due to changes in requirements) and “on-hand excess inventory” (i.e., items that have been categorized for potential reuse or disposal). Additionally, DOD’s actions in its original and follow-up plans address key root causes of weaknesses in its inventory management, such as excess inventory and demand forecasting for spare parts. Since our February 2015 update, DOD has continued to implement actions associated with the plan across a number of areas of inventory management, such as demand forecasting, and has developed and begun implementing a follow-on improvement plan with actions and milestones intended to guide the department’s improvement efforts through 2020. DOD has continued to use a performance management framework, including metrics and milestones, to track the implementation and effectiveness of the areas of inventory management included in the corrective action plan. The DASD(SCI) oversees implementing the corrective action plan and monitors performance on the associated metrics through progress review meetings with representatives from the military services and DLA. The meetings are held about monthly. Since fiscal year 2010, DOD has demonstrated sustained progress sufficient to remove the inventory management area from the supply chain management high-risk category. Specifically, DOD has demonstrated progress in the following four key areas of inventory management, and used our findings and implemented our recommendations to improve the department’s management of inventory: Reducing excess inventory: Since fiscal year 2009, DOD has reduced the percentage and value of its on-order excess inventory— items already purchased that may be excess due to subsequent changes in requirements—and its on-hand excess inventory—items categorized for potential reuse or disposal. DOD’s data show that the proportion of on-order excess inventory to the total amount of on- order inventory decreased from 9.5 percent at the end of fiscal year 2009 to 7.0 percent at the end of fiscal year 2015, the most recent fiscal year for which data is available. During these years, the value of on-order excess inventory also decreased from $1.3 billion to $701 million. DOD’s data show that the proportion of on-hand excess inventory to the total amount of on-hand inventory dropped from 9.4 percent at the end of fiscal year 2009 to 7.3 percent at the end of fiscal year 2015. The value of on-hand excess inventory also decreased during these years from $8.8 billion to $6.8 billion. DOD plans to continue to monitor the amount of excess inventory in its follow-on improvement plan. Revising policy and guidance: DOD has made key revisions to its inventory management policy and guidance. Based on analysis conducted as part of its corrective action plan, the department updated its main supply chain management policy in February 2014. The update strengthened its guidance for on-order excess inventory, the management of “retention stock” (i.e., inventory calculated to be more economical to keep than to dispose of and repurchase because it will likely be needed in the future or inventory retained to support specific contingencies), and demand forecasting. DOD subsequently continued to update aspects of the guidance, such as adding requirements associated with overseeing contractor-managed inventory in August 2015. DOD also developed and implemented, in March 2016, a guide that standardizes inventory management metrics across the services and DLA. Lastly, DOD developed and began implementing plans to update its policy and guidance as it continues to oversee inventory management through its follow-on improvement plan. Addressing demand forecasting weaknesses: As we noted in our February 2015 update, DOD has taken actions to improve the accuracy of its demand forecasting for spare parts in an effort to address a key root cause of both excess inventory and parts shortages. First, in fiscal years 2010 through 2014, DOD reviewed its demand forecasting methods, which led to a number of changes in DOD’s guidance to the services and DLA aimed at improving the accuracy of demand forecasting. Second, DOD established department-wide forecasting accuracy metrics in 2013. Its key metric helped department officials determine that their forecast accuracy has improved from 46.7 percent in fiscal year 2013 to 57.4 percent in fiscal year 2015, the latest fiscal year for which complete data are available. As of August 2016, since our February 2015 update, DOD has been working to establish procedures, including statistical techniques, for setting appropriate targets to continue to guide improvement in the accuracy of forecasting the demand for spare parts. Third, DOD and DLA, in fiscal year 2013, modified approaches for setting inventory levels for over 495,000 consumable items with low or highly variable demand, and continue to monitor the effect of these changes through a suite of performance metrics. The Air Force also is in the process of implementing a similar method for setting levels for reparable items with low demand and is refining an approach for reparable items with variable demand and conducting additional analysis before deciding to implement it. Fourth, DOD has made progress improving its collaborative forecasting (i.e., using customer input to forecast demand versus relying solely on statistical forecasting methods) for spare parts. Specifically, we found in June 2016 that DLA partnered with the services to improve collaborative forecasting efforts through an analytical, results-oriented approach, such as regularly monitoring key performance metrics. The approach is tailored for each service, and DOD identified in its follow-on improvement plan that it will analyze these different approaches and assess areas for improvement in an effort to further reduce excess inventory and shortages. DLA also designed an additional metric for its collaborative forecasting program to more accurately assess and manage the program and plans to fully implement the metric by July 2017. DOD also is in the process of designing and adopting metrics to assess the accuracy of inventory planning factors, such as the accuracy of part lists that are used to determine the type and quantity of parts to buy for depot maintenance activities, and plans to implement these metrics by the end of fiscal year 2018. Enhancing the management and oversight of retention stock: DOD has continued to take actions to improve the management of retention stock across the department. For example, since fiscal year 2009, DOD has monitored the amount of its retention stock relative to on-hand inventory, reviewed and updated its policy and guidance for retention stock, and taken steps to ensure retention stock is managed consistently across the department. Further, in response to our June 2014 recommendation for the DLA Director to dispose of retention stock based on the results of an economic analysis, the Director changed DLA’s on-hand inventory reduction goal, which was leading DLA to dispose of items that the department’s guidance and DLA’s analysis showed were more economical to keep. With respect to “contingency retention stock” (i.e., items retained to support specific contingencies, such as disaster relief or civil emergencies), the department independently assessed its management in March 2011 and implemented resulting recommendations, such as establishing categories and tracking the reasons for retaining contingency retention stock. Lastly, DOD has used our findings and implemented our recommendations to improve how it manages inventory. Since May 2006, we have made 63 recommendations aimed at improving the efficiency and effectiveness of the department’s inventory management. As of January 2017, DOD has implemented 42 of those recommendations and was in the process of taking actions to implement an additional 13 recommendations, which are focused generally on re-assessing inventory goals, improving collaborative forecasting, and making changes to information technology systems used to manage inventory. The remaining eight recommendations were made in fiscal years 2007 and 2009 and focused on improving the management of acquisition lead times for spare parts and oversight of Army and Navy inventory management, respectively. However, these recommendations are no longer relevant given the department’s efforts since 2010. Senior leaders have continued to demonstrate commitment and support for addressing the department’s materiel distribution challenges. In April 2015, DOD established a distribution working group to draft a plan of actions and milestones for improving materiel distribution. The working group is co-chaired by the Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration and the U.S. Transportation Command (USTRANSCOM). Other stakeholders include the Office of the Deputy Assistant Secretary of Defense for Transportation Policy, the military services, the Joint Staff, and DLA. As a result of the working group’s efforts, DOD completed its Materiel Distribution Improvement Plan (Improvement Plan), and the Acting Assistant Secretary of Defense for Logistics and Materiel Readiness signed it in September 2016. According to the Improvement Plan, the Supply Chain Executive Steering Committee will receive regular updates on the progress of the Improvement Plan’s implementation. The steering committee is chaired by the Deputy Assistant Secretary for Supply Chain Integration and includes senior-level supply chain stakeholders from across DOD. Under its charter, the steering committee oversees implementation of initiatives designed to improve logistics. DOD has continued to demonstrate that it has the capacity—personnel and resources—to improve materiel distribution. Key organizations in DOD’s global distribution system and its associated governance structure are USTRANSCOM, its military components, and DLA. Although the Improvement Plan does not quantify the level of resources required to accomplish corrective actions, it recognizes that some additional resources will likely be needed. With regard to developing a new distribution cost metric, for example, the Improvement Plan states that the metric would require a majority of its data inputs from two principal stakeholders—DLA and USTRANSCOM —and that many inputs can be pulled from existing data sources. However, there are likely other sources of information that must be identified or developed, some of which will require additional resources or processes to capture and validate relevant information that is not currently gathered. According to the Improvement Plan, the distribution governance structure is expected to provide the resources and staff to complete each recommended action in the Improvement Plan and close any identified performance gaps within the time frame specified. The governance structure includes senior DOD officials. At the top of this structure is the Distribution Process Owner Executive Board, which is chaired by the Commander, USTRANSCOM, and whose members are at the 3-Star or Senior Executive Service (SES) equivalent level. The next most senior body, the Distribution Oversight Council, is chaired by the Deputy Commander, USTRANSCOM, and has members at the 1- and 2-Star and SES equivalent level. The Council is tasked with ensuring that high- priority initiatives and enterprise improvements are pursued, commensurate with authorized resources. Since our February 2015 high-risk update, DOD has taken steps that meet our high-risk criteria for developing a corrective action plan to address the department’s materiel distribution challenges. The Acting Assistant Secretary of Defense for Logistics and Materiel Readiness signed the Improvement Plan in September 2016. According to the Acting Assistant Secretary, the Improvement Plan will guide and direct the department’s efforts to improve materiel distribution support to the warfighter by detailing specific goals and actions to better measure the end-to-end distribution process, ensure the accuracy of underlying data used to measure that process, and strengthen and integrate distribution policies and the governance structure. The Improvement Plan lists 18 actions divided among 3 lines of effort: (1) metrics and performance, (2) data accuracy, and (3) policy and governance. The intent of these lines of effort and actions is to improve DOD’s capability for measuring the performance of its materiel distribution system, enabling continuous process improvement. According to the Improvement Plan, DOD “must be able to measure performance with certainty across the enterprise before it can affect meaningful improvements in the distribution function.” In addition, the Acting Assistant Secretary of Defense for Logistics and Materiel Readiness states in the Improvement Plan that a robust policy and governance structure ensures that DOD can form, implement, and monitor corrective actions that address root causes and close distribution performance gaps once they are identified. The Improvement Plan provides time frames for completing each of the 18 actions. It calls for 11 of the actions to be completed within 1 year of the Improvement Plan’s approval, 4 additional actions to be completed within 2 years of the Improvement Plan’s approval, and the remaining 3 actions to be completed within 3 years of the Improvement Plan’s approval. Going forward, DOD’s Distribution Steering Group will assume responsibility for executing the Improvement Plan. The Distribution Steering Group, part of the distribution governance structure, is co- chaired by staff within USTRANSCOM and DLA. DOD has partially met this criterion. Through its Improvement Plan, DOD aims to improve its capability to measure the performance of the distribution system by developing a suite of distribution performance metrics, improving the quality of data underlying those metrics, and sharing metrics information among stakeholders. While DOD has numerous distribution metrics in place, a team within the Distribution Working Group determined that five metrics should be included in its new suite of metrics. The selected metrics are aimed at addressing various attributes of the distribution system: responsiveness, reliability, information visibility, and efficiency/cost. The Improvement Plan’s focus on these efforts has the potential, if implemented, to improve DOD’s ability to monitor various performance attributes of its distribution system. However, the Improvement Plan acknowledges that work remains to be done to investigate expanding the use of certain performance metrics, develop other metrics, improve data quality, and change policies to provide greater transparency of performance data and conduct routine reviews of performance metrics. DOD’s Improvement Plan refers to measuring performance for all legs of the distribution system, including the tactical leg. Specifically, one of the goals in the Improvement Plan is for greater transparency of service, agency, and combatant command distribution performance data, including cost data. The Improvement Plan identifies where a policy change could be made to capture and provide such data. However, the Improvement Plan does not specify the nature of data to be collected from the DOD components or how the data would be integrated with other metrics to measure the performance of all legs of the distribution system, including the tactical leg, and allow DOD to comprehensively monitor and oversee the materiel distribution system. DOD began implementing its Improvement Plan in 2016. However, it is too early to assess whether implementing its Improvement Plan will result in the necessary demonstrated progress. However, the Improvement Plan is a key step toward meeting this criterion. Specifically, as discussed above, the Improvement Plan is aimed at improving the department’s capability to comprehensively measure distribution performance. With a performance measurement system in place, DOD will be better positioned to identify distribution problems, along with root causes and solutions. DOD has identified next steps for implementing its Improvement Plan. According to the DASD(SCI), the Distribution Working Group (which developed the Improvement Plan) will formulate an approach to completing the Improvement Plan’s actions. The Distribution Steering Group will assume responsibility for executing and overseeing the Improvement Plan. We have previously noted that DOD has made progress in addressing its materiel distribution challenges. For example, DOD was able to improve delivery times for some customers and use available assets more. These efforts, according to DOD officials, resulted in $1 billion in cost avoidances through April 2013. In its Improvement Plan, DOD highlighted initiatives it has taken to improve distribution and noted that efforts to improve asset visibility also benefit materiel distribution. However, challenges remain in addressing materiel distribution weaknesses. As we reported in 2015, current materiel distribution metrics used by the department do not provide decision makers with a complete representation of performance across the entire global distribution pipeline. Further, although joint doctrine has set efficient and effective distribution “from the factory to the foxhole” as a priority, these metrics do not always include performance for the final destination. In addition, DOD may not have sufficiently reliable data to accurately determine the extent to which it has met the standards it has established for distribution performance. DOD’s Improvement Plan is focused on these issues, but it will be important for the department to demonstrate progress in measuring the entire pipeline and ensuring the reliability of its data and measures as implementation of the Improvement Plan evolves. Senior leaders at the department have continued to demonstrate commitment to addressing the department’s asset visibility challenges as evidenced, in part, by DOD issuing, in January 2014 and October 2015, its Strategies for Improving DOD Asset Visibility. The Office of the Deputy Assistant Secretary of Defense for Supply Chain Integration oversees department-wide how the Strategy is developed, coordinated, approved, and implemented, and reviews the implementation of the initiatives. Also, senior leadership commitment is evident in its involvement in efforts to improve asset visibility through groups such as the Supply Chain Executive Steering Committee—senior-level officials responsible for overseeing asset visibility improvement efforts—and the Asset Visibility Working Group; which includes representatives from the components and other government agencies, as needed; identifies opportunities for improvement; and monitors the implementation of initiatives. Sustained leadership commitment will be critical moving forward as the department continues to implement its Strategies intended to improve asset visibility and associated asset visibility initiatives. DOD now meets this criterion. As we previously reported in February 2013 and continued to report in February 2015 resources and investments should be discussed in a comprehensive strategic plan, to include the costs to execute the plan and the sources and types of resources and investments—including skills, human capital, technology, information and other resources—required to meet established goals and objectives. DOD has demonstrated that it has the capacity—personnel and resources—to improve asset visibility. For example, as we previously noted the department had established the Asset Visibility Working Group that is responsible for identifying opportunities for improvement; and monitoring the implementation of initiatives. The Working Group includes representatives from OSD and the components—Joint Staff, DLA, USTRANSCOM, and each of the military services. Furthermore, DOD’s 2015 Strategy calls for the components to consider items such as manpower, materiel, and sustainment costs when documenting cost estimates for the initiatives in the Strategy, as we recommended in January 2015. However, in December 2015 we found that the 2015 Strategy included three initiatives that did not include cost estimates. DOD has taken steps to address this weakness. Specifically, in December 2016, a DOD official provided an abstract from the draft update to the 2015 Strategy that provides additional direction on how to explain and document cases where the funding for the initiatives is embedded within overall program funding. The draft update notes that there may be instances where asset visibility improvements are embedded within a larger program, making it impossible or cost prohibitive to isolate the cost associated with the specific asset visibility improvements. In these cases, the plan outlining the initiative will indicate that cost information is not available and why. However, if at some point during implementation some or all costs are identified, the information about the initiative will be updated to reflect as such. According to Office of the Secretary of Defense (OSD) officials, DOD plans to issue the update to the 2015 Strategy in 2017, but a release date has not been determined. DOD now meets this criterion. The National Defense Authorization Act for Fiscal Year 2014 (NDAA) required DOD to submit to Congress a comprehensive strategy and implementation plans for improving asset tracking and in-transit visibility. The 2014 NDAA, among other things, called for DOD to include in its strategy and plans elements such as goals and objectives for implementing the strategy. The NDAA also included a provision that we assess the extent to which DOD’s strategy and accompanying implementation plans include the statutory elements. In January 2014, DOD issued its 2014 Strategy and accompanying implementation plans, which outline initiatives intended to improve asset visibility. DOD updated its 2014 Strategy and plans in October 2015. We previously reported in February 2013 and continued to report in February 2015 that while the 2014 Strategy and implementation plans serve as a corrective-action plan, there was not a clear link between the initiatives and the Strategy’s goals and objectives. We recommended that DOD clearly specify the linkage between the goals and objectives in the Strategy and the initiatives intended to implement the Strategy. DOD implemented our recommendation and updated its 2015 Strategy, which includes matrixes that link each of DOD’s ongoing initiatives intended to implement the Strategy to the Strategy’s overarching goals and objectives. DOD also added eight new initiatives to its 2015 Strategy and linked each of these efforts to the Strategy’s overarching goals and objectives. DOD partially meets this criterion. As we previously reported in 2013 and continued to report in February 2015, DOD lacked a formal, central mechanism to monitor the status of improvements or fully track the resources allocated to them. We also reported that, while DOD’s draft strategy included overarching goals and objectives that address the overall results desired from implementing the strategy, it only partially addressed, among other factors, performance measures, which are necessary for DOD to monitor progress. Since February 2015, DOD has taken some steps to better monitor its improvement efforts. As noted in the 2015 Strategy, DOD described a process that tasks the Asset Visibility Working Group—a team that oversees the development and execution of DOD’s Strategy—to, among other things, review the performance of the component’s initiatives during implementation on a quarterly basis. According to OSD officials, they plan to issue an update to the 2015 Strategy, but the release date for this update has not been determined. The Working Group uses status reports from the DOD components that include information on progress made toward implementation milestones, resources, and funding. DOD also identified performance measures for its asset visibility initiatives. However, the measures for the eight initiatives we reviewed were generally not clear, quantifiable, objective, and reliable. Measures with these attributes can help managers better monitor progress, including determining how well they are achieving their goals and identifying areas for improvement, if needed. Additionally, while the Asset Visibility Working Group has closed initiatives, the Working Group generally did not have information related to performance measures to assess the progress of these initiatives. As a result, DOD is unable to consistently monitor progress in achieving the Strategies’ goals and objectives. In December 2016, a DOD official provided an abstract from the draft update to the 2015 Strategy that noted that detailed metrics data will be collected and reviewed at the level appropriate for the initiative. High-level summary metrics information will be provided to the Working Group in updates to the plan outlining the initiatives. The extent this planned change will affect the development of clear, quantifiable, objective, and reliable performance measures remains to be determined. DOD partially meets this criterion. While DOD has made progress developing and implementing the 2014 and 2015 Strategies, the performance measures associated with the eight initiatives we reviewed cannot be used to demonstrate results. DOD reports it has closed or will no longer review the status of 20 of the 27 initiatives from the 2014 and 2015 Strategies and continues to monitor the remaining seven initiatives. Additionally, in October 2016, DOD officials stated that they plan to add 10 new initiatives in its update to the 2015 Strategy, which will be released in 2017, but OSD officials have not determined a date. However, DOD has not taken steps to consistently incorporate information in after-action reports on initiatives’ performance measures to demonstrate the extent to which progress has been made toward achieving its goals for improving asset visibility. Without clear and quantifiable performance measures and information to support that progress has been made, DOD may not be able to demonstrate that implementing these initiatives resulted in measurable outcomes and progress towards achieving the goals and objectives in the Strategy. Also, DOD will be limited in its ability to demonstrate sustained progress in implementing corrective actions and resolving the high-risk area. DOD Developed Metrics Guidance and Uses the Metrics to Monitor the Efficiency and Effectiveness of Its Inventory Management: In 2012, we found that DOD was developing metrics to assess the effectiveness and efficiency of its inventory management, but that it had not determined if it would incorporate these metrics into guidance. We noted that without guidance specifying standardized definitions, methodologies, and procedures for data collection procedures, DOD’s efforts to employ metrics to monitor and evaluate inventory management performance may be hampered. To ensure sustained management attention consistent with results- oriented management practices, we recommended that the Secretary of Defense direct the Assistant Secretary of Defense for Logistics and Materiel Readiness to (1) develop and implement guidance that establishes a comprehensive, standardized set of department-wide inventory management metrics, including standardized definitions and procedures for measuring and reporting the metrics, and (2) employ these metrics in periodically monitoring the effectiveness and efficiency of its inventory management practices. Based on our recommendations, the Assistant Secretary of Defense for Logistics and Materiel Readiness developed and issued the Supply Chain Metrics Guide in March 2016. This guide identifies a comprehensive, standardized set of inventory management metrics and identifies each metric’s application, definition, business value, data requirements, computational rules, goals and trends analysis, and connections to other related metrics. DOD’s metric guidance provided the necessary information to ensure that metrics across the services and the DLA are standardized and can be used to manage the department’s inventory. Also, the DASD(SCI) uses these metrics to regularly monitor the department’s inventory management practices and outcomes. These actions will allow the department to monitor the effectiveness and efficiency of its inventory management practices across the services and the DLA. The Army Established On-Order Excess Inventory Goals to Guide Performance Improvement: In our April 2015 report on the military services’ inventory management, we found that the Army had not established goals for reducing on-order excess inventory. To improve management and minimize the amount of on-order excess inventory, we recommended that the Secretary of the Army direct the Commander, Army Materiel Command, to develop life-cycle management command-specific goals for the reduction of on-order excess inventory and monitor these goals. Based on our recommendation, in April 2015, the Army established on-order excess inventory goals for its life-cycle management commands and began monitoring its performance against those goals. These actions will provide the Army the ability to better oversee on-order excess inventory and maximize the amount of on-order excess inventory it reduces. The Navy Established Management Reviews to Improve Oversight of On-Order Excess Inventory: In our April 2015 report on the military services’ inventory management, we found that the Navy did not use management reviews of potential on-order excess inventory based on dollar thresholds, as required by DOD guidance, resulting in a lack of oversight of on-order excess inventory. To help ensure the Navy adequately oversees on-order excess termination decisions, we recommended the Secretary of the Navy direct the Commander, Naval Supply Systems Command, to incorporate graduated management reviews based on dollar value thresholds into its current on-order excess inventory termination practices. Based on our recommendation, as of September 2015, the Navy began management reviews based on dollar value thresholds. This action will provide the Navy the ability to better oversee on-order excess inventory, thereby preventing unneeded inventory from being procured. DLA Revised Its Fiscal Year 2014 On-Hand Inventory Goal: In our June 2014 report on DLA inventory management, we found that DLA, in order to meet its on-hand inventory goal in fiscal year 2013, disposed of $855 million in inventory that its own economic analyses determined should be kept due to the risk DLA will need to buy the same items again in the future. To ensure that DLA does not dispose of inventory that is more economic to keep, in accordance with DOD guidance, we recommended that the Secretary of Defense direct the Director, DLA, to reassess and, if determined appropriate, revise DLA’s inventory reduction goals and schedule to achieve them in a way that minimizes risks and costs of having to buy items again in the long term. Based on our recommendation, in July 2014, DLA re- examined and documented its on-hand inventory reduction goal for fiscal year 2014. As a result of the review, DLA revised its on-hand inventory goal for fiscal year 2014 from $10 billion to about $10.9 billion. Adjusting its goals will result in DLA needing to dispose of less inventory to meet the goals, which reduces the risk DLA may have to buy the same inventory in the future. DLA Incorporated On-Order Excess Inventory Metrics into Senior Management Performance Briefings: In our June 2014 report on DLA inventory management, we found that DLA senior management did not regularly review on-order excess inventory performance and that performance across DLA’s aviation, land, and maritime supply chains varied. To improve management and minimize the amount of on-order excess inventory, we recommended the Secretary of Defense direct the Director, DLA, to regularly monitor progress reducing on-order excess inventory through DLA’s senior management performance briefings. Based on our recommendation, in July 2014, DLA began including on-order excess inventory metrics in DLA’s Agency Performance Review, which is reviewed quarterly by the DLA Director and monthly by DLA headquarters senior logistics operations managers. As a result of these actions, senior management will oversee on-order excess inventory performance and guide continued improvement managing its on-order inventory. DLA Established and Monitors Supply Chain-Specific On-Order Excess Inventory Goals: In our June 2014 report on DLA inventory management, we found that DLA had not established supply chain- specific goals for on-order excess inventory and that performance across DLA’s aviation, land, and maritime supply chains varied. To improve management and minimize the amount of on-order excess inventory, we recommended the Secretary of Defense direct the Director, DLA, to establish and regularly monitor supply chain-specific on-order excess goals that support DLA minimizing its investment in inventory that is not needed to meet requirements and achieving the DOD goal of 4 percent of the total value of on-order inventory by the end of fiscal year 2016. Based on our recommendation, DLA established supply chain-specific goals of 6 percent in July 2014 that were aligned with DOD goals for fiscal year 2014. In July 2014, DLA also began monitoring supply chain-specific on-order excess inventory performance against DOD’s established department wide goals as part of its monthly Agency Performance Reviews. These actions will provide DLA the ability to guide continued improvement in reducing on-order excess inventory as well as monitor supply chain-specific performance against DOD’s goals. DLA Is Tracking and Reviewing On-Order Excess Inventory Performance Data: In our June 2014 report on DLA inventory management, we found that DLA had not consistently tracked and reported data to thoroughly measure its efforts to reduce on-order excess inventory. To improve management and minimize the amount of on-order excess inventory, we recommended the Secretary of Defense direct the Director, DLA, to track and regularly review performance data, such as the amount of on-order excess inventory reviewed, modified, or cancelled, and the reasons for not modifying or cancelling, in its inventory management processes. Based on our recommendation, as of June 2016, DLA implemented a monthly report process that reviews performance cancelling of on-order excess inventory as well as the reasons for decisions to retain or cancel on-order excess contracts. As part of this review process, DLA reports bi-annually on the status of its on-order excess inventory, specifically the reasons for retaining on-order excess contracts. These actions will provide DLA the ability to better oversee on-order excess inventory, including tracking and monitoring the reasons for retaining on-order excess inventory. DOD Made Clear the Linkage between Its Goals and Objectives and Its Asset Visibility Initiatives: In our January 2015 report on DOD’s efforts to improve asset visibility, we found that DOD’s 2014 Strategy included goals and objectives, but these goals and objectives were not linked with the initiatives. We recommended that DOD clearly specify the linkage between the goals and objectives in the Strategy and the initiatives intended to implement the Strategy. In October 2015, DOD issued its 2015 update to its Strategy, which included graphics showing a summary of the initiatives and their alignment to the Strategy’s goals and objectives. As a result of making apparent the alignment between its goals and objectives in the 2015 Strategy and the initiatives intended to implement them, DOD should be better positioned to assess progress toward realizing its goals and objectives. DOD Included the Elements Considered in Its Cost Estimates for Asset Visibility Initiatives: In our January 2015 report on DOD’s efforts to improve asset visibility, we found that DOD’s Strategy did not specify the specific elements included in its cost estimates, such as human capital, information, and other resources required to meet the goals and objectives. That is, the components provided cost estimates in the plans outlining the initiatives, but generally at an aggregate level without details of the elements included. We recommended DOD include this information in subsequent updates to its Strategy. As a result, in its 2015 update to its Strategy, DOD provided direction instructing the components to include cost estimates in their plans outlining the initiatives and to include at least the categories of manpower, materiel, and sustainment in these estimates of cost. As a result of updating its Strategy to require the components to include information on the specific elements included in cost estimates, DOD gains insights on the elements considered in developing the cost estimates and the level of detailed cost information it needs to make well-informed decisions about asset visibility. For additional information about this high-risk area, contact Zina Merritt at (202) 512-5257 or [email protected] or Cary Russell at (202) 512-5431 or [email protected]. Defense Inventory: Further Analysis and Enhanced Metrics Could Improve Service Supply and Depot Operations. GAO-16-450. Washington, D.C.: June 9, 2016. Defense Logistics: DOD Has Addressed Most Reporting Requirements and Continues to Refine its Asset Visibility Strategy. GAO-16-88. Washington, D.C.: December 22, 2015. Defense Inventory: Services Generally Have Reduced Excess Inventory, but Additional Actions Are Needed. GAO-15-350. Washington, D.C.: April 20, 2015. Defense Logistics: Improvements Needed to Accurately Assess the Performance of DOD’s Materiel Distribution Pipeline. GAO-15-226. Washington, D.C.: February 26, 2015. Defense Logistics: DOD Has a Strategy and Has Taken Steps to Improve Its Asset Visibility, but Further Actions Are Needed. GAO-15-148. Washington, D.C.: January 27, 2015. Defense Inventory: Actions Needed to Improve the Defense Logistics Agency’s Inventory Management. GAO-14-495. Washington, D.C.: June 19, 2014. In March 2016, we reported that the Department of Defense (DOD) expects to invest $1.4 trillion (fiscal year 2016 dollars) to develop and procure its portfolio of 79 major defense acquisition programs. Congress and DOD have long sought to improve how major weapon systems are acquired, yet many DOD programs fall short of cost, schedule, and performance expectations, meaning DOD pays more than anticipated, can buy less than expected, and, in some cases, delivers less capability to the warfighter. With the prospect of slowly-growing or flat defense budgets for years to come, DOD must get better returns on its weapon system investments and find ways to deliver capability to the warfighter on time and within budget. Top leadership at DOD is committed to improving the way DOD acquires weapon systems. Since we added this area to our High-Risk List in 1990, DOD has made progress in addressing challenges, such as through the Better Buying Power initiatives outlined by the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics since 2010. Although DOD lacks a comprehensive action plan for fully addressing this high-risk area and its root causes, the Better Buying Power initiatives are a step in the right direction, as DOD has prescribed a number of concrete changes. DOD has partially met the criteria for monitoring by issuing a series of annual performance reports on the portfolio of major defense acquisition programs. In 2016, DOD issued the fourth report in this series. Continuing and expanding this series of reports should help DOD measure its progress over time. DOD has partially met the criteria for capacity by, for example, updating some policies to enable better outcomes and assessing the acquisition workforce. However, we remain concerned about whether DOD will fully implement its proposed reforms or continue to track progress in meeting workforce goals, as DOD has, in the past, failed to convert policy into practice. DOD has partially met the criteria for demonstrating progress as it relates to the cost and schedules of its weapon programs. Although we reported in March 2016 on the progress many DOD programs are making in reducing their cost, as demonstrated by improvements when measured against cost-growth targets, individual weapon programs are still not conforming to best practices for acquisition, or implementing key acquisition reforms and initiatives that could prevent long-term cost and schedule growth. Our work reveals that, while there is still cost and schedule growth in major defense acquisition programs, DOD is making progress in decreasing the amount of cost growth realized in the portfolio as a whole. In March 2016, we reported that the total acquisition cost of DOD’s fiscal year 2015 portfolio of 79 programs decreased by $2.5 billion from the previous year. The decrease, however, was due primarily to reductions in a few programs. The majority of individual programs, 42 of the 79, increased in cost. In terms of schedule, the time it took to deliver initial capabilities to the warfighter increased, on average, an additional 2.4 months. Our analysis also showed evidence that DOD made progress in improving efficiencies in its programs from 2014 to 2015. When we account for increased costs attributable to increased program quantity, 38 programs improved their buying power—that is, the amount of goods procured for dollars spent. DOD’s major acquisition programs also showed some improvement when measured against the three cost-growth targets we have used to measure DOD’s progress in the weapon system acquisition high-risk area since 2011. Most notably, 72 percent of programs meet the threshold for less than 10 percent growth over the past 5 years, and 76 percent meet the threshold for less than 2 percent growth in the past year, both an improvement over past assessments (see figure 18). In addition, Congress has been working to reform the process for acquiring weapon systems for several years. In the National Defense Authorization Acts (NDAA) for just the past 5 years, for example, Congress has enacted the following reforms, among others: In the 2013 NDAA, Congress introduced measures to control costs on acquisition programs by requiring DOD to limit the use of cost-type contracts for production, and to open programs to competition at the subcontract level. In the 2014 NDAA, Congress expanded requirements for cost reporting by requiring DOD to include additional cost and schedule estimates in its annual reports to Congress. In the 2016 NDAA, Congress made numerous reforms to the acquisition process including requiring more close involvement of the service chiefs; requiring DOD to report on efforts to streamline the requirements, acquisition, and budgeting processes; stipulating the use and contents of an acquisition strategy; and reducing the number of certifications required for programs at milestone reviews. In the 2017 NDAA, Congress enacted reforms to require modular open system approaches in major programs, further ensure the achievement and reporting of program goals, modify requirements for independent cost estimates, and reorganize the acquisition authority within the Office of the Secretary of Defense. At this point, DOD needs to build on existing reforms—not necessarily revisiting the process itself but augmenting it by tackling incentives. Based on our extensive body of work in weapon systems acquisition, DOD could examine best practices to integrate critical requirements, resources, and acquisition decision-making processes; attract, train, and retain acquisition staff and managers so that they are both empowered and accountable for program outcomes; use funding decisions at the start of new programs to reinforce desirable principles such as well-informed acquisition strategies; identify significant risks up front and resource them; explore ways to align budget decisions and program decisions more investigate tools, such as limits on system development time, to improve program outcomes. Further, we have open priority recommendations related to four acquisition programs that would benefit from greater attention given the size of DOD’s investments in them and their cost, schedule, and performance challenges, including the following: In April 2015, we made one priority recommendation for the F-35 Joint Strike Fighter program, that DOD analyze the affordability of the program’s current procurement plan that reflects various assumptions about future technical progress and funding availability. DOD stated that it would analyze affordability as part of an internal deliberative process culminating in the services’ annual budget request. We made one priority recommendation for the Littoral Combat Ship program in July 2014. This recommendation stated that the program should successfully complete key tests—such as shock, anti-air warfare self-defense testing, or final survivability assessments— before contracting for additional ships. The Navy’s recent decision to restructure the program alters the timing of our recommendation, but does not change our intent to ensure that the Navy does not continue to commit to additional ships until it demonstrates that it has attained some level of knowledge in key areas, such as ship survivability. In September 2013, we made three priority recommendations for the lead ship in the Ford-class aircraft carrier fleet, designated as CVN 78. DOD should explore capability trade-offs, update the Ford-class program’s test and evaluation master plan to allot sufficient time for testing, and adjust the post-delivery test schedule to ensure that system integration testing is completed prior to operational testing. DOD has made progress in implementing these recommendations by, for example, completing a cost-benefit analysis to determine the acquisition strategy for the follow-on ship. DOD, however, failed to fully explore capability trade-offs, and it remains to be seen whether additional time has been allotted to complete testing, as an updated test and evaluation master plan has not been approved. We made two priority recommendations in April 2013 for the Missile Defense Agency and its programs. We recommended that the agency both stabilize its acquisition baselines to enable meaningful comparisons over time and make its cost estimates more comprehensive by including military services’ operation and support costs. While DOD generally concurred with our recommendations, the Missile Defense Agency’s baselines continue to change, and agency decision makers still have not been informed of full program costs. Finally, Congress has an important role to play in advancing weapon system acquisition reform overall, particularly in what it sanctions via funding approvals. Programs that propose optimistic or rushed acquisition strategies represent opportunities for Congress to either maintain or change the defense acquisition culture—a prevailing set of incentives that encourages decisions to go forward with programs before they are ready, and a willingness to accept cost growth and schedule delays as the likely byproduct of such decisions. When programs that do not follow acquisition best practices are denied funding approval, those risky acquisition strategies, in effect, lack congressional sanction. DOD has met the criterion for leadership commitment. DOD continues to demonstrate a strong commitment, at the highest levels, to improving the management of its weapon system acquisitions. Over the past 6 years, the Office of the Under Secretary of Defense for Acquisition, Technology, and Logistics has implemented a series of efforts for acquisition reform through its Better Buying Power initiative. In January 2015, DOD updated its acquisition instruction, furthering this commitment as it incorporates many of the Better Buying Power initiatives, as well as acquisition reforms from the Weapon Systems Acquisition Reform Act of 2009 and other legislation. These actions are consistent with our past findings and recommendations. If these initiatives are to have a lasting, positive effect, however, decision makers need to be held accountable for implementing them. Our recent work shows there is much ground yet to cover. DOD has partially met the criterion for capacity. Across the portfolio, DOD has unevenly implemented knowledge-based acquisition practices that might prevent or mitigate cost growth. When we assessed DOD weapon programs in March 2016, we found that while DOD continues to show progress in following a knowledge-based approach to reduce risk, it has significant room for improvement. While programs that have recently passed through major decision points have demonstrated best practices—such as planning to constrain development times and achieving design stability—key practices like demonstrating technology maturity or controlling manufacturing processes are still not being fully implemented. Of the 17 programs we assessed that had recently passed through one of three key decision points in the acquisition process, only 3 had implemented all of the applicable knowledge-based practices applicable for that decision point. The remaining programs will carry technology, design, and production risks, which increase cost and schedule risks, into subsequent phases of the acquisition process. In March 2016, we also reported that implementation of the Better Buying Power and acquisition reform initiatives varied across programs. While 91 percent of programs successfully implemented “should-cost” initiatives and reported significant cost savings, only 67 percent had established affordability constraints. In addition, DOD has not completely implemented the direction to improve competition. Of the 12 future programs we assessed in our March 2016 report on selected weapon programs, half did not plan to conduct competitive prototyping before the start of development, and many current programs did not have acquisition strategies to ensure competition through the end of production. Eight current programs reported that they will not take actions to promote any competitive measures before or after development start. A significant element of capacity is whether the agency has the workforce in place to resolve risks. DOD has made some progress in managing its acquisition workforce. Specifically, in October 2016, DOD issued its updated acquisition workforce strategic plan which, among other things, assessed the current capability of the workforce and identified risks that DOD needed to manage to meet future needs. DOD acknowledged, however, that it will need to develop and implement metrics to track progress towards meeting the four strategic goals identified in its October 2016 strategic workforce plan. Further, the workforce plan does not establish specific career field goals or targets, which will hinder efforts to ensure DOD has the right people with the right skills to meet future needs. DOD has partially met the criterion for an action plan as it lacks a comprehensive action plan for fully addressing this high-risk area and its root causes, but addresses some of these issues in its Better Buying Power initiatives. Better Buying Power outlines some steps DOD can take across its acquisition portfolio to achieve better results. These initiatives include measures such as setting and enforcing affordability constraints, instituting a long-term investment plan for portfolios of weapon systems, implementing “should cost” management to control contract costs, and eliminating redundancies within portfolios. The initiatives also emphasize the need to adequately grow and train the acquisition workforce. DOD has partially met the criterion for monitoring progress. In December 2008, we, DOD, and the Office of Management and Budget discussed a set of cost growth metrics and goals to evaluate DOD’s progress on improving program performance for purposes of our high-risk report. These metrics were designed to capture total cost-growth performance over 1- and 5-year periods as well as from the original program estimate on a percentage basis, as opposed to dollar amount to control for the differences in the amount of funding among programs. DOD no longer supports the use of these metrics. We continue to believe that the current metrics have value. DOD has made some progress in its efforts to assess the root causes of poor weapon system acquisition outcomes, and monitor the effectiveness of its actions to improve how it manages weapon systems acquisition. In 2016, DOD issued the fourth in what is promised to be an annual series of performance reports on its portfolio of major defense acquisition programs. The report examines a wide range of acquisition-related information, such as contract type, contractor incentives, and the effects of statutes and policies to determine if there is any statistical correlation between these factors and good or poor acquisition outcomes. The report is a good step, but DOD needs to continue to refine and enhance this reporting. In addition, the department or Congress should formalize a requirement for the report to ensure it continues despite changes in leadership. DOD has partially met the criterion for demonstrating progress. As we reported in March 2016, many DOD programs are making progress reducing costs, as demonstrated by improvements when measured against cost-growth targets. However, individual weapon programs are still not conforming to best practices for acquisition or implementing key acquisition reforms and initiatives that could prevent long-term cost and schedule growth. Over the past 4 fiscal years, our analyses of DOD’s weapon system acquisitions have resulted in nearly $30 billion in financial savings. We have reported on the F-35 Joint Strike Fighter (JSF) program, DOD’s most expensive aircraft acquisition, for over a decade. A recurring theme in this body of work has been the program’s very aggressive and risky acquisition strategy, particularly the substantial concurrency, or overlap, among development, testing, and production activities. We repeatedly cautioned against procuring large quantities of aircraft before the system design was stable, performance verified through testing, and the manufacturing process capable of efficiently building aircraft at the planned production rates. We made numerous recommendations aimed at reducing annual procurements, delaying plans to accelerate production, and focusing more time and resources on system development and testing. We amplified this message in annual “Quick Look” reports, congressional testimonies, and numerous budget justification reviews. Defense officials acknowledged the concurrency in the JSF acquisition strategy, but stated that the risks were manageable. DOD’s position started to change, however, after years of cost growth and schedule delays. Consistent with our findings and recommendations, DOD decreased near-term procurement quantities by 103 aircraft for fiscal years 2013 and 2014 at a budgeted savings of about $9 billion, and by 187 aircraft for fiscal years 2015 through 2017 at a budgeted savings of about $12 billion. Congressional defense committees have depended on our work to provide accurate and realistic information to inform the ongoing debate on the F-35, and both congressional leaders and top DOD officials have noted that we were right about concurrency and the need to decrease annual aircraft purchases. In addition, as part of our annual work on the Ballistic Missile Defense System and assessments of defense-wide funding requests for research, development, test and evaluation, and procurement, we reported to Congress several times from March 2011 to April 2013 on the high acquisition risks and lack of analysis supporting the Precision Tracking Space System (PTSS). PTSS was designed as a satellite system to track ballistic missiles. We found that the program had developed an optimistic acquisition approach, including elevated levels of concurrency, and faced significant design challenges. This approach would have precluded demonstrations that the laboratory satellite design worked as intended before the Missile Defense Agency committed to industry-built satellites. DOD canceled the PTSS program in 2013 because of concerns with the program’s high-risk acquisition strategy and technical challenges that we raised, saving approximately $2.7 billion in planned funding for fiscal years 2014 through 2018. For additional information about this high-risk area, contact Michael J. Sullivan, Director, Acquisition and Sourcing Management at (202) 512- 4841 or [email protected] . F-35 Joint Strike Fighter: Continued Oversight Needed as Program Plans to Begin Development of New Capabilities.GAO-16-390. Washington, D.C.: April 14, 2016. KC-46 Tanker Aircraft: Challenging Testing and Delivery Schedules Lie Ahead. GAO-16-346. Washington, D.C.: April 8, 2016. Defense Acquisitions: Assessments of Selected Weapon Programs. GAO-16-329SP. Washington, D.C.: March 31, 2016. Defense Advanced Research Projects Agency: Key Factors Drive Transition of Technologies, but Better Training and Data Dissemination Can Increase Success. GAO-16-5. Washington, D.C.: November 18, 2015. Ford Class Aircraft Carrier: Poor Outcomes Are the Predictable Consequences of the Prevalent Acquisition Culture. GAO-16-84T. Washington, D.C.: October 1, 2015. GPS: Actions Needed to Address Ground System Development Problems and User Equipment Production Readiness. GAO-15-657. Washington, D.C.: September 9, 2015. Weapon System Acquisitions: Opportunities Exist to Improve the Department of Defense’s Portfolio Management. GAO-15-466. Washington, D.C.: August 27, 2015. Defense Acquisition Process: Military Service Chiefs’ Concerns Reflect Need to Better Define Requirements before Programs Start. GAO-15-469. Washington, D.C.: June 11, 2015. Defense Acquisitions: Better Approach Needed to Account for Number, Cost, and Performance of Non-Major Programs. GAO-15-188. Washington, D.C.: March 2, 2015. Acquisition Reform: DOD Should Streamline Its Decision-Making Process for Weapon Systems to Reduce Inefficiencies. GAO-15-192. Washington, D.C.: February 24, 2015. F-35 Joint Strike Fighter: Assessment Needed to Address Affordability Challenges. GAO-15-364. Washington, D.C.: April 14, 2015. Littoral Combat Ship: Additional Testing and Improved Weight Management Needed Prior to Further Investments. GAO-14-749. Washington, D.C.: July 30, 2014. Ford-Class Carriers: Lead Ship Testing and Reliability Shortfalls Will Limit Initial Fleet Capabilities. GAO-13-396. Washington, D.C.: September 5, 2013. Missile Defense: Opportunity to Refocus on Strengthening Acquisition Management. GAO-13-432. Washington, D.C.: April 26, 2013. Since 2015, the Department of Defense’s (DOD) progress in improving its financial management processes and operations has been mixed. Without reliable, useful, and timely financial information, DOD is severely hindered in making sound decisions affecting the department’s operations. DOD financial management was first added to our High-Risk List in 1995. Long-standing, uncorrected deficiencies with DOD’s financial management systems, business processes, financial manager qualifications, and material internal control and financial reporting weaknesses continue to negatively affect DOD’s ability to manage the department and make sound decisions on mission and operations. Having sound financial management practices and reliable, useful, and timely financial and performance information is important to help ensure accountability over DOD’s extensive resources and efficiently and economically manage the department’s assets and budgets. This is particularly important because DOD’s reported discretionary spending makes up about half of the federal government’s reported discretionary spending, and its reported assets represent more than 70 percent of the federal government’s reported physical assets. However, DOD remains one of the few federal entities that cannot demonstrate its ability to accurately account for and reliably report its spending or assets. DOD’s financial management problems remain one of three major impediments preventing us from expressing an opinion on the consolidated financial statements of the federal government. The effects of DOD’s financial management problems extend beyond financial reporting. Long-standing internal control deficiencies have adversely affected the economy, efficiency, and effectiveness of operations. For example, as we have reported, DOD’s financial management problems have contributed to (1) inconsistent and sometimes unreliable reports to Congress on weapon system operating and support costs, limiting the visibility that Congress needs to effectively oversee weapon system programs; and (2) an impaired ability to make cost-effective choices, such as deciding whether to outsource specific activities or how to improve efficiency through technology. DOD’s efforts to improve its financial management have been impaired by its decentralized environment; cultural resistance to change; lack of skilled financial management staff; lack of effective processes, systems, and controls; incomplete corrective action plans (CAP); and ineffective monitoring and reporting. Effective financial management is also fundamental to achieving DOD’s broader business transformation goals. However, given DOD’s decentralized environment and hundreds of nonstandard financial management business processes and systems, DOD anticipates it will take several years of effort before it will reach these goals. Current budget constraints and fiscal pressures make the reliability of DOD’s financial information and its ability to maintain effective accountability for its resources increasingly important to the federal government’s ability to make sound decisions about allocating resources. The Army, Navy, and Air Force underwent audits of their respective Schedules of Budgetary Activity (Budgetary Schedules) for fiscal years 2015 and 2016. However, all three of the independent public accountants (IPA) that performed these audits issued disclaimers, meaning that the IPAs were not able to complete their work or issue an opinion because they lacked sufficient evidence to support the amounts presented. These IPAs also identified material weaknesses in internal control at the three military services and collectively issued hundreds of findings and recommendations. As of the end of fiscal year 2016, 700 IPA findings and recommendations related to the three military services’ fiscal years 2015 and 2016 Budgetary Schedules remained open. These weaknesses included the military services’ inability to, among other things, reasonably assure that the Budgetary Schedules reflected all of the relevant financial transactions that occurred and that documentation was available to support such transactions. The results of these audits illustrate the significant amount of work that remains for DOD to have reliable, useful, and timely financial management and performance information for decision making on its mission and operations. In addition, DOD officials reported in the November 2016 Financial Improvement and Audit Readiness (FIAR) Plan Status Report that the department anticipates receiving disclaimers of opinion on its full financial statements for several years but emphasized that being subject to audit will help the department make progress. Since 2015, DOD’s progress in improving its financial management processes and operations has been mixed. DOD has made partial progress toward demonstrating leadership commitment and developing capacity and action plans. For example, DOD continues its efforts to address its financial management challenges through (1) updating the FIAR Guidance related to service providers, financial reporting of property, and seven critical capabilities for full audit readiness; (2) implementing training programs to build a skilled financial management workforce; and (3) developing a number of action plans. However, DOD continues to face challenges in monitoring corrective actions and demonstrating progress. In furtherance of financial management reform, Congress took the following actions during fiscal years 2013 through 2016: The National Defense Authorization Act (NDAA) for Fiscal Year 2013 established certain requirements for the FIAR Plan, including actions to be taken to ensure that DOD’s Schedule of Budgetary Resources is validated as ready for audit not later than September 30, 2014, and an assessment of readiness for the SBR audit. The NDAA for Fiscal Year 2014 mandated an audit of DOD’s fiscal year 2018 full financial statements, and that the results be submitted to Congress not later than March 31, 2019. Further, the NDAA for Fiscal Year 2016 had several relevant financial management provisions that, among other things required coordination with the Federal Accounting Standards Advisory Board to establish accounting standards to value large and unordinary general property, plant, and equipment items no later than September 30, 2017; required the Secretary of Defense to report to Congress, ranking the military departments and defense agencies in order of how advanced they are in achieving auditable financial statements; provided for DOD Office of Inspector General (OIG) involvement in each DOD component’s annual audit, including obtaining an audit of each component by an independent external auditor, participating in selecting the auditors, and monitoring the audits; required the financial audit reports issued by the independent external auditors to be submitted to the Under Secretary of Defense (Comptroller), Controller of the Office of Management and Budget’s (OMB) Office of Federal Financial Management, and appropriate congressional committees; and authorized the Secretary of Defense to carry out a pilot program allowing financial management personnel to temporarily exchange between DOD and contractors. Congressional oversight committees have continued to press for increased progress at DOD through hearings. DOD needs to assure the sustained involvement of leadership at all levels of the department in addressing financial management reform and business transformation. DOD leadership has stated that it is committed to achieving effective financial management controls to support financial accountability and reliable and timely information for day-to-day management decision making, and auditable financial statements. However, DOD reported in its November 2016 FIAR Plan Status Report that because some remediation actions and major system and process changes will not be fully completed, it expects the fiscal year 2018 full financial statements audit to result in significant audit findings and a disclaimer of opinion. In addition, DOD reported that it anticipates receiving disclaimers of opinion on its financial statements for several years. DOD leadership needs to reasonably assure that DOD components adhere to the processes in the FIAR Plan and the accompanying FIAR Guidance so that components have effective leadership, processes, systems, and controls in place to sustainably improve DOD’s financial management operations and audit readiness. Sustained leadership commitment is critical to DOD’s success in achieving financial accountability and in providing reliable information for day-to-day management decision making as well as financial audit readiness. DOD needs to continue building a workforce with the level of training and experience needed to support and sustain sound financial management. DOD needs to address the availability of financial management staff in light of the mandatory workforce reductions at headquarters. In addition, to continue building a skilled and knowledgeable workforce, DOD needs to assure that its financial management certification program continues developing and refreshing required competencies, periodically assessing the workforce’s capabilities, identifying competency gaps, and closing those gaps. DOD needs to continue to develop and deploy enterprise resource planning (ERP) systems as a critical component of DOD’s financial improvement and audit readiness strategy. DOD also will need to strengthen automated controls or design manual workarounds for the remaining legacy systems to satisfy audit requirements and improve data used for day-to-day decision making. The DOD OIG has reported that DOD continues to have schedule delays in effectively implementing its ERPs. These delays in implementing ERP systems increase the risk that DOD will not have reliable information for making important decisions on mission and operations or meet its goal of being validated as ready for an audit of its full financial statements by September 30, 2017. DOD needs to address identified deficiencies in service providers’ systems, processes, and controls that affect the reliability of financial data and information used in the related business processes. In addition, each of the components needs to resolve integration issues with DOD service providers. Further, the military services need to work with Defense Finance and Accounting Service (DFAS) management to address suspense accounts and support for adjustments made by journal vouchers. DOD needs to assure that military services enhance their policies and procedures for developing CAPs and improve processes for identifying, tracking, and remediating financial management related audit findings and recommendations. Improving remediation processes over these deficiencies will be more important in light of the hundreds of findings and recommendations resulting from the fiscal year 2015 and 2016 Budgetary Schedule audits. DOD needs to effectively implement its FIAR Plan and FIAR Guidance to focus on strengthening processes, controls, and systems to improve the accuracy, reliability, and reporting for the Budgetary Schedule and the SBR and assess the existence, completeness, and valuation of mission- critical assets. It also needs to fully define, in the FIAR Guidance, actions needed to resolve long-standing department and component financial management weaknesses. In taking such actions, DOD should not lose sight of the ultimate goal of implementing lasting and sustainable financial management reform which provides reliable, useful, and timely information for decision making as a routine part of financial management operations. Auditable financial statements would be a natural byproduct of the department’s success. To effectively monitor its components as they implement the FIAR Guidance and assess and test controls and remediate control deficiencies, DOD needs to establish a process for assuring that financial improvement plans have been effectively implemented. DOD management will need to monitor and assess the progress that the department is making. Additionally, the FIAR Directorate should validate that the military services and other components have achieved the seven critical capabilities. According to the April 2016 FIAR Guidance, these seven critical capabilities are related to DOD’s ability to: (1) produce a universe of transactions; (2) reconcile its Fund Balance with Treasury (FBWT) (i.e., balance its checkbook); (3) provide supporting documentation for material adjustments to its financial records; (4) validate the existence, completeness, and rights of its assets; (5) establish processes to manage and value its assets correctly; (6) establish an auditable process for estimating and recording its environmental and disposal liabilities; and (7) implement critical information technology controls for its financial systems. DOD should take the following actions: assure that the Navy fully implements the FIAR Guidance for FBWT in the areas of analyzing processes, prioritizing, assessing and testing internal controls, and evaluating supporting documentation to support audit readiness; require the military services to improve their policies and procedures for monitoring their CAPs for financial management related findings and recommendations; improve its process for monitoring the military services’ audit remediation efforts by preparing a consolidated CAP management summary that provides a comprehensive picture of the status of corrective actions throughout the department; and expand the FIAR Plan Status Report so that Congress and other decision makers will have more sufficient information to assess DOD’s current audit readiness status and the improvements that still need to be made. In addition, with regard to our open priority recommendations, DOD should monitor actions components are taking to direct DFAS to complete actions in response to our recommendations for implementing the requirements in the FIAR Guidance in the areas of planning, testing, and corrective actions; improve DOD processes to identify, estimate, reduce, recover, and report on improper payments to assure these processes fully comply with OMB guidance, the Improper Payments Information Act of 2002, as amended, and the Improper Payments Elimination and Recovery Act of 2010, and reconsider the status of three recommendations made by the House Armed Services Committee Panel on Defense Financial Management and Auditability Reform that the department determined to be met but that we determined to be partially met; these recommendations related to: attesting to audit readiness in each of the FIAR Plan Status including FIAR-related goals in Senior Executive Service performance plans and rewarding and evaluating performance over time based on these goals; and reviewing audit readiness assertions before component senior executive committees. Improving the department’s financial management operations—and thereby providing DOD management and the Congress with more accurate and more reliable information on the results of its business operations—will not be an easy task. Key challenges remain, such as allocating the department’s workforce and budget among competing priorities, achieving the critical capabilities detailed in the FIAR Guidance, and executing CAPs to effectively remediate findings and recommendations from IPAs, the DOD OIG, and us. According to its November 2016 FIAR Plan Status Report, DOD is continuing to work toward undergoing a full financial statement audit for fiscal year 2018; however, it expects to receive disclaimers of opinion on its financial statements for a number of years. This is why it is important for DOD and the military services to improve their processes for identifying, tracking, remediating, and monitoring audit findings and recommendations related to financial management. The military services will need to assure that they enhance their policies and procedures for remediating these findings and recommendations and DOD will need to obtain comprehensive information on the status of CAPs throughout the department in order to fully monitor and report on the progress being made to resolve financial management deficiencies. A lack of comprehensive information on the CAPs limits the ability of DOD and Congress to evaluate DOD’s progress toward achieving audit readiness, especially given the short amount of time remaining before DOD is required to undergo an audit of the department-wide financial statements for fiscal year 2018. Being able to show the progress that the department is making in remediating its financial management deficiencies will be useful as the department works toward implementing lasting financial management reform to ensure that it can generate reliable, useful, and timely information for financial reporting as well as for decision making and effective operations. DOD continues to partially meet the leadership commitment criterion. Since the last high-risk update in 2015, the commitment of DOD’s senior leadership to improving the department’s financial management has continued to be encouraging. The statements, testimony, and actions of senior leaders have emphasized the importance of effective financial management and audit readiness to DOD’s stewardship over the substantial funding and other resources entrusted to the department. In response to statutory requirements and targets, DOD leadership directives have set out a strategy and methodology for improving DOD’s financial management through the FIAR Plan Status Reports and FIAR Guidance. DOD’s current FIAR strategy and methodology focuses on four priorities—budgetary information, proprietary accounting and information, mission critical asset information, and valuation—with overall goals of improving the department’s financial management operations, helping provide service members with the resources they need to carry out their mission, and improving stewardship of the resources entrusted to DOD by the taxpayers. DOD Comptroller officials meet regularly with us for a constructive exchange of information on the status of DOD and component actions and to help sustain progress toward the FIAR goals. The April 2016 FIAR Guidance incorporates recent policy updates related to integrating service providers and financial reporting on existence, completeness, and valuation of property. It also defines seven critical capabilities that reporting entities must address prior to asserting full audit readiness. According to DOD, the approach to achieving full financial statement auditability by September 30, 2017, relies upon each DOD component and service provider addressing the seven critical capabilities in a timely manner; failing to do so will put the entire department’s strategy at risk. DOD continues to partially meet the capacity criterion. DOD faces capacity challenges because (1) its financial management personnel are insufficient in number, qualifications, and expertise; (2) its legacy financial systems data and ERPs lack the necessary standardization and reliability to support generating financial statements and related data; and (3) its service providers’ audit readiness activities are not fully integrated with respective DOD components’ audit readiness activities. DOD continues to identify the need for sufficient numbers of qualified and experienced personnel as a challenge to achieving its goals of financial improvement and audit readiness. In the November 2016 FIAR Plan Status Report, DOD reported that audit readiness resources are expected to decline across the department as audit readiness activities continue to rise. For example, DOD reported that new financial statement audits will increase the work demands on headquarters staff. However, since the department has been mandated to reduce its headquarters workforce by fiscal year 2020, this additional work could exacerbate the demands on the workforce. In addition, the Defense Health Program reported that resources needed to concurrently support audit readiness and financial management operations exceed the capacity of its available resources. Similarly, the Army identified resource constraints and the timing of its fiscal year 2016 Schedule of Budgetary Activity audit as challenges to its ability to remediate audit findings related to its ERP systems. Further, DOD reported in its November 2016 FIAR Plan Status Report that resource needs for financial statement audits will likely increase as the scope of the audits expand and work to correct audit findings increases. DOD has undertaken efforts to increase the knowledge and skills of its financial management workforce by implementing its financial manager certification program. However, it will take some time before DOD’s financial management staff achieves the level of training and experience needed to support and sustain financial management as envisioned by the FIAR Plan. Further, DOD’s decentralized management environment may have an effect on the ability of its financial management personnel to gain the requisite expertise to develop and implement needed CAPs. Moreover, while DOD has made progress in financial manager training, it lacks the level of expertise needed to lead financial management reform across the department. DOD faces challenges with its systems’ capacity to generate reliable, auditable financial information because it continues to rely on (1) legacy systems and related processes and controls that feed financial information to component general ledger systems and (2) general ledger systems, including ERP systems, that do not meet federal accounting standards, U.S. Standard General Ledger (USSGL) requirements, federal financial management system requirements, and DOD’s Standard Financial Information Structure. DOD continues to report that relying on legacy systems is a challenge. This is because legacy systems produce data that are not standardized and are therefore difficult to reconcile to the financial statements. Many legacy systems will still be in use when the audit of DOD’s fiscal year 2018 full financial statements must commence. In its May 2016 FIAR Plan Status Report, DOD discussed continuing challenges regarding the large number of business and financial systems and the level of effort and cost of developing and maintaining an audit- ready systems environment. DOD continues to implement and upgrade various ERP systems to establish an audit-ready systems environment. However, because these systems were not always designed to capture transaction-level information that can be tied to original supporting documents, significant time will be needed to make necessary modifications to assure that they generate reliable financial information. DOD components have varying plans for correcting system deficiencies; for some components, completion dates have either not been determined or extend into fiscal year 2019. DOD uses service providers to improve efficiency and standardize business operations in various functional areas, including accounting, personnel and payroll, logistics, contracting, and system operations and hosting support. DOD service providers and their business systems are fundamental to reliable accounting and reporting and financial audit readiness. For example, to process and record payments to contractors, DOD components depend on over a dozen systems owned and operated by service providers and on nonstandard business processes that need to link between the components and service providers. This complex level of interdependency increases the difficulty of identifying the systems that need to be modified, upgraded, or eliminated to support financial management improvement and audit readiness and the difficulty of defining critical roles and responsibilities for carrying out such actions. The FIAR Guidance calls for examinations of DOD service providers’ systems, processes, and controls. The IPAs that conduct these examinations have continued to identify deficiencies in service providers’ systems, processes, and controls that affect the reliability of financial data and information used in the related business processes. Each of the components has identified integration with DOD service providers as a challenge to completing financial improvement initiatives and audit readiness efforts. For example, the Army has expressed concerns about service providers’ abilities to provide timely responses to auditor samples, data requests, and sufficient supporting documentation. In addition, the Marine Corps has expressed concerns about the ability of service providers to provide supporting documentation for existence, completeness, rights, and valuation of Marine Corps assets. Further, the military services have expressed concerns about how DFAS manages suspense accounts and provides supporting documentation for adjustments made by journal vouchers. DOD continues to partially meet the action plan criterion. While the military services have developed, implemented, and validated many corrective actions, DOD’s limited progress in making needed financial management reform can be attributed to its decentralized management environment and cultural resistance to change, which have significantly impeded the department’s ability to modernize and transform business processes, systems, and controls. Sound financial management practices and reliable, useful, and timely financial information are important to help ensure accountability over DOD’s extensive resources and to efficiently and economically manage the department’s assets and budgets. Under DOD’s nonstandard, decentralized environment, each component is responsible for following steps in OMB’s guidance and DOD’s FIAR Guidance for addressing financial management related findings and recommendations reported by external auditors, including steps to (1) identify and track them, (2) prioritize them, (3) develop CAPs to remediate them, and (4) monitor the implementation status of the CAPs. However, we found that the remediation processes designed by each military service had deficiencies in one or more of these areas. For example, each military service’s policies and procedures lacked sufficient controls to reasonably assure that they identified and tracked the complete universe of open findings and recommendations related to financial management. Without identifying and tracking the complete universe of unresolved deficiencies, the military services cannot reasonably assure that the deficiencies will be addressed in a timely manner, which can ultimately affect the reliability of financial information and the auditability of their financial statements. The need to effectively implement financial management remediation processes has become more important in light of (1) the hundreds of findings and recommendations that resulted from the fiscal year 2015 and 2016 Budgetary Schedule audits, (2) future audits that will have a broader scope of work and may therefore identify additional findings and recommendations, and (3) the short period remaining before DOD is required to undergo a full financial statement audit for fiscal year 2018. DOD components have self-identified completion dates for achieving the seven critical audit readiness capabilities for both their general funds and working capital funds in coordination with their service providers. As reported in DOD’s November 2016 FIAR Plan Status Report, most of DOD’s audit readiness tasks and associated audit readiness milestones have planned completion dates in fiscal year 2017. DOD faces significant challenges, given its limited progress in assuring it can attain the seven critical capabilities and the volume and magnitude of open audit findings and recommendations that still need to be addressed from the fiscal year 2015 and 2016 Budgetary Schedule audits of the Army, Navy, and Air Force. To date, the efforts of DOD components to implement the FIAR Guidance have not fundamentally transformed systems and operations as necessary to produce reliable, useful, and timely information for day-to- day decision making on mission and operations. Resolving these deficiencies also will be crucial to DOD’s efforts to meet the statutory requirement to undergo a full financial statement audit for fiscal year 2018. However, much work remains to be completed in order for this date to be met. In its November 2016 FIAR Plan Status Report, DOD stated that readiness to undergo an audit does not mean that it expects to receive a positive opinion and that it is important to continue the audit regimen in order to gain valuable information from its early audit efforts, information that will help focus the department’s corrective actions in the most critical areas. DOD has not met the monitoring criterion. Effective monitoring requires instituting a program to monitor and independently validate the effectiveness and sustainability of corrective measures. However, as we have reported, while the DOD Comptroller has established several elements of a department-wide audit readiness remediation process, the DOD Comptroller does not obtain the complete, detailed information on all corrective action plans (CAP) from the military services related to the department’s critical capabilities necessary to fully monitor and assess DOD’s progress. Specifically, DOD does not prepare a consolidated management summary that would provide a comprehensive, department- wide picture of the status of CAPs needed for audit readiness that includes all of the elements that are recommended by the Implementation Guide for OMB Circular A-123. As a result, reports to external stakeholders, such as Congress, on the status of audit readiness do not provide comprehensive information on progress against the CAPs, limiting the ability of DOD and Congress to evaluate DOD’s progress toward achieving audit readiness, especially given the short amount of time remaining before the statutorily required full financial statement audit for fiscal year 2018. Further, the lack of comprehensive information on the status of CAPs increases DOD’s risk that it will not be able to fully, timely, and efficiently correct its long-standing deficiencies. In addition, we reported that DOD’s FIAR Plan Status Reports do not provide adequate visibility for Congress and other decision makers regarding the extent to which DOD has addressed certain internal control deficiencies that it refers to as deal-breakers. For example, the status reports do not include information on (1) audit assertions made without correcting internal control deficiencies along with actions and plans to remediate the deficiencies and (2) details of military services’ actions taken and progress made toward correcting the underlying deficiencies for reported deal-breakers. Without greater visibility of the status of DOD’s audit readiness or progress toward reported completion dates in its FIAR Plan Status Report, Congress and other decision makers may not have sufficient information to assess DOD’s current audit readiness status and the improvements that still need to be made. DOD has not effectively implemented the FIAR Guidance because, in part, it lacks effective monitoring to assess the effectiveness of controls and the remediation of control deficiencies. For example, we reported that the Navy did not fully implement the FIAR Guidance for reconciling its FBWT in the areas of process analysis, prioritization, internal control assessment and testing, and evaluation of supporting documentation to support audit readiness. In addition, each of the IPAs that performed audits of the military services fiscal year 2016 Budgetary Schedules identified deficiencies in monitoring information technology controls for its financial systems. DOD also has challenges with carrying out its strategy in the FIAR Guidance with regard to its critical capabilities. For example, the DOD OIG reported that the Army could not reconcile approximately $207 billion (68 percent) of its outlays, because the Army and DFAS did not coordinate to reengineer business processes when they implemented a new FBWT reconciliation tool. As a result, the DOD OIG reported that the Army cannot demonstrate an effective FBWT transaction-level reconciliation, which DOD identified as one of the deal-breakers to auditability. Furthermore, the DOD OIG reported that Army and DFAS could not adequately support material amounts of year-end adjustments to the Army General Fund financial data during the fiscal year 2015 financial statement compilation. As a result, the data used to prepare the fiscal year 2015 Army General Fund statements were unreliable and lacked an adequate audit trail. The DOD OIG also reported that DOD and Army managers could not rely on the data in the accounting systems when making management and resource decisions. According to the DOD OIG, until these control deficiencies are corrected, there is a considerable risk that the Army General Fund financial statements will be materially misstated and that the Army will not achieve the goal of being audit ready by September 30, 2017. DOD has not met the demonstrated progress criterion, showing limited progress in implementing corrective measures to resolve its long-standing financial management challenges. For example, because of difficulties encountered in preparing for an audit of the multi-year Statement of Budgetary Resources (SBR), DOD decided that, beginning with fiscal year 2015, it would limit the scope of the initial audits for all DOD components to current-year budget activity reported on a Budgetary Schedule. This was intended to be an interim step toward achieving the audit of multiple-year budgetary activity required for an audit of the SBR, with subsequent audits including current-year appropriations as well as prior-year appropriations going back to fiscal year 2015. Consequently, the Budgetary Schedules for the Army, Navy, and Air Force for fiscal year 2015 reflected only current year budget activity. As noted above, all three of the IPAs contracted to audit these fiscal year 2015 Budgetary Schedules issued disclaimers, meaning that the IPAs were unable to express an opinion because they lacked sufficient evidence to support the amounts presented. The IPAs for the three military services also identified material weaknesses in internal control. These weaknesses included military services’ inability to, among other things, reasonably assure that the Budgetary Schedules reflected all of the relevant financial transactions that occurred and that documentation was available to support such transactions. The IPAs for the three military services also issued disclaimers on the three services’ fiscal year 2016 Budgetary Schedules for reasons similar to those identified in the fiscal year 2015 audits. Further, the results of these audits—with hundreds of open findings and recommendations—show the extent and complexity of improvements needed to provide reliable information for financial reporting as well as for sound decision making on mission and operations. For additional information about this high-risk area, contact Asif Khan at (202) 512-9869 or [email protected]. DOD Financial Management: Significant Efforts Still Needed for Remediating Audit Readiness Deficiencies. GAO-17-85. Washington, D.C.: February 9, 2017. DOD Financial Management: Improvements Needed in the Navy’s Audit Readiness Efforts for Fund Balance with Treasury. GAO-16-47. Washington, D.C.: August 19, 2016. DOD Financial Management: Greater Visibility Needed to Better Assess Audit Readiness for Property, Plant, and Equipment. GAO-16-383. Washington, D.C.: May 26, 2016. DOD Financial Management: Improved Documentation Needed to Support the Air Force’s Military Payroll and Meet Audit Readiness Goals. GAO-16-68. Washington, D.C.: December 17, 2015. DOD Financial Management: Additional Efforts Needed to Improve Audit Readiness of Navy Military Pay and Other Related Activities. GAO-15-658. Washington, D.C.: September 15, 2015. DOD Financial Management: Continued Actions Needed to Address Congressional Committee Panel Recommendations. GAO-15-463. Washington, D.C.: September 28, 2015. DOD Financial Management: Actions Are Needed on Audit Issues Related to the Marine Corps’ 2012 Schedule of Budgetary Activity. GAO-15-198. Washington, D.C.: July 30, 2015. The Department of Defense (DOD) spends billions of dollars each year to acquire modernized systems that are fundamental to achieving its business transformation goals, including systems that address key areas such as personnel, financial management, health care, and logistics. While DOD’s capacity for modernizing its business systems has improved over time, significant challenges remain. These challenges include fully defining and establishing management controls for business systems modernization. Such controls are vital to ensuring that DOD can effectively and efficiently manage an undertaking with the size, complexity, and significance of its business systems modernization, and minimize the associated risks. DOD’s effort to modernize its business systems environment has been designated as high risk since 1995. DOD has demonstrated elements of leadership commitment and has made progress in this area by taking steps to manage the modernization of its business systems more effectively and efficiently. For example, the department has begun to implement an improved investment management framework and processes, and has established the capacity to use its federated architecture to identify potentially duplicative investments. However, more needs to be done to leverage DOD’s capacity to identify potentially duplicative investments, and to ensure that, among other things, systems are reviewed at appropriate levels as part of the department’s improved investment management framework. In addition, DOD’s business systems modernization efforts continue to fall short of cost, schedule, and performance expectations, and the department has not yet established an action plan (or plans) highlighting how it intends to improve its use of its business architecture, improve its business system investment management process, or improve its business system acquisition outcomes. The department can leverage the federal information technology (IT) dashboard as a mechanism for beginning to monitor progress in improving its business system acquisition outcomes. Nevertheless, without an action plan, DOD lacks a baseline against which it can monitor broader progress in its business systems modernization efforts. Further, the National Defense Authorization Act for Fiscal Year 2017 and its accompanying conference report include provisions that might impact how the department will manage its business systems. Specifically, the act establishes a Chief Management Officer and the accompanying conference report calls for the department to develop a plan by June 2017 to implement a more optimized organizational structure and processes to support information management and cyber operations, including the policy, direction, oversight, and acquisition functions associated with, among other things, business systems. The impact of these provisions on the department’s business systems modernization efforts remains to be seen. Although more needs to be done to address this high-risk issue, DOD has achieved important benefits by implementing our recommendations. For example, fiscal years 2013 and 2014 saw total financial savings of $970 million due to the department cancelling the Air Force’s Expeditionary Combat Support System because of significant cost and schedule overages discovered as a result of increased oversight. DOD must more fully demonstrate leadership commitment and progress in implementing critical IT modernization management controls. For example, the department needs to address the provisions of the conference report accompanying the Fiscal Year 2017 National Defense Authorization Act that call for DOD to develop a plan by June 2017 to implement a more optimized organizational structure and processes to support, among other things, business systems. DOD also needs to ensure that its business system investments are managed with the kind of rigor and discipline embodied in relevant acquisition management guidance and best practices so that each investment will deliver expected benefits and capabilities on time and within budget. In addition, DOD should ensure that its information reported on the Office of Management and Budget’s IT Dashboard is reliable and, over time, demonstrates improved achievement of cost, schedule, and performance expectations. DOD should also demonstrate that it is improving its guidance on incrementally developing IT systems to help ensure a timely delivery of needed capabilities, consistent with the Federal IT Acquisition Reform provisions of the Carl Levin and Howard P. ‘Buck’ McKeon National Defense Authorization Act for 2015. In addition, DOD needs to take steps to address key portfolio management practices documented in our IT Investment Management Framework. For example, DOD has not yet defined criteria for reviewing defense business systems at an appropriate DOD level based on factors such as complexity, scope, cost, and risk in support of the certification and approval process. DOD also needs to develop plans defining how it will ensure that it is using its federated business architecture to identify and address potentially duplicative investments within its business systems environment. Further, DOD should demonstrate that plans exist for addressing these various actions and associated recommendations, and that it is monitoring progress against these plans and demonstrating progress and related outcomes. DOD also needs to ensure that it has the appropriate capacity in place by conducting needed human capital analyses. DOD has partially met the criterion for leadership commitment. For example, the department has taken steps to improve its publicly available investment ratings and encourage incremental development. However, more remains to be accomplished before the department can fully demonstrate leadership commitment. In particular, the department needs to take steps to improve the accuracy of the department’s ratings, improve its use of incremental development, and further define expectations for managing its business system investments. In March 2014, the department revised its chief information officer ratings process for investments presented on the Federal IT Dashboard to take into account additional information about the risk of its investments, such as investment complexity, execution issues, and external risk assessments, including our reports. Establishing an accurate picture of program risk helps department management better understand which investments would benefit from additional oversight. Nevertheless, we reported in June 2016 that investment risk ratings presented on the Dashboard were not consistent with our assessment of investment risks. Specifically, our assessment of 25 DOD programs, 4 of which were defense business systems, determined that 19 of the programs, including all 4 defense business systems, were at a higher risk level than what was presented on the Dashboard. Moreover, in January 2015, the department revised Department of Defense Instruction 5000.02: Operation of the Defense Acquisition System, which describes an incremental software development approach for IT investments. According to the instruction, the approach has been adopted for many defense business systems. This is partially consistent with the recommendation from our May 2014 report emphasizing the importance of IT investments delivering capabilities in smaller increments over shorter periods of time. However, the instruction does not provide a time frame for how often functionality is to be delivered. As a result, the instruction does not fully address our recommendation, which calls for DOD to update its incremental development policies to ensure that it complies with Office of Management and Budget guidance. This guidance requires federal agencies to deliver usable system functionality every 6 months. In addition, the results from our recent related work show that the department has not consistently implemented an incremental development approach for all of its major IT investments. Specifically, in August 2016, we reviewed 14 business system projects associated with seven business system investments and found that, in fiscal year 2016, only 8 projects planned to deliver functionality every 6 months. Moreover, only nine projects planned to deliver functionality every 12 months. Six of the projects that had planned to deliver functionality within 6 months were associated with only one of the seven investments. According to DOD officials, the department allows its program managers to determine the appropriate delivery schedule. The officials also noted that a 6-month schedule would be too expensive to implement given the scale of the projects at the department. Nevertheless, until DOD modifies and implements its incremental development policy, it continues to run the risk of failing to deliver major investments in a cost-effective and efficient manner. In November 2016, DOD officials from the Offices of the Deputy Chief Management Officer, Under Secretary for Acquisition, Technology, and Logistics, and DOD Chief Information Officer stated that the department had developed a draft DOD Instruction focused on improving business system acquisition. This instruction is to provide guidance in areas such as risk management, requirements management, and incremental development. However, as of December 2016, the department had not completed the instruction. In addition, as previously discussed, the impact of provisions included in the National Defense Authorization Act for Fiscal Year 2017, and its accompanying conference report, on DOD business system acquisition management remains to be seen. DOD has not met the criterion for capacity. In May 2013, we reported that the Office of the Deputy Chief Management Officer, which is responsible for annually reviewing and approving the expenditure of funds associated with DOD business systems, had not conducted a human capital analysis and that no plans existed to analyze and address skill gaps, thus limiting the department’s capacity to lead improvement initiatives in these areas. In August 2016, department officials reported that the office had undergone two reorganizational changes and used skill inventories, needs assessments, and gap analyses as part of a strategic approach to human capital planning. However, DOD has not provided evidence of having performed a needs assessment or a gap analysis. In November 2016, an official from the department’s Office of the Under Secretary of Defense for Acquisition, Technology and Logistics stated that the department planned to take additional steps to address human capital needs after issuing its forthcoming instruction on defense business systems. DOD has not met the criterion for developing an action plan. In particular, the department lacks a plan (or plans) to monitor efforts to manage its business system investments with the rigor and discipline embodied in relevant acquisition guidance and best practices. In October 2016, the Assistant Deputy Chief Management Officer described steps the department is taking to make improvements in this area, but stated that the department has not developed an action plan to address this high-risk area. DOD has partially met the criterion for monitoring progress. Specifically, the department can leverage the Federal IT Dashboard with more accurate data as a mechanism for beginning to monitor progress in improving its business system acquisition outcomes. However, without an approved action plan for addressing the DOD Business Systems Modernization high-risk area, the department lacks a means to monitor broader progress in making improvements to its business system acquisition management efforts. DOD has partially met the criterion for demonstrating progress. As discussed previously, the department has taken steps to improve business system acquisition management. However, it needs to show continued progress as it takes steps to improve its efforts. For example, in our series of reports on DOD major automated information systems, we reported that the department has had mixed success in addressing key acquisition practices, such as risk and requirements management. We also continue to identify examples of business systems that do not meet performance expectations and experience significant cost overruns and schedule slippages. For example, in March 2016, we reported that the projected cost of the Air Force system that provides financial capabilities, such as cost accounting and collections, had increased about 9 percent from the program’s first February 2012 estimate (from approximately $1.43 billion up to $1.56 billion). Program officials attributed the cost increase, in part, to program scope growth and the addition of software upgrade enhancements. We also reported that this system experienced a 1-year slippage in its full deployment decision date. Program officials attributed this slippage to findings identified in the system’s initial operational test and evaluation report. In addition, the system did not meet five of its nine key performance indicators. In November 2016, DOD officials stated that the system was not deployed as planned and is currently undergoing a critical change. Accordingly, as of November 2016, updated milestones have not yet been established. DOD has partially met the criterion for leadership commitment. Specifically, the department has taken steps to improve its business systems investment management process to include defining and implementing policies and procedures for managing portfolio-level investments consistent with our Information Technology Investment Management Framework, and relevant investment management and business system modernization requirements. For example, in July 2015, we reported that DOD was continuing its efforts to further define and implement its defense business system governance framework, called the Integrated Business Framework. In this regard, the department had taken steps to align its business system certification and approval process with its planning, programming, budgeting, and execution process. According to the department’s February 2015 certification and approval guidance, organizational execution plans, which are to summarize each component’s business strategy for each functional area (e.g., financial management), are to include information about certification requests for the upcoming fiscal year as well as over the course of the department’s Future Years Defense Program. In addition, DOD has generally concurred with our recommendations to address improvements to its management of business systems. Nevertheless, the department needs to show continued leadership commitment and progress in addressing our associated recommendations as it takes steps to improve its business system investment management process. These recommendations are aimed at ensuring that business systems receive the appropriate levels of review using a tiered investment review board approach, and that strategies for DOD functional areas include all of the critical elements identified in DOD investment management guidance. These critical elements include performance measures to determine progress toward achieving the goals that incorporate all of the attributes called for in the department’s guidance. Further, as previously discussed, the impact of provisions in the National Defense Authorization Act for Fiscal Year 2017, and its associated conference report, on the department’s business systems investment management process remains to be seen. DOD has partially met the criterion for capacity. Although the department has established an investment review board to oversee its portfolio-based investment management process, much still remains to be accomplished to better define and institutionalize this process. For example, as of December 2016, the department had not yet issued an update to its February 2015 Certification Guidance. Officials from the Offices of the Deputy Chief Management Officer, Under Secretary for Acquisition, Technology and Logistics, and DOD Chief Information Officer stated in November 2016 that the department was developing a DOD Instruction aimed at improving the management of defense business systems. According to the officials, updated guidance on defense business systems, including updated certification guidance, will be issued after the instruction is finalized. In addition, in May 2013, we reported that the Office of the Deputy Chief Management Officer, which is responsible for annually reviewing and approving the expenditure of funds associated with DOD business systems, had not conducted a human capital analysis and had not developed plans to analyze and address skill gaps, thus limiting the department’s capacity to lead improvement initiatives in these areas. In August 2016, department officials reported that the office had undergone two reorganizational changes and used skill inventories, needs assessments, and gap analyses as part of a strategic approach to human capital planning. However, DOD has not provided evidence of having performed a needs assessment or a gap analysis. Nevertheless, in November 2016, an official from the department’s Office of the Under Secretary for Acquisition, Technology and Logistics stated that the department planned to take additional steps to address human capital needs after issuing its forthcoming instruction on defense business systems. DOD has not met the criterion for developing an action plan. Specifically, the department has not established an action plan (or plans) for addressing gaps in its business system investment management approach. In October 2016, the Assistant Deputy Chief Management Officer described steps the department is taking to make improvements in this area, but stated that the department has not developed an action plan to address this high-risk area. DOD has not met the criterion for monitoring progress. Specifically, without an approved action plan for addressing the DOD Business Systems Modernization high-risk area, the department lacks a means to monitor progress in making improvements to its business system investment management process. DOD has partially met the criterion for demonstrated progress. As discussed previously, the department has taken steps to improve its business system investment management process. However, the department needs to show continued progress in addressing our associated recommendations as it takes steps to improve its business system investment management process. For example, as discussed, in February 2015, the department took steps to align its business system certification and approval process with its planning, programming, budgeting, and execution process. However, as we reported in July 2015, the department’s February 2015 certification and approval guidance does not specify a process for conducting an assessment or call for the use of actual versus expected performance data and predetermined thresholds. DOD has partially met the criterion for leadership commitment for its federated business enterprise architecture. For example, in May 2014, we reported that the department’s Deputy Chief Management Officer required all business systems to be entered into the architecture compliance tool before they could be certified and approved as part of DOD’s business system investment management process. In addition, the Office of the Deputy Chief Management Officer has initiated an effort to improve how the department leverages the architecture, and the department has identified several associated milestones. However, as of December 2016, the department had not demonstrated that this effort and the associated milestones had obtained final approval from the Assistant Deputy Chief Management Officer. In addition, as previously discussed, the impact of provisions in the National Defense Authorization Act for Fiscal Year 2017, and its accompanying conference report, on the business architecture remains to be seen. DOD has met the criterion for capacity by establishing tools and processes intended to improve the department’s efforts to identify potentially duplicative systems by leveraging the federated business enterprise architecture. For example, in 2014, the department completed efforts to automate its business architecture compliance review process. According to officials, this automation will improve the department’s efforts to identify potentially duplicative systems. In addition, the department’s December 2014 problem statement requirements validation guidance called for an enterprise architecture analysis to be conducted to determine if a capability already exists within the organization or elsewhere across the department. Further, the department’s April 2015 business enterprise architecture compliance guidance reinforced this guidance by stating that programs should be examined for potential duplication and overlap during the problem statement requirements analysis process, which is to occur early in a program’s life cycle. DOD has not met the criterion for developing an action plan. The department has initiated an effort to improve how it leverages the architecture and identified several associated milestones. However, as of December 2016, the department had not demonstrated that this effort and the associated milestones had been approved by the Assistant Deputy Chief Management Officer. DOD has not met the criterion for monitoring progress. The department has developed a draft plan to improve how it leverages the architecture and identified several associated milestones. However, as of December 2016, the department had not demonstrated that this effort and the associated milestones had been approved by the Assistant Deputy Chief Management Officer. Without approved plans, DOD lacks a means to monitor progress in leveraging its architecture compliance tool. DOD has partially met the criterion for demonstrated progress. For example, the department has established the capacity to identify potentially duplicative investments. DOD has also provided examples of benefits attributed, at least in part, to the department’s business enterprise architecture. For example, according to officials from the Office of the Deputy Chief Management Officer, two proposed new defense business system investments were not approved by DOD due, in part, to architecture reviews that revealed the requested capabilities were already available in existing systems. In addition, in November 2016, the department provided examples of programs that had been assessed for potential duplication and overlap based on their associated business activities. Nevertheless, the department has not yet demonstrated that it is actively and consistently using such assessments of potential duplication and overlap to eliminate duplicative systems. The department’s draft plan for improving how it leverages its business architecture acknowledges this gap and identifies steps the department can take to improve. In 2013, the department took actions to improve its investment management decision making. For example, the department’s investment management guidance, issued by the Office of the Deputy Chief Management Officer in April 2013, required the precertification authorities to include any open recommendations from us for program weaknesses, as well as a status update on addressing our recommendations as part of the certification requests. These actions help ensure that DOD’s Investment Review Board is provided with identified program weaknesses that can be appropriately considered and thus better inform and justify certification decisions for business systems investments. In 2014, the department reported all business system certification actions in its annual report to Congress. Specifically, DOD’s 2014 annual report to Congress included, among other things, a list of all certification actions the department took in the previous year on its business systems modernization investments. For example, the report contained an attachment that reported all fiscal year 2014 certification actions, including the amount of funding requested, the amount approved or disapproved, and any conditions placed on funding not certified or conditionally certified. Additionally, fiscal years 2013 and 2014 saw total financial savings of $970 million due to the department cancelling the Air Force’s Expeditionary Combat Support System because of significant cost and schedule overages discovered as a result of increased oversight. In 2015, the department demonstrated that it took steps to help ensure that it was appropriately reengineering business processes on defense business systems. In particular, as part of DOD’s fiscal year 2013 certification and approval process, the department placed conditions on certifications for these business systems requiring that a plan be submitted describing how each system would become compliant with business process re-engineering requirements. DOD officials also provided documentation showing that they tracked these conditions. In addition, DOD has reported much higher levels of compliance with business process reengineering requirements in subsequent annual review cycles. For example, for the fiscal year 2014 and 2015 certification cycles, DOD officials reported that only two systems and six systems, respectively, were approved that did not have complete business process reengineering assertions. Moreover, DOD officials provided justifications for why each of these systems did not have complete business process reengineering assertions. In 2016, the Air Force, Army, and Navy developed a plan for addressing core elements described in our Enterprise Architecture Management Maturity Framework. For additional information about this high-risk area, contact Carol C. Harris at (202) 512-4456 or [email protected]. Information Technology Reform: Agencies Need to Increase Their Use of Incremental Development Practices. GAO-16-469. Washington, D.C.: August 16, 2016. IT Dashboard: Agencies Need to Fully Consider Risks When Rating Their Major Investments. GAO-16-494. Washington, D.C.: June 2, 2016. DOD Major Automated Information Systems: Improvements Can Be Made in Reporting Critical Changes and Clarifying Leadership Responsibility. GAO-16-336. Washington, D.C.: March 30, 2016. DOD Business Systems Modernization: Additional Action Needed to Achieve Intended Outcomes. GAO-15-627. Washington, D.C.: July 16, 2015. Defense Major Automated Information Systems: Cost and Schedule Commitments Need to be Established Earlier. GAO-15-282. Washington, D.C.: February 26, 2015. Since our 2015 high-risk update, the Department of Defense (DOD) has shown some improvement in managing its infrastructure to better achieve reductions and efficiencies, and has partially met each of the five criteria for removal from the High-Risk List. For this update, we are consolidating our evaluation of these two areas based on DOD officials’ assertion that achieving efficiencies in base support is integrated through numerous programs and efforts at the Office of the Secretary of Defense (OSD), military service, and installation levels, and is incorporated in DOD’s overall efforts to efficiently manage its infrastructure. Further, DOD officials stated that the joint basing program is no longer DOD’s primary effort for achieving efficiencies in base support services. For these reasons, we are reframing our evaluation to focus generally on DOD’s efforts to better align DOD’s support infrastructure with the needs of its forces and achieve efficiencies. DOD manages a global real property portfolio that consists of more than 562,000 facilities—including barracks, commissaries, data centers, office buildings, laboratories, and maintenance depots—located on about 4,800 sites worldwide and covering more than 25 million acres. With a DOD- estimated replacement value of about $880 billion, this infrastructure is critical to maintaining military readiness, and the cost to build and maintain it represents a significant financial commitment. Since designating this area as high risk in 1997, we have reported on various long-term challenges DOD faces in managing its infrastructure. Specifically, DOD has experienced obstacles reducing excess infrastructure, more efficiently using underutilized facilities, and reducing base support costs, as well as achieving efficiencies by consolidating or eliminating duplicate support services. In our 2015 high-risk update, we categorized the need for improvement into two areas: (1) reducing excess infrastructure, which included disposing of and consolidating facilities under the Base Realignment and Closure (BRAC) process and improving how DOD uses facilities; and (2) achieving efficiencies in base support through joint basing—a program aimed at consolidating support services by combining bases that are in close proximity or adjacent to one another. We reported that DOD retained significant excess capacity relative to its planned force structure; needed to improve the completeness and quality of its information on how it uses facilities to better manage and use them; and had not realized the anticipated cost savings and efficiencies in reducing duplicative support services through its joint basing program. As cited previously, since our 2015 high-risk update, DOD has shown some improvement in managing its infrastructure to better achieve reductions and efficiencies, and has partially met each of the five criteria for removal from the High-Risk List. Specifically, DOD has demonstrated leadership by requesting more rounds of BRAC—its primary method for reducing excess infrastructure not needed to support its forces. DOD has also showed some improvement in its leadership commitment, capacity, action plans, monitoring, and progress by increasing the completeness of utilization data, publishing an overarching Real Property Efficiency Plan, communicating and addressing issues on consolidating installation services at the joint bases, and reducing excess infrastructure through the Freeze the Footprint policy. However, DOD needs to take additional steps across all five of our high-risk criteria. For example, DOD has not committed to take action on some of our recommendations related to it implementing any future BRAC rounds, such as improving DOD’s ability to estimate potential liabilities, and savings to achieve desired outcomes. Further, DOD continues to maintain excess capacity in relation to its force structure, including long-standing excess facilities, and needs to ensure accuracy of its real property data to better identify potential areas to reduce and consolidate facilities. DOD also needs to address in its plans any actions geared toward achieving efficiencies in base support services, such as through consolidating services. By acting on our recommendations to strengthen its efforts in each of these areas, DOD will be better positioned to align its support infrastructure with the needs of its forces and achieve efficiencies. In April 2016, we provided DOD with a letter that outlined 19 actions and outcomes that we believe it should address in order to correct long- standing weaknesses in its support infrastructure management efforts. Based on discussions with DOD officials and recent efforts across the department, as of January 2017, we believe that DOD has addressed 4 of the 19 actions and outcomes related to capacity, monitoring, and demonstrated progress. Specifically, DOD evaluated the purpose of joint basing and whether its goals are still appropriate, reviewed and prioritized standards to ensure a shared framework for managing base support, provided guidance to the joint bases that directs them to identify opportunities for cost savings and efficiencies, and continued to develop an approach to identify and isolate cost savings resulting from consolidating support services at the joint bases. We also added one action on improving the accuracy and completeness of lease data, which we believe will assist DOD in managing its facilities more efficiently. Going forward, DOD needs to show measureable and sustained progress in addressing the remaining 16 actions and outcomes across each of the 5 criteria for removal from the High-Risk List related to improving implementation of any future BRAC rounds, improving facility utilization data, reducing base support costs, and achieving efficiencies in base support. In September 2016, we also provided DOD with a letter describing the overall status of DOD’s implementation of our recommendations, and noted specific open recommendations that we believe the department should give high priority to addressing. Included in the letter were 7 open priority recommendations related to improving initial cost estimates, limiting bundling of stand-alone realignments, developing baseline cost data, and establishing reduction targets for any future BRAC, which are also included in the 16 actions that are part of this high-risk update. DOD needs to take the following 16 actions to satisfy the five high-risk criteria for DOD support infrastructure management: Leadership Commitment: For any future BRAC rounds, DOD needs to commit to improve the process for identifying and entering into Cost of Base Realignment Actions (COBRA) requirements for relocating personnel and equipment, costs for alternatively financed projects, and limiting the practice of bundling multiple stand-alone realignments or closures into single recommendations, or when bundling is appropriate, itemize the costs and savings associated with each major discrete action. DOD should provide clear direction to the joint bases about goals, time frames, and measures in consolidating base support services. Capacity: DOD needs to implement guidance on improving utilization data; and, continue to manage the reduction of long-standing excess facilities, such as proactively managing processes to meet historic preservation and environmental requirements and working with host nations to avoid prolonged negotiations over returning excess infrastructure in foreign countries. Action Plan: DOD needs to include in its plans any actions geared toward reducing duplication or consolidating support services, such as providing measurable goals linked to achieving savings and efficiencies stemming from consolidation at the joint bases. Monitoring: DOD needs to improve the accuracy and completeness of data, including breaking out the cost and square footage information on multiple properties included in a single lease; in any future BRAC round, commit to improving the fidelity of initial BRAC cost estimates by working with military services and other appropriate stakeholders to fully identify requirements—the cost of military construction, information technology, and relocating personnel and equipment, and alternatively financed projects—and limit bundling multiple stand-alone realignments or closures into single recommendations. When bundling is appropriate, itemize the costs and savings associated with each major discrete action; direct the military departments to develop baseline cost data, including any consolidation resulting from a future BRAC round; and continue to periodically track service-level efforts to reduce excess infrastructure, such as planned service targets to reduce or better use excess space, based on reliable real property data, including information on utilization and leased space. Demonstrate Progress: DOD needs to establish targets for eliminating excess capacity, consistent with the BRAC selection criteria chosen, for any future BRAC rounds; assess—using better data on the use of space and better monitoring of DOD-level and service-level efforts— whether its goals and efforts need to be reviewed to align space utilization with mission needs; and ensure its plans and programs to achieve reduction goals are implemented and progress monitored, in addition to other actions previously mentioned under the other high-risk criteria. If Congress authorizes additional BRAC rounds, it may wish to consider amending BRAC legislation to require the Secretary of Defense to formally establish specific goals that the department expects to achieve from a future BRAC process and require DOD to implement our recommendations related to BRAC. DOD partially met the criterion for leadership commitment. DOD has demonstrated some top leadership commitment to reducing excess infrastructure and more efficiently managing its infrastructure, but needs to demonstrate further commitment to better managing any future BRAC rounds and providing steps to achieve its joint basing goals, timeframes, and measures in achieving efficiencies in support services. Since 2013, DOD has been successful in reducing excess infrastructure through its past BRAC rounds and has demonstrated leadership in requesting additional BRAC rounds. In addition, since 2013, in coordination with the military services, DOD has developed and implemented more effective and efficient methods to reduce excess infrastructure, such as through more proactively managing DOD’s processes to meet historic preservation and environmental requirements. Additionally, DOD has worked with host nations to avoid prolonged negotiations over returning excess infrastructure in foreign countries. However, DOD needs to demonstrate additional leadership commitment to ensuring the success of any future BRAC rounds by agreeing to implement key actions we have recommended from reviews of the most recent BRAC round. In March and April 2013, we reported that while the BRAC process was fundamentally sound, the way DOD implemented the 2005 BRAC round at times limited its ability to estimate costs, potential liabilities, and savings to achieve desired outcomes. Specifically, we identified a number of issues with DOD’s process for estimating BRAC costs and savings, which was hindered in many cases by underestimating recommendation-specific requirements that were entered in the COBRA estimation model. For example, the primary reason costs increased for BRAC 2005 was higher-than-anticipated military construction costs—an increase of 86 percent from $13.2 billion originally estimated by the BRAC Commission to $24.5 billion after BRAC implementation ended in 2011. DOD significantly understated initial requirements inputted into COBRA for information technology costs (e.g., realigning supply, storage, and distribution management initially estimated to be $31 million increased to over $190 million). Also, DOD understated the costs of relocating military personnel positions and equipment, and did not consistently capture all costs associated with alternatively financed projects. We recommended various actions to improve the quality of information that forms the basis for the costs estimates. In written comments to our March 2013 report, DOD officials did not fully concur with these actions, stating that the COBRA model was not meant for the purposes we recommended. However, more recently, they agreed to take additional action to better forecast the initial costs inputted into COBRA related to military construction, information technology, and relocating military personnel positions and equipment, and have already taken some steps to do so, in support of any future BRAC round. Officials did not agree that liabilities from alternatively financed projects need to be consistently captured in the COBRA model, stating that it is difficult to estimate these costs. However, as we stated in the April 2013 report, in cases where the amount of the liability cannot be estimated, modifying the model with a capability to note the existence of a potential liability would provide decision makers with valuable information to inform their deliberations. DOD officials also cautioned that costs can increase during implementation of BRAC recommendations which cannot be easily foreseen, and increases in costs are reported to Congress. We agree that costs can and have increased during the implementation of BRAC recommendations. However, the intent of our recommendations are to improve the information provided to decision makers while they are comparing competing scenarios and making closure and realignment decisions, understanding that ultimate costs may differ from these initial estimates. Further, DOD bundled multiple BRAC recommendations into single, highly complex recommendations without itemizing costs and savings associated with each separate major action, which limited visibility into the estimated costs and savings for individual closures and realignments and complicated the ability of the Defense Base Closure and Realignment Commission (BRAC Commission) to review the recommendations. We recommended actions to improve the quality of information that forms the basis for the cost estimates by limiting the bundling of recommendations, or if bundling is appropriate, to itemize the costs and savings associated with each major discrete action. In the March 2013 report, DOD did not fully concur with these recommendations, stating that actions are bundled when they relate to a common outcome, and thus need to be viewed comprehensively rather than individually. More recently, officials agreed that when bundling is appropriate during any future BRAC round, they would provide additional details related to costs and savings as needed. We are encouraged by DOD’s agreement that improvements can be made in the quality of the information that supports BRAC cost estimates, and we continue to believe addressing these issues when planning for any future BRAC rounds will help the department improve initial cost estimates and provide a means for better evaluating the proposed closure and realignment recommendations. Improving its planning processes, including the cost estimates, would also help DOD implement the BRAC process more effectively towards reducing excess capacity and provide more confidence to Congress and the public on DOD’s efforts in implementing BRAC actions. With respect to achieving efficiencies in base support, DOD reported relying on a multitude of efforts and initiatives at the OSD, military service, and installation levels. We have reported on DOD’s progress in implementing its joint basing program, one key initiative aimed at achieving efficiencies in base support. We reported that OSD demonstrated some leadership commitment to addressing issues affecting joint bases by issuing a memo to the Secretaries of the military departments asserting its support for joint basing and clarifying the program goals, but OSD and the military departments have not yet provided detailed guidance on how to meet the goals and related timeframes. DOD’s memo outlined key areas for continual success of the program, including continuing to consolidate installation support functions at the bases. While the 2014 memo did not provide detailed guidance on achieving cost savings and efficiencies or provide for milestones, as we have recommended, it affirmed the purpose and goals of the joint bases and demonstrated a commitment to the program. Continued leadership by DOD, to include implementing our prior recommendations in any future BRAC rounds and focusing its efforts to reduce duplication of support services for its bases, among DOD’s other efficiency measures, will be important to sustain efforts to more effectively and efficiently align its infrastructure with its needs. DOD partially met the criterion for capacity. DOD demonstrated its capacity to align its infrastructure with its force’s needs by disposing of excess infrastructure during past BRAC rounds, and by consolidating some installation services at the joint bases, among other efficiency efforts. However, DOD needs to ensure the accuracy of its real property data, and implement its utilization guide to improve its ability to identify potential areas to reduce and consolidate its infrastructure. DOD needs to further implement its Real Property Efficiency Plan, which is aimed at disposing of longstanding excess infrastructure. DOD has improved the way it collects utilization data for its facilities since our 2015 high-risk update, and has issued a guide for calculating utilization to help improve completeness and accuracy of the utilization data. In following up on our September 2014 report recommendations on DOD’s use of its facilities, we found that DOD has utilization data on about 97 percent of its facilities as of September 2015, the most recent data available—increasing from 53 percent as of September 2013. However, the utilization rates entered into DOD’s database are likely not reliable, since a majority of the facilities (85 percent) have the highest possible rate of 100, which indicates full utilization at the same time that DOD believes it has over 20 percent excess facility capacity. In addition, of the facilities that have a rating of 100, 24 percent had either no inspection date or been mostly recently inspected prior to September 30, 1999, which calls into question the accuracy of this data. In December 2016, DOD issued a policy memorandum that provided guidance for calculating utilization to ensure utilization is measured and reported consistently throughout DOD, and to maintain current information on facility utilization. As the guidance is implemented, DOD officials expect improvement in the accuracy of utilization data as facilities are assessed and to increase the completeness of utilization data. Implementing the guidance will help focus DOD’s efforts on reducing excess facility capacity, and should improve information on the utilization of facilities to position DOD to better identify excess facility capacity in support of its efforts to reduce excess infrastructure. In addition, we reported in September 2011 that long-standing excess facilities—those identified prior to DOD’s demolition program in fiscal 2008—accounted for more than half of the excess inventory DOD identified and may be more costly to eliminate due to historic preservation of certain facilities and environmental issues. We recommended that DOD continue to manage reduction of long-term excess facilities, such as proactively managing processes to meet historic preservation and environmental requirements and working with host nations to avoid prolonged negotiations over returning excess infrastructure in foreign countries. While DOD officials stated that they have been proactively managing historic preservation and environmental requirements, the amount of funding dedicated to future demolition is not consistent with the number of long-standing facilities yet to be demolished. In October 2015, DOD officials developed a DOD Real Property Efficiency Plan that describes DOD’s strategic and tactical approach to managing its real property effectively and efficiently, including reduction targets for fiscal years 2016 through 2020. The plan further provides for how DOD expects to dispose of long-standing excess facilities. However, DOD is in the early stages of implementing the plan, and thus it is too early to assess its results. If implemented effectively, the plan should help DOD improve its capacity and ability to identify excess facilities, and to more effectively and efficiently manage its real property. We also reported that DOD has shown capacity to consolidate installation services at the joint bases. We reported in November 2012 that the joint bases reported meeting common standards more than 70 percent of the time in fiscal years 2010 and 2011. Also, in September 2014, we reported that the joint bases reported partially consolidating 80 percent of their installation functions. However, we noted that without comprehensively evaluating whether installation support functions were still suitable for consolidation, and without identifying and addressing limitations reported by the joint bases, DOD might not be able to fully consolidate all installation support functions. We recommended that DOD evaluate the support functions identified in its joint base guidance to determine which are still suitable for consolidation, and subsequently identify and make any appropriate changes. In 2015, DOD evaluated the possibility of a European joint base, and removed six support functions that it determined were not suitable because the functions provided limited opportunities for consolidation. In addition, as part of its regular annual review of joint base standards, DOD continues to evaluate which standards are suitable for consolidation. Together, these actions address the intent of our recommendation. DOD partially met the criterion for having an action plan and has developed plans to better identify and dispose of excess infrastructure, including an overarching Real Property Efficiency Plan. However, these plans do not include actions geared toward improving infrastructure efficiencies related to achieving efficiencies in support services. DOD developed a number of action plans to reduce infrastructure under various initiatives. These action plans together provide for corrective measures and solutions to reduce excess infrastructure. For example, in October 2015, in response to a requirement under the Office of Management and Budget’s (OMB) Reduce the Footprint policy, DOD officials developed a Real Property Efficiency Plan that describes its strategic and tactical approach to managing its real property effectively and efficiently. This plan addresses our September 2014 recommendation to establish a strategic plan to manage DOD’s real property and facilitate the department’s ability to identify potential consolidation and disposal opportunities. The finalized plan describes goals aligned with the National Strategy for the Efficient Use of Real Property and for reducing the footprint of its real property inventory. The plan also describes the strategies, programs, and methodology for meeting these goals through the real property management policies and procedures of the military departments, and metrics to gauge progress. Implementing the plan, which began in 2016 and is scheduled to run through 2020, will help DOD improve its ability to identify excess facilities and plan for the effective and efficient management of its real property. However, DOD’s plans, such as the Real Property Efficiency Plan, do not address achieving efficiencies in support services. For example, for the joint base program, DOD has not established an action plan, including corrective measures and a timeline to benchmark progress, for achieving cost savings and efficiencies, as we recommended in November 2012 and September 2014. As a result, joint base commanders are responsible for determining to what extent they will pursue initiatives to reduce redundancy and achieve potential cost savings or efficiencies, and the extent to which such initiatives have been pursued varies by joint base. We continue to believe that having an action plan related to reducing duplication and consolidating installation support services would improve DOD’s efforts to align its infrastructure to its mission needs and lead to efficiencies in the department’s base support efforts. DOD partially met the criterion for monitoring. DOD has committed to taking actions that would improve its monitoring of any future BRAC rounds, and has demonstrated some ability to monitor its efforts to achieve reductions and efficiencies in infrastructure, but it does not have reliable real property data to effectively monitor property and facility utilization. Specifically, DOD is able to generally monitor excess infrastructure reduced through past BRAC rounds and ongoing property reduction efforts, and has improved its cost data monitoring for the joint bases. For example, DOD has some procedures in place to monitor excess infrastructure reduced from the 2005 BRAC round, the Freeze and Reduce the Footprint policies and each service’s efforts at monitoring its infrastructure. Under the Freeze and Reduce the Footprint policies, OMB directed federal agencies to limit expansion of property (no new facilities without disposing of equivalent facilities), provide real property efficiency plans, and plan for and report on the reduction of property. Through DOD’s Real Property Efficiency Plan, each military department outlines its methods and metrics for identifying and reducing excess infrastructure, and DOD monitors the military departments’ progress towards meeting its reduction goals. However, it is too early to assess the results from the plan since implementation began in 2016 and is scheduled to run through 2020. While DOD has made progress in improving its monitoring, it needs to improve the reliability of its real property data and the monitoring of costs and savings resulting from any future BRAC rounds. Specifically, as mentioned previously, we reported in September 2011 and September 2014 that DOD does not have reliable real property data to assess how it uses property and facilities. Subsequently, in March 2016 we reported that DOD lacked reliable data to effectively assess how it uses leases. While DOD is taking some steps to address data issues, it cannot fully determine the number, size, and costs of its leases for real property because the real property inventory system that DOD uses to monitor its leased assets contains some inaccurate and incomplete data. For example, we reported that about 15 percent of the lease records for fiscal year 2011 and 10 percent of the records for fiscal year 2013 were inaccurate. We recommended actions to improve the accuracy and completeness of this data, such as breaking out the cost and square footage information on multiple properties included in a single lease. DOD concurred with our findings, but did not concur with our recommended method to update DOD’s database. If DOD does not improve the reliability of its data, the department will continue to be limited in its ability to monitor its reduction of excess infrastructure, identify opportunities to consolidate underutilized facilities, and identify opportunities to reduce reliance on costly leased space by moving DOD organizations into excess facilities. Further, DOD has committed to taking some actions that would improve the monitoring of costs and savings from any future BRAC rounds, although some additional actions are needed. For example, we made a number of recommendations in March 2013 and April 2013 which would help DOD better monitor the implementation and effectiveness of the BRAC recommendations. DOD officials acknowledged that they could improve the initial estimates in future BRAC rounds, and have reported taking some action to do so, including updating standard factors for information technology as part of the European Infrastructure Consolidation effort. However, DOD also needs to consistently capture liabilities from alternatively financed projects in the COBRA model for any future BRAC round. These actions would provide for better baseline data with which to make decisions as well as to track and monitor the results achieved through any future BRAC rounds. We also reported in February 2016 that DOD’s implementation of certain BRAC recommendations limited its ability to determine cost savings because it lacked baseline cost data. Despite challenges in isolating cost information, without maintaining such information, DOD cannot determine the budgetary effect of implementing actions to achieve reductions and efficiencies in infrastructure. With respect to improving baseline cost data for the joint bases, in November 2012, we recommended that DOD continue to develop and refine the joint bases common standards in order to eliminate data reliability problems, facilitate comparisons of joint basing costs with the costs of operating separate bases, and isolate costs and savings from the joint basing initiative. DOD partially concurred with our recommendation, and stated that it was working to improve the data’s reliability but found it impractical to isolate and distinguish joint basing cost savings from the savings that result from unrelated DOD- or service-wide actions. DOD provided guidance to the joint bases to correct baseline data and as a result, the quality of the data improved for fiscal years 2012 and 2013, resulting in a 2013 analysis showing that the joint bases cost less to operate than the separate installations. Together, these actions met the intent of our recommendation and provided DOD with an improved picture of the cost of operating the joint bases. DOD partially met the criterion for demonstrated progress. DOD has demonstrated some progress in aligning its infrastructure to its forces’ needs by reducing excess infrastructure through BRAC and other service efforts, and in consolidating base support services. Although initially not agreeing to our related recommendations, DOD identified steps to improve the quality of information used to support recommendations for any future BRAC rounds, and improve the accuracy and completeness of utilization data. However, DOD needs to further improve lease data to better identify excess infrastructure for disposal and develop a plan for reducing duplication and consolidating support services to increase the efficiency of the department’s infrastructure services. DOD has also reduced some excess infrastructure, but needs to develop targets for eliminating excess through any future BRAC rounds, and ensure that its plans and programs to reach reduction goals are implemented and progress monitored. DOD did not concur with our recommendation to develop targets for eliminating excess infrastructure through any future BRAC rounds, stating that having overarching targets would subvert developing actions based on military value. However, in further discussion, DOD officials stated that qualitative goals, such as needing to reduce excess infrastructure, are helpful in focusing efforts and measuring success, but they continued to believe that quantitative goals would be in conflict with BRAC selection criteria. We have reported on the soundness of the BRAC selection criteria and generally endorsed their retention for the future, and do not believe that establishing targets for eliminating excess infrastructure affects DOD’s ability to apply these criteria. While we agree that stating a goal in future BRAC rounds, such as reducing excess infrastructure, is useful, we continue to believe that establishing specific targets would assist DOD in measuring progress in reducing excess infrastructure and not harm the department’s ability to consider military value as its primary selection criteria. Moreover, DOD would retain the ability to exercise military judgement in selecting from among the candidate recommendations to be put forward to the BRAC commission, as was the case in BRAC 2005 and which we have generally endorsed. The military services have also demonstrated some progress in reducing excess infrastructure. For example, the services have disposed of and demolished excess facilities through their individual efforts, and under the Freeze the Footprint policy DOD has limited construction of new facilities without disposing of equivalent facilities. Further, for fiscal year 2013, DOD reported a net reduction of 7.7 million square feet, which is about 75 percent of the total reduction across the federal government under this policy. As described above, DOD’s Real Property Efficiency Plan outlines goals, strategies and programs to reach goals, and metrics to gauge progress. It will be important for DOD to ensure that the plan is effectively implemented and progress is monitored so that the department can achieve its reduction goals. However, DOD’s progress in reducing excess infrastructure is limited by challenges with long-standing excess facilities and unreliable data related to the use of its facilities and of its leased space. Until DOD improves its capacity and monitoring of efforts aimed at reducing long-standing excess facilities, the department cannot fully demonstrate progress in better aligning its infrastructure to its mission needs. DOD has demonstrated some progress in achieving efficiencies in base support, such as officials reporting reductions of redundant funded positions, contracts, and procedures at the joint bases. DOD’s data shows that joint bases are obligating less funding than they would have as stand-alone bases, although some of the savings are attributable to other service actions, such as budget cuts unrelated to joint basing, as noted above. Further, DOD instituted mechanisms to facilitate routine communication to encourage jointly resolving common challenges and sharing best practices and lessons learned. DOD also issued a joint basing handbook to address inconsistent service level guidance. However, DOD has not provided clear direction to joint bases on steps needed to reach program goals, and lacks a plan for reducing duplication and consolidating support services. In October 2015, DOD issued its Real Property Efficiency Plan that describes DOD’s strategic and tactical approach to managing its real property effectively and efficiently. This plan addresses our September 2014 recommendation to establish a strategic plan to manage DOD’s real property and to facilitate the department’s ability to identify potential consolidation and disposal opportunities. The finalized plan describes goals aligned with the National Strategy for the Efficient Use of Real Property and for reducing the footprint of DOD’s real property inventory. The plan describes strategies, programs, and methodology to achieve these goals through the real property management policies and procedures of the DOD property holders—the three military departments and Washington Headquarters Service. The plan also provides baseline amounts and metrics to gauge progress toward goals established in the plan. As a result, we believe that DOD’s plan should help improve its ability to identify excess facilities and plan for effective and efficient management of its real property. In May 2015, DOD issued a handbook to provide basic information and clarify processes and procedures for the joint bases. The document is intended to serve as a first point of reference for information about the joint bases and the unique policies and guidance that govern them. This handbook, which addresses how joint bases differ from other military installations among other relevant issues, can better inform incoming servicemembers about the particular characteristics of joint bases, as well as reduce duplication or inconsistency in how the joint bases train incoming servicemembers. This document addresses our November 2012 recommendation for DOD to develop guidance to ensure all joint bases develop and provide training materials to incoming personnel to increase opportunities for greater efficiencies and reduce duplication of efforts. In January 2015, DOD evaluated the possibility of a European joint base, and removed six support functions that it determined were not suitable because the functions provided limited opportunities for consolidation. In addition, DOD continues to evaluate which standards are suitable for consolidation in its annual review process. Together these actions address the intent of our September 2014 recommendation to evaluate whether to continue including all current joint base support functions in future joint basing efforts and to make any changes appropriate to address these limitations. For additional information about this high-risk area, contact Brian J. Lepore at (202) 512-4523 or [email protected]. Defense Infrastructure: More Accurate Data Would Allow DOD to Improve the Tracking, Management, and Security of Its Leased Facilities. GAO-16-101. Washington, D.C.: March 15, 2016. Military Base Realignments and Closures: More Guidance and Information Needed to Take Advantage of Opportunities to Consolidate Training. GAO-16-45. Washington, D.C.: February 18, 2016. DOD Joint Bases: Implementation Challenges Demonstrate Need to Reevaluate the Program. GAO-14-577. Washington, D.C.: September 19, 2014. Defense Infrastructure: DOD Needs to Improve Its Efforts to Identify Unutilized and Underutilized Facilities. GAO-14-538. Washington, D.C.: September 8, 2014. Military Bases: DOD Has Processes to Comply with Statutory Requirements for Closing or Realigning Installations. GAO-13-645. Washington, D.C.: June 27, 2013. Defense Infrastructure: Improved Guidance Needed for Estimating Alternatively Financed Project Liabilities. GAO-13-337. Washington, D.C.: April 18, 2013. Military Bases: Opportunities Exist to Improve Future Base Realignment and Closure Rounds. GAO-13-149. Washington, D.C.: March 7, 2013. DOD Joint Bases: Management Improvements Needed to Achieve Greater Efficiencies. GAO-13-134. Washington, D.C.: November 15, 2012. Military Base Realignments and Closures: Updated Costs and Savings Estimates from BRAC 2005. GAO-12-709R. Washington, D.C.: June 29, 2012. Excess Facilities: DOD Needs More Complete Information and a Strategy to Guide Its Future Disposal Efforts. GAO-11-814. Washington, D.C.: September 19, 2011. The Department of Defense (DOD) has taken some positive steps since the 2015 high-risk update to improve its business transformation efforts. For example, DOD has established the Defense Business Council (DBC) to serve as a senior-level governance forum for its business functions, and issued an Agency Strategic Plan that includes business transformation priorities and which the department is using to guide its business operations. However, additional steps are needed to address long-standing weaknesses in DOD’s business operations and remove this issue from the High-Risk List. DOD spends billions of dollars each year to maintain key business operations intended to support the warfighter, including systems and processes related to the management of contracts, finances, the supply chain, support infrastructure, and weapon systems acquisition. Weaknesses in these areas adversely affect DOD’s efficiency and effectiveness, and render its operations vulnerable to waste, fraud, and abuse. DOD’s overall approach to transforming these business operations is inextricably linked to DOD’s ability to perform its overall mission, directly affecting the readiness and capabilities of U.S. military forces. We added DOD’s overall approach to managing business transformation as a high-risk area in 2005 because DOD had not taken the necessary steps to achieve and sustain business reform on a broad, strategic, department-wide, and integrated basis. Further, DOD’s historical approach to business transformation has not proven effective in achieving meaningful and sustainable progress in a timely manner. For example, DOD had not established clear and specific management responsibility, accountability, and control over business transformation-related efforts and applicable resources across business functions. Also, DOD did not have an integrated plan for business transformation with specific goals, measures, and accountability mechanisms to monitor progress and achieve improvements. Since 2005, DOD has demonstrated some leadership commitment and notably improved capacity toward addressing business transformation efforts, such as assigning responsibility for agency goals and objectives. DOD has also taken several notable steps to improve its capacity to monitor DOD’s business transformation efforts, such as developing position descriptions for management analysts, and updating the mission for the Office of the Deputy Chief Management Officer’s (DCMO) Planning, Performance, and Assessment directorate to fulfill performance management-related requirements. While DOD has demonstrated some progress through undertaking initiatives intended to improve the efficiency of its business processes, DOD has not 1) fully developed a corrective action plan, 2) consistently held performance reviews that include department-wide performance information, and 3) fully established accountability mechanisms for meeting performance targets. Until DOD makes further progress in addressing these actions and outcomes, its progress in transforming into a more efficient department will be limited. To date, Congress has passed legislation that could assist DOD in addressing this high-risk area. For example, the National Defense Authorization Act for Fiscal Year 2017, among other things, created a distinct Chief Management Officer (CMO) position effective February 1, 2018, with the mission of managing, establishing policies on, and supervising the business operations of the department. This position would also have the authority to direct the Secretaries of the military departments and the heads of all other DOD components with regard to matters for which the CMO would have responsibility. Before the implementation of this position, the Secretary of Defense is required to conduct a review of the disposition of leadership positions, subordinate organizations, and defined relationships, including the placement and responsibilities of the new CMO position. Specifically, it requires a proposed implementation plan for how the Department would recommendations for revisions to appointments and qualifications, duties and powers, and precedent in the Department; recommendations for such legislative and administrative action, including conforming and other amendments to law, as the Secretary considers appropriate to implement the plan; and any other matters that the Secretary considers appropriate. A final report is due to the defense committees by August 1, 2017. Continued congressional attention to addressing this high-risk area will be essential going forward. In August 2014, we provided DOD with a letter that outlined 13 actions and outcomes that we believe it should address in order to mitigate or resolve long-standing weaknesses in its business transformation efforts. Based on discussions with DOD officials and recent efforts across the department as of October 2016, we believe that DOD has addressed 5 of the 13 actions and outcomes, but have yet to address 8 actions and outcomes. These actions and outcomes are based on the five high-risk criteria for removal: leadership commitment, capacity, action plan, monitoring, and demonstrated progress. For the capacity criterion, while we believe the actions and outcomes we have identified remain important, we also believe they have made notable progress in this criterion to be considered as met, such as reviewing the systems and functions of the Office of the DCMO and Office of the Secretary of Defense (OSD) organizations, and improving the alignment of its personnel with the strategic goals in the draft Agency Strategic Plan. For the remaining four criteria, DOD needs to show measureable and sustained positive outcomes in addressing the remaining eight actions and outcomes. This includes, among other things, DOD continuing to hold business function leaders accountable for performance, refining or developing a more comprehensive corrective action plan as well as existing performance measures, and achieving measurable and sustained outcomes. Leadership Commitment: DOD should continue to hold business function leaders accountable for diagnosing performance problems and identifying strategies for improvement; and continue to lead regular DOD performance reviews regarding transformation goals and associated metrics and ensure that business function leaders attend these reviews to facilitate problem solving. tradeoffs, priorities, and any sequencing needed to implement the initiatives, and help leaders plan for and provide the resources needed to make the corrective actions identified. continue to refine existing performance measures to ensure that measures assess progress in achieving all business transformation initiatives as needed, and hold owners of DOD’s business functions accountable for providing input into performance targets; and conduct frequent and regular data-driven performance reviews using established performance measures, and use existing governance structures, such as the DBC, to assess department-wide performance including the military departments. Demonstrated Progress: DOD should make substantial progress in implementing a corrective action plan that includes measures addressing the root causes of shortfalls in business functions, and details how corrective actions designed to improve DOD business functions will be implemented; continue to implement initiatives that result in measurable and sustained positive outcomes over several years, including cost savings and increased efficiencies, thus promoting actions that control costs across the department envisioned by the Secretary of Defense, as noted in DOD’s 2014 Report to Congress on the Defense Business Operations; and document and report on progress in implementing corrective actions across business functions to Congress and other key stakeholders to strengthen accountability; progress could be reported in the annual report to Congress on DOD Business Operations or through other means. a performance management framework that DOD intends to use to evaluate its effectiveness. DOD’s Agency Strategic Plan identifies five strategic goals that have associated strategic objectives, performance goals, agency priority goals, or cross-agency priority goals, as well as performance indicators with targets for assessing progress. One of these goals is to reform and reshape the defense institution. As part of the Agency Strategic Plan, OSD Principal Staff Assistants are responsible for reporting progress on performance goals, agency priority goals, or cross- agency priority goals that are linked to DOD’s strategic goals and objectives. OSD Principal Staff Assistants have reported on the progress of meeting these associated goals at the DBC meetings. In June and in August 2016, the Acting DCMO, through the DBC, conducted performance reviews intended to assess progress against agency priority goals and other performance measures in the Agency Strategic Plan, and provide opportunities to discuss problems and alternatives, among other things. However, these performance reviews have not been conducted on a regular basis. Specifically, prior to June 2016, the DBC had not conducted a performance review since November 2015. Office of the DCMO officials stated that the Acting DCMO plans to conduct a performance review in December 2016 and on a quarterly basis going forward. It will be important for the Acting DCMO to continue to conduct these performance reviews on a regular basis to hold business function leaders accountable for progress. To further enhance DOD’s oversight of its business transformation efforts, the National Defense Authorization Act for Fiscal Year 2017, among other things, created a distinct CMO position with the mission of managing, establishing policies on, and supervising the business operations of the department. This new position, to begin in February 2018, is expected to provide greater management authority to oversee management of business operations, and could help DOD further demonstrate its commitment to addressing business transformation efforts. This new position would also report directly to the Secretary of Defense. The Deputy Secretary of Defense will no longer serve as CMO. However, the effect of this new structure on improving business transformation within DOD remains to be determined, to include the extent to which this position will have the authority and support needed to drive business transformation efforts across the department. The Office of the DCMO has taken several notable steps to improve its capacity to monitor DOD’s business transformation efforts and now meets this high-risk criterion. In September 2016, the Acting DCMO stated that DOD conducted a business process and systems review that included reviewing structures and functions within the Office of the DCMO. DOD DCMO officials said that the office completed the review of the Office of the DCMO in September 2014. The review of the DCMO found that the overall structure of the office was sound from a mission perspective, but also identified opportunities to better align related organizations within the office. For example, the Office of the DCMO’s Planning, Performance, and Assessment Directorate was restructured to create outreach teams aligned to major strategic initiatives that are responsible for establishing goals and objectives. According to DOD officials, as part of this effort, the Office of the DCMO reassessed position descriptions to determine the appropriate structure for the office. The Office of the DCMO also developed position descriptions for management analysts, updated the mission for its Planning, Performance, and Assessment directorate, and reorganized the directorate to align its personnel with the strategic goals in the draft Agency Strategic Plan. They stated that this action was taken to ensure that the Office of the DCMO could work across each business function to accomplish department-wide goals. Further, Office of the DCMO officials stated that the Planning, Performance, and Assessment directorate hired personnel with expertise in strategic planning and performance management to increase its capacity to oversee business transformation efforts. Officials further stated that the directorate has assessed its staff’s knowledge, skills, and abilities related to strategic planning and performance management, and monitors progress towards addressing any gaps through annual performance reviews. working group is used to leverage subject matter expertise, including conducting additional analyses on issues tied to business operations for the Office of the DCMO as needed. It will be important for the Office of the DCMO to continue to use its existing management analysis capacity along with the Fourth Estate Working Group to drive business transformation efforts across the department. In addition to maintaining the capacity of the DCMO to drive business transformation efforts, it will be critical that the CMO position, established by the National Defense Authorization Act for Fiscal Year 2017, has the personnel and other resources needed to fulfill its significant responsibilities. Since this position will not go into effect until February 2018 and the details of its implementation and responsibilities are not fully known, it is too early to determine whether it will have the capacity needed to lead the department’s business transformation efforts. We will monitor DOD’s progress in implementing this position moving forward to include its impact on DOD’s transformation efforts. DOD now partially meets this criterion. In July 2015, DOD issued its first Agency Strategic Plan. Subsequently, in September 2016, DOD officials shared its draft update to the Agency Strategic Plan for Fiscal Years 2015 – 2018, Version 2.0. This draft update has a performance action plan that contains some but not all elements of a corrective action plan. The performance action plan is intended to provide detailed information for monitoring and reporting DOD’s progress towards each strategic goal, objective, and performance goal as well as, where appropriate, to address actions the department is taking in response to our and DOD Inspector General recommendations. The performance action plan identifies business function leaders for each strategic objective and associated performance goals. In addition, the plan includes, among other things, a description of the problem and opportunity; relationship to strategic goal and objective; key barriers and challenges; mitigation efforts; and an implementation plan, initiatives, and targets for performance measures over time. However, the performance action plan does not define the root causes of business transformation weaknesses or the steps necessary to implement solutions we have recommended in our prior work. Further, the performance action plan does not identify processes and systems to implement initiatives to address root causes, or the tradeoffs needed to implement the initiatives. In January 2017, a senior DOD official stated that DOD does not plan to issue the update to its Agency Strategic Plan, and will instead continue to collect, review, and report on performance data using the draft update until it is superseded. While the continued use of the draft update to the Agency Strategic Plan is a positive step forward, a more comprehensive performance action plan that outlines the necessary elements of a corrective action plan would allow DOD to more effectively hold business function leaders accountable. DOD now partially meets this criterion. DOD’s performance action plan in its draft update to the Agency Strategic Plan contains performance measures intended to measure progress in DOD’s business transformation efforts and establishes clear linkages to performance and resource decisions. However, the Office of the DCMO has not established how it plans to hold owners of DOD business functions accountable for performance or monitor the military departments’ business transformation efforts. According to DOD and military department officials, there has been an increased emphasis on reviewing the performance of DOD’s business functions as part of the DBC meetings. However, the DBC did not conduct quarterly reviews of performance from November 2015 until June 2016, when the Acting DCMO conducted a briefing of DOD’s agency priority goals in June 2016. In September 2016, the Acting DCMO stated that the department plans to conduct quarterly performance reviews against the agency priority goals and other performance measures in the draft update to the Agency Strategic Plan, and in its most recent meeting in December 2016, the DBC conducted a quarterly performance review against these measures. Further, in January 2017, a senior DOD official stated that DOD does not plan to issue the update to its Agency Strategic Plan, and will instead continue to collect, review, and report on performance data using the draft update until it is superseded. Consistently conducting quarterly performance reviews is critical to assessing the department’s progress in its business transformation efforts, and issuing an updated Agency Strategic Plan that sets forth DOD’s approach to monitoring would further institutionalize such efforts. wide performance to more effectively achieve business transformation goals. DOD now partially meets this criterion. Since 2014, and in part to respond to congressional direction, DOD has undertaken initiatives intended to improve the efficiency of its business processes, but DOD has not been able to demonstrate clear results associated with these initiatives, as well as sustained attention and focus consistently across the business functions. DOD guidance states that the DCMO is responsible for working to better synchronize, integrate, and coordinate the business operations of DOD to optimally align them to support the DOD warfighting mission. DOD reviewed headquarters organizations and other DOD entities to identify cost savings, but it is unclear to what extent these initiatives will help the department achieve the savings it has identified. For example, in May 2015, DOD concluded its Core Business Process Review, which was intended to apply lessons learned and information technology approaches from the commercial sector to the department’s business processes in order to reduce cost and improve mission performance. Through this review, the Office of the DCMO identified at least $62 billion in potential cumulative savings opportunities across the six business processes for fiscal years 2016 through 2020. The review identified that these potential savings opportunities could be achieved through not replacing civilian personnel who attrite and retire over the next 5 years; matching labor productivity in comparable industries or sectors; and improving core processes, such as rationalizing organizational structures to reduce excessive layers, optimizing contracts, and using information technology to eliminate or reduce manual processes. However, in June 2016, we reported that the potential savings opportunities could not entirely be achieved, according to Office of the DCMO officials. The results of DOD’s reviews of headquarters organizations and other DOD entities are still being implemented across the department, and DOD has not yet reported on progress associated with these reviews. efficiencies for delayering, contracted services, and other headquarters- related initiatives. Identifying savings and increased efficiencies from these efforts is important to promoting actions that control costs as envisioned by the Secretary of Defense, and we have cited the need for DOD to implement initiatives that result in measurable and sustained positive outcomes. The DCMO has used the DBC to continue to focus attention on modernizing its business systems versus more broadly on business transformation issues. While this is important in addressing another DOD high-risk area, the DCMO also needs to place greater attention on improving its business processes across the business functions. Further, the DCMO has not yet documented or reported on progress in implementing any corrective actions across business functions to Congress and other key stakeholders to strengthen accountability. For additional information about this high-risk area, contact Zina D. Merritt at (202) 512-5257 or [email protected]. Defense Business Transformation: DOD Should Improve Its Planning with and Performance Monitoring of the Military Departments. GAO-17-9. Washington, D.C.: December 7, 2016. Defense Headquarters: Improved Data Needed to Better Identify Streamlining and Cost Savings Opportunities by Function. GAO-16-286. Washington, D.C.: June 30, 2016. DOD Financial Management: Greater Visibility Needed to Better Assess Audit Readiness for Property, Plant, and Equipment. GAO-16-383. Washington, D.C.: May 26, 2016. High-Risk Series: Key Actions to Make Progress Addressing High-Risk Issues. GAO-16-480R. Washington, D.C.: April 25, 2016. DOD Financial Management: Continued Actions Needed to Address Congressional Committee Panel Recommendations. GAO-15-463. Washington, D.C.: September 28, 2015. DOD Business Systems Modernization: Additional Action Needed to Achieve Intended Outcomes. GAO-15-627. Washington, D.C.: July 16, 2015. Managing for Results: Agencies Report Positive Effects of Data-Driven Reviews on Performance but Some Should Strengthen Practices. GAO-15-579. Washington, D.C.: July 7, 2015. Defense Business Transformation: DOD Has Taken Some Steps to Address Weaknesses, but Additional Actions Are Needed. GAO-15-213. Washington, D.C.: February 11, 2015. Federal agencies and our nation’s critical infrastructures—such as energy, transportation systems, communications, and financial services— are dependent on computerized (cyber) information systems and electronic data to carry out operations and to process, maintain, and report essential information. The security of these systems and data is vital to public confidence and the nation’s safety, prosperity, and well- being. However, safeguarding federal computer systems and the systems that support critical infrastructures—referred to as cyber critical infrastructure protection—has been a long-standing concern. The security of federal cyber assets has been on our High-Risk List since 1997. In 2003, we expanded this high-risk area to include the protection of critical cyber infrastructure. In 2015, we added protecting the privacy of personally identifiable information (PII) that is collected, maintained, and shared by both federal and nonfederal entities. implemented. As of October 2016, about 1,000 of our information security–related recommendations had not been implemented. Risks to cyber assets can originate from unintentional and intentional threats. These include insider threats from disaffected or careless employees and business partners, escalating and emerging threats from around the globe, the steady advances in the sophistication of attack technology, and the emergence of new and more destructive attacks. Ineffectively protecting cyber assets can facilitate security incidents and cyberattacks that disrupt critical operations; lead to inappropriate access to and disclosure, modification, or destruction of sensitive information; and threaten national security, economic well-being, and public health and safety. Regarding PII, advancements in technology, such as new search technology and data analytics software for searching and collecting information, have made it easier for individuals and organizations to correlate data and track it across large and numerous databases. In addition, lower data storage costs have made it less expensive to store vast amounts of data. Also, ubiquitous Internet and cellular connectivity makes it easier to track individuals by allowing easy access to information pinpointing their locations. These advances—combined with the increasing sophistication of hackers and others with malicious intent, and the extent to which both federal agencies and private companies collect sensitive information about individuals—have increased the risk of PII being exposed and compromised. Leadership at the White House and Department of Homeland Security (DHS) demonstrated commitment to improving cybersecurity. For example, the President issued strategy documents for improving aspects of cybersecurity and an executive order (E.O.) and policy directive for improving security and resilience of critical cyber infrastructure. However, challenges remain, such as shortages in qualified cybersecurity personnel and continued weaknesses in agencies’ information security programs. These challenges need to be addressed as initial steps toward removal from the High-Risk List. Furthermore, progress will need to be demonstrated by agencies fully implementing their information security programs and by critical infrastructure sectors improving their cybersecurity. In addition, Congress enacted legislation intended to strengthen information security across the federal government and to improve the protection of critical cyber assets. The Cybersecurity Act of 2015 established a voluntary framework for sharing cybersecurity threat information between and among the federal government, state governments, and private entities, and protects private sector entities from liability when sharing and receiving cyber threat information. The act also makes DHS’s National Cybersecurity and Communications Integration Center responsible for implementing these mechanisms, requires DHS to offer its intrusion and detection capabilities to any federal agency, and calls for agencies to assess their cyber-related workforce. DHS needs to expand capabilities, improve planning, and support wider adoption of its government-wide intrusion detection and prevention system. Agencies need to develop and implement complete policies, plans, and procedures for responding to cyber incidents and effectively oversee response activities. Agencies need to consistently implement policies and procedures for responding to breaches of PII. The federal government needs to expand its cyber workforce planning and training efforts. Agencies need to enhance efforts for recruiting and retaining a qualified improve cybersecurity workforce planning activities. The federal government needs to expand efforts to protect cyber critical infrastructure. For example: DHS and sector-specific agencies need to collaborate with sector partners to develop performance metrics and determine how to overcome challenges to reporting the results of their cyber risk mitigation activities; and DHS needs to assess whether its efforts to share information on cyber threats, incidents, and countermeasures with federal and non-federal entities are useful and effective. The federal government needs to better oversee the protection of PII contained in electronic health information and health insurance marketplaces. Needed efforts include the following: Department of Health and Human Services (HHS) needs to enhance its oversight and guidance related to the actions to protect privacy implemented by entities that maintain electronic health information. HHS’s Centers for Medicare & Medicaid Services (CMS) needs to ensure that Healthcare.gov and state health insurance marketplaces have effective controls in place to safeguard electronic health information. Congress should consider amending privacy laws to more fully protect the PII collected, used, and maintained by the federal government. The EOP and DHS met the criterion of demonstrating top leadership commitment to securing federal information and protecting the privacy of PII. For example, the President signed legislation, issued executive orders and a policy directive, and published a national action plan that were intended to improve aspects of federal information security, privacy safeguards, and critical infrastructure cybersecurity. In addition, updated guidance, as well as actions such as creating positions for a senior advisor for privacy and federal chief information security officer within the Office of Management and Budget (OMB), further demonstrated the extent to which the EOP was committed to securing federal information systems and protecting privacy. Specific actions taken by the administration and DHS included the following: In July 2016, the President released Presidential Policy Directive (PPD)-41 which set forth principles governing the federal government’s response to cyber incidents involving government or private sector entities. For significant cyber incidents, this PPD establishes lead federal agencies and a process for coordinating the broader federal government response. PPD-41 also requires the Department of Justice (DOJ) and DHS to maintain updated contact information for public use to assist entities affected by cyber incidents in reporting those incidents to the proper authorities. In February 2016, the President issued E.O. 13719, which created the Federal Privacy Council, a council of senior federal privacy officials established to share ideas and best practices and develop new approaches for protecting privacy in today’s technology driven environment. The President also directed his administration to systematically review where the federal government can reduce reliance on Social Security numbers. organizations, executive departments and agencies, and other entities and to collaborate to respond in as close to real time as possible. In July 2016, OMB issued a revised Circular A-130, Managing Information as a Strategic Resource, to reflect changes in law and advances in technology and to ensure consistency with executive orders, presidential directives, recent OMB policy, and National Institute of Standards and Technology (NIST) standards and guidelines. The revised circular establishes general policy for, among other things, information governance, security, and privacy. It incorporates security and privacy requirements as crucial elements of a comprehensive, strategic, and continuous risk-based program at federal agencies. DHS established the Critical Infrastructure Cyber Community (C3) Voluntary Program to encourage entities to adopt NIST’s Framework for Improving Critical Infrastructure Cybersecurity. As part of this program, DHS developed guidance and tools that are intended to help entities use the framework. The C3 Voluntary Program also includes outreach and awareness activities, promotion efforts targeting specific types of entities, and creation of communities of interest around critical infrastructure cybersecurity. The EOP and DHS partially met the criterion for improving the capacity of federal agencies to sufficiently protect their information systems and PII. Resources and initiatives were identified to address federal cybersecurity capacity concerns. Increased budgetary resources and human capital strategies were proposed to address limitations on federal cybersecurity capacity. For example, the President’s 2017 budget request proposed funds to enhance the Scholarship for Service program, develop a cybersecurity core curriculum, increase the number of academic institutions that are National Centers for Academic Excellence in Cybersecurity, and offer student loan forgiveness for cybersecurity experts in the federal workforce. The President’s 2017 budget also proposed investing $19 billion in cybersecurity, an increase of about 35 percent over fiscal year 2016. Nevertheless, according to OMB and agency chief information security officers, the federal government suffered from a shortage of cybersecurity professionals due to persistent recruitment and retention challenges. Also, it is unclear the extent to which efforts to improve the capacity of the cybersecurity workforce, among other cybersecurity-related initiatives, were focused on increasing resources at agencies devoted to privacy protection. Executing the human resources strategy and budget priorities could ensure that federal agencies have the necessary capacity to better address the information security and PII protection needs of federal civilian agencies. The EOP and DHS partially met the criterion for having a corrective action plan to improve the protection of cyber assets and PII. Government-wide plans identified actions to be taken to enhance cybersecurity and PII protection. Examples included the following: OMB issued the Cybersecurity Strategy and Implementation Plan in October 2015. The plan aimed to strengthen federal civilian cybersecurity by (1) identifying and protecting high-value information and assets, (2) detecting and responding to cyber incidents in a timely manner, (3) recovering rapidly from incidents when they occur and accelerating the adoption of lessons learned, (4) recruiting and retaining a highly qualified cybersecurity workforce, and (5) efficiently acquiring and deploying existing and emerging technology. The President directed his administration to implement the Cybersecurity National Action Plan. The plan identified near-term actions and a long-term strategy that are intended to enhance cybersecurity awareness and protections, protect privacy, maintain public safety and economic and national security, and empower Americans to take better control of their digital security. OMB issued the Federal Cybersecurity Workforce Strategy on July 12, 2016, which identified key actions to help recruit and retain a federal cybersecurity workforce. These key actions included directions to OMB and the Office of Personnel Management (OPM) to provide guidance on the use of special hiring authorities to recruit cybersecurity professionals as well as directions to DHS for piloting a new hiring tool. However, agencies had not yet fully implemented the actions identified in the plans and strategy. In addition, the plans do not consistently address the implementation of about 1,000 of our information security–related recommendations identified across federal agencies. The EOP, DHS, and federal agencies partially met the criterion for implementing programs to monitor corrective actions related to cybersecurity and PII protection. A government-wide reporting process provided a mechanism for monitoring the efforts of federal agencies in achieving cross-agency priority goals for cybersecurity. Specifically, the EOP and DHS developed and used metrics for measuring agency progress in implementing initiatives on information security regarding continuous monitoring, strong authentication, and anti-phishing and malware defense. In addition, OMB and DHS continued to monitor agencies’ implementation of information security requirements using FISMA reporting metrics that are tracked in the CyberScope system. Together, they had conducted CyberStat reviews that are intended to hold agencies accountable and offer assistance for improving their information security posture. Nevertheless, other cybersecurity monitoring efforts lacked metrics to measure and report on the effectiveness of the planned and implemented activities. Examples included the following: In December 2015, we reported that DHS had not developed metrics to measure the effectiveness of its efforts to promote the voluntary use of NIST’s Framework for Improving Critical Infrastructure Cybersecurity or to develop guidance and tools to help entities use the framework. We recommended that DHS develop metrics to monitor the effectiveness of its efforts to promote the framework. DHS agreed and indicated that these efforts are underway. mitigate cyber risks and vulnerabilities for their respective sectors. However, most sector-specific agencies had not developed metrics to measure and report on the effectiveness of their cyber risk mitigation activities or their sectors’ cybersecurity posture. We recommended that federal agencies develop performance metrics to monitor their progress. These metrics have not yet been developed. The EOP, DHS, and federal agencies partially met this criterion by demonstrating progress in implementing the many requirements for securing federal systems and networks. For example, the federal government had taken the following steps to enhance cybersecurity and protect PII: The EOP established an OMB Cyber Unit in January 2015 to improve overall federal cybersecurity oversight. OMB initiated a 30-day Cybersecurity Sprint in June 2015 to lead federal agencies to adopt strong authentication controls and deploy critical patches. OMB and DHS conducted CyberStat reviews at federal agencies during fiscal years 2015 and 2016. weakness or significant deficiency in internal controls over financial reporting for fiscal year 2016. Further, inspectors general at 20 of the 23 agencies cited information security as a major management challenge for their agencies. Providing government-wide intrusion detection and prevention services. In January 2016, we reported that DHS’s National Cybersecurity Protection System (NCPS) was partially, but not fully, meeting its stated system objectives of detecting intrusions, preventing intrusions, analyzing malicious content, and sharing information. DHS also had not developed metrics for measuring the performance of NCPS. We recommended that DHS take action to enhance NCPS’s capabilities, among other things. DHS concurred with our recommendations but has not yet fully implemented them. Strengthening security over industry and public health data at FDA. In August 2016, we reported that the Food and Drug Administration (FDA) had a significant number of security control weaknesses jeopardizing the confidentiality, integrity, and availability of its information and systems. The agency did not fully or consistently implement access controls, which are intended to prevent, limit, and detect unauthorized access to computing resources. Specifically, FDA did not always (1) adequately protect the boundaries of its network, (2) consistently identify and authenticate system users, (3) limit users’ access to only what was required to perform their duties, (4) encrypt sensitive data, (5) consistently audit and monitor system activity, and (6) review the physical security of its facilities. We made 15 recommendations to FDA to fully implement its agency-wide information security program. In a separate report with limited distribution, we recommended that FDA take 166 specific actions to resolve weaknesses in information security controls. FDA concurred with our recommendations and stated it has begun implementing many of them. Improving security controls over high-impact systems. In May 2016, we reported that 18 federal agencies with high-impact systems identified cyberattacks from “nations” as the most serious and most frequently occurring threat to the security of their systems. These agencies also noted that attacks delivered through e-mail were the most serious and frequent. During fiscal year 2014, 11 of the 18 agencies reported 2,267 incidents affecting their high-impact systems, with almost 500 of the incidents involving the installation of malicious code. At least half of the 18 agencies reported that challenges in recruiting and retaining staff with appropriate skills, rapidly changing technologies, and the limited effectiveness of intrusion detection tools impaired their capability to identify cyber threats to high-impact systems to a great or moderate extent. We also examined the security controls over eight high-impact systems at four agencies and reported that although the agencies had implemented numerous controls over the systems, they did not always fully implement key elements of their information security programs including developing security plans, assessing security controls, and remedying known vulnerabilities. We recommended that OMB complete its plans and practices for securing federal systems and that the National Aeronautics and Space Administration, Nuclear Regulatory Commission, OPM, and Department of Veterans Affairs fully implement key elements of their information security programs. The agencies generally concurred with the recommendations, with the exception of OPM. OPM did not concur with our recommendation to re-evaluate security control assessments to ensure they comprehensively test technical controls. We continue to believe the recommendation is warranted. Addressing cybersecurity for the nation’s critical infrastructures. Improving Critical Infrastructure Cybersecurity in the critical infrastructure sectors. For example, DHS established the Critical Infrastructure Cyber Community Voluntary Program to encourage entities to adopt the framework. However, DHS had not developed metrics to measure the success of its activities and programs. In addition, DHS and the General Services Administration (GSA) had not determined whether to develop tailored guidance for implementing the framework in government facilities sectors as other sector-specific agencies had done for their respective sectors. DHS concurred with our recommendation to develop metrics, but has not indicated that it has taken action as of yet, and DHS and GSA concurred with our recommendation and made a determination about whether to develop sector-specific guidance. In November 2015, we reported that the sector-specific agencies had determined the significance of cyber risk to the nation’s critical infrastructures and took actions to mitigate cyber risks and vulnerabilities for their respective sectors. However, not all sector-specific agencies had metrics to measure and report on the effectiveness of all their activities to mitigate cyber risks or their sectors’ cybersecurity posture. We recommended that agencies lacking metrics develop them and determine how to overcome any challenges to reporting the results of their activities to mitigate cyber risks. Four of the agencies explicitly agreed with our recommendations and identified planned or on-going efforts to implement performance metrics, but none have yet to provide developed metrics or reports of outcomes. Protecting the security and privacy of electronic health information. In August 2016, we reported that guidance for securing electronic health information issued by HHS did not address all key controls called for by other federal cybersecurity guidance. In addition, HHS oversight efforts did not always offer pertinent technical guidance and did not always follow up on corrective actions when investigative cases were closed. HHS generally concurred with the five recommendations we made and stated it would take actions to implement them. Information about actions taken to address the recommendations had not been provided at the time of this report. Ensuring privacy when face recognition systems are used. In May 2016, we reported that the Federal Bureau of Investigation (FBI) had not been timely in publishing and updating privacy documentation for using face recognition technology. Publishing such documents in a timely manner would better assure the public that the FBI is evaluating risks to privacy when implementing systems. Also, the FBI had taken limited steps to determine whether the face recognition system it was using was sufficiently accurate. Of the six recommendations we made, DOJ agreed with one, partially agreed with two, and disagreed with three. Information about actions taken to address the recommendations had not been provided at the time of this report. Protecting the privacy of users’ data on state-based marketplaces. In March 2016, we reported on weaknesses in technical controls for the “data hub” that CMS uses to exchange information between its health insurance marketplace and external partners. We also identified significant weaknesses in the controls in place at three selected state-based marketplaces established to carry out provisions of the Patient Protection and Affordable Care Act. We recommended that CMS define procedures for overseeing the security of state-based marketplaces and require continuous monitoring of state marketplace controls. HHS concurred with our recommendations. Information about actions taken to address the recommendations had not been provided at the time of this report. Improving consumer privacy protections. Major recommendations of the administration’s 2012 report on consumer privacy had not yet been implemented in 2016. The report included a framework as a broad action plan intended to improve consumer privacy protection, yet the administration’s recommendations to enact a consumer privacy bill of rights into law and to establish a national standard for data breach notification had not been implemented. Establishing a strategy for improving federal cybersecurity. In October 2015, OMB issued the Cybersecurity Strategy and Implementation Plan, which identified a series of action steps in several key areas that are intended to improve federal information security. As we had recommended in February 2013, the strategy clearly assigns responsibilities to specific organizations and individuals, sets specific dates for completing actions, and establishes a mechanism for monitoring progress. Implementing the strategy effectively and on time will likely improve the overall posture and capabilities of the federal government to protect its information and computer systems and networks. Bolstering information security at federal agencies. Over the last 4 fiscal years, federal agencies have implemented over 330 of our recommendations related to strengthening the security over sensitive information and systems at the Census Bureau, Federal Communications Commission, Internal Revenue Service, Federal Deposit Insurance Corporation, Securities Exchange Commission, CMS, and Federal Aviation Administration, among others. Security vulnerabilities expose agency information to increased risk of unauthorized access, disclosure, modification, and use. Addressing vulnerabilities better assures the confidentiality, integrity, and availability of the information agencies maintain and use for conducting their missions. Improving privacy protections for PII. While more needs to be done, agencies have taken action in response to our recommendations for specific steps to enhance the protection of PII. For example, agencies have implemented 8 of the 23 recommendations we made in 2013 to improve their practices in response to breaches of PII, improvements which can improve the consistency and effectiveness of data breach response programs. Likewise, HHS has implemented all 6 management recommendations we made in 2014 to ensure that PII contained in systems supporting the Healthcare.gov health insurance marketplace is properly protected from potential privacy threats. For additional information about this high-risk area, contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Federal Information Security: Actions Needed to Address Challenges. GAO-16-885T. Washington, D.C.: September 19, 2016. Electronic Health Information: HHS Needs to Strengthen Security and Privacy Guidance and Oversight. GAO-16-771. Washington, D.C.: August 26, 2016. Federal Chief Information Security Officers: Opportunities Exist to Improve Roles and Address Challenges to Authority GAO-16-686. Washington, D.C.: August 26, 2016. Information Security: FDA Needs to Rectify Control Weaknesses That Place Industry and Public Health Data at Risk. GAO-16-513. Washington, D.C.: August 30, 2016. Information Security: Agencies Need to Improve Controls over Selected High-Impact Systems. GAO-16-501. Washington, D.C.: May 18, 2016. Vehicle Cybersecurity: DOT and Industry Have Efforts Under Way, but DOT Needs to Define Its Role in Responding to a Real-world Attack. GAO-16-350. Washington, D.C.: March 24, 2016. SmartPhone Data: Information and Issues Regarding Surreptitious Tracking Apps That Can Facilitate Stalking. GAO-16-317. Washington, D.C.: April 21, 2016. Information Security: DHS Needs to Enhance Capabilities, Improve Planning, and Support Greater Adoption of Its National Cybersecurity Protection System. GAO-16-294. Washington, D.C.: January 28, 2016. Healthcare.gov: Actions Needed to Enhance Information Security and Privacy Controls. GAO-16-265. Washington, D.C.: March 23, 2016. Critical Infrastructure Protection: Sector-Specific Agencies Need to Better Measure Cybersecurity Progress. GAO-16-79. Washington, D.C.: November 19, 2015. The Department of Homeland Security’s (DHS) top leadership, including the Secretary and Deputy Secretary of Homeland Security, has demonstrated exemplary commitment and support for addressing the department’s management challenges. However, DHS needs to continue implementing its Integrated Strategy for High Risk Management and maintain engagement with us to show measurable, sustainable progress in implementing corrective actions and achieving outcomes. In 2003, we designated implementing and transforming DHS as high risk because DHS had to transform 22 agencies—several with major management challenges—into one department. Further, failure to effectively address DHS’s management and mission risks could have serious consequences for U.S. national and economic security. Given the significant effort required to build and integrate a department as large and complex as DHS, our initial high-risk designation addressed the department’s implementation and transformation efforts to include associated management and programmatic challenges. At that time, we reported that the creation of DHS was an enormous undertaking that would take time to achieve, and that successfully transforming large organizations, even those undertaking less strenuous reorganizations, could take years to implement. needs facing the nation after the department’s establishment, and the challenges posed by creating, integrating, and transforming it. As DHS continued to mature, and as we reported in our assessment of DHS’s progress and challenges in the 10 years following 9/11, we found that the department implemented key homeland security operations and achieved important goals in many areas to create and strengthen a foundation to reach its potential. For example, DHS developed strategic and operational plans to guide its efforts—such as the National Response Framework that outlines disaster response guiding principles—and successfully hired, trained, and deployed workforces, including the federal screening workforce to assume screening responsibilities at airports nationwide. However, we also found that more work remained for DHS to address weaknesses in other areas of its operational and implementation efforts. For example, we reported in 2011 that DHS had not yet determined how to implement a biometric exit capability, had taken action to address a small portion of the estimated overstay population in the United States, and needed to strengthen efforts to assess national capabilities for all- hazards preparedness. We further reported that continuing weaknesses in implementing and integrating DHS’s management functions continued to affect the department’s implementation efforts. 2013 we narrowed the scope of the high-risk area and changed the name from Implementing and Transforming the Department of Homeland Security to Strengthening Department of Homeland Security Management Functions to reflect this focus. In our 2015 high-risk update, we found that DHS’s top leadership had continued to demonstrate exemplary commitment to and support for addressing the department’s management challenges and that DHS had made important progress in strengthening its management functions. However, we also found that DHS continued to face significant management challenges that hindered its ability to achieve its missions and concluded that DHS needed to continue to demonstrate sustainable, measureable progress in addressing key challenges that remained within and across its management functions. DHS’s continued efforts to strengthen and integrate its acquisition, IT, financial, and human capital management functions have resulted in the department meeting three criteria for removal from the High-Risk List (leadership commitment, a corrective action plan, and a framework to monitor progress) and partially meeting the remaining two criteria (capacity and demonstrated, sustained progress). DHS’s top leadership, including the Secretary and Deputy Secretary of Homeland Security, has demonstrated exemplary commitment and support for addressing the department’s management challenges. For instance, the department’s Deputy Secretary, Under Secretary for Management, and other senior management officials have frequently met with us to discuss the department’s plans and progress, which serves as a model for senior- level engagement and helps ensure a common understanding of the remaining work needed to address our high-risk designation. Further, DHS established a framework for monitoring its progress in its Integrated Strategy for High Risk Management, in which it has included performance measures to track the implementation of key management initiatives since June 2012. In addition, since our 2015 high-risk update, DHS has strengthened its monitoring efforts for financial system modernization programs that are key to effectively supporting the department’s financial management operations, resulting in DHS meeting the monitoring criteria for the first time. which we identified and DHS agreed are critical to addressing the challenges within the department’s management areas, and to integrating those functions across the department. DHS has continued to make important progress across all of its management functions, fully addressing 13 of these outcomes, 9 of which it has sustained as fully implemented for at least 2 years. For example, DHS fully addressed one outcome for the first time by demonstrating improvement in human capital management by linking workforce planning efforts to strategic and program planning efforts. DHS also sustained full implementation of two other outcomes by obtaining a clean audit opinion on its financial statements for 4 consecutive fiscal years. Further, DHS has mostly addressed an additional eight outcomes, meaning that a small amount of work remains to fully address them. Considerable work remains, however, in several areas for DHS to fully achieve the remaining 17 outcomes and thereby strengthen its management functions. Addressing some of these outcomes, such as those pertaining to improving employee morale and modernizing the department’s financial management systems, are significant undertakings that will likely require multiyear efforts. DHS needs to make additional progress identifying and allocating resources in certain areas to sufficiently demonstrate that it has the capacity (that is, the people and resources) to achieve and sustain all 30 outcomes, as well as demonstrate additional sustainable and measurable progress in addressing key challenges that remain within and across these management functions. 2015, the DHS Accountability Act of 2016, and the DHS Reform and Improvement Act. House Report 114-215, which accompanied H.R. 3128 (DHS appropriations bill for fiscal year 2016) and later became effective under the Consolidated Appropriations Act, 2016, includes mandates related to DHS’s financial management system modernization projects, which relate to three high-risk financial management outcomes. Specifically, the committee directed GAO to assess the risks of DHS utilizing the Department of Interior’s Business Center (IBC), whether IBC is capable of expanding its services to additional federal agencies, and a comparison of the services and capabilities of federal and commercial shared service providers. In addition, the committee directed the DHS Office of the Chief Financial Officer to update the lifecycle cost estimate to reflect all contract awards and projected overall costs, including those for every component that plans to migrate to a federal shared service provider. The Border Patrol Agent Pay Reform Act of 2014, enacted on December 18, 2014, includes a mandate related to cybersecurity workforce assessments, which relates to one human capital management outcome. Specifically, DHS must identify all cybersecurity workforce positions and identify positions and areas of critical need. Congress also held a number of oversight hearings related to addressing DHS’s management challenges: U.S. Senate, Committee on Homeland Security and Governmental Affairs Hearing: DHS Management and Acquisition Reform. March 16, 2016. U.S. House of Representatives, Committee on Homeland Security, Subcommittee on Oversight and Management Efficiency Hearing: Assessing DHS’s Performance: Watchdog Recommendations to Improve Homeland Security. February 26, 2015. U.S. House of Representatives, Committee on Homeland Security Hearing: Preventing Waste, Fraud, Abuse and Mismanagement in Homeland Security – A GAO High-Risk List Review. May 7, 2014. U.S. Senate, Committee on Homeland Security and Governmental Affairs Hearing: The Department of Homeland Security at 10 Years: A Progress Report on Management. March 21, 2013. In the coming years, DHS needs to continue implementing its Integrated Strategy for High Risk Management and maintain engagement with us to show measurable, sustainable progress in implementing corrective actions and achieving outcomes. In doing so, it will be important for DHS to maintain its current level of top leadership support and sustained commitment to ensure continued progress in executing its corrective actions through completion; continue to identify the people and resources necessary to make progress towards achieving outcomes, work to mitigate shortfalls and prioritize initiatives, as needed, and communicate to senior leadership critical resource gaps; continue to implement its plan for addressing this high-risk area and periodically provide assessments of its progress to us and Congress; closely track and independently validate the effectiveness and sustainability of its corrective actions, and make midcourse adjustments as needed; and make continued progress in achieving the 17 outcomes it has not fully addressed and demonstrate that systems, personnel, and policies are in place to ensure that progress can be sustained over time. We will continue to monitor DHS’s efforts in this high-risk area to determine if the outcomes are achieved and sustained over the long term. Further, in order to address the outcomes, DHS must implement our prior recommendations listed below. DHS should address employee morale problems through comprehensively examining root causes and establishing clear metrics of success within DHS and its components’ action plans. DHS should ensure that its Human Resources IT Program (HRIT), of which the Performance and Learning Management System is the primary active project, receives necessary oversight and attention by ensuring the HRIT Executive Steering Committee is consistently involved. DHS should also address HRIT’s poor progress and ineffective management by: (1) updating and maintaining a schedule estimate for when DHS plans to implement each of the strategic improvement opportunities; (2) developing a complete life-cycle cost estimate for the implementation of HRIT; (3) documenting and tracking all costs, including components’ costs, associated with HRIT; and (4) updating and maintaining the department’s human resources system inventory, among other things. To more accurately communicate DHS’s funding plans for U.S. Coast Guard’s major acquisitions programs, DHS should ensure the funding plans presented to Congress are comprehensive and clearly account for all operations and maintenance funding DHS plans to allocate to each of the programs. DHS should enhance its leadership’s ongoing efforts to improve the affordability of the department’s major acquisitions portfolio by requiring components to submit funding certification memorandums for all major acquisition programs that have not been reviewed at an Acquisition Decision Event; and convening Acquisition Review Boards to discuss affordability and make tradeoffs between cost, schedule, and performance, as necessary. In addition, DHS should ensure that the Fiscal Year 2017 Future Years Homeland Security Program report reflects the results of any tradeoffs stemming from the acquisition affordability reviews; and require components to establish formal, repeatable processes for addressing major acquisition affordability issues. DHS’s Chief Information Officer should use accurate and reliable information, such as operational assessments of the new architecture and cost and schedule parameters approved by the Under Secretary of Management, to help ensure that assessments prepared by the Office of the Chief Information Officer in support of the department’s updates to the federal IT Dashboard more fully reflect the current status of the Transformation Program. DHS should continue to work to address its IT mission critical skills gaps, such as those related to its cybersecurity workforce. Further, DHS needs to remediate the material weakness in information security controls reported by its financial statement auditor in fiscal year 2016 by effectively addressing weaknesses in controls related to access, configuration management, and segregation of duties. DHS should ensure consistent, effective oversight of DHS’s acquisition programs and make the Comprehensive Acquisition Status Report (CASR) more useful by adjusting CASR to enable DHS to hold programs accountable for maintaining their cost, schedule, and performance data. For example, CASR could report an individual rating for each program’s cost, schedule, and technical risks, and the level at which the program’s life-cycle cost estimate was approved. progress on outstanding actions that are to be accomplished related to the high-risk area. According to DHS officials, these meetings provide an opportunity to maintain leadership support and accountability for making progress toward resolving management challenges facing the department. It will be important for DHS to maintain its current level of top leadership support and commitment to ensure continued progress in successfully completing its corrective actions. DHS has taken important actions to identify and put in place the people and resources needed to resolve departmental management risks; however, DHS needs to make additional progress identifying and allocating resources in certain areas to sufficiently demonstrate that it has the capacity to achieve and sustain corrective actions and outcomes. In particular, in a September 2010 letter to DHS, we identified and DHS agreed to achieve 31 outcomes that are critical to addressing challenges within the department’s management areas and in integrating those functions across the department. In March 2014, we updated these outcomes in collaboration with DHS to reduce overlap and ensure their continued relevance and appropriateness. These updates resulted in a reduction from 31 to 30 total outcomes. Toward achieving the outcomes, DHS has issued 10 updated versions of its initial January 2011 Integrated Strategy for High Risk Management, most recently in August 2016. Prior to the January 2016 Integrated Strategy for High Risk Management, DHS did not identify sufficient resources in a number of areas that could undermine DHS’s efforts to strengthen its management functions. For example, in June 2015, DHS identified that it had resources and personnel needed to implement 8 of the 11 key management initiatives it was undertaking to achieve the 30 outcomes, but did not identify sufficient resources for the 3 remaining initiatives. In addition, our prior work has identified specific capacity gaps that could undermine achievement of management outcomes. the Unity of Effort Integration within the Office of Policy to oversee Unity of Effort implementation. However, we found that DHS needs to make additional progress identifying and allocating resources in certain areas. Acquisition management. With respect to acquisition, DHS’s 2016 staffing assessments focused on identifying critical acquisition-related position gaps rather than all major program acquisition-related positions; consequently, some programs were assessed as being fully or almost fully staffed for critical positions despite significant staffing shortfalls in the overall program. This increased focus on critical gaps may limit DHS’s insight into the size and nature of acquisition-related staffing shortfalls, making it difficult for DHS to develop a plan or process to address these vacancies. In December 2016, DHS updated its staffing assessment guidance to refocus the assessment process on all major program acquisition-related positions. However, DHS plans to pilot the implementation of this policy update incrementally during 2017, and the timing of full implementation is not yet known. Emergency Management Agency and U.S. Immigration and Customs Enforcement modernization projects until April 2017. DHS has taken actions to address some of its previous capacity shortcomings and ensure that the department has the people and resources necessary to resolve risk. However, additional progress is needed to ensure that DHS has sufficient capacity not only to resolve risks, but to fully achieve and sustain the 30 outcomes. As a result, we assess DHS having partially met the capacity criterion. DHS needs to continue to comprehensively identify the people and resources necessary to make progress towards achieving all 30 outcomes; work to mitigate shortfalls and prioritize initiatives, as needed; and communicate to senior leadership about critical resource gaps requiring resolution. DHS previously established a plan for addressing this high-risk area as discussed above, and has continued to take critical, actionable steps towards addressing challenges faced within the department. As with prior iterations, DHS included in its most recent August 2016 version of its Integrated Strategy for High Risk Management key management initiatives and related corrective actions for addressing each of the management challenges and related outcomes we identified. For example, the August 2016 updated version of its strategy includes information on actions DHS is taking for an initiative focused on financial systems modernization and an initiative focused on IT human capital management, which support various outcomes. DHS’s strategy and approach, if effectively implemented and sustained, provides a path for DHS to be removed from our High-Risk List. strategy. For example, to monitor progress made towards strengthening the DHS acquisition process by improving the acquisition workforce, DHS management continues to monitor the percent of its nine acquisition certification policies completed—policies related to program management, cost estimating, and contracting among others—and the percent of required acquisition certification training developed. However, in our 2015 high-risk update, we found that DHS could strengthen its financial management monitoring efforts and thus concluded that the department had partially met the criterion for establishing a framework to monitor progress. In particular, according to DHS officials, as of November 2014, the department was establishing a monitoring program that would include assessing whether the projects modernizing key components of their financial management systems were following industry best practices and meeting users’ needs. Effectively implementing these modernization projects is important because until they are complete, the department’s systems will not effectively support financial management operations. Following the 2015 high-risk update, DHS entered into a contract for independent verification and validation services that should help ensure that financial management systems modernization projects meet key requirements. Moving forward, DHS will need to continue to closely track and independently validate the effectiveness and sustainability of its corrective actions, and make midcourse adjustments as needed. DHS has continued to make important progress in strengthening its management functions, but needs to demonstrate additional sustainable and measurable progress in addressing key challenges that remain within and across these functions. DHS has either fully or mostly addressed 21 of the 30 outcomes, demonstrating the department’s progress in strengthening its management functions, and partially addressed or initiated the remaining 9 outcomes. For example, DHS established the Joint Requirements Council, an acquisition oversight body, through which it has created a process for validating capability and requirements documents, among other things. DHS has also worked to improve the management and oversight of its IT investments by establishing and implementing a tiered governance and portfolio management structure. In addition, DHS obtained a clean audit opinion on its financial statements for 4 consecutive fiscal years—2013, 2014, 2015, and 2016. that hinder the department’s ability to meet its missions. For this update, we determined that DHS has partially addressed 6 and initiated 3 of the 30 outcomes. For example, while DHS has initiated acquisition program health assessments to demonstrate that major acquisition programs are on track to achieve their cost, schedule, and capability goals, it will take time to demonstrate that these initiatives will improve program performance. In addition, DHS does not have modernized financial management systems, which affects its ability to have ready access to reliable information for informed decision making. Further, it is important that DHS retain and attract the talent required to complete its work—a challenge the department continues to face due to employee morale issues. Addressing these and other management challenges will be a significant undertaking, but will be critical to mitigate the risks that management weaknesses pose to mission accomplishment. Achieving sustained progress across the outcomes, in turn, requires leadership commitment, effective corrective action planning, adequate capacity (that is, the people and other resources), and monitoring the effectiveness and sustainability of supporting initiatives. Table 7 summarizes DHS’s progress in addressing the 30 key outcomes and is followed by selected examples. Acquisition management. DHS has fully addressed two of the five acquisition management outcomes, mostly addressed two outcomes, and partially addressed the remaining outcome. For example, DHS has validated the required acquisition documentation for all of its major acquisition programs and plans to continue to ensure that all major acquisition programs have approved acquisition program baselines, and to use a pre-Acquisition Review Board checklist to confirm that programs have all required documentation for Acquisition Decision Events. In addition, DHS has taken a number of recent actions to establish and operate the Joint Requirements Council. These actions include (1) establishing a process for validating capability and requirements documents, and (2) piloting a joint assessment of requirements process that is intended to eventually inform the department’s budget decisions. Further, DHS continues to assess and address whether appropriate numbers of trained acquisition personnel are in place at the department and component levels. Finally, we reported in March 2016 that only 11 of the 25 major DHS acquisition programs we reviewed remained on track to meet their current schedule and cost goals. DHS has initiated acquisition program health assessments to report to senior DHS management the status of major acquisition programs toward achieving cost, schedule, and capability goals; however, it will take time to demonstrate that such initiatives are improving program performance. of DHS’s IT workforce, as well as hiring, training, and managing staff with those new skill sets. Enforcement financial management systems before DHS will be in a position to implement modernized solutions for these components and their customers. For example, discovery phase activities to determine the feasibility of implementing, deploying, and maintaining the chosen solution are not expected to be completed for these two projects until April 2017. Such information is essential for determining the implementation schedule and finalizing cost estimates that are needed prior to approving the projects for implementation. Further, without sound internal controls and systems, DHS faces long-term challenges in sustaining a clean audit opinion on its financial statements and in obtaining and sustaining a clean opinion on its internal controls over financial reporting, which are needed to ensure that its financial management systems generate reliable, useful, and timely information for day-to- day decision making as a routine business operation. Human capital management. DHS has fully addressed three human capital management outcomes, mostly addressed three, and partially addressed the remaining one. For example, the Secretary of Homeland Security signed a human capital strategic plan in 2011— which was revised and reissued in 2014—that DHS has since made sustained progress in implementing, thereby fully addressing one outcome. In addition, DHS successfully demonstrated the ability to conduct structured workforce planning for the majority of its priority mission critical occupations at the department in fiscal year 2015, and for all mission critical occupations in fiscal year 2016. To support this planning, DHS issued its Workforce Planning Guide in 2015, which enabled DHS components to apply a consistent and departmentally- approved methodology, including the use of standardized tools and templates. DHS also published and implemented a department-wide Employee Engagement Action Plan, which DHS’s components used to develop tailored action plans for their own employee engagement and outreach. results-oriented performance culture, talent management, and job satisfaction) from 2008 through 2015. DHS has developed plans for addressing its employee satisfaction problems and improved scores in all four areas in 2016, but as we previously recommended, in September 2012, DHS needs to continue to improve its root-cause analysis efforts related to these plans. DHS also needs to continue strengthening its learning management capabilities. Specifically, in February 2016, we reported that DHS had initiated the Human Resources Information Technology (HRIT) investment in 2003 to address issues presented by its human resource environment. designed to allow the department to operate in a more integrated fashion. Further, in support of this effort, in August 2015, the Under Secretary for Management identified four integrated priority areas to bring focus to strengthening integration among the department’s management functions. According to DHS’s August 2016 updated version of its strategy, these priorities—which include, for example, strengthening resource allocation and reporting reliability and developing and deploying secure technology solutions—each include detailed goals, objectives, and measurable action plans that are monitored at monthly leadership meetings led by senior DHS officials, including the Under Secretary for Management. Accomplishments DHS officials attribute to the Unity of Effort initiative and integrated priorities initiatives include the following, among others: DHS’s Office of Program Accountability and Risk Management developed and implemented a policy directive to monitor and track critical staffing gaps for major acquisition programs to ensure that such gaps are identified and remediated in a timely manner. DHS Science and Technology Directorate established Integrated Product Teams to better link the department’s research and development investments with the department’s operational needs. DHS strengthened its strategy, planning, programming, budgeting, execution, and acquisition processes by improving existing structures and creating new ones where needed to build additional organizational capability. DHS has institutionalized these reforms by issuing a range of departmental management directives and instructions. However, given that these main management integration initiatives are in the early stages of implementation and contingent upon DHS sustaining implementation plans and efforts over a period of years, it is too early to assess their effects. To achieve this outcome, DHS needs to continue to demonstrate sustainable progress integrating its management functions within and across the department and its components, as well as fully address the other 17 outcomes it has not yet achieved. In 2016, we recommended, among other things, that DHS (1) update the HRIT executive steering committee charter to establish the frequency with which HRIT executive steering committee meetings are to be held, (2) establish time frames for re-evaluating the strategic improvement opportunities and associated projects in the Human Capital Segment Architecture Blueprint and determining how to move forward with HRIT, and (3) evaluate the strategic improvement opportunities and projects within the Human Capital Segment Architecture Blueprint to determine whether they and the goals of the blueprint are still valid and reflect DHS’s HRIT priorities going forward, and update the blueprint accordingly. We reported that HRIT’s limited progress was due in part to lack of involvement of its executive steering committee and, as a result, key governance activities, such as approval of HRIT’s operational plan, were not completed. We concluded that until DHS takes actions to reevaluate and manage this neglected investment, it was unknown when its human capital weaknesses would be addressed. In response, in 2016, DHS addressed these three recommendations. As a result, DHS should have better assurance that the HRIT executive steering committee will meet regularly and carry out its responsibility to provide oversight and guidance to the HRIT investment. Further, DHS is better positioned to update the blueprint and address inefficiencies in its human resources environment, make informed resource decisions on the implementation of the strategic improvement opportunities, and address inefficiencies in its human resources environment. In 2015, we recommended that DHS re-baseline cost, schedule, and performance expectations for the remainder of the U.S. Citizenship and Immigration Services Transformation Program. We reported that the Transformation Program had an increased cost of $1 billion and delay of over 4 years from its initial July 2011 baseline, mostly due to changes in its acquisition strategy to address various technical challenges. These changes significantly delayed the program’s planned schedule, which in turn had adverse effects on when the program expects to achieve cost savings, operational efficiencies, and other benefits. In response, in 2015, DHS addressed this recommendation, and the re-baseline helps ensure that progress made by the program can be monitored against established and approved parameters. Secretary for Management (USM) to develop written guidance to clarify roles and responsibilities of PARM and the Office of the Chief Information Officer Enterprise Business Management Office for conducting oversight of major acquisition programs; (3) directed the USM to produce operations and maintenance cost estimates for programs in sustainment and establish responsibility for tracking sustainment programs’ adherence to those estimates; and (4) directed the USM to determine mechanisms to hold programs accountable for entering data in the Next Generation Periodic Reporting System consistently and accurately, and to hold Component Acquisition Executives accountable for validating the information and evaluate the root causes of why programs are not using the Next Generation Periodic Reporting System as intended. By PARM issuing a handbook that provides oversight roles and responsibilities and other guidance to PARM component leads, and by the USM and Acting Deputy USM issuing multiple memorandums regarding the clarification of acquisition oversight roles and responsibilities, the verification and certification of the data in designated fields, the verification and certification of the data on a biannual basis, and the requirement of root cause analyses, DHS is helping ensure consistent and effective oversight of its acquisition programs. In 2015, we recommended that DHS should ensure the Director of Operational Test and Evaluation explicitly address all of the relevant key performance parameters in each letter of assessment appraising operational test results of DHS’s major acquisitions programs. As a result, in 2015, DHS finalized an internal office procedure that established that each letter of assessment should provide detailed analysis indicating whether or not the key performance parameters were met. In 2014, we recommended that DHS clearly identify Leader Development Program goals and ensure program performance measures include key attributes, such as linkage, clarity, and measurable targets. As a result, in December 2014, Leader Development Program Office officials provided us with updated documentation on the program’s assessment approach. This documentation established 10 program goals. It also explained how the program’s performance measures link to the 10 program goals and to department-wide goals. Further, the documentation established targets for each performance measure and provided clarification for ambiguous measures. These enhancements to the Leader Development Program assessment approach should help produce actionable information for the program’s management to use in identifying the need for, and making, program improvements. In 2013, we recommended that DHS should direct the Office of the Chief Human Capital Officer (OCHCO) to require all components to provide recruiting cost information in a consistent manner to allow better tracking of overall recruiting costs, and use this information to assess the extent to which recruiting costs are being reduced by components as a result of increased coordination and leveraging resources as called for in the Coordinated Recruiting and Outreach Strategy. In June 2015, OCHCO provided us with examples of recruiting cost information that it has begun tracking in response to this recommendation. The data provided demonstrate that OCHCO has begun to better track component-level recruiting expenditures in a way that illustrates coordination among components, and could be used to track reduction in costs stemming from this coordination. In 2015, in response to one of our recommendations, DHS developed a financial systems modernization transition plan that included the tasks, milestones, and time frames for implementing new systems, and establishing the optimal sequencing of activities. If effectively implemented, the transition plan will help DHS increase its ability to effectively manage its financial management system modernization efforts. Also, in 2015, DHS developed a financial systems modernization transition plan and an updated architecture roadmap that collectively describe a target state architecture for DHS financial management segment in business terms (e.g., business functions and business processes) and technical terms (e.g., account classification standards data model, shared services, and federated solution approach). These DHS actions have helped improve DHS’s ability to ensure the effectiveness of financial management system investment decisions. For additional information about this high-risk area, contact Rebecca Gambler (202) 512-8777 or [email protected]. Homeland Security Acquisitions: Joint Requirements Council’s Initial Approach Is Generally Sound and It Is Developing a Process to Inform Investment Priorities. GAO-17-171. Washington, D.C.: October 24, 2016. Homeland Security Acquisitions: DHS Has Strengthened Management, but Execution and Affordability Concerns Endure. GAO-16-338SP. Washington, D.C.: March 31, 2016. Department of Homeland Security: Progress Made, but Work Remains in Strengthening Acquisition and Other Management Functions. GAO-16-507T. Washington, D.C.: March 16, 2016. Homeland Security: Oversight of Neglected Human Resources Information Technology Investment Is Needed. GAO-16-253. Washington, D.C.: February 11, 2016. Immigration Benefits System: Better Informed Decision Making Needed on Transformation Program. GAO-15-415. Washington, D.C.: May 18, 2015. Homeland Security Acquisitions: DHS Should Better Define Oversight Roles and Improve Program Reporting to Congress. GAO-15-292. Washington, D.C.: March 12, 2015. Department of Homeland Security: Progress Made, but More Work Remains in Strengthening Management Functions. GAO-15-388T. Washington, D.C.: February 26, 2015. DHS Training: Improved Documentation, Resource Tracking, and Performance Measurement Could Strengthen Efforts. GAO-14-688. Washington, D.C.: September 10, 2014. DHS Financial Management: Continued Effort Needed to Address Internal Control and System Challenges. GAO-14-106T. Washington, D.C.: November 15, 2013. DHS Financial Management: Additional Efforts Needed to Resolve Deficiencies in Internal Controls and Financial Management Systems. GAO-13-561. Washington, D.C.: September 30, 2013. Technological superiority is critical to U.S. military strategy. Thus, the Department of Defense (DOD) spends billions of dollars each year to develop and acquire sophisticated technologies to provide an advantage for the warfighter during combat or other missions. Many of these technologies are also sold or transferred to foreign partners to promote U.S. economic, foreign policy, and national security interests. These technologies can also be acquired through foreign investment in the U.S. companies that develop or manufacture them. In addition, they are targets for unauthorized transfer, such as theft, espionage, reverse engineering, and illegal export. To identify and protect technologies critical to U.S. interests, the U.S. government has a portfolio of programs. These include export controls— those developed to regulate exports and ensure that items and information are transferred in a manner consistent with U.S. interests—as well as a number of non-export control programs, including the Foreign Military Sales (FMS) program, anti-tamper measures, and the National Industrial Security Program, which oversees government contractors handling classified information, including that associated with critical technologies. These programs and activities are administered by multiple federal agencies with various interests, including DOD and the Departments of Commerce, Homeland Security, Justice, State, and the Treasury. We designated this area as high risk in 2007 because these programs, established decades ago, were ill-equipped to address the evolving challenges of balancing national security concerns and economic interests. While these agencies are making progress in addressing challenges identified by our work, we believe that additional leadership and coordination of programs and activities in the non-export control programs, among other things, is needed to identify strategic reforms that will help to advance U.S. interests. Since this area was added to the High-Risk List in 2007, our body of work in this area has identified progress in the programs designed to protect technologies critical to U.S. national security interests, but government- wide challenges remain, including the need to adopt a more consistent leadership approach, improve coordination among programs, address weaknesses in individual programs, and implement export control reform. Hence, we continue to consider each of our high-risk criteria in this area to be partially met: Leadership commitment to addressing challenges has been evident in some areas of the critical technologies portfolio, particularly with respect to the Export Control Reform initiative. However, as we reported in our 2015 update, greater collaboration among the critical technologies programs not directly related to export controls— including the FMS program, the anti-tamper program, and the National Industrial Security Program—could ensure that lead and stakeholder agencies take a more consistent approach to meeting program goals. The capacity for addressing challenges and implementing reforms has improved for some programs. However, many efforts remain limited to individual programs or activities within the overall program portfolio, and there are areas where broader coordination could be beneficial, such as determining an appropriate technical reference to inform key decisions relating to critical technologies. Action plans to guide improvements are in place for some programs; however, additional steps have yet to be taken to develop and implement action plans that will address ongoing challenges, such as administering the anti-tamper program. Monitoring of efforts to meet key challenges also has improved at some programs. DOD and State have implemented some, but not all, of our past recommendations on developing performance measures and monitoring program outcomes. The need for action remains both at the individual program level and the portfolio level. We have made a number of recommendations to agencies aimed at improving coordination among the programs that are intended to protect technologies critical to U.S. national security. We believe that implementing these recommendations could result in significant improvements. Our body of work shows that challenges remain. To address existing challenges, we have previously reported that the executive branch and Congress should consider reevaluating the wider portfolio of programs protecting critical technologies, including assessing the prospects for achieving collaboration across separate but related programs designed to protect critical technologies. Executive branch leadership has been committed to reforming the area of export controls, an important step forward. But leadership commitment is less evident in the critical technologies programs that fall outside the scope of export control reform. Individual agencies need to continue to implement our recommendations to address weaknesses in their respective programs. Doing so could increase these programs’ capacity for implementing reforms. For example, the export control agencies should work to develop standard operating procedures for the Export Enforcement Coordination Center—a primary forum within the federal government to coordinate export enforcement efforts and identify and resolve conflicts—to facilitate data sharing. Developing a concrete action plan for achieving collaboration across separate but related programs designed to protect critical technologies remains important. Executive branch leadership has developed a thorough action plan for export control reform. But formal and integrated planning is less evident in the critical technologies programs that fall outside the scope of export control reform. Individual agencies need to continue to implement our recommendations to address weaknesses in their respective programs. Doing so could increase these programs’ ability to monitor progress. For example, DOD should take additional actions to enhance its ability to provide security assistance through, for example, its FMS program by establishing performance measures for all phases of the security assistance process. users’ needs for a technical reference, whether it be the U.S. Munitions List or the Industrial Base Technologies List, other alternatives being used, or some combination thereof, and ensure that resources are coordinated and efficiently devoted to sustain the approach chosen. Since our recommendation, DOD officials said the department has moved toward using the U.S. Munitions List. However, DOD has not changed its policy requiring use of the Militarily Critical Technologies List (MCTL) as it has not yet received relief from that statutory requirement. At the portfolio level, implementing export control reforms demonstrates leadership commitment, but the agencies involved in export controls must continue to implement reforms to achieve the goals set to protect U.S. interests. For non-export control reform, increased collaboration between DOD’s offices responsible for administering the FMS program and approving exports represents an important step forward in coordinating the activities of selected programs. However, leadership still must decide, among other things, how to address protection of critical technologies at a more strategic level. In particular, in February 2015 we recommended that, to ensure a consistent and more collaborative approach to protecting critical technologies, the Secretaries of Commerce, Defense, Homeland Security, State, and the Treasury as well as the Attorney General of the United States—who have lead and stakeholder responsibilities for the programs within the critical technologies portfolio—should take steps to promote and strengthen collaboration mechanisms among their respective programs while they implement and assess ongoing initiatives. These steps need not be onerous; for example, they could include conducting an annual meeting to discuss their programs, including the technologies they are protecting, their programs’ intent, and any new developments or changes planned for their programs, as well as defining consistent critical technologies terminology and sharing important updates. Export control reform is being implemented in three phases. Phases I and II reconcile various definitions, regulations, and policies for export controls. As of August 2015, Phase I was finished. Phase II is nearing completion. This is all building toward Phase III, which will result in implementation of major changes supported by these reconciliations by consolidating export control efforts in four reform areas: creating a single, consolidated control list; designating a single licensing agency; designating a primary export enforcement coordination agency; and establishing a unified information technology system. We reported in February 2015 that significant collaboration by the participating agencies is essential to the Phase III consolidation efforts. In that same report, we noted that in order for full implementation of this third and final phase to occur, congressional action is needed to designate a single licensing agency and a primary export enforcement coordination agency. For example, since there are currently separate statutory bases for State and Commerce to review and issue export licenses, legislation will be required to consolidate the current system into a single licensing agency. Some of the issues identified through past reports on export controls include poor interagency coordination, inefficiencies in the license application process, and a lack of systematic assessments. This criterion has been met. The Obama administration directed an interagency review of the U.S. export control system that resulted in the 2010 establishment of an Export Control Reform initiative, which has continued to demonstrate strong leadership commitment, both from that administration and from leaders at the key federal agencies. This initiative is under way and actions toward the four key goals of reform—creation of a single, consolidated control list, a single licensing agency, a primary export enforcement coordination agency, and a unified information technology system—have been implemented using a phased approach, which we have concluded has the potential to address weaknesses in the U.S. export control system. the three key export control agencies are using this single system, and other agencies, such as Treasury, are working toward joining this system. However, other efforts under this criterion have yet to be completed. Fifteen federal agencies have come together through the establishment of the Export Enforcement Coordination Center (the Center), which, according to statistics the Center Director provided to us, has heightened awareness by exchanging investigation-related information. The Center had made good progress in addressing our February 2015 findings that export enforcement agencies had poor interagency coordination, but remaining efforts have stalled. For example, the Center has not yet finalized procedures for coordination between the investigative export control enforcement and intelligence communities. Center officials cited understaffing of interagency personnel as a key barrier, and, in August 2016, Commerce assigned new staff to the Center to assist in this process. This criterion has been met. The export control reform efforts lay out a clear plan of action—consisting of a three-phase framework of agency actions to implement reforms to export control lists, licensing, enforcement, and information technology—which has the potential to improve the efficiency and effectiveness of the export control process. This criterion has been partially met. We made four recommendations in March 2012 that departments with responsibilities for export control enforcement take steps to more effectively monitor resources spent on export control enforcement activities and develop and implement metrics for monitoring their effectiveness. As of 2016, one of these recommendations has been implemented by Homeland Security, but not Justice; a second has been implemented by both Homeland Security and Commerce; a third has not been implemented by Homeland Security; and a fourth has been implemented by both Commerce and State. remain under State control or move to Commerce control. The goal is to move certain less sensitive items from State’s jurisdiction to Commerce’s, while leaving high-risk and high-priority items on State’s list. However, other key steps, such as implementation of the Center’s procedures for coordination with the intelligence communities, remain incomplete. for ensuring consistent protection of critical technologies across weapon systems and their respective export variants. The Defense Security Service, which is responsible for administering the National Industrial Security Program and overseeing the protection of classified information at contractor facilities, has also made leadership progress in its technology protection role by beginning implementation of an enterprise-wide risk management approach that it expects to allow more effective oversight of technology and classified information. In 2016, agency officials reported that this approach has improved the overall oversight of all contractors by increasing visibility of security management issues across the agency’s individual directorates. This criterion has been partially met. In our 2015 update, we reported that DOD had initiated a plan and instituted the capacity for oversight and collaboration on those programs related to security cooperation and disclosure, and, while DOD has continued to expand these capacities, they remain fragmented across the portfolio of programs. For example, based on direction in the National Defense Authorization Act for Fiscal Year 2011, DOD created a Defense Exportability Features Pilot Program to reduce program costs and facilitate export sales for U.S. and foreign customers while balancing program protection needs. Since it was created, this pilot program has funded a limited number of designated systems to conduct initial feasibility studies, follow-on studies, and design efforts relating to protection of critical information on systems that may be candidates for export. Our ongoing work suggests that the pilot program has achieved some significant initial successes in helping assure greater value and effectiveness in preparing weapon programs for export. DOD officials also reported improved collaboration between agencies involved in the protection of critical technologies. Specifically, DOD officials responsible for administering FMS and export license requests, respectively, highlighted areas of increased collaboration, including joint briefings to Congress and temporary staff details across their organizations. significant work remains to be done in this area. Specifically, DOD officials said they do not have a strategic plan for administering the anti- tamper program, and officials also noted that, although technology protection is a strategic priority within the department, it was not included in a recent presidential transition strategy in terms of performance and tracking measures. This criterion has been partially met. While DOD has made some progress in establishing data-driven performance measures and tracking them against organizational goals, additional work is needed in some areas relating to the transfer of U.S. military equipment to foreign governments. For example, in our last update we noted that DOD has not implemented our recommendations to improve monitoring of the security assistance process for FMS and other security cooperation programs in which military equipment is provided directly to foreign governments. Since then, one recommendation—from November 2012—that DOD establish performance measures to assess the timeliness of the security assistance case closure process for FMS and related programs, has been implemented, but another—from the same report—calling for DOD to establish a performance measure to assess timeliness for the acquisition phase of the security assistance process remains unaddressed. Additionally, DOD officials responsible for administering the Defense Exportability Features Pilot Program said they have not yet developed meaningful metrics relating to aspects of the program International Cooperation officials would like to measure, such as cost savings and the defense industry’s ability to handle increased production to accommodate both U.S. and export items. example, we have previously reported that DOD’s MCTL, originally developed in response to the Export Administration Act of 1979 in order to inform export decisions, is no longer being updated or used by DOD officials who provide input on the criticality of technologies as part of export license determinations and reviews of foreign acquisition of U.S. companies. We recommended in January 2013 that DOD determine the best approach for meeting users’ requirements for a technical reference and DOD officials noted that a memorandum is pending final signature that would cancel DOD’s policy requiring use of the MCTL. In the meantime, DOD officials we spoke with in August 2016 highlighted an ongoing effort to update the U.S. Munitions List, which is now more widely used in security cooperation efforts. Additionally, the Defense Security Service maintains a separate list—the Industrial Base Technology List—which is used by many DOD entities to characterize threats to information and technology and to categorize technology acquisitions. In March 2012, we issued a report identifying delays in the license determination process, by which agencies confirm whether an item for export is controlled and requires a license. We recommended that Commerce establish timeliness goals for responding to license determination requests. According to Commerce, in April 2014, Commerce’s Bureau of Industry and Security began implementing the license determination module of the Commerce USXPORTS Export Support System. This system has enabled them to reduce their average processing time for license determinations to around 14 days, well below Commerce’s internal requirement for processing license determinations of 35 days. foreign security forces under security-related assistance programs to establish formal written procedures to consult with the Directorate of Defense Trade Controls to determine if there are additional safeguards recommended for the transfer of the defense articles. According to State officials, in October 2015, the Department of State’s Bureau of International Narcotics Control and Law Enforcement Affairs issued new standard operating procedures directing end-use monitoring officials to ensure that all U.S. government personnel utilize an end-use monitoring defense article checklist when conducting inspections. For additional information about this high-risk area, contact Marie A. Mak at (202) 512-4841 or [email protected]. Critical Technologies: Agency Initiatives Address Some Weaknesses, but Additional Interagency Collaboration Is Needed. GAO-15-288. Washington, D.C.: February 10, 2015. Export Controls: NASA Management Action and Improved Oversight Needed to Reduce the Risk of Unauthorized Access to Its Technologies. GAO-14-315. Washington, D.C.: April 15, 2014. Countering Overseas Threats: DOD and State Need to Address Gaps in Monitoring of Security Equipment Transferred to Lebanon. GAO-14-161. Washington, D.C.: February 26, 2014. Protecting Defense Technologies: DOD Assessment Needed to Determine Requirement for Critical Technologies List. GAO-13-157. Washington, D.C.: January 23, 2013. Security Assistance: DOD’s Ongoing Reforms Address Some Challenges, but Additional Information Is Needed to Further Enhance Program Management. GAO-13-84. Washington, D.C.: November 16, 2012. Export Controls: Compliance and Enforcement Activities and Congressional Notification Requirements under Country-Based License Exemptions. GAO-13-119R. Washington, D.C.: November 16, 2012. Nonproliferation: Agencies Could Improve Information Sharing and End- Use Monitoring on Unmanned Aerial Vehicle Exports. GAO-12-536. Washington, D.C.: July 30, 2012. Export Controls: U.S. Agencies Need to Assess Control List Reform’s Impact on Compliance Activities. GAO-12-613. Washington, D.C.: April 23, 2012. Export Controls: Proposed Reforms Create Opportunities to Address Enforcement Challenges. GAO-12-246. Washington, D.C.: March 27, 2012. Export Controls: Agency Actions and Proposed Reform Initiatives May Address Previously Identified Weaknesses, but Challenges Remain. GAO-11-135R. Washington, D.C.: November 16, 2010. The Department of Health and Human Services (HHS), the U.S. Department of Agriculture (USDA), and the Office of Management and Budget (OMB) have taken some positive steps since the 2015 high-risk update to address fragmentation in the federal food safety oversight system. For example, HHS and USDA have continued and expanded collaboration on specific food safety issues, and HHS has updated its strategic plan to address interagency coordination on food safety. However, additional steps are needed to address the system’s fragmentation and remove this issue from the High-Risk List. For more than four decades, we have reported on the fragmented federal food safety oversight system, which has caused inconsistent oversight, ineffective coordination, and inefficient use of resources. We added federal food safety oversight to the High-Risk List in 2007 because of risks to the economy, to public health, and to safety. A 2011 estimate by the Centers for Disease Control and Prevention (CDC)—its most recent estimate—indicates that, as a result of foodborne illness, roughly 1 in 6 Americans (48 million people) gets sick each year, 128,000 are hospitalized, and 3,000 die. CDC data also show that the number of reported multistate foodborne illness outbreaks is increasing. This is notable because although multistate outbreaks make up a small proportion of total outbreaks, they affect greater numbers of people. For example, according to CDC data, 3 percent of reported outbreaks from 2010 to 2014 were multistate, but these outbreaks were associated with 11 percent of illnesses, 34 percent of hospitalizations, and 56 percent of deaths. CDC cites several potential contributors to the increase in reported multistate outbreaks, including greater centralization of food processing practices, wider food distribution, and improved detection and investigation methods. developing Crohn’s disease, a chronic inflammatory bowel disease. According to a May 2015 estimate from USDA’s Economic Research Service, the most common 15 foodborne pathogens together impose an economic burden related to foodborne illnesses, hospitalizations, and deaths in the United States of over $15.5 billion annually. That same year, researchers at HHS’s Food and Drug Administration (FDA) estimated health costs associated with foodborne illness at about $36 billion annually. In addition to the human health toll, foodborne illness outbreaks can impose high costs to industry from food recalls. An October 2011 study published by the Grocery Manufacturers Association (GMA), in partnership with Covington & Burling LLP and Ernst & Young, estimated the cost of food recalls. The study surveyed 36 GMA member companies and found that more than half had been affected by a product recall in the prior 5 years. For companies that had faced a recall in the past 5 years, 48 percent estimated the financial impact to be less than $9 million; 29 percent, from $10 million to $29 million; and 23 percent, $30 million or more. Based on the survey results, the four largest costs that companies face as a result of a recall are business interruption or lost profits; recall execution costs, such as destroying and replacing recalled products; liability risk; and company or brand reputation damage. As we reported in December 2014, three major trends create food safety challenges. First, a substantial and increasing portion of the U.S. food supply is imported, which stretches the federal government’s ability to ensure the safety of these foods. Second, consumers are eating more raw and minimally processed foods, which in general are more susceptible to foodborne pathogens. Third, segments of the population that are particularly susceptible to foodborne illnesses, such as older adults and immune-compromised individuals, are growing. The safety and quality of the U.S. food supply, both domestic and imported, are governed by a highly complex system stemming from at least 30 federal laws that are collectively administered by 16 federal agencies. The federal agencies with primary responsibility for food safety oversight are USDA’s Food Safety and Inspection Service (FSIS) and FDA. FSIS is responsible for the safety of meat, poultry, processed egg products, and catfish. FDA is responsible for virtually all other food. As we reported in May 2016, the federal food safety oversight system is supplemented by states, localities, tribes, and territories, which may have their own laws and agencies to address the safety and quality of food. HHS, USDA, and OMB have taken some positive steps since the 2015 high-risk update to address fragmentation in the federal food safety oversight system—including in relation to crosscutting requirements for individual strategic and performance planning documents and collaboration on specific food safety issues—but they have not addressed our March 2011 recommendation for a government-wide plan and Congress has not acted on our December 2014 matters for it to consider for government-wide planning and leadership. We continue to believe that these actions are important to federal food safety oversight efforts. A framework for addressing these actions could be provided through development and implementation of a national strategy for food safety oversight. Food safety and government performance experts who participated in a 2-day meeting that we, with the assistance of the National Academies of Sciences, Engineering, and Medicine (National Academies), convened in June 2016 stated that there is a compelling need for such a strategy to provide a framework for strengthening the federal food safety oversight system and addressing fragmentation. a government-wide plan and our December 2014 matters for Congress to consider for government-wide planning and leadership. In addition, developing and implementing a national strategy could provide a framework for addressing criteria for removing food safety from the High- Risk List. Such a strategy could also include actions consistent with our prior suggestion that Congress may wish to assess the need for comprehensive, uniform, risk-based food safety legislation or amendment of FDA’s and USDA’s existing authorities. To address capacity constraints for addressing fragmentation in federal oversight of food safety and to guide corrective actions and monitor progress, Congress should consider directing OMB to develop a government-wide performance plan for food safety and formalizing the Food Safety Working Group (FSWG) through statute. To provide building blocks toward OMB’s development of a government-wide performance plan for food safety, USDA should implement our priority recommendation to continue building upon its efforts to implement the GPRA Modernization Act of 2010 (GPRAMA) requirements to address crosscutting food safety efforts in its strategic and performance planning documents, which HHS has already done. These actions should provide federal food safety agencies with vehicles to demonstrate strong commitment to, top leadership support for, and progress in implementing corrective measures to address fragmentation in federal oversight of food safety. These actions could also be addressed through development and implementation of a national strategy for food safety oversight, which could thereby address criteria for removing food safety oversight from the High-Risk List. In addition, such a strategy could include actions consistent with our prior suggestion that Congress may wish to assess the need for comprehensive, uniform, risk-based food safety legislation or amendment of FDA’s and USDA’s existing authorities. If, over the next several years, weaknesses in the food safety system persist, Congress should also consider commissioning a detailed analysis of alternative organizational structures for food safety. The criterion of demonstrating commitment to, and top leadership support for, addressing fragmentation in federal oversight of food safety has been partially met. With the enactment of GPRAMA in January 2011, Congress and the executive branch demonstrated strong commitment and top leadership support for improving collaboration across the federal government. GPRAMA further highlights the need for crosscutting strategic and performance planning for issues that involve multiple federal agencies and could provide the initial steps toward a government-wide performance plan for food safety. GPRAMA added new requirements for addressing crosscutting efforts in federal strategic and performance planning. For example, GPRAMA requires agencies to describe in their strategic and performance planning documents how they are working with other agencies to achieve their goals and objectives. In December 2014, we found that HHS and USDA had taken steps to implement GPRAMA’s crosscutting requirements for their food safety efforts. However, the agencies did not fully address crosscutting food safety efforts in their strategic and performance planning documents. We recommended that HHS and USDA continue to build upon their efforts to implement GPRAMA requirements to address crosscutting food safety efforts in their strategic and performance planning documents. Both agencies agreed with the recommendation. included more information on crosscutting food safety efforts in its fiscal year 2017-2021 strategic plan and in its draft fiscal year 2017 annual plan than it did in its prior strategic and annual plans; USDA planned to include information on interagency collaboration in its next strategic plan, according to USDA officials. Fully addressing crosscutting food safety efforts in individual strategic and performance planning documents is an important first step toward providing a comprehensive picture of the federal government’s performance in overseeing food safety. However, the agency-by-agency focus of individual planning documents alone does not provide the integrated perspective on federal food safety performance necessary to guide congressional and executive branch decision making and to inform the public about what federal agencies are doing to ensure food safety. Those individual documents could, however, provide building blocks toward the next, more challenging task of developing a single, government-wide performance plan for food safety. The President demonstrated strong commitment and top leadership in March 2009, when the President established the FSWG to coordinate federal efforts and develop goals to make food safer. In March 2011, we indicated that creation of the FSWG was a positive step. However, the group stopped meeting after about 2 years. In December 2014, we reported that, according to senior FDA and FSIS officials and OMB staff, the FSWG was no longer needed, given the existence of other collaborative mechanisms. FDA and FSIS are involved in numerous mechanisms to facilitate interagency coordination on food safety; however, existing mechanisms focus on specific issues, and none provides for broad-based, centralized collaboration. For example, FDA and FSIS are collaborating with CDC through the Interagency Food Safety Analytics Collaboration to improve estimates of the most common sources of foodborne illnesses. However, this and other mechanisms do not allow FDA, FSIS, and other agencies to look across their individual programs and determine how they all contribute to federal food safety goals. In addition, the FDA Food Safety Modernization Act (FSMA)—enacted in 2011 to amend existing food safety laws—includes numerous provisions requiring interagency collaboration, but these too focus on specific topics and do not provide for centralized, broad-based collaboration across food safety regulations and programs. In December 2014, we suggested that Congress consider formalizing the FSWG through statute to help ensure sustained leadership across food safety agencies over time. As of January 2017, HHS, USDA, and OMB had taken some positive steps since our 2015 high-risk update to address fragmentation in the federal food safety oversight system—including continued and expanded collaboration on specific food safety issues—but they had not addressed our March 2011 recommendation for a government-wide plan and Congress had not acted on our December 2014 matters for it to consider for government-wide planning and leadership. We continue to believe that these actions are important to federal food safety oversight efforts. In January 2017, however, we also concluded that a framework for addressing these actions could be provided through development and implementation of a national strategy for food safety oversight. Food safety and government performance experts who participated in a 2-day meeting that we, with the assistance of the National Academies, convened in June 2016 stated that there is a compelling need for such a strategy to provide a framework for strengthening the federal food safety oversight system and addressing fragmentation. The experts identified stating the purpose, establishing sustained leadership, identifying resource requirements, monitoring progress, and including actions for gaining traction as key elements that should be included in a national strategy for food safety oversight; these elements are consistent with characteristics that we have identified as desirable in a national strategy. We have found that complex interagency and intergovernmental efforts, which could include food safety, can benefit from developing a national strategy and establishing a focal point with sufficient time, responsibility, authority, and resources to lead the effort. The experts did not specify which entity should lead such a strategy, but they emphasized that it should be led by the highest level of the administration. Past efforts to develop high-level strategic planning for food safety have depended on leadership from entities within the Executive Office of the President (EOP). By developing a national strategy to guide the nation’s efforts to improve the federal food safety oversight system and address ongoing fragmentation, the appropriate entities within the EOP, in consultation with relevant federal agencies and other stakeholders, could provide a comprehensive framework for considering organizational changes and making resource decisions. Experts identified the following stakeholders as key contributors to a national strategy for food safety: federal, tribal, state, and local government agencies; industry; consumer groups; academia; and key congressional committees. In our January 2017 report, we found that a national strategy for food safety, as described by the experts and possessing the desirable characteristics identified in our past work, could fulfill the intent behind our March 2011 recommendation for a government-wide plan and our December 2014 matters for congressional consideration for government- wide planning and leadership. Such a strategy could include all of the elements of a government-wide performance plan for federal food safety oversight, such as government-wide goals and performance indicators. In addition, we found that, to the extent that such a strategy establishes sustained leadership, it could fulfill the intent behind our December 2014 matter for Congress to consider formalizing the FSWG through statute to help ensure sustained leadership across food safety agencies over time. We therefore recommended that the appropriate entities within the EOP, in consultation with relevant federal agencies and other stakeholders, should develop a national strategy that states the purpose of the strategy, establishes high-level sustained leadership, identifies resource requirements, monitors progress, and identifies short- and long-term actions to improve the food safety oversight system. HHS and OMB did not comment on our recommendation. USDA disagreed with the need for a national strategy but cited factors to consider should changes be proposed. Even with USDA’s reservations, we continue to believe that a national strategy would provide a comprehensive framework for considering organizational changes and resource decisions to improve the federal food safety oversight system. It will be up to the stakeholders participating in such a strategy to decide which actions to pursue. Among the actions identified by experts at our June 2016 meeting for potential inclusion in a national strategy was alignment of FDA’s and USDA’s existing authorities. For example, several experts mentioned modifying the statutes that FSIS implements, such as the Federal Meat Inspection Act and the Poultry Improvement Act, to align the authorities of USDA with the Federal Food, Drug, and Cosmetic Act, as amended by FSMA, which outlines FDA’s responsibilities. This could help ensure a consistent approach across food commodities. Such actions would comport with our prior suggestion that Congress may wish to assess the need for comprehensive, uniform, risk-based food safety legislation or to amend FDA’s and USDA’s existing authorities. Federal food safety agencies have partially met the criterion for capacity to address the fragmentation in food safety oversight. USDA and HHS have the capacity to more fully address crosscutting food safety efforts in their individual strategic and performance planning documents; however, OMB action is needed to use those documents as building blocks to develop a government-wide performance plan on food safety. Federal food safety agencies also have the capacity to participate in a centralized collaborative mechanism on food safety—like the FSWG—but congressional action would be required to formalize such a mechanism through statute. Furthermore, appropriate entities within the EOP have the capacity to consult with relevant federal agencies and other stakeholders to develop a national strategy for food safety. Doing so could address our March 2011 recommendation for a government-wide plan and our December 2014 matters for congressional consideration for government-wide planning and leadership. The criterion of having a corrective action plan has not been met. Without a government-wide performance plan for food safety, Congress, program managers, and other decision makers are hampered in their ability to identify agencies and programs addressing similar missions and to set priorities, allocate resources, and restructure federal efforts, as needed, to achieve long-term goals. Moreover, without a centralized collaborative mechanism on food safety—like the FSWG—there is no forum for agencies to reach agreement on a set of broad-based food safety goals and objectives that could be articulated in a government-wide performance plan on food safety. Development and implementation of a national strategy for food safety could also fulfill these government-wide planning and leadership needs. The criterion of having a program to monitor corrective measures has not been met. Without a government-wide performance plan for food safety, federal food safety efforts are not clear and transparent to the public. Currently, to understand what government is doing to ensure the safety of the food supply, Congress, program managers, other decision makers, and the public must access, attempt to make sense of, and reconcile individual documents across the 16 federal agencies responsible for administering the more than 30 federal statutes that govern food safety and quality. This government-wide planning need could also be addressed through a national strategy for food safety. The criterion of demonstrating progress in implementing corrective measures to address fragmentation in federal oversight of food safety has been partially met. As noted, HHS, USDA, and OMB took some positive steps to address fragmentation in the federal food safety oversight system—including in relation to GPRAMA crosscutting requirements and collaborative mechanisms on specific food safety issues—but they did not address our March 2011 recommendation for a government-wide plan and Congress did not act on our December 2014 matters for it to consider for government-wide planning and leadership. Development and implementation of a national strategy for food safety could fulfill these government-wide planning and leadership needs and show sustained progress in addressing fragmentation in the federal food safety oversight system. In response to a recommendation we made in December 2014, HHS took steps to update its strategic and performance planning documents to better address crosscutting food safety efforts. For example, in February 2015, HHS updated its strategic plan to more fully describe how it is working with other agencies to achieve its food safety related goals and objectives. Among other things, HHS described its collaboration with USDA, the Environmental Protection Agency, and others through collaborative mechanisms such as the National Antimicrobial Resistance Monitoring System, the Partnership for Food Protection, and the Food Emergency Response Network. As a result, we closed the recommendation to HHS as implemented. For additional information about this high-risk area, contact Steve D. Morris at (202) 512-3841 or [email protected]. Food Safety: A National Strategy Is Needed to Address Fragmentation in Federal Oversight. GAO-17-74. Washington, D.C.: January 13, 2017. Food Safety: FDA Coordinating with Stakeholders on New Rules but Challenges Remain and Greater Tribal Consultation Needed. GAO-16-425. Washington, D.C.: May 19, 2016. Federal Food Safety Oversight: Additional Actions Needed to Improve Planning and Collaboration. GAO-15-180. Washington, D.C.: December 18, 2014. Federal Food Safety Oversight: Food Safety Working Group Is a Positive First Step but Governmentwide Planning Is Needed to Address Fragmentation. GAO-11-289. Washington, D.C.: March 18, 2011. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. Millions of medical products—drugs, biologics, and medical devices—are used daily by Americans at home, in the hospital, and in other health care settings. The Food and Drug Administration (FDA) has the vital mission of protecting the public health by overseeing the safety and effectiveness of these products marketed in the United States. The agency’s responsibilities begin long before a product is brought to market and continue after FDA approves a product, regardless of whether it is manufactured in the United States or abroad. The importance of FDA’s role in ensuring our citizens’ well-being cannot be overstated. In recent years, FDA has been confronted with multiple challenges. Rapid changes in science and technology, globalization, unpredictable public health crises, an increasing workload, and the continuing need to monitor the safety of thousands of marketed medical products are among the many challenges with which FDA must routinely contend. The oversight of medical products was added to our High-Risk List in 2009 because these obstacles threatened to compromise FDA’s ability to protect the public health. While progress has been made, we have found that some challenges remain and new ones, such as drug shortages, have emerged. In 2015, we found that FDA had made substantial progress in addressing some of the concerns we raised in this high-risk area. Specifically, we determined that FDA had significantly improved its oversight of medical device recalls and the implementation of the Safe Medical Devices Act of 1990. In recognition of the agency’s significant strides in these two areas, we narrowed the scope of our high-risk designation. FDA met all five criteria—demonstrating strong leadership commitment, ensuring sufficient capacity, developing both specific action plans and effective monitoring tools, and demonstrating progress—for having the high-risk designation removed for both medical device areas. At that time we also found that FDA had action plans in place to help it respond to two remaining issues of high importance: the effect of globalization on FDA’s ability to monitor medical product manufacturing, and the availability of medically necessary drugs. In addition, we reported that the agency’s leadership was committed to and supportive of initiatives in these two remaining areas. However, the agency’s capacity to address these issues was unclear, and the effectiveness of its monitoring and lack of adequate progress was a concern. Therefore, FDA’s oversight of medical products remained as a high-risk area. Since 2015, we have found FDA has made some progress addressing our remaining concerns about globalization and drug availability. For example, FDA has demonstrated progress in responding to globalization by increasing the number of inspections it conducts of foreign manufacturing establishments producing drugs for the U.S. market. It has also improved the accuracy and completeness of information in its catalog of drug manufacturing establishments subject to inspection (which we referred to as an “inventory” in previous reports). The availability of more reliable data should enhance FDA’s oversight and help FDA apply its risk-based model for selecting drug establishments for inspection. FDA also has the opportunity to better monitor drug shortages by fully utilizing a recently implemented tracking system. Although these are positive steps, we continue to have concerns in both areas. The effectiveness of FDA’s foreign offices, which began opening in 2008, has not yet been meaningfully assessed. In addition, persistently high vacancy rates in these offices suggest that they may lack the capacity to robustly monitor the global arena as the agency originally envisioned. As of July 2016, 46 percent of FDA foreign offices positions were vacant. Moreover, we found that some of the challenges FDA faces in recruiting staff to work in these offices are the same as those we reported on in 2010 and 2015. With regard to ensuring drug availability, the way FDA monitors its drug shortage information remains a concern. Although it implemented a new tracking system—the Shortage Tracker—in March 2016, this is the fourth approach to monitoring shortages that the agency has taken in 5 years. According to FDA, it routinely enters data into the system, but the agency has not yet developed standard reports to help it manage its efforts, nor has it made plans to use these data to analyze trends or identify patterns to help it predict future shortages. Similarly, we remain concerned about the reliability and availability of information that is necessary to monitor postmarket drug safety. For example, FDA has not yet fully implemented a recommendation we made in 2013 to ensure its databases collect reliable and timely data on inspections of certain establishments that compound drugs. causes, has been inconsistent. These inconsistencies may undermine FDA’s action plan and its effectiveness. In addition, in December 2015 and May 2016, we identified new concerns regarding the agency’s collection of reliable data regarding postmarket drug safety and shortcomings in its broader strategic planning efforts for drugs and other medical products. As a result, we no longer consider that FDA has met the criteria associated with having an effective action plan, and are therefore changing its rating in this area from met to partially met. In recent years, Congress has taken actions that have facilitated FDA’s ability to address concerns we have identified, and make progress in this important high-risk area. In July 2013, we reported that FDA’s authority to oversee drug compounding was unclear. The Drug Quality and Security Act, enacted in November 2013, helped clarify FDA’s authority to oversee drug compounding nationally. In November 2016, we reported that since the law’s enactment, FDA has issued numerous guidance documents related to compounding and conducted more than 300 inspections of drug compounders. These inspections have resulted in actions such as FDA issuing warning letters, which are issued for violations of regulatory significance, and recalls voluntarily initiated by manufacturers of potentially contaminated drugs. The Food and Drug Administration Safety and Innovation Act (FDASIA), enacted in July 2012, directed FDA to take a risk-based approach to inspecting both foreign and domestic drug manufacturing establishments, consistent with our 2008 recommendation. FDA has now fully implemented this provision. The number of foreign inspections has consistently increased each year since fiscal year 2009. In fiscal year 2015, FDA conducted more foreign than domestic inspections. The agency has also enhanced its risk-based approach to prioritizing drug establishments for inspection. consider the agency to meet the criteria for having an effective action plan. In addition to redoubling its efforts to develop—and sustain—an effective action plan for both globalization and drug availability, FDA needs to demonstrate that it has the capacity to address multiple challenges we have identified, along with effective monitoring strategies. For example, it needs to fully execute its plan to inspect the many foreign drug establishments making drugs for the U.S. market, for which it has no inspectional history, over the next 3 years. Furthermore, FDA should implement our prior recommendations to resolve new and previously identified concerns, including the following: FDA should assess the effectiveness of the foreign offices’ contributions, by systematically tracking information to measure whether the offices’ activities specifically contribute to drug safety- related outcomes, such as inspections, import alerts, and warning letters. FDA should establish goals to achieve the appropriate staffing level for its foreign offices. FDA should routinely use its new Shortage Tracker and conduct periodic analyses to systematically assess drug shortage information to proactively identify risk factors for potential drug shortages. FDA should develop comprehensive plans, including goals and time frames, to correct problems with its postmarket safety data and ensure that these data can be easily used for oversight. FDA should consistently collect reliable and timely information in FDA’s databases on inspections and enforcement actions associated with compounded drugs. FDA has met this criterion. In 2015, we noted FDA showed leadership commitment to this area by creating an office dedicated to confronting the challenges of globalization and helping prepare the agency to move from regulating domestic products to overseeing a worldwide market. The agency’s leadership commitment was made further evident by its strategic priorities for fiscal years 2014 through 2018, which discuss its goal of expanding its regulatory presence and partnerships overseas. producing drugs for the U.S. market than any other country, followed closely by China. While globalization brings benefits, it also carries risks, as some of these countries have regulatory systems less sophisticated than our own. This global marketplace has placed greater pressure on FDA to oversee the safety and effectiveness of all medical products marketed in the United States, regardless of where they are produced. In 2008, we reported that FDA inspected relatively few foreign drug manufacturing establishments each year. We also pointed out that FDA had not used its risk-based process to select foreign establishments for inspection to the extent it had for selecting domestic establishments. Two years later, in 2010, we reported FDA had increased the number of foreign drug inspections it conducted, but that it still conducted relatively fewer foreign drug inspections. However, since 2009, FDA has enhanced its capacity to conduct inspections and has increased the number of foreign establishments it inspects each year. In fiscal year 2015, FDA conducted more foreign than domestic inspections. Establishments in China and India were inspected by FDA more than those in other foreign countries. More recently, we have questioned the effectiveness of FDA’s foreign offices, which are overseen by its Office of International Programs (OIP). FDA began opening these offices in 2008 to obtain better information on products coming from overseas. Among other things, these offices help FDA build partnerships with its regulatory counterparts and industry members overseas, and help certain countries improve their regulatory capacities. Staff in these offices also inspect foreign establishments, gather intelligence, and foster information sharing with FDA headquarters. In December 2016, we reported that, while foreign office staff have inspected drug establishments overseas, they have conducted relatively few such inspections and may not have the capacity to do more. Most inspections of foreign drug establishments have been conducted by FDA’s domestically-based staff. Foreign office staff have conducted 5 percent of these inspections since fiscal year 2010. Further, the persistently high vacancy rates in these offices suggest that they may lack the capacity to robustly assist FDA and monitor the global arena, as the agency originally envisioned. As of July 2016, 46 percent of the offices’ positions were vacant, up slightly from 44 percent in October 2014. Moreover, we found that FDA still faces some of the challenges of recruiting staff to work in these offices that we identified in 2010 and 2015. Although FDA recently finalized a strategic workforce plan, as we recommended in 2010, we have identified several weaknesses in it. For example, the plan does not target vacancies by specific position types. While FDA recognizes its vacancy rate in its foreign offices is high and has set a goal of reducing this rate, the measure it has developed targets all of the staff in OIP, including those who are domestically-based. Thus, FDA could increase the number of domestically-based staff in OIP and fulfill its goal without reducing vacancies in its foreign offices. We remain concerned that, without targeting the foreign offices specifically or the types of positions most likely to have vacancies, FDA will not have a meaningful measure reflecting its true staffing needs overseas. In December 2016, we recommended that FDA establish goals to achieve the appropriate staffing levels for its foreign offices, which would include separating foreign office vacancies from the OIP-wide vacancy rate and setting goals by position type. We believe such actions are needed in order for FDA to demonstrate progress and help ensure that its foreign offices have the capacity to monitor conditions abroad and meaningfully contribute to drug safety. FDA said it is taking immediate steps to address this recommendation. FDA has met this criterion. In 2015, we recognized that FDA had developed an action plan for building a stronger, more secure global product safety net. In addition, we noted that FDA developed plans to partner with foreign regulatory authorities to leverage resources through increased information sharing following the enactment of FDASIA in 2012, which increased FDA’s ability to strengthen its efforts in this area. FDASIA also reinforced our 2008 recommendation that the agency should take a risk-based approach to selecting both foreign and domestic drug manufacturing establishments for inspection, which helped FDA develop plans to prioritize its drug inspections. FDA has partially met this criterion. We have been critical of FDA’s internal monitoring of its drug inspection program since as early as 1998, when we reported that the agency’s own internal evaluations concluded that it did not have a comprehensive data management system to monitor foreign manufacturers. The evaluations concluded that unless corrected, problems in FDA’s foreign inspection program could allow adulterated and low-quality drugs to be imported, posing serious health risks to Americans. Although the agency was aware of this problem, we found that similar problems persisted in 2008 and 2010, which affected the agency’s ability to manage the foreign drug inspection program. FDA has recently taken steps to better monitor its drug inspection program. In December 2016, we reported that FDA formalized its process for developing, evaluating, and documenting key decisions about the risk- based model that it will use to select drug establishments to inspect each year. FDA previously lacked a process for tracking revisions to its model and, as a result, officials were unable to recall or explain all the changes to the model over time. FDA’s documentation will now chronicle decisions made regarding which factors were included in the model in a particular year, according to officials. FDA officials also said that our prior reviews reinforced the need for written procedures. FDA has also taken steps to improve the accuracy and completeness of the information it uses to manage its foreign drug inspection program. The databases that FDA was using to select establishments to inspect did not contain accurate information on the number of establishments manufacturing drugs for the U.S. market, as we reported in 2008. Two years later, in 2010, we also found that 64 percent of the foreign establishments in FDA’s catalog may have never been inspected, almost half of which were in China and India. To help the agency manage its catalog of data, FDA established a data governance board in May 2015 to define standards, best practices, and policies, on which FDA’s oversight depends, including the veracity of its risk-based site selection model. FDA officials said the board has developed guidance for merging data processes and is working toward defining data metrics to determine whether they have improved on their reporting. The board has also defined data standards for storing key attributes of establishments, such as companies’ names, and continues to examine best practices for sharing establishment data across FDA. This action has helped FDA reduce the number of establishments in its catalog that may never have had a surveillance inspection. Currently, FDA lacks information on the inspection history of 33 percent of the foreign establishments in its catalog, compared to the 64 percent for which it lacked inspection history in 2010. While the agency has made progress in reducing this knowledge gap, it is important to note that the overall number of foreign establishments with no surveillance inspection history remains large, with about 1,000 of the approximately 3,000 in its catalog of establishments with no inspection history. To address this persistent concern, the agency plans to inspect all establishments in its catalog with no prior surveillance inspection history over the next 3 years (approximately one-third each year), beginning in fiscal year 2017. In addition, FDA has not sufficiently monitored the contributions of its foreign offices or meaningfully assessed their effectiveness. While these offices engage in collaborative activities with foreign stakeholders, FDA does not systematically track how information collected by the offices has contributed to drug safety. The agency has been considering the best approach to assessing the future needs of its foreign offices and measuring their performance. In 2014 and 2015, FDA’s Office of Planning compiled detailed information about their operations, including their workforce composition. More recently, in July 2016, FDA’s Office of Planning completed an internal evaluation to develop an evidence-based, collaborative, and repeatable process to select foreign post locations, considering the effects of cost, legislation, and program alignment on FDA foreign post operations, and the appropriate mix of FDA staffing at the posts. This evaluation proposed a process for determining the correct mix of staffing and position types for the foreign offices. The results of this evaluation suggest that the foreign offices would benefit from strategically aligning their operational activities and desired public health impacts. However, OIP has yet to implement and apply the process to the foreign offices. In December 2016, we recommended that FDA assess the effectiveness of the foreign offices’ contributions, which would require systematically tracking information to measure whether the offices’ activities specifically contribute to drug safety-related outcomes. FDA said it is taking immediate steps to address this recommendation. FDA has partially met this criterion. Since 2015, FDA has taken a variety of steps to respond to globalization and has made progress in meeting this challenge. For example, FDA has strengthened its monitoring of foreign drug establishments by improving the accuracy and completeness of information used to develop its catalog of drug manufacturing establishments subject to inspection. The availability of more reliable data should enhance FDA’s monitoring and oversight while helping it apply its risk-based model for prioritizing drug establishments for inspection. taken a risk-based approach to inspecting both foreign and domestic drug manufacturing establishments, in accordance with a directive in FDASIA and consistent with our 2008 recommendation. formalized its process for prioritizing the establishments it inspects to determine compliance with good manufacturing requirements, based on certain risk factors specified by FDASIA. decided that, starting in fiscal year 2017, the agency will allow no more than 5 years to elapse between inspections at a specific establishment. Yet, FDA still faces challenges overseeing the global marketplace and must continue to demonstrate progress in conducting more inspections of foreign establishments. There remain a large number of foreign establishments making drugs for the U.S. market—almost 1,000—that may never have been inspected. Over the last decade, prescription drugs—including those that are life- saving and life-sustaining—have been in short supply, preventing health care providers and patients from accessing medications that are essential for treatment. Those in shortage have included essential therapies, such as anesthetic, anti-infective, cardiovascular, nutritive, and oncology drugs. Although the number of new shortages reported each year has generally decreased since 2011, the number of ongoing shortages—those that began in prior years—have remained high. Since 2013, the majority of the ongoing shortages in a given year were first reported at least 2 years earlier. We have issued several reports on this topic since 2011 and made recommendations to enhance the agency’s ability to respond and oversee shortages. FDA has since implemented some of these recommendations. FDA has met this criterion by demonstrating leadership commitment to responding to drug shortages, which we recognized in 2015. Its strategic priorities for fiscal years 2014 through 2018 emphasize its continued commitment to responding to shortages. FDASIA also required FDA to issue a strategic plan to enhance the agency’s ability to prevent and mitigate shortages. FDA issued this strategic plan in October 2013. found that, while shortages persisted, FDA had prevented more potential shortages than it had in the prior 2 years by, for example, working with manufacturers to increase production. More recently, in 2016, we reported that FDA prioritized its review of nearly 400 applications to market generic drugs (or supplements to existing approved new or generic drug applications) to address shortages from January 2010 through July 2014. We analyzed a subset of those submissions and found that some were approved before the shortage was prevented or resolved. Although the timing of FDA’s approvals of submissions could not be directly linked to the resolution of particular shortages, we believe that prioritizing reviews may be a useful strategy in addressing some drug shortages. Despite the agency efforts, shortages persist and we recognize that FDA cannot resolve this concern alone. Nonetheless, there is more FDA could do. For example, given that the median time to approve prioritized generic drug applications is over a year, this approach is generally not a strategy for addressing shortages in the short term. In addition, FDA’s ability to manage risk-based decisions and proactively help prevent and resolve shortages may be hindered because it does not routinely analyze the data it collects. FDA now partially meets this criterion. In 2015, we rated FDA as meeting this criterion. However, we are changing this rating to partially meets due to shortcomings that we identified in recent reports, as discussed below. In order to protect public health, FDA works to ensure the availability of medically necessary drugs and the safety of the drug supply. In our 2015 high-risk report, we credited FDA for having an action plan that focuses on its capacity to respond when alerted to supply disruptions and on developing long-term prevention strategies to address the causes underlying supply disruptions. However, more recently we have identified several concerns with the agency’s readiness and plans to collect, track, and analyze data related to drug shortages and postmarket drug safety. We have also reported on shortcomings in its broader strategic planning efforts related to drugs and other medical products. We no longer consider that FDA has met the criteria associated with having an effective action plan. routinely and systematically assess this information, and use it proactively to identify risk factors for potential drug shortages. FDA’s response to these two recommendations has been mixed and an action plan has not been fully developed to implement these recommendations. In 2011, FDA relied on e-mail status reports to track shortages. Later that year it began using an electronic spreadsheet, which was replaced by a drug shortage database in 2012. A new drug shortage data system followed in 2014. But FDA’s planning did not result in a smooth transition from one system to another. FDA suspended its use of the drug shortage database at the end of 2013 while it was developing the more robust drug shortage data system. The transition to the new data system took longer than anticipated and FDA documented limited information about shortages using manual logs during an extended period in 2014. FDA began using its new data system in late 2014, and information on new and active shortages in 2014 was entered retroactively into this system. However, that system is no longer in use and FDA has now adopted an even newer system—its fourth approach to monitoring shortages in 5 years. The Shortage Tracker was implemented in March 2016. While it appears promising, FDA officials said it has been populated with data going back to January 2015 only, precluding the agency from easily conducting extensive analyses of trends prior to that date. Moreover, the agency has not yet made plans to use these data to analyze trends or identify patterns to help it predict future shortages, nor has it developed standard reports to assist with managing its efforts. Similar to our concerns with FDA’s drug shortage data, the reliability and availability of information that is necessary to monitor postmarket drug safety is limited. FDA lacks an action plan to address these issues. For example, in July 2013 we reported that FDA lacks timely and reliable information to oversee the entities that compound drugs, including timely, reliable information on the findings of inspections of these entities. FDA’s inspection database did not always distinguish compounding pharmacies from manufacturers of human or veterinary drugs. In addition, its database did not consistently reflect the agency’s final determination of an individual inspection’s results. We also found that the agency lacked reliable data to make decisions to prioritize its inspections of such pharmacies and other follow-up and enforcement actions. We recommended that FDA ensure its databases collect reliable and timely data on inspections of certain establishments that compound drugs, but the agency has not yet fully implemented this recommendation, which would improve its monitoring. Similarly, in December 2015, we found that FDA lacks reliable, readily accessible data on tracked safety issues and postmarket studies needed to meet certain postmarket safety reporting responsibilities, and to conduct systematic oversight. Tracked safety issues are potential safety issues that FDA determines are significant and that it tracks using an internal database. However, FDA’s evaluations of its database revealed problems with the completeness, timeliness, and accuracy of the data. For example, data on tracked safety issues were incomplete, postmarket study data were outdated and contained inaccuracies, and tracked safety issue and postmarket study data were not readily accessible to FDA staff for analysis. These problems, as well as problems with the way data are recorded that impair their accessibility, have prevented FDA from publishing statutorily required reports on certain potential safety issues and postmarket studies in a timely manner, and have restricted the agency’s ability to perform systematic oversight of postmarket drug safety. FDA has demonstrated some progress in addressing the problems with its data. However, the agency lacks plans that comprehensively outline its efforts and establish related goals and time frames. We recommended that FDA develop plans to correct problems with its postmarket safety data and ensure that these data can be easily used for oversight. While FDA recognized the challenges with its ability to track safety issues and has begun some efforts to improve its data, the agency has not provided comprehensive plans, with goals and time frames, to help ensure that FDA corrects the identified problems with its database on safety issues and postmarket studies. among the centers. Moreover, the strategic integrated management plan does not fully link its performance goals to its general goals and objectives. We also found in May 2016 that FDA lacks measurable goals to assess its progress in advancing regulatory science—the science supporting its effort to assess the products it regulates. Although the agency issued strategic planning documents in 2011 and 2013 to guide its regulatory science efforts and identify priority areas for conducting work, these documents do not specify the targets and time frames necessary for the agency to measure progress overall or within each of the eight priority areas related to medical products. According to leading practices for strategic planning, identifying and using consistent measurable goals in planning and progress documents is important to assessing effectiveness. While FDA cited examples of its achievements in regulatory science in a 2015 report, it cannot assess how those achievements constitute progress towards its goals. In addition, FDA lacks information about how funding targeted at regulatory science is distributed across the priority areas. Decisions to award these funds are made by individual FDA centers and offices, which generally did not collect information on the associated priority areas of funded projects. Rather, FDA retrospectively identified these areas for the purpose of our review. The lack of consistent information limits FDA’s ability to examine obligations across, or progress within, specific priority areas. Furthermore, multiple centers or offices fund projects toward a given priority area and leading practices for strategic planning encourage agencies to manage efforts that cut across the agency. Given the totality of our concerns, which range from needing action plans to address specific weaknesses we have identified to the agency’s overall strategic planning, we no longer consider that FDA has met the criteria associated with having an effective action plan. This criterion requires that a corrective action plan exist that defines the root cause, identifies solutions, and explains how an agency will substantially complete corrective measures, including steps necessary to implement solutions we recommended. We are therefore changing FDA’s action plan rating in this area, as well as its overall rating, from met to partially met. help it predict future shortages. While the drug shortage staff said that FDA’s Office of Pharmaceutical Quality will be interested in using data to conduct rigorous analyses for predicting shortages and risk factors, the drug shortage staff have not provided reports to any FDA components, raising questions about the agency’s commitment to conducting such analyses and leaving this recommendation unimplemented. We are also concerned that the annual reports FDA has issued to Congress on drug shortages have been limited, with no report providing data for more than a 9-month period. This annual report, which is required by FDASIA, is due no later than the end of the calendar year. FDA staff explained to us that it is not possible to issue a report containing 12 months of calendar year data by December 31, and they therefore report data from the first 9 months. However, FDA has not met the December 31 deadline, with publication dates ranging from February 5 through April 17. Given that the agency has never met its publication deadline, we believe it would be more helpful that policymakers receive a full year’s worth of data—such as data covering the federal fiscal year (October 1 through September 30)—so they could more closely monitor shortage information themselves and obtain a more realistic view of this serious public health problem. FDA has partially met this criterion by taking actions in recent years. FDA has implemented some of our recommendations, including one we made in 2014 regarding the need for the agency to develop policies and procedures for its drug shortages information management system, now known as the Shortage Tracker. These policies and procedures should help ensure information is entered into the Shortage Tracker consistently and accurately. FDA has assessed how it allocates its resources to improve the agency’s capacity to respond to drug shortages and increased the number of personnel devoted to shortages, as we recommended in 2011. In addition, FDA elevated the office of its drug shortage staff to a more prominent position in the agency and assigned drug shortage coordinators in each of its 20 district offices to help bring drug shortage-related concerns to light earlier, such as inspections citing violations of good manufacturing practices at establishments producing a large volume of drugs. And as we recommended in 2011, FDA has issued a strategic plan to enhance the agency’s ability to prevent and mitigate shortages, and also developed results-oriented performance metrics that can help evaluate program performance. including fully addressing the recommendations we made in 2011 and 2014. While FDA developed the new Shortage Tracker in March 2016— its fourth approach to monitoring shortages in the last 5 years—it needs to use this system consistently and share information across FDA offices regarding drugs that are in short supply. FDA also needs to periodically analyze this information to proactively identify risk factors for potential drug shortages early, thereby potentially helping FDA to recognize trends, clarify causes, and resolve problems before drugs go into short supply. FDA is now conducting more inspections of foreign manufacturing establishments producing drugs for the U.S. market, and is taking a risk-based approach by combining foreign and domestic establishments into a single list to prioritize establishments for inspection. FDA has improved the accuracy and completeness of information in its catalog of drug manufacturing establishments subject to inspection. FDA has developed a new drug shortage tracking system. Drug Safety: FDA Has Improved Its Foreign Drug Inspection Program, but Needs to Assess the Effectiveness and Staffing of Its Foreign Offices. GAO-17-143. Washington, D.C.: December 16, 2016. Drug Compounding: FDA Has Taken Steps to Implement Compounding Law, but Some States and Stakeholders Reported Challenges. GAO-17-64. Washington, D.C.: November 17, 2016. Drug Shortages: Certain Factors Are Strongly Associated with This Persistent Public Health Challenge. GAO-16-595. Washington, D.C.: July 7, 2016. Food and Drug Administration: Comprehensive Strategic Planning Needed to Enhance Coordination between Medical Product Centers. GAO-16-500. Washington, D.C.: May 16, 2016. Drug Safety: FDA Expedites Many Applications, But Data for Postapproval Oversight Need Improvement. GAO-16-192. Washington, D.C.: December 15, 2015. Drug Shortages: Better Management of the Quota Process for Controlled Substances Needed; Coordination between DEA and FDA Should Be Improved. GAO-15-202. Washington, D.C.: February 2, 2015. Drug Shortages: Public Health Threat Continues, Despite Efforts to Help Ensure Product Availability. GAO-14-194. Washington, D.C.: February 10, 2014. Drug Compounding: Clear Authority and More Reliable Data Needed to Strengthen FDA Oversight. GAO-13-702. Washington, D.C.: July 31, 2013. Drug Shortages: FDA’s Ability to Respond Should Be Strengthened. GAO-12-116. Washington, D.C.: November 21, 2011. The Environmental Protection Agency’s (EPA) ability to effectively implement its mission of protecting public health and the environment is critically dependent on assessing the risks posed by chemicals in a credible and timely manner. Such assessments are the cornerstone of scientifically sound environmental decisions, policies, and regulations under a variety of statutes, such as the Safe Drinking Water Act, the Toxic Substances Control Act (TSCA), and the Clean Air Act. EPA conducts assessments of chemicals under its Integrated Risk Information System (IRIS) program. EPA is also authorized under TSCA to obtain information on the risks of chemicals and to control those the agency determines pose an unreasonable risk. Because EPA had not developed sufficient chemical assessment information under these programs to limit exposure to many chemicals that may pose substantial health risks, we added this issue to the High-Risk List in 2009 as a government program in need of broad-based transformation. The Frank R. Lautenberg Chemical Safety for the 21st Century Act, enacted on June 22, 2016, provides EPA with greater authority to address chemical risks, but implementing it will take time. to continue to implement the TSCA reform legislation and define how it will implement corrective actions to assess and control toxic chemicals. EPA has now met the criteria for monitoring the IRIS program by finalizing the IRIS Multi-Year Agenda and other actions, including continuing to submit IRIS assessments for independent review to entities with scientific and technical credibility. EPA has not met the criteria for monitoring the TSCA program; to help ensure that the resources dedicated to TSCA are sufficient for effectively implementing the new law, EPA needs to institute a program to monitor and independently validate the effectiveness and sustainability of its initiative to use the new TSCA authorities. For the IRIS program, EPA has now partially met the criteria for demonstrated progress by, among other things, issuing five IRIS assessments since fiscal year 2015—as of January 19, 2017—and making three assessments available for public comment in fiscal year 2016 in preparation for an external peer review meeting associated with that particular assessment. For the TSCA program, EPA has not met the criteria for demonstrated progress. Both the IRIS and TSCA programs need to continue to implement corrective actions to resolve this complex high-risk area. Passing the Frank R. Lautenberg Chemical Safety for the 21st Century Act may facilitate EPA’s effort to improve its processes for assessing and controlling toxic chemicals in the years ahead. The new law provides EPA with greater authority and the ability to take actions that could help EPA implement its mission of protecting human health and the environment. Continued leadership commitment from EPA officials and Congress will be needed to fully implement reforms. Additional work will also be needed to issue a workload analysis to demonstrate capacity, complete a corrective action plan, and demonstrate progress implementing the new legislation. We recommended that EPA periodically assess the level of resources that should be dedicated to the Integrated Risk Information System (IRIS) program to meet user needs and maintain a viable database. therefore is not ensuring that current and accurate information on chemicals that EPA plans to assess through IRIS is available to IRIS users. Using the Federal Register to communicate these plans offers greater transparency to the public about the IRIS process than other forms of communication. We recommended that EPA develop a strategy to address the needs of its Program Offices and regions when IRIS toxicity assessments are not available. Officials from select EPA offices stated that, in the absence of agency-wide guidance, they used a variety of sources, other than IRIS toxicity assessments to meet their needs, including toxicity information from other EPA offices, or other state or federal agencies. IRIS program officials also stated that there is no agency- wide mechanism for EPA to ensure that chemicals without sufficient scientific data during one nomination period will have such information by subsequent nomination periods. We recognize that the development of EPA’s Multi-Year Agenda, issued in December 2015, was a productive effort that EPA told us included an extensive evaluation of user needs. However, the agency does not have a strategy for addressing data gaps or have assurance that its efforts will be sustainable over time. EPA needs to address this priority recommendation by developing: (1) an agency-wide strategy that addresses coordination across EPA offices and with other federal research agencies to help identify and fill data gaps that preclude the agency from conducting IRIS toxicity assessments, and (2) guidance that describes alternative sources of toxicity information and when it would be appropriate to use them when IRIS values are not available, applicable, or current. After many years of congressional committees considering legislation aimed at reforming the Toxic Substances Control Act (TSCA), in June 2016, Congress passed and the President signed the Frank R. Lautenberg Chemical Safety for the 21st Century Act, which gave EPA greater authority to improve its processes for assessing and controlling toxic chemicals. EPA and Congress need to continue to ensure that the resources dedicated to TSCA activities are sufficient to effectively implement the new law. We made three priority recommendations to address challenges EPA has faced obtaining toxicity and exposure data, banning or limiting the use of chemicals, and identifying resource needs. First, we recommended that EPA issue a rule to obtain toxicity and exposure data that chemical companies have submitted to the European Chemicals Agency. Second, we recommended that EPA issue a rule to obtain exposure-related data from processors. Third, we recommended that EPA develop strategies for addressing challenges associated with obtaining these data, banning or limiting the use of chemicals, and identifying resource needs. Because EPA has used its authority to limit or ban only five chemicals since TSCA was originally enacted in 1976, in part, because it believed it didn’t have enough information, we made these recommendations to address these concerns. The Frank R. Lautenberg Chemical Safety for the 21st Century Act, enacted on June 22, 2016, provides EPA with greater authority to address chemical risks, but implementing it will take time. With the implementation of the Frank R. Lautenberg Chemical Safety for the 21st Century Act, we believe EPA can make progress on these open recommendations. The act substantially revises TSCA and requires EPA to carry out numerous rulemaking and other activities within the next 2 years. In early 2016, we started a review of the TSCA program. With the passage of TSCA reform, we decided to suspend our review and give EPA time to implement the new law. In October 2016, as part of our recommendation follow-up process, we reviewed information on the new TSCA provisions. EPA officials told us that with new TSCA authority, the agency is better positioned to take action to require chemical companies to report chemical toxicity and exposure data. The new law authorizes EPA to order companies to develop new information relating to a chemical as necessary for prioritization and risk evaluation. This authority may help EPA to gather new information, as necessary, to evaluate hazard and exposure risks. TSCA reform legislation offers promise for EPA implementation of our recommendations and bringing the agency closer to achieving its goal of ensuring the safety of chemicals. provide a management-level review for consistency and quality control across assessments. Also, the Office of Research and Development’s Deputy Assistant Administrator worked with other EPA Deputy Assistant Administrators in Program Offices, such as the Office of Water and Deputy Regional Administrators, to develop the IRIS Multi-Year Agenda. EPA’s top leadership has also demonstrated support for improving the IRIS program by continuing to implement recommendations from us and EPA’s Science Advisory Board, and suggestions from the National Academies. EPA has partially met the criteria for capacity, after not meeting the criteria in 2015. In May 2013, we reported that EPA had not recently evaluated the demand for IRIS toxicity assessments with input from users inside and outside EPA. In response to our report, EPA started work on an IRIS Multi-Year Agenda in the summer of 2013 and issued it in December 2015. According to EPA, the purpose of the agenda was to: (1) identify IRIS assessments currently underway and their status; (2) prioritize IRIS assessments that will be initiated over the next few years; and (3) evaluate assessment needs and develop an update process for existing IRIS values. Now that EPA has finalized the agenda, the agency is better informed about how many people and resources to dedicate to the IRIS program. We have reviewed internal EPA documents on the need for people and resources, and the IRIS program has started to determine if it has the capacity to address the issues it faces. Because of EPA’s efforts to develop the Multi-Year Agenda, in October 2016, we closed a priority recommendation we made to EPA in 2008 for the program to determine the types of IRIS assessments to conduct on the basis of the needs of EPA’s Program Offices and other users. EPA’s actions are a good starting point for EPA’s continued process for determining the types of IRIS assessments to conduct on the basis of the needs of EPA’s Program Offices and others. part of its process for developing the Multi-Year Agenda it issued in December 2015. EPA also indicated that the agency used six general criteria to inform the selection of chemicals for assessment or reassessment, and it documented this process in an internal working table as part of its process for developing the agenda. By beginning to document how it applies its IRIS selection criteria, the IRIS program can start to determine a corrective action plan that defines root causes and solutions to move the program forward. EPA needs to be as transparent as possible when applying the selection criteria so that IRIS stakeholders can know how EPA is choosing what assessments to start and why. EPA has met the criteria for monitoring the IRIS program—after partially meeting the criteria in 2015—by finalizing the IRIS Multi-Year Agenda and other actions. Specifically, the program identified and evaluated demand for the number of IRIS toxicity assessments and resources required to meet users’ needs—a priority recommendation we made in 2013 and closed recently based on internal documents provided by EPA. Moreover, EPA presented a plan for how the agency will implement the National Academies’ suggestions for improving IRIS assessments in the “roadmap for revision” included in the National Academies’ peer review report on the draft formaldehyde assessment. The National Academies’ most recent report on the IRIS program, issued in May 2014, independently validates some of the corrective measures the program is implementing. EPA also created the Chemical Assessment Advisory Committee in January 2013, and uses it to provide continuing, consistent review of IRIS assessments and comment on implementing the National Academies’ suggestions in specific IRIS assessments—a recommendation we made in December 2011 and closed in the fall of 2016. All of these actions demonstrated EPA’s commitment to monitoring the IRIS program. EPA has partially met the criteria for demonstrating progress in implementing corrective measures by taking actions, such as releasing the IRIS Multi-Year Agenda that publicly identifies the current and future IRIS assessments. As of January 19, 2017, EPA issued two assessments in fiscal year 2017, two assessments in fiscal year 2016, and one assessment in fiscal year 2015. In addition, EPA made three assessments available for public comment in fiscal year 2016 in preparation for an external peer review meeting associated with that particular assessment. the public’s comments prior to peer review. EPA told us that the Stopping Rules also are important to the IRIS process to determine how to include new studies in an assessment without delaying the process or cycling through repeated revisions and re-revisions. Because of these actions, we closed a 2008 priority recommendation that demonstrated progress in implementing corrective measures. The recommendation called for EPA to conduct IRIS assessments on the basis of peer-reviewed scientific studies available at the time of the assessment, and develop criteria for allowing assessments to be suspended to await the completion of scientific studies only under exceptional circumstances. Although EPA officials told us that the agency has not formally invoked the Stopping Rules in response to a request to delay an assessment to incorporate studies, they told us they apply the rules in their everyday work when deciding whether to include new studies at different points in the IRIS development process. EPA said they would characterize the Stopping Rules as public IRIS policies that are in place to avoid delay for the inclusion of new studies or analysis that they believe would not affect the assessment’s conclusions. Over the past two decades, we reported that EPA had found much of TSCA difficult to implement—hampering the agency’s ability to obtain certain chemical data or place limits on chemicals. For example, EPA has found it difficult to obtain adequate information on toxicity—that is, the degree to which the chemical is harmful or deadly—and exposure levels—the frequency and duration of contact with the chemical. Without this information, it is difficult for EPA to determine whether a chemical poses an unreasonable risk to human health or the environment, and then take any action necessary to regulate such chemicals. The Frank R. Lautenberg Chemical Safety for the 21st Century Act, which reformed TSCA, was enacted on June 22, 2016. The new law provides EPA with greater authority and the ability to take actions that could help EPA implement its mission of protecting human health and the environment. including TSCA. In addition, the former Administrator and top leadership have expressed support for implementing TSCA reform. For example, the former Administrator said that, as with any major policy reform, this one includes compromises. But the former Administrator noted that the legislation should help EPA’s mission to protect public health and the environment. As in 2015, EPA has not met the criteria for capacity because the agency has not yet issued a workload analysis which is needed to determine whether EPA’s TSCA program has the capacity—people and resources— to resolve the risk to the program. The TSCA reform legislation requires EPA to report to Congress by December 2016 on its capacity to implement certain aspects of the legislation, including carrying out chemical risk evaluations and issuing rules regulating specific chemicals. In January 2017, EPA issued a report in response to this deadline. The report estimates the costs of carrying out risk evaluations under the TSCA reform legislation and discusses actions underway or planned for increasing EPA’s capacity to carry out these evaluations. The report does not, however, contain estimates of EPA’s capacity for carrying out risk evaluations or promulgating associated rules. We have previously reported that EPA has found many provisions of TSCA cumbersome and time consuming to implement. It is currently unclear if EPA has the people and resources to implement the new law. We will continue to monitor the program to determine if progress is made and the criteria for capacity are met. EPA continues to partially meet the criteria for having an action plan. As we reported in 2015, EPA has increased its efforts to obtain chemical toxicity and exposure data, initiate chemical risk assessments, and review certain new uses of chemicals, but it is too early to tell whether these actions will reduce chemical risks. With new TSCA authority, EPA officials stated that the agency is better positioned to take action to require chemical companies to report chemical toxicity and exposure data. Officials also stated that the new law gives the agency additional authorities, including the authority to require companies to develop new information relating to a chemical as necessary for prioritization and risk evaluation. Using both new and previously existing TSCA authorities should enhance the agency’s ability to gather new information as necessary to evaluate hazard and exposure risks. ensuring the safety of chemicals. We will continue to monitor the TSCA program as the agency implements this important legislation. As in 2015, EPA has not met the criteria for demonstrating progress, although it has recently begun implementing corrective measures to resolve this high-risk area. For example, the first TSCA reform reporting deadline directed EPA to publish in the Federal Register a list of mercury compounds that will be prohibited from export, not later than 90 days after the date of enactment. That reporting deadline was September 20, 2016; on August 26, 2016, EPA published a list of the mercury compounds that will be prohibited from export effective January 1, 2020. TSCA reform actions required by December 19, 2016, included the following topics and actions: (1) Risk Evaluations: EPA must ensure that risk evaluations are being conducted on 10 chemical substances drawn from the 2014 TSCA Work Plan; (2) Small Business: EPA must review, and potentially revise, its definitions of small businesses for reporting purposes after consulting with the Small Business Administration; and (3) Congressional Report: EPA must submit a report to Congress regarding the agency’s capacity to carry out risk evaluations and associated actions. According to EPA, the promulgation of these rules will better position the agency to increase the rate at which chemicals are evaluated for human and environmental health and safety. As of December 19, 2016, EPA had taken steps to respond to the December deadlines for risk evaluations and small business. Specifically, EPA has announced the first 10 chemicals it will evaluate for potential risks to human health and the environment and published a Federal Register notice on Standards for Small Manufacturers and Processors. In January 2017, EPA took action in response to December deadline 3 by issuing a report: Initial Report to Congress on the EPA’s Capacity to Implement Certain Provisions of the Frank R. Lautenberg Chemical Safety for the 21st Century Act. We will continue to monitor EPA as it implements this important piece of chemical legislation and determine if it is satisfying all the criteria for removal from the High-Risk List. recommendation we made in 2013 and closed recently based on EPA’s actions. Our work has also supported deliberations by Congress about TSCA and about strengthening EPA’s ability to regulate chemicals. For example, as far back as 1994, we reported that Congress should consider setting specific deadlines for reviewing existing chemicals, which the new TSCA legislation would address because it requires EPA to establish a chemical prioritization process, and to initiate risk evaluations of high priority chemicals, among other issues. Our work since then has addressed a variety of chemical management policy matters for Congress. For example, in 2009, we testified that EPA does not routinely assess the risks of chemicals in commerce, and in 2013, we testified about possible statutory changes to TSCA to give EPA additional authorities to obtain information, and shift more of the burden to chemical companies for demonstrating the safety of their chemicals. Finally, in 2016, Congress passed the Frank R. Lautenberg Chemical Safety for the 21st Century Act, which we found addresses key challenge areas we’ve identified previously. For additional information about this high-risk area, contact Alfredo Gómez at (202) 512-3841 or [email protected]. Chemicals Management: Observations on Human Health Risk Assessment and Management by Selected Foreign Programs. GAO-16-111R. Washington, D.C.: October 9, 2015. Chemical Assessments: Agencies Coordinate Activities, but Additional Action Could Enhance Efforts. GAO-14-763. Washington, D.C.: September 29, 2014. Chemical Regulation: Observations on the Toxic Substances Control Act and EPA Implementation. GAO-13-696T. Washington, D.C.: June 13, 2013. Chemical Assessments: An Agencywide Strategy May Help EPA Address Unmet Needs for Integrated Risk Information System Assessments. GAO-13-369. Washington, D.C.: May 10, 2013. Toxic Substances: EPA Has Increased Efforts to Assess and Control Chemicals but Could Strengthen Its Approach. GAO-13-249. Washington, D.C.: March 22, 2013. Chemical Assessments: Challenges Remain with EPA’s Integrated Risk Information System Program. GAO-12-42. Washington, D.C.: December 9, 2011. Chemical Assessments: Low Productivity and New Interagency Review Process Limit the Usefulness and Credibility of EPA’s Integrated Risk Information System. GAO-08-440. Washington D.C: March 7, 2008. The two federal agencies responsible for managing weather satellites, the Department of Commerce’s National Oceanic and Atmospheric Administration (NOAA) and the Department of Defense (DOD), are in different stages in their efforts to ensure continued weather satellite coverage in their respective satellite orbits. In recognition of NOAA’s significant progress, we have narrowed the scope of this high-risk area to remove the segment on NOAA’s geostationary weather satellites. At the same time, we are expanding this high-risk area to include a segment on DOD’s polar-orbiting weather satellites because the agency has been slow to replace aging satellites and, as a result, is at risk of a gap in weather satellite data in the early morning orbit. We did not include a segment on DOD weather satellites in our prior high-risk update because the department was not, at that time, facing an imminent satellite data gap. The United States relies on two complementary types of satellite systems for weather observations and forecasts: (1) polar-orbiting satellites that provide a global perspective every morning and afternoon, and (2) geostationary satellites that maintain a fixed view of the United States. Both types of systems are critical to weather forecasters, climatologists, and the military, who map and monitor changes in weather, climate, the oceans, and the environment. Federal agencies are currently planning or executing major satellite acquisition programs to replace existing polar and geostationary satellite systems that are nearing the end of, or beyond, their expected life spans. Specifically, NOAA is responsible for the polar satellite program that crosses the equator in the afternoon and for the geostationary satellite program, while DOD is responsible for the polar satellite program that crosses the equator in the early morning orbit. However, these programs have troubled legacies of cost increases, missed milestones, technical problems, and management challenges that have reduced functionality and delayed launch dates. As a result, the continuity of weather satellite data is at risk. NOAA officials acknowledge that there is a risk of a gap in polar satellite data in the afternoon orbit, between the time that the current polar satellite is expected to reach the end of its life and the time when the next satellite is expected to be in orbit and operational. This gap could span up to a year or more, depending on how long the current satellite lasts and whether there are any delays in launching or operating the new one. In addition, there is a risk of a gap in polar satellite data in the early morning orbit because DOD has not yet replaced satellites that are nearing the end of their life spans. While NOAA does not anticipate gaps in geostationary satellite observations, such a gap could occur if the satellites currently in orbit do not last as long as anticipated or if the major satellite acquisition currently underway encounters schedule delays. According to NOAA program officials, a satellite data gap would result in less accurate and timely weather forecasts and warnings of extreme events—such as hurricanes, storm surges, and floods. Such degraded forecasts and warnings would endanger lives, property, and our nation’s critical infrastructures. Similarly, according to DOD officials, a gap in space-based weather monitoring capabilities could affect the planning, execution, and sustainment of U.S. military operations around the world. Given the criticality of satellite data to weather forecasts, the likelihood of significant gaps, and the potential impact of such gaps on the health and safety of the U.S. population and economy, we concluded that the potential gap in weather satellite data is a high-risk area and added it to the High-Risk List in 2013. It remained on the High-Risk List in 2015. the Geostationary Operational Environmental Satellite-R (GOES-R) series. Moreover, the agency successfully launched this satellite in November 2016 and is now better able to ensure continuous satellite coverage. In contrast, we are expanding the high-risk area to include a segment on DOD’s polar-orbiting satellite program, which provides weather observations in the early morning orbit. The department has been slow to establish plans for its follow-on satellite program and has made little progress in determining how it will meet selected weather satellite requirements in the early morning orbit. Moreover, DOD is currently relying on an older satellite that is well past its expected life span. As a result, there is a real risk of a weather satellite data gap in the early morning orbit. Such a gap could negatively affect military operations that depend on weather data. The two federal agencies responsible for managing weather satellites, NOAA and DOD, are in different stages in their efforts to ensure continued weather satellite coverage in their respective satellite orbits. NOAA’s efforts to strengthen mitigation planning for its polar-orbiting satellites in the afternoon orbit have resulted in it meeting three of the five criteria for removal from the high-risk area: leadership commitment, capacity, and monitoring progress. Specifically, NOAA has demonstrated leadership commitment in mitigating data gaps on its polar-orbiting weather satellites by establishing gap mitigation action plans, improving its computing capacity, and monitoring progress in implementing multiple mitigation activities. However, the agency has not yet addressed key shortfalls in its gap mitigation plans and several mitigation projects are not yet complete. Moreover, the agency recently decided to delay the launch date of the next polar-orbiting satellite due to problems in development. These issues increase the likelihood of a data gap in the afternoon orbit. The agency’s efforts to further improve its gap mitigation plans, complete gap mitigation projects, and successfully launch the next polar satellite will help ensure that it is in a good position to mitigate the possibility of gaps in satellite data. Aeronautics and Space Administration (NASA) successfully launched the latest geostationary weather satellite in November 2016, a step which improved the agency’s ability to ensure robust satellite coverage. In recognition of the agency’s significant progress, we have narrowed the scope of this high-risk area to remove the segment on NOAA’s geostationary satellites. On the other hand, DOD has been slow to establish a new satellite program, selected high-priority capabilities are not addressed by the department’s planned program, and problems with existing satellites have increased the risk of a gap in satellite data in the early morning orbit. In October 2016, over 6 years after the department was directed to establish a program to launch new satellites in the early morning orbit, DOD established a plan for its Weather Satellite Follow-on—Microwave program. The department plans to launch the first operational satellite under this program in 2022. However, this program does not address two high-priority capabilities—cloud characterization and area-specific weather imagery—and the department has not yet determined how it will provide those capabilities. Further, DOD’s primary satellite in the early morning orbit failed in February 2016, and the department is now using an older satellite that is well past its expected life span. Until the department launches its next satellite and establishes a plan to provide the two high-priority capabilities, it faces a significant risk of a gap in satellite data should the existing operational satellite fail. As a result of DOD’s limited progress in developing and implementing a plan to fulfill its weather satellite requirements, we are expanding this high-risk area to include a segment on DOD’s progress in addressing the need for satellite coverage in the early morning orbit. Over the last 4 years, congressional committees have held multiple hearings to address this high-risk area. Examples include: Subcommittees of the House Science, Space, and Technology Committee have held multiple hearings to provide oversight of major satellite acquisitions and the risk of gaps in satellite coverage (September 2013, February 2015, December 2015, July 2016) and on private sector weather forecasting (May 2015, June 2016). In March 2016, the Subcommittee on Commerce, Justice, Science, and Related Agencies of the Senate Appropriations Committee held a hearing on the President’s fiscal year 2017 budget proposal that included a discussion of current and future satellite programs. In July 2016, the House Science, Space, and Technology Committee’s Subcommittee on Environment held a hearing to provide oversight of DOD’s efforts to plan a new satellite acquisition and address the potential for gaps in satellite coverage. Also over the last 4 years, Congress has worked on legislation to address this high-risk area. Examples include: The Weather Research and Forecasting Innovation Act of 2015 was introduced as a bill in the House of Representatives to advance programs and activities related to improving weather warnings and forecasts—including analysis of potential observing system gaps— and clarifying NOAA’s ability to access commercial weather data and products. Congress appropriated funds for satellite data gap mitigation activities through the Disaster Relief Appropriations Act, 2013. address residual shortfalls in its mitigation plan, including providing key information about the cost and effects of the mitigation options, and establishing when the testing of selected options would be completed (this is a recommendation that we identified as a priority recommendation to the Secretary of Commerce); and demonstrate progress by completing the remaining gap mitigation projects identified in the polar satellite gap mitigation plan, including addressing the technical challenges that delayed the scheduled launch date for the next satellite, deciding when the next satellite will be launched, and acting to ensure a timely and successful launch. DOD has made limited progress in its efforts to replace aging satellites and is now at risk of a gap in weather satellite data in the early morning orbit. As a result, we are expanding this high-risk area to include DOD’s polar-orbiting weather satellites. The department needs to demonstrate progress on its next generation of weather satellites, called the Weather System Follow-on—Microwave (WSF-M) program, to address the risk of a gap in the early morning orbit; and establish and implement plans to mitigate the risk of a gap in the high- priority capabilities that are not included in WSF-M . NOAA has met the criterion of demonstrating a strong leadership commitment to mitigating potential gaps in polar-orbiting satellite data. In April 2015, NOAA issued an updated polar satellite gap mitigation plan which identifies the specific technical, programmatic, and management steps the agency is taking to ensure that satellite mitigation options are viable. Moreover, NOAA continues to oversee the implementation of 35 gap mitigation projects, including efforts to assimilate data from new sources into weather models and to explore how manned and unmanned aircraft observations could increase the accuracy of numerical weather predictions for high-impact weather events. In addition, NOAA executives oversee the acquisition of the next generation of polar-orbiting satellites through monthly briefings on the cost, schedule, and technical risks affecting the satellites’ development and planned launch dates. performance computing capacity resulted in reduced scope or delayed work on other critical mitigation projects, and recommended that NOAA investigate ways to prioritize the gap mitigation projects with the greatest potential benefit to weather forecasting. NOAA agreed with this recommendation, implemented it, and has since completed efforts to improve its high-performance computing capacity. Specifically, in May and December 2015, the agency completed upgrading its high- performance computers that support research and operations. These upgrades allowed the agency to move forward on multiple other mitigation activities, including experimenting with other data sources and assimilating these data into its weather models. NOAA has partially met the criterion for having a plan to address the risk of a polar satellite data gap. In April 2015, NOAA issued an updated satellite mitigation plan, which includes several improvements over its prior plan. For example, in response to a recommendation we made in December 2014 to address shortfalls in the mitigation plan, NOAA’s latest plan includes an expanded list of mitigation projects and identifies opportunities for accelerating the availability of satellite products after the next satellite is launched. However, the agency has not yet addressed residual shortfalls in its mitigation plan, including providing key information about the cost and impact of the mitigation options, and establishing when the testing of selected options would be completed. Until NOAA fully addresses the shortfalls in its gap mitigation plan, it may not be sufficiently prepared to mitigate potential gaps in polar satellite coverage. NOAA has met the criterion for monitoring progress on its gap mitigation activities, which is an increase over its prior rating. In December 2014, we reported that NOAA’s oversight of its many gap mitigation projects was not consistent or comprehensive. For example, only one of three NOAA organizations had briefed management on a monthly basis on the status of its mitigation projects and the agency had not yet reported progress on nine mitigation activities outlined in its plan. We recommended that NOAA ensure that the relevant entities provide regular progress updates on all mitigation projects and activities. NOAA agreed and implemented this recommendation. All three responsible NOAA organizations are now regularly briefing management on all active gap mitigation projects. categories: (1) understanding the likelihood and impact of a gap, (2) reducing the likelihood of a gap, and (3) reducing the impact of a gap. As of May 2016, 16 projects had been completed; 18 were ongoing; and 1 was planned for the future. However, one of the most important steps in reducing the likelihood of a gap—keeping the launch of the next polar satellite on schedule—has had problems. While NOAA targeted a March 2017 launch date for the next polar-orbiting satellite, agency officials recently decided to delay the launch by 4 to 6 months due to problems in developing the ground system and a critical instrument on the spacecraft. This launch delay exacerbates the probability of a gap in satellite data since the current operational satellite is now past its expected 5-year life span and one key instrument on that satellite has been experiencing technical issues. NOAA acknowledged that if this instrument fails before the next satellite is launched and operational, it would result in degraded weather forecasts, exposing the nation to a 15 percent chance of missing an extreme weather event forecast. While NOAA has made progress on its many mitigation projects, the agency acknowledges that no steps will completely mitigate a sudden failure of the primary operational polar- orbiting satellite. Until NOAA demonstrates that it is making swift and effective progress in mitigating potential near-term gaps in polar satellite data, there will be a growing risk that degraded forecasts and warnings will negatively impact the U.S. population and economy. NOAA has met the criterion of demonstrating strong leadership commitment to mitigating potential gaps in geostationary satellite data by revising and improving its geostationary satellite contingency plans, updating an assessment of the viability of the program schedule leading up to the launch date, and taking steps to ensure that the GOES-R satellite was successfully launched in November 2016. NOAA has met the criterion for ensuring it has the capacity to address the risk of a gap in backup coverage, which is an increase over its prior rating. Over the past several years, the agency has demonstrated its ability to mitigate operational satellite outages by monitoring the health of the satellites and by moving a backup satellite into operation when needed. Moreover, we rated capacity as partially met in our 2015 report due to concerns about NOAA’s ability to complete critical testing activities because it was already conducting testing on a round-the-clock, accelerated schedule. Since then, NOAA adjusted its launch schedule from March 2016 to November 2016 to allow time to complete critical integration and testing activities. rating. In December 2014, we reported on shortfalls in the satellite program’s gap mitigation/contingency plans and made recommendations to NOAA to address these shortfalls. For example, we noted that the plan did not sufficiently address strategies for preventing a launch delay, timelines and triggers to prevent a launch delay, and whether any of its mitigation strategies would meet minimum performance levels. NOAA agreed with these recommendations and released a new version of its geostationary satellite contingency plan in February 2015. The new plan includes information on steps planned or underway to mitigate potential launch delays, the potential impact of failure scenarios in the plan, and the minimum performance levels expected under such scenarios. NOAA has met the criterion for monitoring progress in addressing its risks. Officials responsible for satellite operations actively monitor the health of the satellite constellation and are prepared to implement contingency operations if they are warranted. In addition, GOES-R program officials actively monitored and analyzed the program schedule in order to minimize changes to the launch date. Program officials also regularly report to senior managers on progress and risks. NOAA has met the criterion for demonstrating progress in mitigating risks, which is an increase over its prior rating. In September 2013, we reported that the agency had weaknesses in its schedule management practices on its core ground system and spacecraft, and we made recommendations to address those weaknesses. The weaknesses pertained to the sequencing of all activities, ensuring there were adequate resources for the activities, and conducting a schedule risk analysis. NOAA agreed with the recommendations and the GOES-R program made improvements to its schedule management practices. In early 2016, the program improved the links between remaining activities on the spacecraft schedule, included needed schedule logic for a greater number of activities on the ground schedule, and included indications in the ground schedule that the results of a schedule risk analysis were used in calculating the duration of its activities. In addition, the GOES-R program made significant progress in developing and testing the GOES-R satellite and successfully launched it in November 2016. The agency now has a robust constellation of operational satellites and backup satellites in orbit. As a result, the agency has made significant progress in addressing the risk of a gap in geostationary satellite data coverage. In 2010, when the Executive Office of the President decided to disband a tri-agency polar weather satellite program, DOD was given responsibility for providing polar-orbiting weather satellite capabilities in the early morning orbit. However, the department was slow to develop plans to replace its existing satellites that provide this coverage. The department conducted a requirements review and analysis of alternatives from February 2012 through September 2014 to determine the best way forward for providing needed polar-orbiting satellite environmental capabilities in the early morning orbit. In October 2016, DOD approved plans for the WSF-M program. Through this program, the department plans to launch a demonstration satellite in 2017 and to launch its first operational satellite in 2022. However, DOD’s plans for the early morning orbit are not comprehensive. The department did not thoroughly assess options for providing its two highest-priority capabilities (cloud characterization and area-specific weather imagery) due to an incorrect assumption about the capabilities that would be provided by international partners. WSF-M does not include these two highest-priority capabilities and the department has not yet determined its long-term plans for providing them. Due to DOD’s delay in establishing plans for its next generation of weather satellites, there is now a significant risk of a satellite data gap in the early morning orbit. The last satellite that the department launched, called Defense Meteorological Satellite Program (DMSP)-19, stopped providing recorded data used in weather models in February 2016. A prior satellite, called DMSP-17, is now the primary satellite operating in the early morning orbit. However, this satellite was launched in 2006 and is operating with limitations due to the age of its instruments. DOD had developed another satellite, called DMSP-20, but plans to launch that satellite were canceled after the department did not certify that it would launch the satellite by the end of calendar year 2016. As a result, the department will need to continue to rely on the older DMSP-17 satellite until (1) its new satellite becomes operational in 2022, and (2) it determines how it will address the high priority capabilities that the new satellite will not provide. Given the age of the DMSP-17 satellite and uncertainty on how much longer it will last, the department could face a gap in critical satellite data that lasts for years. options for acquiring and fielding new equipment, such as satellites and satellite components, to provide the capabilities. In addition, the department anticipates that the demonstration satellite to be developed as a precursor to WSF-M could help mitigate a potential gap by providing some data. However, these proposed solutions may not be available in time or be comprehensive enough to avoid near-term coverage gaps. Such gaps could negatively affect operations that depend on weather data, such as long-range strike capabilities and aerial refueling. Over the next 2 years, we will assess DOD’s progress in addressing polar-orbiting weather satellites against the high-risk criteria and will report this information as appropriate. Examples of benefits achieved over the last 4 fiscal years by implementing our recommendations include the following actions by NOAA: Improving its gap mitigation/contingency plans for its polar-orbiting weather satellites. Prioritizing its gap mitigation efforts supporting its polar-orbiting weather satellites. Improving its oversight of its gap mitigation projects for its polar- orbiting weather satellites. Improving its schedule management practices on its geostationary satellite program. Improving its outreach to key external users of geostationary satellite data. Addressing shortfalls in its geostationary gap mitigation plans. its plan in April 2015 and addressed several of the identified shortfalls. However, we also reported that the plan does not include all elements needed to fully implement our recommendation, such as a schedule with meaningful timelines and linkages among mitigation activities. NOAA plans to update its polar satellite contingency plan to address these residual shortfalls in early 2017. For additional information about this high-risk area, contact David Powner at (202) 512-9286, or [email protected]. Environmental Satellites: NOAA Needs to Ensure Its Timelines Are Accurate, Clear, and Fully Documented.GAO-16-767. Washington, D.C.: September 8, 2016. Polar Satellites: NOAA Faces Challenges and Uncertainties that Could Affect the Availability of Critical Weather Data. GAO-16-773T. Washington, D.C.: July 7, 2016. Defense Weather Satellites: DOD Faces Acquisition Challenges for Addressing Capability Needs. GAO-16-769T. Washington, D.C.: July 7, 2016. Polar Weather Satellites: NOAA Is Working to Ensure Continuity but Needs to Quickly Address Information Security Weaknesses and Future Program Uncertainties. GAO-16-359. Washington, D.C.: May 17, 2016. Defense Weather Satellites: Analysis of Alternatives Is Useful for Certain Capabilities, but Ineffective Coordination Limited Assessment of Two Critical Capabilities. GAO-16-252R. Washington, D.C.: March 10, 2016. Environmental Satellites: Launch Delayed; NOAA Faces Key Decisions on Timing of Future Satellites. GAO-16-143T. Washington, D.C.: December 10, 2015. Environmental Satellites: Improvements Needed in NOAA’s Mitigation Strategies as It Prepares for Potential Satellite Coverage Gaps. GAO-15-386T. Washington, D.C.: February 12, 2015. Polar Weather Satellites: NOAA Needs To Prepare for Near-term Data Gaps . GAO-15-47. Washington, D.C.: December 16, 2014. Geostationary Weather Satellites: Launch Date Nears, but Remaining Schedule Risks Need to be Addressed. GAO-15-60. Washington, D.C.: December 16, 2014. Since our high-risk report in February 2015, the Department of Energy (DOE) continued to meet the leadership commitment criterion and to partially meet the criterion for having a corrective action plan. DOE has improved its monitoring of the effectiveness of corrective measures and now partially meets this criterion. DOE did not meet the criterion for having the capacity to resolve contract and project management problems, nor did DOE meet the criterion for demonstrating progress toward implementing measures to resolve high-risk areas. DOE oversees a broad range of programs related to nuclear security, science, energy, and nuclear waste cleanup, among other areas. To support these missions, DOE has several offices, each of which oversees numerous programs that often design and construct large capital asset projects to meet the department’s mission needs. DOE relies primarily on contractors to carry out its programs. It is the largest civilian contracting agency in the federal government, and spends approximately 90 percent of its fiscal year 2017 funding of more than $32 billion on contracts and large capital asset projects. We designated DOE’s contract management—which has included both contract administration and project management—a high-risk area in 1990 because DOE’s record of inadequate management and oversight of contractors has left the department vulnerable to fraud, waste, abuse, and mismanagement. In January 2009, to recognize progress made at DOE’s Office of Science, we narrowed the focus of DOE’s high-risk designation to 2 DOE program elements—the Office of Environmental Management (EM) and the National Nuclear Security Administration (NNSA). Together, these 2 elements accounted for almost 60 percent of DOE’s annual budget. In February 2013, we further narrowed the focus of the high-risk designation to NNSA and EM’s major contracts and projects—those with an estimated cost of $750 million or greater—to acknowledge progress made in managing nonmajor projects, those with an estimated cost below $750 million. We continue to monitor DOE’s management of nonmajor projects to ensure that progress in this area is sustained. implemented corrective actions that aim to identify and address root causes of persistent project management challenges and implement solutions. Since our 2015 assessment, we also observed progress in DOE’s monitoring of the effectiveness and sustainability of corrective measures. As in previous years, however, EM and NNSA struggled to ensure they have the capacity (both people and resources) to mitigate risks. They have also demonstrated limited progress in contract management, particularly in the area of financial management, and have struggled to stay within cost and schedule estimates for some major projects. DOE has made progress in its contract and project management. DOE continued to meet the criterion for demonstrating a strong commitment and top leadership support for improving project management. The Secretary of Energy issued two memorandums, in December 2014 and June 2015, that lay out a series of changes to policies and procedures to improve project management. These changes were included in DOE’s revised project management order, DOE Order 413.3B, issued in May 2016. As noted in the memorandums, some of these changes are in response to recommendations we made in prior years, such as requiring that projects develop cost estimates and analyses of alternatives according to our best practices. According to DOE officials, the two memorandums serve as DOE’s corrective action plan, but we note that this plan does not appear to be comprehensive and, as such, DOE continues to partially meet this criterion. Specifically, DOE’s corrective action plan does not address 1) acquisition planning for its major contracts—a phase during which critical contract decisions are made that have significant implications for the cost and overall success of an acquisition; 2) the quality of enterprise-wide cost information available to DOE managers and key stakeholders; 3) DOE’s need for a program management policy; and 4) how DOE’s new requirements will be applied to the department’s major legacy projects, which receive billions of dollars in annual funding and often present the most intractable project management challenges. executes its major projects and programs, but additional time is needed for us to assess how effectively these recent monitoring improvements will validate the sustainability of corrective measures. We have not yet evaluated the operations of the newly created Project Management Risk Committee (PMRC). In addition, DOE’s new oversight and monitoring efforts are not comprehensive, as certain activities within EM are not subject to review by the PMRC, even though together they cost billions of dollars and last for numerous years. Finally, the effectiveness of DOE’s monitoring of its contracts, projects, and programs depends upon the availability of reliable enterprise-wide cost information on which to base oversight activities. DOE did not meet the criterion for having the capacity to mitigate risks with project and contract management. Since 2015, DOE has taken steps to improve capacity, such as increasing its number of contract specialists, but even with these recent steps, capacity challenges remain. The Secretary’s December 2014 and June 2015 memorandums were generally silent on capacity issues. In several recently issued reports, we found capacity shortfalls in key contract management functions, including cost and schedule performance evaluation, as well as in oversight of major projects and programs. For example, in May 2015, we found that NNSA had not determined whether it has sufficient, qualified personnel to ensure it used information from contractor assurance systems (CAS) consistently, which include information on contractors’ cost and schedule performance. In 2016, DOE issued a new Supplemental Directive on NNSA Site Governance requiring NNSA to develop training for NNSA organizations to help them implement the governance model that relied on information from CAS for oversight, but it is unclear whether this training has been developed and initiated. In November 2016, we found that DOE and NNSA had not established training programs, such as a career development program, for program managers. On December 14, 2016, the President signed the Program Management Improvement Accountability Act. The act, among other things, requires that each agency head appoint a Program Management Improvement Officer, who must develop a strategy for enhancing the role of program managers within the agency that includes enhanced training and educational opportunities for program managers. Finally, in July 2016, we found problems with DOE’s effort to evaluate the environment for raising concerns without fear of reprisal. are in the early stages, and more time is needed to assess the effectiveness of corrective measures and associated progress, especially with respect to ongoing major projects. DOE has taken significant actions regarding two of its six ongoing major projects but continues to encounter significant project management challenges, cost increases, and schedule delays on others. In addition, even though we removed nonmajor projects from our High-Risk List, we continue to monitor how DOE manages these projects to ensure that DOE sustains progress in this area. Finally, DOE’s recent reforms do not address contract management, and our work since the last high-risk report has identified several significant challenges with DOE contract management on which DOE has taken little action. Specifically, in May 2015, we found that NNSA had not established policies or guidance specific to using information from CAS to evaluate management and operations (M&O) contractor performance. Congress has taken several actions related to this high-risk area. For example, the fiscal year 2016 National Defense Authorization Act (NDAA) was enacted with several provisions on the basis of our recommendations, including modifications to requirements for cost-benefit analyses for competing management and operating contracts and additional requirements related to the oversight of the Hanford Waste Treatment and Immobilization Plant (WTP). In addition, the Senate Armed Services Committee report accompanying the fiscal year 2017 NDAA included requirements for DOE relevant to many issues highlighted in our high-risk report, including specific provisions for the Mixed Oxide (MOX) Fuel Fabrication Facility, the Chemistry and Metallurgy Research Replacement (CMRR) project, and the WTP. The Senate Armed Services Committee also held hearings in 2015 and 2016 on challenges identified in this high-risk area. We testified on our observations on DOE’s management challenges and the steps taken to address them. The House Energy and Commerce Committee also held a hearing in 2015 in which we testified on the actions needed to improve DOE and NNSA oversight of management and operating contracts. Capacity: DOE will need to commit sufficient people and resources to resolve its project, program, and contract management problems. DOE must develop a strategy to address these needs. We note that the initiatives DOE established in 2015, some of which we described in our last high-risk report, are not yet complete. NNSA’s issuance of a new Supplemental Directive on NNSA Site Governance is a good first step toward addressing the recommendations we made with regard to the agency’s capacity to conduct oversight activities using information from CAS. Specifically, the Supplemental Directive includes requirements for NNSA’s Office of Safety, Infrastructure and Operations to develop training for NNSA organizations to assist their implementation of the site governance model and to annually review and update the training as needed to ensure continuous improvement. However, NNSA has not yet established comprehensive guidance, beyond the general framework described in the new Supplemental Directive, to consistently implement the described governance model across the nuclear security enterprise, and this is needed to ensure that the training developed is aligned with the specifics of that governance model. In addition, significant additional action is required by both EM and NNSA to fully address our recommendations. DOE must implement program management policies and develop a strategy for enhancing the role of program managers, including for training, as required by the Program Management Improvement Accountability Act, and address our and others’ recommendations on whistleblower protection to ensure a safety- conscious work environment where staff are encouraged to use their expertise, identify risks, and proactively mitigate them without fear of workplace retaliation. Action Plan: DOE will need to ensure that its corrective action plan is comprehensive and addresses all root causes—including all front-end planning challenges and contract and program management, as well as capacity issues. To be considered a corrective action plan, DOE’s plan must also set milestones and timelines, assign responsibilities for implementing and completing corrective measures, and identify mechanisms to monitor progress and provide measurable outcomes. DOE must also ensure the corrective action plan includes steps necessary to implement solutions we and others have recommended. address acquisition planning for its major contracts, the quality of enterprise-wide cost information, and how DOE’s new requirements will be applied to major legacy projects. Finally, we will monitor how DOE applies—enterprise-wide—the standards, policies and guidelines for program management that are to be established at federal agencies in response to the Program Management Improvement Accountability Act. Monitoring: DOE will need to continue to monitor and independently validate the effectiveness and sustainability of its corrective measures, particularly for major projects. Meeting the monitoring criterion will require a comprehensive corrective action plan—as described above—against which progress can be monitored. DOE has created the PMRC to track progress of projects across the agency, but it is too early to assess its effectiveness, especially on major projects. As a next step, DOE should create a framework in which the PMRC and programs use existing and other tools as needed to track progress against a comprehensive corrective action plan and regularly update the plan with progress and any newly identified root causes based on the PMRC’s validation of completion. DOE should also ensure it has the reliable, enterprise-wide cost information that is needed to effectively monitor projects and programs. DOE will also need to ensure that EM’s operations activities that are currently outside of project management requirements are included in this framework and are subject to comparable monitoring and oversight by the PMRC or another body. Demonstrated Progress: DOE will need to demonstrate progress in implementing corrective measures, especially measures intended to improve the performance of major projects and contracts. For example, for projects, DOE must continue to show improvements on meeting cost and schedule targets and a commitment to applying new requirements to all of its major projects. DOE should also continue to monitor progress and apply corrective measures to nonmajor projects. For contracts, once DOE’s corrective action plan addresses contract management, DOE must apply these measures to address its longstanding contract management problems. More specifically, DOE should address some of the problems we found, such as developing a contract management framework addressing the use of CAS so that DOE staff have the ability to evaluate contractor performance. The department continued to meet the criterion for demonstrating a strong commitment and top leadership support for improving project management in EM and NNSA. The Secretary of Energy issued two memorandums, in December 2014 and June 2015, that lay out a series of changes to policies and procedures to improve project management. The Secretary’s changes were included in DOE’s revised project management order, DOE Order 413.3B, issued in May 2016. As noted in the memorandums, some of these changes are in response to recommendations we made in prior years, as shown in the following examples: DOE added requirements for program offices to conduct a root cause analysis if a major project is expected to exceed its approved cost or schedule. DOE added requirements for program offices to ensure that major projects’ designs and technologies are sufficiently mature before contractors are allowed to begin construction. DOE added a requirement to its revised project management order for program offices to conduct analyses of alternatives consistent with industry best practices, independent of the contractor organization responsible for managing the construction or constructing a capital asset project. DOE added a requirement to its project management order that projects’ cost estimates be developed, maintained, and documented in a manner consistent with industry best practices. DOE also required that its cost estimating guidance and Acquisition Regulations be consistent with cost estimating best practices reflected in our Cost Estimating and Assessment Guide. responsible for reviewing all capital asset projects with a total project cost of $100 million or more. DOE officials told us that the ESAAB met 16 times in fiscal year 2015 and 14 times in fiscal year 2016 after not meeting at all during fiscal years 2013 and 2014. The Secretary also created the PMRC, which includes senior DOE officials and is chaired by a new departmental position—the Chief Risk Officer (CRO). According to its charter, the committee meets biweekly to assess the risks of projects across the department, as well as to advise DOE senior leaders and the ESAAB on cost, schedule, and technical issues for projects. We also continue to monitor nonmajor projects, and we note that the Secretary’s December 2014 and June 2015 memorandums applied project management reforms to nonmajor projects previously not subject to such requirements. For example, DOE’s new project management reforms require full upfront funding for projects costing $50 million or less—a reform that should help deliver such projects on time and within costs. Notably, DOE’s performance in meeting cost and schedule milestones for nonmajor projects continues to improve, with nearly 95 percent of such projects meeting cost and schedule milestones over the last 3 years, according to DOE officials. DOE did not meet the criterion for having the capacity to mitigate risks with project and contract management. The department has long faced challenges in ensuring it has the right number of qualified individuals in crucial oversight areas. For example, we first noted capacity shortfalls in the department’s contract management in our 1994 high-risk report. At that time, we noted that the department did not have the necessary staff expertise and information systems to monitor contractors. In our February 2015 high-risk report, we found that DOE did not meet this criterion and noted that an internal DOE review determined that the department had an extremely low number of contract specialists. We noted in our 2015 high- risk report that DOE had established the Acquisition Fellows Program to recruit, acquire, develop, and retain contract specialists, and NNSA had signed an agreement with the U.S. Army Corps of Engineers (USACE) to supplement NNSA’s capacity needs. Since 2015, DOE has taken the following steps to improve capacity: DOE increased its number of contract specialists by 4, from 550 to 554. In November 2016, DOE officials told us that the department still faces shortfalls of contract specialists. They noted that there are statutory caps on the number of staff DOE can hire. The Acquisition Fellows Program’s first class of 11 participants is expected to graduate in January 2017. DOE is analyzing lessons learned from the program’s first cohort and determining ways to improve the program for the second cohort. NNSA officials stated that they continue to use USACE specialists because it helps NNSA manage its workload within the statutory workforce caps. DOE officials also stated that, on the basis of a USACE staffing model, NNSA recently increased the number of staff on certain major projects, in some cases more than doubling the number of staff responsible for project management activities. Even with these recent steps, capacity challenges remain. The Secretary’s December 2014 and June 2015 memorandums—which DOE has stated serve as its corrective action plan—were generally silent on capacity issues. The Secretary’s memorandums required the department to create a Project Leadership Institute and both the ESAAB and PMRC are to evaluate, among other things, issues related to organization and staffing if such factors present a risk to a project; however, other capacity issues, such as those related to contract oversight, were not explicitly addressed. In several recently issued reports, we found capacity shortfalls in key contract management functions, including cost and schedule performance evaluation, as well as in oversight of major projects and programs, as shown in the following examples: In May 2015, we found that NNSA had not determined whether it has sufficient, qualified personnel to ensure it used information from CAS consistently, which include information on contractors’ cost and schedule performance. Federal field office officials raised concerns that staffing levels and the mix of staff skills may not be adequate to use information from CAS to conduct appropriate oversight, potentially resulting in NNSA staff over relying on this information without the ability to ensure it is reliable. project, field office, and functional managers, it appears that the scope of this staffing assessment may not address all aspects covered by the supplemental directive itself. In May 2015, we found that DOE faced persistent and significant technical and management challenges at its WTP at Hanford and, consequently, we recommended that DOE take steps to augment its capacity to oversee the contractor. External reviews found that technical challenges continue to affect the facilities needed to treat radioactive waste, and the extent of the challenges was beyond the capacity of DOE to monitor and prevent recurrence. Under the WTP construction contract, and as recommended by an external DOE advisory group, DOE can employ an owner’s agent to help the department review the contractor’s approach to design management and mitigate design challenges. We recommended that DOE enlist the services of another agency or external entity to serve as an owner’s agent in reviewing and evaluating the WTP contractor’s design and approach to mitigating design challenges. Congress also included a provision in the 2016 NDAA requiring DOE to enlist the services of an owner’s agent who was to have certain oversight responsibilities independent of the contractor. In 2016, DOE instituted an owner’s representative, but the responsibilities of the owner’s representative do not include key elements of an owner’s agent’s responsibilities that we discussed in our report, such as independence and authority to oversee the contractor’s approach to design management. In February 2016, we found that the B-61-12 Life Extension Program faced staff shortfalls. We reported that NNSA may need about two or three times more personnel in the federal program manager’s office to ensure sufficient federal oversight. NNSA’s federal program office employs about 20 people—8 federal FTEs and about 12 FTE- equivalent contractors—to manage NNSA activities. In contrast, the Air Force office—the armed service office responsible for air-delivered weapons such as the B61—employs about 80 federal FTEs and contractors to manage comparable Air Force activities. with about $287 million in contract spending, compared with a federal government average of $9 million per procurement employee. In November 2016, we found that DOE faced capacity challenges in program management. Program management can help ensure that a group of related projects and activities are managed in a coordinated way to obtain benefits not available from managing them individually. This approach helps federal agencies get what they need, at the right time, and at a reasonable price. We found that DOE and NNSA had not established training programs, such as a career development program, for program managers. In contrast, DOE has established a training program for project managers, which the department said is open to program managers. In the absence of a current DOE or NNSA training program for program managers, most of the NNSA program managers we interviewed did not have training related to program management. As a result, NNSA may have difficulty developing and maintaining a cadre of professional, effective, and capable program managers. We recommended that DOE establish a training program for program managers. Notably, a new federal law may help NNSA address some of its capacity challenges in program management. In December 2016, the President signed the Program Management Improvement Accountability Act. The act, among other things, requires the Director of the Office of Personnel Management, in consultation with the Director of the Office of Management and Budget, to issue regulations that identify key skills and competencies needed for program and project managers; establish a new job series, or update and improve an existing job series; and establish a new career path for program and project managers. The act also requires that each agency head appoint a Program Management Improvement Officer, who must develop a strategy for enhancing the role of program managers within the agency that includes enhanced training and educational opportunities for program managers. that several factors may limit the use and effectiveness of mechanisms for contractor employees to raise concerns and seek whistleblower protections. We also found that DOE infrequently used its enforcement authority to hold contractors accountable for unlawful retaliation against whistleblowers, issuing just 2 violation notices in the past 20 years. Additionally, in 2013, DOE determined that it does not have the authority to enforce a key aspect of policies that prohibit retaliation for nuclear safety-related issues—despite having taken such enforcement actions previously. We made several recommendations, including that DOE independently assess the environment for raising concerns, evaluate whether the whistleblower pilot program will mitigate challenges with the existing program, expedite time frames for clarifying regulations, and clarify policies to hold contractors accountable. DOE concurred with most of these recommendations. In August 2016, DOE issued a proposed rule to change DOE’s nuclear safety rules to clarify the department’s authority to assess civil penalties against certain contractors and subcontractors for violating the prohibition against retaliating against whistleblowers. The comment period closed in September 2016, and DOE is now considering the comments that were submitted. In September 2016, DOE also updated its Order 221.1B that establishes the requirements and responsibilities for reporting fraud, waste, and abuse. The revised order provides some additional specificity to its Office of Inspector General’s role in processing employee allegations and provides additional language intended to prohibit contractors from deterring or dissuading employees from reporting concerns. DOE partially met the criterion for having a corrective action plan that defines root causes and identifies effective solutions. In issuing two memorandums to improve project management, the Secretary required project management reforms that—if fully implemented—will help ensure that future projects are not affected by the challenges that have persisted for DOE’s major projects. According to DOE officials, the memorandums serve as DOE’s corrective action plan to address the root causes DOE identified in its November 2014 report. DOE codified the memorandums’ reforms in its revised project management order, DOE Order 413.3B, which includes instituting best practices we and industry have identified for cost estimating, schedule estimating, and applying an analysis of alternatives (AOA) framework to the early stages of project planning. DOE also plans to publish a guide to instruct DOE staff on how to conduct an AOA. We are encouraged by DOE’s project management reforms but note that the memorandums and the November 2014 report, as well as associated changes to DOE’s project management order, do not fully include all important elements of a corrective action plan. For example, these documents do not identify goals and performance measures, establish milestones and metrics for implementing plan goals, or establish processes for reporting progress. In addition, DOE’s corrective action plan does not appear to be comprehensive. For example, DOE’s plan does not address challenges with (1) acquisition planning for its major contracts, (2) the quality of enterprise-wide cost information, or (3) the policy on program management. It also does not fully address how DOE will apply these new requirements to major legacy projects. Specifically: DOE’s corrective action plan does not address acquisition planning for its major contracts—a phase during which critical contract decisions are made that have significant implications for the cost and overall success of an acquisition. In August 2016, we found that DOE did not consider acquisition alternatives beyond continuing its longstanding M&O contract approach for 16 of its 22 M&O contracts. Without considering broader alternatives, DOE cannot ensure that it is selecting the most effective scope and form of contract, raising risks for both contract cost and performance. The size and duration of DOE’s M&O contracts—22 M&O contracts with an average potential duration of 17 years, representing almost three-quarters of the agency’s spending in fiscal year 2015—underscore the importance of planning for each M&O acquisition. DOE’s corrective action plan does not address the quality of enterprise-wide cost information available to DOE managers and key stakeholders. Reliable enterprise-wide cost information is needed to identify the cost of activities, to ensure the validity of cost estimates, and to provide information to Congress to make budgetary decisions. In January 2017, we found that NNSA’s recently developed plan to improve and integrate financial data to better understand and compare costs across NNSA programs, contractors, and sites did not fully incorporate leading strategic planning practices, which limits its usefulness as a planning tool as well as the effectiveness of NNSA’s effort to provide meaningful financial information to Congress and other stakeholders. NNSA’s plan also contains few details for all the elements it must include, such as its feasibility assessment, estimated costs, expected results, and an implementation timeline. Consequently, NNSA’s plan does not provide a useful roadmap for guiding NNSA’s effort. We recommended that NNSA develop a plan for producing cost information that fully incorporates leading planning practices. NNSA agreed with our recommendation. DOE’s corrective action plan does not address its need for a program management policy. For example, in November 2016, we found that DOE had not established a department-wide program management policy, and that NNSA had cancelled its program management policy in 2013 without establishing a new policy in its place. We concluded that having a policy that incorporates existing key internal control standards and leading industry program management practices may help ensure that EM and NNSA program offices are better able to achieve their missions, goals, and objectives. For example, in an August 2016 report examining NNSA’s plans to build the CMRR, we found that the agency had not clarified whether the project would satisfy the mission needs of other NNSA and DOE programs. NNSA might have been better able to clarify this project’s mission needs if DOE and NNSA had been operating under a DOE-wide program management policy incorporating leading practices. DOE and NNSA officials said they recognize the importance of establishing a program management policy, but at the time DOE had not taken steps to develop such a policy. We recommended that DOE establish a program management policy addressing internal control standards and leading practices. DOE had no comments on our recommendation. After our report was issued, the President signed the 2016 Program Management Improvement Accountability Act, also requiring the development of standards, policies, and guidelines for program and project management across the federal government. As required in the act, we will continue to monitor and report on its implementation in connection with our biennial high-risk updates, including on the effectiveness of the standards, policies, and guidelines that will be developed. DOE’s corrective action plan also does not fully address how DOE’s new requirements will be applied to the department’s major legacy projects, which receive billions of dollars in annual funding and often present the most intractable project management challenges. For example, we found in May 2015 that DOE continues to allow construction of certain WTP facilities before designs are 90 percent complete and other facilities before establishing updated cost and schedule baselines. before establishing cost and schedule baselines and (2) cost and schedule estimates that meet industry best practices. The WTP is DOE’s largest project, and it has faced numerous technical and management challenges that have added decades to its schedule and billions of dollars to its cost. We recommended in 2015 that DOE consider limiting construction for certain waste treatment facilities until technical challenges are addressed, but DOE did not implement our recommendation. For DOE to fully meet the corrective action criterion, it must demonstrate its willingness to apply project management reforms to the projects that need them the most. Moreover, the department still may not understand all of the root causes of its contract and project management problems. The most recent corrective actions taken by DOE represent the third such cycle since 2008, and the root causes DOE identified in November 2014 included some issues that the department had declared it previously mitigated, such as difficulties with front-end planning. Specifically, DOE acknowledged in its November 2014 root cause analysis its longstanding problems with front-end planning, stating that insufficient front-end planning has consistently contributed to DOE projects not finishing on budget or schedule. objectively consider all alternatives, without preference for a particular solution, as it proceeds with its AOA process. NNSA neither agreed nor disagreed with our recommendation. In August 2016, we found problems with DOE’s front-end project planning at the Waste Isolation Pilot Plant (WIPP) for the new permanent ventilation system. This system is being built to enable DOE to resume full operations of the geological nuclear waste repository, which were suspended after a radiological release accident in February 2014. DOE did not follow all best practices in analyzing and selecting an alternative for the new ventilation system at WIPP, which DOE estimated will cost between $270 million and $398 million to build and will be completed by the end of March 2021. For example, DOE did not select the preferred alternative based on assessing the difference between the life-cycle costs and benefits of each alternative, as called for by best practices and required by DOE’s revised project management order. We recommended that DOE require projects, including the WIPP ventilation system, to implement recommendations from independent AOA reviews or document the reasons for not doing so. DOE concurred with the recommendation and planned to incorporate guidance in its updated project review guide on how DOE offices should address recommendations from independent reviews. DOE made significant efforts to improve its performance in monitoring and independently validating the effectiveness and sustainability of corrective measures and now partially meets our monitoring criterion. Changes DOE has made are important and can substantively improve how DOE oversees and executes its major projects and programs. We have not evaluated the effectiveness of the new monitoring measures because it will take time for DOE to employ them, and we note that they do not cover all aspects of contract management or certain EM activities and depend upon the availability of reliable enterprise-wide cost information. and it meets on a biweekly basis. According to DOE officials, during 2015, the committee reviewed 19 project milestones, 2 proposals for updating major projects’ cost and schedule, and received 15 briefings from independent project review teams. Also in 2015, the PMRC reviewed multiple major projects, such as the Uranium Processing Facility (UPF), the MOX facility, the CMRR project, WTP, and the Salt Waste Processing Facility. The PMRC also prepared information on these projects for ESAAB meetings in which most of these major projects were discussed. In addition, according to senior DOE officials, the PMRC focuses on all elements of project risk, not just those elements related to DOE’s project management order but also projects’ contract terms and regulatory compliance. DOE has included the role of the PMRC in its updated project management order, issued in May 2016, and created the CRO position, which DOE plans to institutionalize. The CRO’s primary function is to independently oversee capital asset projects and alert the Secretary to any particular risks that may threaten projects’ on- time or on-budget delivery. DOE enhanced oversight of projects during the commissioning phase—the phase after construction is complete but before operations begin. DOE did so in response to its experience with the Sodium-Bearing Waste Treatment Facility at its Idaho site. In March 2016, DOE’s Office of Inspector General found major design and construction problems during the commissioning phase of this facility. The Inspector General’s investigation found that DOE had moved the scope of work associated with the comprehensive performance test, which demonstrates that the facility would perform its mission as designed, from the construction phase of the project to the operations phase of the project. The project modification prevented DOE from rigorously testing the facility before construction was declared complete. The Inspector General’s investigation concluded that the total actual construction cost for this facility was likely understated by about $181 million, and additional future costs to make the facility operational could exceed $40 million. will be the Sodium-Bearing Waste Treatment Facility. Officials also stated that the department intends to provide guidance to project managers through a new Commissioning Guide to be issued in fiscal year 2017. DOE established project assessment offices, independent of line management, which review projects at least annually. Through a May 2015 memorandum, NNSA elevated its Office of Project Assessment to report directly to the Under Secretary, increasing the prominence of this function and the likelihood that problems, if encountered, will receive senior-level attention within NNSA. According to EM officials, EM uses its Office of Project Management to conduct regular independent project reviews for projects under $100 million, and since July 2016, DOE’s Office of Project Management, Oversight, and Assessments has reviewed EM projects with a cost greater than $100 million. key waste treatment facilities. DOE’s cost performance data shows that the approved total project cost of $16.8 billion is underestimated, and a senior DOE official recently informed Congress that the WTP’s cost will increase significantly. DOE’s efforts to improve monitoring are encouraging, but additional time is needed for us to assess how effectively these recent monitoring improvements will validate the sustainability of corrective measures. We have not yet evaluated the operations of the PMRC, but according to its charter this committee serves in an advisory role to the ESAAB and the programs, while the program offices remain responsible for delivering projects. DOE officials stated that the PMRC provides a list of its recommendations for the ESAAB meetings, but DOE does not track which PMRC recommendations are implemented. In our ongoing work, we have identified an example that raises questions about whether the programs are following the guidance of the PMRC. For the Tank Waste Characterization and Staging facility at Hanford, DOE estimated a cost range of $390 million to $690 million. However, we reported in May 2015 that this cost range was not reliable. We also found that EM officials had estimated that the cost for this facility would range from $1 billion to $1.5 billion, making it a major project and subject to more rigorous oversight requirements. The PMRC reviewed the cost estimates showing that this facility should be classified as a major project, but the program office responsible for the facility did not modify the cost range for the project at inception, raising questions about the extent of the PMRC’s influence. DOE’s new oversight and monitoring efforts are not comprehensive, as certain activities within EM are not subject to review by the PMRC, even though together they cost billions of dollars and last for numerous years. Specifically, the PMRC does not review the cost and schedule performance of operations activities within EM. These operations activities include programs such as groundwater treatment at the Hanford site, which has annually cost between about $140 million and $185 million in recent years. of about $64 million and a schedule delay of nearly 9 months, in part because DOE’s initial estimates to complete the recovery activities did not follow all best practices and were therefore unreliable. Notably, DOE estimated it would restart waste operations based on a schedule that gave DOE less than a 1 percent chance of meeting its restart date. We recommended that EM revise its protocol to require it to use best practices in developing cost and schedule estimates. DOE concurred with our recommendation and stated that EM plans to transition from the operations activities protocol to a new directive for operations activities, which will include guidance on using cost and schedule best practices. Finally, the effectiveness of DOE’s monitoring of its contracts, projects, and programs depends upon the availability of reliable enterprise-wide cost information on which to base oversight activities. Such information is needed to, among other things, identify the costs of activities and ensure the validity of its cost estimates. However, meaningful cost analysis— including comparisons across programs, contractors, and sites—is not possible because NNSA’s contractors use different methods of accounting for and tracking costs. NNSA developed a plan to improve and integrate its cost reporting structures; however, we found in our January 2017 report that the plan did not provide a useful roadmap for guiding NNSA’s effort. Until a plan is in place that incorporates leading strategic planning practices, NNSA cannot be assured that its efforts will result in a cost collection tool that produces reliable enterprise-wide cost information that satisfies the information needs of Congress and program managers, and enables DOE to effectively monitor its progress in improving how it manages its contracts and programs. As noted earlier, DOE implemented a series of changes to policies and procedures to improve project management, but the department does not yet meet the criterion for demonstrating progress. DOE’s recent reforms are in the early stages, and more time is needed to assess the effectiveness of corrective measures and associated progress, especially with respect to ongoing major projects. DOE has taken significant actions regarding two of its six ongoing major projects but continues to encounter significant project management challenges, cost increases, and schedule delays on others. In addition, DOE’s recent reforms do not address contract management, and our work since the last high-risk report has identified several significant challenges with DOE contract management on which DOE has taken little action. For two major projects, DOE has taken significant steps to address cost and schedule problems. For example, NNSA proposed, in its fiscal year 2017 budget request, to terminate the MOX project and pursue an alternative path for disposing of plutonium, under which DOE would dilute plutonium for disposal in a geologic repository. For the UPF, NNSA has cancelled its plans for a large uranium facility, and proposed to use both existing and new smaller facilities and new technologies to meet its needs. It is too early to determine the effects of these changes. DOE has not developed a complete, reliable cost estimate for its new approaches at the MOX or UPF facilities. NNSA officials believe the new approaches will allow the agency to meet its mission needs at lower costs to the taxpayer. Our recent work has identified continuing challenges for two major projects that DOE’s recent project management reforms in theory should have addressed. For example, In May 2015, we found that DOE continues with its design build approach at the WTP, which is not consistent with DOE’s revised project management order. DOE’s revised project management order requires a facility’s design to be at least 90 percent complete before establishing cost and schedule baselines. We found that construction had outpaced design at some facilities at WTP, and external reviews had identified hundreds of vulnerabilities in the waste treatment facilities after assessing only half of the facilities’ systems. However, EM has not applied DOE’s requirement to the WTP. We recommended that DOE (1) limit construction on the WTP until risk mitigation strategies are developed to address known technical challenges, and (2) determine the extent to which the quality problems exist, in accordance with its quality assurance policy, for the facilities’ systems that have not been reviewed to determine if additional vulnerabilities exist. DOE neither agreed nor disagreed with these recommendations and has not implemented them. analyzing plutonium for the revised CMRR project. NNSA neither agreed nor disagreed with the recommendations. As noted earlier, DOE’s corrective action plan does not address problems with DOE’s oversight of major contracts. These problems have been longstanding. For example, we noted in 1991 that DOE lacked assurance that its oversight and control of contract expenditures will deter and detect potential fraud, waste, and abuse. In addition to the contract management issues noted earlier, such as acquisition planning for major contracts and the quality of enterprise wide-cost information, our recent work identifies additional challenges DOE continues to face in contract management. In May 2015, we found that NNSA had not established policies or guidance specific to using information from CAS to evaluate M&O contractor performance. NNSA did not have policy or guidance on how or to what extent NNSA officials should use information from CAS in evaluating M&O contractors’ performance. We recommended that NNSA revise its policy, guidance, and procedures for evaluating performance to fully address how and under what circumstances those responsible for evaluating M&O contractors’ performance should use information from CAS. NNSA agreed with this recommendation and revised the policy in 2016. NNSA also created a website and held a summit to share CAS lessons learned and strengthen the CAS community of practice. However, NNSA has not established comprehensive guidance for implementing this policy consistently. Even though we removed nonmajor projects from our High-Risk List, we continue to monitor how DOE manages these projects to ensure that DOE sustains progress in this area. We note that the Secretary’s December 2014 and June 2015 memorandums applied project management reforms to nonmajor projects previously not subject to such requirements, and DOE’s performance in meeting cost and schedule milestones for nonmajor projects continues to improve, with nearly 95 percent of such projects meeting cost and schedule milestones over the last 3 years, according to DOE officials. Our recent work, however, shows that several nonmajor projects exhibit some of the challenges that have long persisted for DOE’s major projects, such as incomplete front-end planning and unreliable cost and schedule estimates, which means that nonmajor projects still warrant our observation. waste in the tanks and (2) a tank waste characterization and staging facility to stage, mix, sample, and characterize high-level waste from the tanks prior to delivery to the pretreatment facility. They have a combined total estimated cost of $633 million to at least $1 billion. We found DOE excluded from its estimates the costs of some major activities necessary to construct these facilities, and did not sequence activities to complete them in accordance with schedule estimating best practices. We recommended, among other things, that DOE revise cost and schedule estimates for these two facilities in accordance with industry best practices. DOE generally agreed with our recommendations but has not yet implemented them. In 2014, we reviewed DOE’s request for fiscal year 2015 funding for the WTP. We found that DOE requested an additional $23 million for the design of a system to address technical problems the WTP had recently encountered. We noted that because engineering and construction at key WTP facilities had been stalled or slowed in fiscal year 2013, it was unclear whether DOE needed the full funding for WTP plus the additional amount to address technical problems. In the fiscal year 2015 appropriations bill, Congress provided $667 million for work at the WTP, which was $23 million less than DOE’s budget request for the WTP for that year. DOE achieved some benefits by implementing several of our recommendations in fiscal years 2015 and 2016. Specifically DOE instituted requirements for projects and programs to follow cost- estimating best practices. DOE instituted requirements for projects and programs to follow analysis of alternatives best practices. DOE analyzed root causes of the Plutonium Disposition Program cost increases and instituted a department-wide requirement for root cause analysis of cost and schedule breaches. DOE’s Office of Environmental Management developed a consolidated workforce plan. DOE provided independent reviews of nonmajor projects, and defined and tracked performance targets for nonmajor projects. For additional information about this high-risk area, contact David Trimble at (202) 512-3841 or [email protected]. National Nuclear Security Administration: A Plan Incorporating Leading Practices Is Needed to Guide Cost Reporting Improvement Effort, GAO-17-141, Washington, D.C.: January 19, 2017. Program Management: DOE Needs to Develop a Comprehensive Policy and Training Program. GAO-17-51. Washington, D.C.: November 21, 2016. Department of Energy: Actions Needed to Strengthen Acquisition Planning for Management and Operating Contracts. GAO-16-529. Washington, D.C.: August 9, 2016. DOE Project Management: NNSA Needs to Clarify Requirements for Its Plutonium Analysis Project at Los Alamos. GAO-16-585. Washington, D.C.: August 9, 2016. Nuclear Waste: Waste Isolation Pilot Plant Recovery Demonstrates Cost and Schedule Requirements Needed for DOE Cleanup Operations. GAO-16-608. Washington, D.C.: August 4, 2016. Department of Energy: Whistleblower Protections Need Strengthening. GAO-16-618. Washington, D.C.: July 11, 2016. Department of Energy: Observations on Efforts by NNSA and the Office of Environmental Management to Manage and Oversee the Nuclear Security Enterprise. GAO-16-422T. Washington, D.C.: February 23, 2016. Nuclear Weapons: NNSA Has a New Approach to Managing the B61-12 Life Extension, but a Constrained Schedule and Other Risks Remain. GAO-16-218. Washington, D.C.: February 4, 2016. DOE Project Management: NNSA Should Ensure Equal Consideration of Alternatives for Lithium Production. GAO-15-525. Washington, D.C.: July 13, 2015. Department of Energy: Actions Needed to Improve DOE and NNSA Oversight of Management and Operating Contractors. GAO-15-662T. Washington, D.C.: June 12, 2015. National Nuclear Security Administration: Actions Needed to Clarify Use of Contractor Assurance Systems for Oversight and Performance Evaluation. GAO-15-216. Washington, D.C.: May 22, 2015. Hanford Waste Treatment: DOE Needs to Evaluate Alternatives to Recently Proposed Projects and Address Technical and Management Challenges. GAO-15-354. Washington, D.C.: May 7, 2015. National Nuclear Security Administration: Observations on Management Challenges and Steps Taken to Address Them. GAO-15-532T. Washington, D.C.: April 15, 2015. National Nuclear Security Administration: Reports on the Benefits and Costs of Competing Management and Operating Contracts Need to Be Clearer and More Complete. GAO-15-331. Washington, D.C.: March 23, 2015. Nuclear Waste: DOE Needs to Improve Cost Estimates for Transuranic Waste Projects at Los Alamos. GAO-15-182. Washington, D.C: February 18, 2015. The National Aeronautics and Space Administration (NASA) plans to invest billions of dollars in the coming years to explore space, understand Earth’s environment, and conduct aeronautics research. We designated NASA’s acquisition management as high risk in 1990 in view of NASA’s history of persistent cost growth and schedule delays in the majority of its major projects. Our work has shown that NASA has made progress over the past 5 years in a number of key acquisition management areas, but it faces significant challenges in some of its major projects largely driven by the need to improve the completeness and reliability of its cost and schedule estimating, estimating risks associated with the development of its major systems, and managing to aggressive schedules. NASA has continued to strengthen and integrate its acquisition management functions, resulting in the agency continuing to meet three criteria for removal from our High-Risk List: leadership commitment, a corrective action plan, and monitoring. For example, NASA has established metrics to monitor progress in improving acquisition management, and in recent years, we have found that many of the projects within the agency’s major project portfolio have improved their cost and schedule performance. NASA’s metrics include cost and schedule performance indicators and we have found that NASA’s performance metrics generally reflect improved performance. These actions have helped NASA to create better baseline estimates and track performance such that NASA has been able to launch more projects on time and within cost estimates. Although NASA has taken steps toward meeting our criteria for capacity by issuing guidance and implementing tools to reduce acquisition risk, our reviews have found that these efforts have not always been consistent with best practices in areas such as cost and schedule estimating and earned value management (EVM). Finally, while the agency has taken steps to demonstrate progress toward improving acquisition outcomes overall, we found that NASA continues to face significant challenges in its ability to manage and oversee its most expensive and complex projects, most notably its human spaceflight development programs. NASA must ensure that it conducts adequate and ongoing assessments of risks and understands the long-term costs for its larger human exploration programs, as the effects of any potential miscalculations could be felt across NASA’s portfolio. Such efforts should help maximize improvements and to demonstrate that the improved cost and schedule performance will be sustained, even for the agency’s most expensive and complex projects. In our 2015 high-risk update, we found that NASA has satisfied our high- risk criteria for the areas of leadership commitment, monitoring, and an action plan. We believe NASA’s progress in these areas is reflected in the improved cost and schedule performance of NASA’s portfolio of major acquisition projects, which includes projects with a life-cycle cost of more than $250 million. For example, in 2016, overall development cost growth for the portfolio of 12 development projects fell to 1.3 percent and launch delays averaged 4 months. Both of these measures are at or near the lowest levels we have reported since we began our annual assessments in 2009. These measures exclude the James Webb Space Telescope (JWST), which NASA rebaselined in September 2011 with significant cost increase and schedule delays. As of December 2016, we found that program continues to meet its revised cost and schedule commitments. NASA manages a portfolio of projects that will always have inherent technical, design, and integration risks because its projects are complex, specialized, and often push the state of the art in space technology. NASA has already taken steps to reduce acquisition risk from both a technical and management standpoint. The next few years will certainly test the extent to which these measures have taken hold in NASA’s largest programs. However, more needs to be done with respect to anticipating and mitigating risks—especially with regard to large programs, estimating and forecasting costs for its largest projects, and implementing management tools. Actions that will be critical to improving NASA’s acquisition outcomes include the following: Ensure that NASA conducts adequate and ongoing assessments of risks for larger programs—JWST, Space Launch System (SLS), Orion Multi-Purpose Crew Vehicle (Orion), and Exploration Ground Systems (EGS)—especially since each of these programs is at a different critical point in development and implementation, and the impacts of any potential miscalculations will be felt across NASA’s portfolio. Ensure that NASA understands long-term human exploration program costs. While the three major exploration programs have been baselined, none of the three programs have a baseline that covers activities beyond the second planned flight. Long-term estimates, which could be revised as potential mission paths are narrowed and selected, would provide decision makers with a more informed understanding of costs and schedules associated with potential agency development paths. Ensure that the Orion program analyzes the cost of deferred work in relation to levels of management reserves and unallocated future expenses, and actual contractor performance, and report the results of that analysis to NASA management. Ensure that rebaselined projects report cost and schedule growth from original baselines in order to provide stakeholders and Congress with a more accurate view of project performance and to enhance accountability. Ensure that program offices regularly and consistently update their Joint Cost and Schedule Confidence Levels (JCL) across the portfolio. As a project reaches the later stages of development, especially integration and testing, its risk posture may change. An updated project JCL would provide both project and agency management with data on relevant risks that can guide project decisions. Ensure that NASA continues its efforts to build capacity in areas such as cost and schedule estimating, and measuring contractor performance. Revisit schedules to ensure programs have fully considered the effects of managing programs in order to meet aggressive schedule dates. Our ongoing work assessing Commercial Crew, EGS, Orion, SLS, JWST, and the performance of the portfolio as a whole will provide insight into how well NASA is performing over the next several years. We determined in our 2015 update that NASA had met our criteria in the area of leadership commitment, which the agency continues to meet. We believe that the agency’s efforts in this area—including the strengthening of its acquisition policy and oversight functions—have resulted in improvement of major acquisition projects’ cost and schedule performance. NASA has partially met our high-risk criteria for capacity. While NASA has taken steps to issue guidance and implement tools to reduce acquisition risk, our reviews have found that these efforts have not always been consistent with best practices in areas such as estimating costs and schedules and EVM surveillance. In February 2015, NASA published a new version of its Cost Estimating Handbook that includes an appendix on JCL analysis. But NASA does not require its projects to update JCLs. Our prior work has found that projects do not regularly update cost risk analyses to take into account newly emerged risks. Our Cost Estimating and Assessment Guide recommends that cost estimates should be updated to reflect changes to a program or kept current as it moves through milestones. As new risks emerge for a project, updating the cost risk analysis can provide realistic estimates to decision makers, including Congress. Further, we have found that NASA’s three costliest acquisition programs—JWST, SLS, and Orion—did not fully follow best practices when developing their JCLs. For example, in July 2016 we found that the Orion program’s cost estimate met or substantially met 7 of 20 best practices and its schedule estimate met only 1 of 8 best practices. The cost estimate lacked necessary support and the schedule estimate did not include the level of detail required for high-quality estimates. Without sound cost and schedule estimates, decision makers do not clearly understand the cost and schedule risk inherent in the program and lack important information they need to make programmatic decisions. In October 2015, NASA decided to decentralize its independent assessment function and deploy the staff to the agency’s centers, in part, to better use its workforce to meet program needs in areas such as program management, cost estimating, and resource analysis, and to fill gaps in program analysis skills at the center level. It is too early to tell whether this change will address skills gaps and ultimately improve the quality of JCLs in the future as programs will need to hold reviews under this organization of the assessment function, and compare those reviews to actuals in order to assess the change. NASA has made progress implementing EVM analysis—another key project management tool— but the agency has not yet fully implemented a formal EVM surveillance plan in accordance with best practices. NASA has made significant progress rolling out EVM to its centers and supported these efforts with training, including classroom and online training to projects. In November 2012, we recommended that NASA update its procedural requirements to include a formal EVM surveillance program in order to improve the reliability of EVM data collected by NASA programs. While NASA agreed with our conclusion that EVM data reliability needed improvement, it has yet to implement a formal surveillance requirement due to resource constraints. In our December 2015 review of JWST, we found EVM data anomalies and recommended that project officials require the contractors to explain and document all such anomalies in their monthly EVM reports. A continuous surveillance program could have identified these anomalies earlier, allowing the project to pursue corrective action with its contractors. NASA has since implemented this recommendation for the JWST program. Proper surveillance of EVM contractor data is a best practice in the NASA Earned Value Management Handbook and our Cost Estimating and Assessment Guide. In our 2015 high-risk update, we found that NASA had satisfied our high- risk criteria for an action plan and it continues to do so. NASA, which reports its action plan metrics to us on a semiannual basis, continues to perform within the parameters outlined in the plan—such as meeting metrics for cost and schedule performance, and mission success measures. These and other steps have enabled NASA to launch more projects on time and within cost estimates. We found in 2015 that NASA had met our high-risk criteria for monitoring and it continues to do so. NASA has established metrics to monitor progress in improving acquisition management, and we have found that those metrics generally reflect improved performance. The NASA Systems Engineering Handbook includes several technical indicators for design maturity, and the agency’s project management policy and systems engineering policy have been updated to require projects to track these metrics. In March 2016, we found that NASA had sustained prior improvement in design stability for its major acquisition projects. NASA has partially met our criteria for demonstrating progress. The agency has taken steps to improve acquisition outcomes, but we continue to find that the agency faces significant challenges in its ability to manage and oversee its most expensive and complex projects, most notably regarding human spaceflight development. Other programs demonstrate that NASA continues to face challenges accurately estimating or quickly responding to risks. Also, NASA inconsistently reports on the performance of some programs, which masks the full extent of cost and schedule growth. Together, NASA’s three human spaceflight efforts constitute more than half of NASA’s portfolio development cost baseline, and helped make the 2016 portfolio the most expensive collection of NASA projects in development since we began our annual assessment in 2009. Although NASA’s human spaceflight programs are generally better positioned for success than the agency’s most recent effort to replace the space shuttle, managing weaknesses—including unreliable cost estimating, overly ambitious internal deadlines, limited reserves, and operating for extended periods of time without definitized contracts—have increased the likelihood that it will incur overruns and schedule delays, particularly when coupled with the broad array of technical risks that are inherent in any human spaceflight development. Moreover, all three human spaceflight projects will be significantly challenged in the next 2 years as NASA aims to launch its first exploration mission by November 2018. This mission, which will not have a crew, will fly some 70,000 kilometers beyond the moon—using the SLS launch vehicle, Orion, and EGS. During this time, the human spaceflight programs will need to resolve a multitude of technical and design challenges, complete fabrication and testing, and be delivered to the Kennedy Space Center where they will be integrated with each other and prepared for launch. Numerous activities along this development path are sequential and cannot be rearranged to gain back time lost from prior delays. Other activities can be deleted or performed concurrently, but not without more risk to the program. If delays materialize during individual systems integration and testing, they could cause a cascading effect of cross-program problems. NASA has already made these later phases more complicated by postponing key activities in order to keep pace with internal deadlines. In addition, because the agency will be in the final throes of other major programs, such as JWST, senior leaders’ attention may be divided amongst many programs in the months leading up to the first exploration mission. Examples of management risk for human spaceflight programs that we have recently identified include: As we found in July 2016, each program manages to an aggressive internal NASA launch readiness date, which creates an environment for programs to make decisions based on reduced knowledge to meet a date that is not realistic. For example, the EGS program has consolidated future schedule activities to prepare the mobile launcher—the vehicle used to bring SLS to the launch pad—to meet this internal goal. The program acknowledged that consolidating activities—which includes conducting verification and validation concurrent with installation activities—increases risk because of uncertainties about how systems not yet installed may affect the systems already installed. Officials added, however, that this concurrency is necessary to meet the internal schedule. All three programs are operating with limited cost reserves, which limit each program’s ability to address risks and unforeseen technical challenges. For example, we found in July 2016 that the Orion program will maintain very low levels of annual cost reserves until 2018. The lack of currently available cost reserves has caused the program to defer work to address technical issues to stay within budget. As a result, the Orion program’s reserves in future years could be overwhelmed by deferred work—a practice that contributed to the rebaseline of the JWST program, which included a $3.6 billion cost increase and a 52-month schedule delay. We found in July 2016 that the SLS program has not positioned itself well to accurately assess progress with the core stage—SLS’s structural backbone and fuel tank—because it did not have a performance measurement baseline for that contract. Such a baseline is necessary to support EVM reporting that can provide early warning signs of impending schedules delays and cost overrun, and provide unbiased estimates of anticipated costs at completion. The lack of an accurate performance measurement baseline stemmed from different assumptions between NASA and the contractor about when funding would be available to start different work and ultimately led to a contract modification. NASA and the contractor signed the contract replan in May 2016—with a cost increase of approximately $1 billion—and the program began receiving contractor EVM data in July 2016, more than 4.5 years after NASA awarded the contract. The cost and schedule baselines NASA has established for these three programs provide little visibility into long-term planning and costs. The baselines for SLS and EGS are applicable through the first exploration mission, and the baseline for Orion extends through the second exploration mission. However, the limited scope that NASA has chosen for constructing these cost estimates means that these estimates are unlikely to serve as a way to measure progress and track cost growth over the life of the projects which are expected to extend well beyond these first missions. In addition to these human spaceflight programs, NASA plans to reestablish a domestic capability to fly astronauts to the International Space Station through its Commercial Crew program by the end of 2018. This is also proving to be an aggressive schedule and NASA’s two contractors are concurrently developing, testing, and producing their vehicles in an effort to maintain schedule. Significant delays could lead to a gap in U.S. access to the International Space Station as NASA has acquired seats on the Russian Soyuz vehicle only through 2018. NASA also continues to have trouble demonstrating progress in executing two projects that we found in our 2015 high-risk update illustrated instances in which the agency had either underestimated risks and potential effects or had not reacted quickly enough to risks when they worsened: The Ice, Cloud, and Land Elevation Satellite-2 (ICESat-2) project—also scheduled to launch in 2018—continues to experience issues with its sole instrument, a laser altimeter. The project may require an additional 10 months or more to resolve technical challenges. The project already underwent one rebaseline in 2014, resulting in a 37 percent higher development cost than its original baseline—from $558.9 million to $763.7 million—which NASA officials at the time primarily attributed to underestimating the technical complexity of the project’s design. The Space Network Ground Segment Sustainment (SGSS) project’s contractor provided overly optimistic estimates, which—despite project officials being aware of this issue during project confirmation— necessitated a rebaseline shortly after the project was confirmed. NASA approved a new baseline in June 2015, which increased its estimated cost by $345 million and delayed its estimated completion by 27 months. In February 2016, NASA reclassified SGSS as a sustainment project rather than a major project, which reduces reporting and oversight requirements. Finally, as we highlighted in the 2015 high-risk update, the inconsistent way NASA measures its progress toward reducing acquisition risk masks true cost and schedule growth for some programs. When NASA reports on cost and schedule performance for individual projects or across its portfolio, it uses rebaseline data rather than original project baseline data for measuring outcomes. Cost and schedule growth that occurred prior to the rebaseline of a troubled project are excluded from calculations of overall progress. As a result, when the agency reports program performance in this manner—as it has for JWST, ICESat-2, and others— it makes it difficult to track cost and schedule growth compared to the agency’s original commitment levels. In November 2012, we found that NASA employee skill sets available to analyze and implement EVM vary widely from center to center, and we recommended that NASA conduct an EVM skills gap analysis to identify areas requiring augmented capability across the agency, and, based on the results of the assessment, develop a workforce training plan to address any deficiencies. NASA developed an EVM training plan in 2014 based on the results of an EVM skills gap analysis that was conducted in 2013. In November 2012, we found that NASA faced cultural and technical challenges that it must overcome to successfully implement an EVM system and to use this data on a regular basis to inform decision making. We recommended that the agency develop an EVM change management plan to assist managers and employees throughout the agency with accepting and embracing earned value techniques while reducing the operational effect on the agency. In response to our recommendation, in 2014, NASA developed an EVM change management plan. This plan was approved by the EVM Steering Committee, which is comprised of senior-level NASA officials who provide guidance to the agency on implementing EVM. In addition, the plan was briefed to the EVM Focal Points who are responsible for implementing the plan within their respective organizations. In November 2012, we found that 10 NASA major spaceflight projects had not yet fully implemented EVM. As a result, NASA was not taking full advantage of an important tool that could help reduce acquisition risk. We recommended that NASA establish a time frame by which all new spaceflight projects will be required to implement NASA’s newly developed EVM system to ensure that in-house efforts are compliant with ANSI/EIA-748, accounting for the need to increase NASA’s institutional capability for conducting EVM and analyzing and reporting the data. In fiscal year 2013, NASA started a phased rollout at selected centers to increase the agency’s EVM capacity by implementing its EVM Capability process at projects at those centers. According to NASA officials, as future projects at those centers implement EVM, they expect centers will follow the agency EVM process, which will better ensure that they are using systems which are compliant with ANSI/EIA-748. In August 2014, NASA addressed concerns we raised about the SLS by taking actions to balance the program’s cost and schedule risk in line with agency policies. At the time of our report in July 2014, we found that NASA’s funding plan for the first test flight of SLS in December 2017 was insufficient to meet needs. We recommended that the program match resources to requirements that would result in a level of risk in line with NASA policy by—for example—establishing cost and schedule baselines that supported a joint cost and schedule confidence level (JCL) of 70 percent. We indicated that NASA could, for example, increase funding or delay the scheduled launch date to reduce risks and meet the 70 percent JCL. In August 2014, the program addressed our concerns by establishing its agency cost and schedule baselines at a 70 percent JCL of $9.7 billion with a launch readiness date of November 2018. For additional information about this high-risk area, contact Cristina T. Chaplain at (202) 512-4841 or [email protected]. James Webb Space Telescope: Project Meeting Cost and Schedule Commitments but Continues to Use Reserves to Address Challenges. GAO-17-71. Washington, D.C.: December 7, 2016. Orion Multi-Purpose Crew Vehicle: Action Needed to Improve Visibility into Cost, Schedule, and Capacity to Resolve Technical Challenges. GAO-16-620. Washington, D.C.: July 27, 2016. NASA Human Space Exploration: Opportunity Nears to Reassess Launch Vehicle and Ground Systems Cost and Schedule. GAO-16-612. Washington, D.C.: July 27, 2016. NASA: Assessments of Major Projects. GAO-16-309SP. Washington, D.C.: March 30, 2016. James Webb Space Telescope: Project on Track but May Benefit from Improved Contractor Data to Better Understand Costs. GAO-16-112. Washington, D.C.: December 17, 2015. Space Launch System: Management Tools Should Better Track to Cost and Schedule Commitments to Adequately Monitor Increasing Risk. GAO-15-596. Washington, D.C.: July 16, 2015. NASA: Assessments of Selected Large-Scale Projects. GAO-15-320SP. Washington, D.C.: March 24, 2015. The Department of Defense (DOD) obligated $273.5 billion in fiscal year 2015 on contracts for goods and services, including major weapon systems, support for military bases, information technology, consulting services, and commercial items. Contracts also include those supporting contingency operations, such as those in Afghanistan. DOD is, by far, the single largest contracting agency in the federal government, typically accounting for about two-thirds of all federal contracting activity. Our work and that of others, however, has identified challenges DOD faces within three segments of contract management: (1) the acquisition workforce, (2) service acquisitions, and (3) operational contract support (OCS). Ensuring DOD has the people, skills, capacities, tools, and data needed to make informed acquisition decisions is essential if DOD is to effectively and efficiently carry out its mission in an era of more constrained resources. We added this area to our High-Risk List in 1992. Senior DOD leadership remains committed to addressing its contract management challenges and, in particular, has made significant progress in addressing OCS issues since 2015. For example, DOD held meetings of its senior executive level governance forum to institutionalize OCS, issued revised guidance, and made progress in incorporating OCS concepts into operational plans. Further, DOD has taken steps to address education and training shortfalls and has dedicated additional training resources to enhance OCS. DOD also updated its action plan for OCS, which includes both revised and new tasks with measurable metrics and milestones. As a result of these actions, for the OCS subarea, we have raised our assessments for capacity to partially met and consider DOD to have met our criterion for having an action plan. DOD has also made some progress in managing its acquisition workforce. Specifically, in October 2016, DOD issued its updated acquisition workforce strategic plan which, among other things, assessed the current capability of the workforce and identified risks that DOD needed to manage to meet future needs. As a result of these actions, we have raised the action plan criterion for the acquisition workforce subarea to partially met. DOD acknowledged, however, that it will need to develop and implement metrics to track progress toward meeting the four strategic goals identified in its October 2016 strategic workforce plan. Further, the workforce plan does not establish specific career field goals or targets, which will hinder efforts to ensure DOD has the right people with the right skills to meet future needs. Congress has also taken action to help improve the acquisition workforce. In the National Defense Authorization Act for Fiscal Year 2016, Congress made permanent the requirement for the military departments and defense agencies to remit $500 million for each fiscal year to the Defense Acquisition Workforce Development Fund (DAWDF)—a fund used by DOD to increase hiring and provide additional training. This enabled critical support for acquisition workforce development initiatives for DOD. While DOD continues to take action to improve how it manages services acquisitions, demonstrated progress was more limited. In January 2016, DOD issued a new instruction for service acquisitions that provides a management structure for acquiring services and identifies the roles and responsibilities of key leadership positions, but DOD still lacks an action plan that will enable it to assess progress toward achieving its goals, and efforts to identify goals and associated metrics are still in the early stages of development. One critical element in improving services acquisition is to know what the department is buying today and what it intends to buy in the future. We found that while data on future service acquisitions are generally maintained by DOD program offices, DOD and military department guidance does not require that data to be specifically identified in DOD’s budget forecasts. In that regard, DOD’s January 2016 service acquisition instruction includes requirements to generate data on anticipated future service acquisition spending, but this requirement does not clearly identify what level of detail should be collected, leaving DOD at risk of developing inconsistent data between each military department. To further improve outcomes on the billions of dollars spent annually on goods and services, DOD needs to take the following actions. Continue efforts, including strategic planning and aligning funding, to increase the department’s capacity to negotiate, manage, and oversee contracts by ensuring that its acquisition workforce is appropriately sized and trained to meet the department’s needs. Determine the appropriate mix of military, civilian, and contractor personnel. To assist with this, DOD needs to make decisions about the department’s approach for compiling its inventory of contracted services and defining the roles and responsibilities of those involved with the inventory. Strategically manage how it acquires services by defining desired outcomes, establishing goals and measures, and obtaining data needed to measure progress. To enhance available information on service acquisitions, the military departments should revise programming guidance to collect information on how contracted services will be used to meet requirements beyond the budget year. Sustain efforts throughout the department to integrate OCS through policy, planning, training, and application of necessary resources for both current and future contingency operations. Listed below are additional recommendations that need to be addressed: In December 2015, we recommended that DOD update its acquisition workforce plan, including revising career field goals. DOD concurred with our recommendation. In October 2016, DOD issued an updated acquisition workforce strategic plan which, among other things, assessed the current capacity and capability of the workforce and identified the risks that DOD needed to manage to meet future needs. The updated workforce plan also established four strategic goals, approved by the Defense Acquisition Workforce Senior Steering Board, to guide future efforts, including shaping the acquisition workforce to achieve current and future acquisition requirements. The October 2016 plan did not, however, establish specific career field goals or targets for its 13 career fields, including priority career fields where it has not met its targets, such as contracting, business, and auditing, which will hinder efforts to ensure that DOD has the right people with the right skills to meet future needs. In June 2013, we recommended that DOD identify baseline data on the status of service acquisitions, develop specific goals associated with their actions to improve service acquisitions, and establish metrics to assess progress in meeting these goals. DOD concurred with our recommendations and is developing service acquisition goals and metrics as well as an action plan for improving service acquisition. In relation to strategic sourcing—a process of moving away from numerous individual procurements to a broader aggregate approach—in September 2012, we recommended that the department issue direction that sets goals for spending managed through strategic sourcing vehicles, establishes procedures for tracking strategic sourcing efforts, and establishes metrics to track progress toward these goals. We also recommended that DOD identify and evaluate the best way to strategically source DOD’s highest spending categories. DOD concurred with these two priority recommendations and has been working with the Office of Management and Budget’s Category Management Leadership Council to determine appropriate strategic sourcing goals, but specific goals and corresponding metrics have not yet been established. DOD officials stated that appointing senior officials to manage the acquisition of services should help DOD further expand strategic sourcing efforts for high-spend service categories. As of October 2016, however, many of these efforts are in the early stages of implementation. We noted in our 2015 high-risk report that DOD’s top leadership has taken significant steps to plan and monitor progress in the management and oversight of contracting techniques and approaches. For example, we noted that DOD had been using its Business Senior Integration Group—the Under Secretary of Defense for Acquisition, Technology, and Logistics’ executive-level leadership forum for providing oversight in the planning, execution, and implementation of DOD’s Better Buying Power initiatives—as a mechanism to review ongoing and emerging issues, including competition. It is important for DOD to continuously promote competition, which is a critical tool for achieving the best possible return on investment for taxpayers. In addition, congressional action is needed to enhance visibility into DOD’s planned spending on contract services. In February 2016, we found that, unlike DOD budget exhibits for weapon systems, DOD’s other budget exhibits which contain information on contracted services do not include data on projected spending beyond the current budget year. Without a roadmap of future projected service contract spending needs, Congress has limited visibility into an area that constitutes more than half of DOD’s annual contract spending. Given that the intent of section 235 of Title 10 United States Code was to provide both DOD and Congress with increased oversight of the procurement of services, we suggested that Congress should consider amending reporting requirements to include estimated spending on services beyond the budget year. DOD has met this criterion by implementing its Better Buying Power initiative—which included specific actions to improve the professionalism of the acquisition workforce—and through continued efforts to sustain and train the workforce in times of budget constraints and cost-cutting pressures. For example, in June 2016, the Under Secretary of Defense for Acquisition, Technology and Logistics stated that DOD intends to sustain the acquisition workforce at current levels and continue to improve its professionalism. Similarly, DOD’s October 2016 acquisition workforce strategic plan stated that DOD must sustain the acquisition workforce size, factoring in workload demand and requirements; ensure its personnel continue to increase their professionalism, and continue to expand talent management programs to include recruitment, hiring, training, development, recognition, and retention incentives by using DAWDF and other appropriate tools. DOD components plan to spend more than $3.0 billion in DAWDF funding between fiscal years 2018 through 2022 in support of these objectives. DOD has partially met this criterion. Since 2015, DOD has continued to increase the size of the acquisition workforce by about 2,000 acquisition personnel. Overall, the size of its military and civilian acquisition workforce grew by about 26 percent—from close to 126,000 to more than 158,000 between September 2008 and March 2016—or about 12,000 more than the target identified in DOD’s April 2010 acquisition workforce plan. While DOD met the overall acquisition growth goal, it did not accomplish the goals set for some career fields. The plan indicated that targeted growth in 5 of these priority career fields—auditing, business, contracting, engineering, and program management—would help DOD strategically reshape its acquisition workforce. As of March 2016, our analysis shows that DOD met or exceeded its planned growth for 8 career fields by about 12,500 personnel, including the priority career fields of program management and engineering, but fell short by about 2,800 personnel in 5 other career fields, including the priority career fields of contracting, business, and auditing. DOD has also used DAWDF to increase hiring and provide for additional training. In the National Defense Authorization Act for Fiscal Year 2016, Congress further enabled critical support for acquisition workforce development initiatives by making permanent the requirement for the military departments and defense agencies to remit $500 million for each fiscal year to the fund. Increasing the number of people performing acquisition work is only part of DOD’s strategy to improve the capability of its workforce; another part is ensuring that the workforce has the requisite skills and tools to perform their tasks. DOD developed a five-phase process that included surveys of its employees to assess the skills of its workforce and to identify and close skill gaps. DOD completed competency assessments for 12 of its 13 career fields and is developing new training classes to address some skill gaps. However, DOD has not determined the extent to which workforce skill gaps identified in initial career field competency assessments have been addressed and what workforce skill gaps currently exist. In our December 2015 report, we recommended that DOD establish time frames to conduct follow-up career field competency assessments so that it can determine if skill gaps are being addressed. DOD agreed with the recommendation. The department’s October 2016 acquisition workforce strategic plan stated that career field competency assessments should be conducted at a minimum of every 5 years, but it is too soon to tell whether DOD will conduct these assessments as recommended in its workforce plan. DOD has now partially met this criterion. The National Defense Authorization Act for Fiscal Year 2010 required DOD to develop and submit to Congress a strategic plan for DOD’s acquisition workforce, to be updated biennially. In a December 2015 report, we found that DOD had exceeded its workforce growth target established in 2010 and was focused on sustaining the size of its acquisition workforce. We noted that an updated workforce plan that included revised career field goals, coupled with guidance on how to use DAWDF, could help DOD components focus future hiring efforts on priority career fields. Without an integrated approach, we concluded that the department would be at risk of using the funds to hire personnel in career fields that currently exceed their targets or are not considered a priority. Therefore, we recommended that DOD update its acquisition workforce plan, including revising career field goals, so that it could ensure that the most critical acquisition needs are being met. DOD officials agreed with our recommendation. In October 2016, DOD issued an updated acquisition workforce strategic plan which, among other things, assessed the current capacity and capability of the workforce and identified the risks that DOD needed to manage to meet future needs. The updated workforce plan also established four strategic goals, approved by the Defense Acquisition Workforce Senior Steering Board, to guide future efforts, including shaping the acquisition workforce to achieve current and future acquisition requirements. The October 2016 plan did not, however, establish specific career field goals or targets, which will hinder efforts to ensure that DOD has the right people with the right skills to meet future needs. We also continue to find that DOD faces challenges in meeting its statutory requirement to prepare an annual inventory of contracted services—one that could help it make more strategic decisions about the right workforce mix of military, civilian, and contractor personnel and better align resource needs through the budget process to achieve that mix. Specifically, in October 2016, we found DOD faced continued delays in (1) deciding on the path forward for its underlying data collection system for the inventory of contracted services, (2) staffing its inventory management support office, and (3) formalizing roles and responsibilities of that office and stakeholders. These continued delays hinder DOD’s ability to use the inventory to inform workforce and budget decision- making processes. DOD has partially met this criterion. DOD acknowledged that it will need to develop and implement metrics to track progress toward meeting the four strategic goals identified in its October 2016 strategic workforce plan, including those related to shaping the future acquisition workforce. DOD, however, has been tracking workforce growth against targets established in 2010, as well as other metrics, such as those related to education and training. DOD has partially met this criterion. The metrics show that the department has exceeded its overall acquisition workforce growth target and education and training rates have increased significantly since 2008. For example, in its October 2016 acquisition workforce plan, DOD reported that the number of personnel with bachelor’s degrees or higher increased from 77 percent in fiscal year 2008 to 84 percent in fiscal year 2015, while those with graduate degrees increased from 29 percent to 39 percent over the same period. DOD also reported that more than 96 percent of the acquisition workforce either met or was on track to meet certification requirements within required time frames. DOD has not, however, verified that the current composition of the workforce will meet its future workforce needs. DOD has demonstrated sustained leadership commitment in improving its approach to managing the acquisition of services, which accounted for more than 50 percent of DOD’s contract obligations in fiscal year 2015, and has met this criterion. This commitment is reflected in DOD’s issuance in January 2016 of a service acquisition instruction, which established policy, assigned responsibilities, and provided procedures for defining, assessing, reviewing, and validating requirements for the acquisition of services. This instruction, which provides a management structure for acquiring services, builds on DOD’s efforts to improve how it acquires services that were contained in its Better Buying Power initiative. We are currently assessing the actions the military departments are taking to implement the service acquisition instruction. DOD has partially met this criterion by establishing a number of management and oversight positions intended to address its capacity for strategically managing the acquisition of services. These include designating the Principal Deputy Under Secretary of Defense for Acquisition, Technology, and Logistics as the department’s senior manager for service acquisition in 2013, as well as building capacity to address service acquisition issues by designating a senior manager for service acquisitions in each military department. We are currently assessing the effects of these new positions. DOD has not met this criterion. DOD does not have an action plan that would enable it to assess progress toward achieving its goals, and its efforts to develop goals and associated metrics unique to each category of service it acquires are also in the early stages of development. DOD has partially met this criterion. Because DOD lacks an action plan, it is not yet positioned to fully assess its progress in improving service acquisition. A key element to being more strategic in acquiring services is knowing how and where service acquisition dollars are currently being spent and how those dollars will be spent in the future. We found in February 2016 that program offices within each of the military departments that we met with maintained data on current and estimated future spending needs for contracted service requirements, but they did not identify service contract spending needs beyond the next year, as they were not required to do so. We recommended that the military departments revise their programming guidance to collect information that is already available on how contracted services will be used to meet requirements beyond the budget year. We also recommended that DOD establish a mechanism, such as a working group of key stakeholders, to coordinate these efforts. DOD partially concurred with these two priority recommendations, citing challenges in estimating future spending, but as of July 2016, had generally not taken action to address them. In February 2016, however, the Army included service contract reporting requirements in its Command Program Guidance Memorandum for fiscal years 2018-2022. The memorandum instructs Army commands and operating agencies to document all current and future requirements for contracted services for fiscal years 2018-2022. In its memorandum, the Army noted that this data will provide transparency over contracted services funding and requirements and enable the Army to track dollars programmed for services. Further, the Army stated that this effort will provide data that can be used to make resource decisions and inform processes that determine workload requirements and assess the appropriate mix of military, civilian, and contractors to execute workload requirements. In addition, DOD has made progress in acquiring services through strategic sourcing but has more to do to improve monitoring. For example, in September 2015, we found that each of the military departments we reviewed had designated officials responsible for strategic sourcing and created offices to identify and implement strategic sourcing opportunities, including those specific to information technology services. The military departments did not monitor spending or establish savings goals and metrics for the use of their preferred strategic sourcing contracts for information technology services, which resulted in most of their dollars for information technology services being obligated through hundreds of potentially duplicative contracts that diminished the government’s buying power and resulted in missed opportunities to achieve savings and obtain other benefits. DOD has partially met this criterion. The January 2016 DOD services acquisition instruction included additional requirements to generate data on past and anticipated future service acquisition spending, but did not clearly identify what level of detail should be collected, leaving the department at risk of developing inconsistent data between each military department and limiting DOD leadership’s insight into future spending on contracted services. DOD plans to develop service acquisition related goals and metrics in fiscal year 2017 to develop additional baseline data to gauge progress. As DOD and the military departments mature efforts to develop more refined data on past and future service contract spending and develop specific goals related to each, DOD will be better positioned to assess its progress. DOD has met this criterion by continuing to demonstrate sustained commitment and strong leadership support in addressing OCS issues. DOD held its first OCS Summit in October 2015, attended by senior leaders from across the department, to review and discuss strategies to better formalize capability and capacity in the Joint Force. DOD officials are planning to host a similar forum in 2017. Additionally, the Functional Capabilities Integration Board serves as a single senior executive-level governance forum for OCS issues. It convenes quarterly, or as required, providing strategic leadership to multiple stakeholders working to institutionalize OCS. DOD has partially met this criterion. Specifically, DOD has made progress toward addressing agency capacity by identifying several actions to develop its personnel and training resources since our last high-risk update. The July 2014 update to the Joint Staff’s primary OCS guidance, according to DOD officials, changed doctrine and obviated the results of an earlier study that had found capacity shortfalls in OCS positions. Subsequently, according to officials, in September 2016 the Office of the Secretary of Defense established a joint OCS Policy Working Group to clarify and refine OCS policy. Also, DOD officials told us, in October 2016, that DOD is pursuing a joint OCS capacity review process to implement corrective actions to address OCS shortfalls in personnel, education, training, and materiel and to better incorporate OCS requirements. Joint Staff also identified priority items that combatant commanders should consider emphasizing in their training and exercise programs to improve OCS capacity. DOD has made significant progress in addressing the action plan criterion and has met this criterion. In September 2016, DOD issued its fourth iteration of the OCS Action Plan, which is organized around 10 capability gaps that needed to be closed in order to effectively institutionalize OCS capability and is DOD’s primary mechanism for monitoring and validating the effectiveness and sustainability of those tasks. We found, in February 2015, that the 2014 Action Plan lacked performance measures or metrics to evaluate if actions taken had filled the capability gaps. DOD’s 2016 action plan, however, revised tasks and added new tasks to include measurable metrics and provided a cross-walk to show the status of the tasks. For example, the 2016 plan shows 90 tasks completed or deleted from the preceding years. Further, the 2016 plan highlighted a number of other ongoing efforts, such as initiating a new joint capability requirements document and process that, if approved, may accelerate significant changes across DOD. DOD has partially met this criterion. Each task identified in the 2016 Action Plan has a deliverable or outcome measured against a target completion date, and a senior-level board serves as the primary monitor for these performance targets. Moreover, the 2016 Action Plan included a new annex managed by the Joint Staff logistics directorate to capture subtasks that supplement the 36 overarching tasks in the DOD action plan. However, some of these subtasks are not clearly defined and will be difficult to monitor. For example, one subtask associated with a gap— personnel being insufficiently aware of the significance of OCS—suggests the need for an enduring culture change, but it is unclear how DOD will monitor this effort. DOD has partially met this criterion. DOD continues to make progress in incorporating OCS concepts into plans and addressing education and training shortfalls. For example, we found, in December 2015, that U.S. Africa Command developed some annexes to plans that generally contained key considerations discussed in Joint Staff and other DOD guidance such as force protection, host nation agreements, and contractor oversight. Additionally, Joint Staff has revised the Universal Joint Tasks—which support DOD in conducting training and exercises— incorporating lessons learned related to OCS and new doctrine identified in Joint Publication 4-10. However, DOD has not implemented several priority recommendations related to OCS guidance. For example, we reported, in February 2013, that the Navy, Marine Corps, and Air Force have not developed comprehensive guidance, limiting the military departments’ planning efforts to accurately reflect how they use contract support. We recommended that DOD direct the Navy and Air Force to provide service- wide guidance for the Navy, Marine Corps, and Air Force that describes how each service should integrate OCS into its respective organization to include planning for contingency operations. DOD concurred with this priority recommendation. Since that time, the Marine Corps has developed guidance and definitions within the Marine Corps Capabilities List, and the Air Force has issued a memorandum on OCS integration and updated existing guidance to include OCS concepts. OSD officials told us, in December 2016, that Navy planners are drafting an OCS instruction for internal review, which they estimate will be completed in the summer of 2017. However, the September 2016 OCS Action Plan reflects the target publication date as the first quarter of fiscal year 2017. In March 2015, we recommended that DOD revise existing guidance to detail the roles and responsibilities of the military departments in collecting OCS lessons learned. We also recommended that DOD direct the Navy and Air Force to include the military departments’ roles and responsibilities to collect OCS lessons learned in military department specific guidance on how the Navy, Marine Corps, and Air Force should integrate OCS. DOD concurred with these priority recommendations, and, according to senior DOD officials, the department is revising a DOD instruction and directive to address these recommendations. In addition, the 2016 action plan identified foreign vendor vetting as a significant issue that should replace base access as a capability gap. DOD also noted that addressing this potential gap will likely require support from beyond the OCS community. Specifically, according to DOD officials, the OCS community of interest determined that the issue of vendor vetting is outside the responsibility and expertise of the OCS community. DOD established a separate working group on vendor vetting to address this issue. However, DOD has not developed comprehensive guidance on foreign vendor vetting, as we previously recommended. In December 2015, we recommended that the department develop guidance that clarifies the conditions under which combatant commands should have a foreign vendor vetting process or cell in place to determine whether potential vendors actively support any terrorist, criminal, or other sanctioned organization. DOD concurred with this priority recommendation, stating that the Office of the Secretary of Defense in collaboration with the Joint Staff had established a joint working group to identify key stakeholders and develop DOD policy requiring combatant commands to develop processes for vetting foreign vendors. As of December 2016, the department was in the process of preparing a directive type memorandum to the military departments and combatant commands with additional information. According to officials, DOD continues to gain stakeholder support and assess and analyze vendor vetting issues, in order to develop comprehensive guidance, as we previously recommended. In February 2016, we recommended that the military departments revise their programming guidance to collect information on how contracted services will be used to meet requirements beyond the budget year. DOD partially concurred with this recommendation, citing challenges with accurately quantifying service contract requirements beyond the budget year. In its February 2016 Command Program Guidance Memorandum, the Army required all its organizations to provide contract service requirements data for fiscal years 2018-2022, including all current and planned requirements. The Army recognized that this will enable the Army and its commands to analyze contract service requirements and execution trends and allow the Army to prioritize growth or reductions to specific contract service requirements. In March 2010, we recommended that DOD update its planning guidance to address the potential need for contractor support where appropriate. DOD concurred with this recommendation. In October 2012, the Chairman of the Joint Chiefs of Staff issued updated guidance on operational planning which contains information related to planning for contracted support. As a result of this change in guidance, senior DOD leaders will have a better understanding of how the department relies on contractors as it undertakes contingency operations, and will be more attuned to the potential risks of using contractors and better prepared to manage those risks. For additional information about this high-risk area, contact Timothy J. DiNapoli at (202) 512-4841 or [email protected]. DOD Inventory of Contracted Services: Timely Decisions and Further Actions Needed to Address Long-Standing Issues. GAO-17-17. Washington, D.C.: October 31, 2016. DOD Service Acquisition: Improved Use of Available Data Needed to Better Manage and Forecast Service Contract Requirements. GAO-16-119. Washington, D.C.: February 18, 2016. Operational Contract Support: Additional Actions Needed to Manage, Account for, and Vet Defense Contractors in Africa. GAO-16-105. Washington, D.C.: December 17, 2015. Defense Acquisition Workforce: Actions Needed to Guide Planning Efforts and Improve Workforce Capability. GAO-16-80. Washington, D.C.: December 14, 2015. DOD Inventory of Contracted Services: Actions Needed to Help Ensure Inventory Data are Complete and Accurate. GAO-16-46. Washington, D.C.: November 18, 2015. DOD Contract Services: Improvements Made to Planning and Implementation of Fiscal Controls. GAO-15-780. Washington, D.C.: September 30, 2015. Strategic Sourcing: Opportunities Exist to Better Manage Information Technology Services Spending. GAO-15-549. Washington, D.C.: September 22, 2015. Operational Contract Support: Actions Needed to Enhance the Collection, Integration, and Sharing of Lessons Learned. GAO-15-243. Washington, D.C.: March 16, 2015. Contingency Contracting: Contractor Personnel Tracking System Needs Better Plans and Guidance. GAO-15-250. Washington, D.C.: February 18, 2015. The Internal Revenue Service (IRS) continues to demonstrate top leadership support for improving tax compliance and addressing the tax gap. However, IRS’s capacity to implement new initiatives, carry out ongoing enforcement and taxpayer service programs, and combat identity theft (IDT) refund fraud under an uncertain budgetary environment remains a challenge. Enforcement of the tax laws helps fund the U.S. government. IRS enforcement collects revenue from noncompliant taxpayers and, perhaps more importantly, promotes voluntary compliance by giving taxpayers confidence that others are paying their fair share. In 2016, IRS estimated that the average annual gross tax gap—the difference between taxes owed and taxes paid on time—was $458 billion for tax years 2008-2010. IRS is able to recover a portion of the tax gap. In 2016, IRS estimated that it will eventually collect $52 billion of the tax gap through enforcement actions and late payments, leaving an annual estimated net tax gap of $406 billion for tax years 2008-2010. In 2015, we expanded the enforcement of tax laws high-risk area to include IRS’s efforts to address tax refund fraud due to IDT, which occurs when an identity thief files a fraudulent tax return using a legitimate taxpayer’s identifying information and claims a refund. According to IRS, it estimates that at least $14.5 billion in IDT tax refund fraud was attempted in tax year 2015, of which it prevented at least $12.3 billion (85 percent). Of the amount attempted, IRS estimated that at least $2.2 billion (15 percent) was paid. As previously mentioned, IRS continues to demonstrate top leadership support for improving tax compliance and addressing the tax gap. For example, it continues to research the extent and causes of taxpayer noncompliance, and released an updated tax gap estimate in April 2016. The agency has also taken steps to address IDT refund fraud, such as increasing the number of staff and resources dedicated to combating this issue. IRS has now partially met the criterion for capacity with respect to combating IDT refund fraud. But as also cited above, IRS’s capacity to implement new initiatives, carry out ongoing enforcement and taxpayer service programs, and combat IDT refund fraud under an uncertain budgetary environment remains a challenge. Annual appropriations increased by $290 million between fiscal years 2015 ($10.9 billion) and 2016 ($11.2 billion), but remain about $900 million (about 7 percent) below fiscal year 2011 levels ($12.1 billion). IRS continues to take actions toward meeting three other criteria for removal from our High-Risk List: developing a corrective action plan, monitoring, and demonstrating progress. For example, IRS’s strategic plan includes general approaches to make voluntary compliance easier for taxpayers. IRS also has a strategic plan that identifies refund fraud and IDT as challenges facing the nation’s tax system over the next several years. However, IRS has not yet implemented some of our recommendations highlighted in the 2015 high-risk report that could help it improve its corrective action plan, such as better measuring return-on- investment (ROI), better leveraging automated processes, and improving enforcement data. Also, for some compliance initiatives, such as those related to the Foreign Account Tax Compliance Act or the Patient Protection and Affordable Care Act (PPACA), IRS will need to continue to focus on measuring results and the effect of these initiatives on the tax gap. While IRS has developed research efforts to assess its IDT defense effectiveness, the agency needs to do more to demonstrate progress. Due in part to substantial methodological changes used to estimate the amount of IDT refund fraud prevented, year over year comparisons in IRS’s estimates of IDT refund fraud prevented and paid are not comparable. In addition, the agency has yet to address key weaknesses in authenticating taxpayers. While IRS is taking steps to improve authentication, it will still be vulnerable until it completes and uses the results of its analysis of costs, benefits, and risk to inform decision- making. Although more needs to be done, Congress and IRS have taken steps to implement a number of our recommendations that have resulted in benefits. For example, Congress passed legislation targeted at further strengthening tax law enforcement, including the Tax Equity and Fiscal Responsibility Act (TEFRA), which will improve the efficiency of partnership audits. Congress also passed legislation that will increase tax compliance through improved third-party reporting requirements, strengthened controls over higher education tax benefits to reduce inaccurate claims, and provided IRS with authority to correct errors related to the First-Time Home Buyer’s Credit. IRS and congressional actions based on our work in this area resulted in a total financial savings of approximately $7.8 billion between 2011 and 2016 and an estimated $12.5 billion in additional revenue over the next 8 years. IRS should implement our open recommendations, especially those that focus on improving audit effectiveness, taxpayer services, and resource investment decision making and oversight. Specifically, IRS should: continue to develop and implement a long-term strategy to address operations amidst an uncertain budget environment; determine resource allocation strategies for its enforcement efforts such as large partnership audits; assess the performance of its information technology (IT) investments as well as improve its IT security and online web services; develop a strategy for better identifying partnership noncompliance and assessing the effectiveness of exam selection; strengthen referral programs so whistleblowers and other stakeholders can more easily submit information to IRS about tax noncompliance; and enhance taxpayer services by developing a long-term strategy for providing web-based services to taxpayers, and improve telephone service by establishing a customer service standard and identifying resources needed to achieve that standard. With regard to IDT refund fraud, IRS should implement our open recommendations, including identifying and addressing authentication risks associated with the Taxpayer Protection Program; estimating and documenting the costs, benefits, and risks of possible options for taxpayer authentication; and improving third-party partnership programs. Given that the tax gap has been a persistent issue, we have previously reported that reducing it will require targeted legislative actions, including the following: Additional third-party information reporting. Taxpayers are much more likely to report their income accurately when the income is also reported to IRS by a third party. In 2008 and 2009, we suggested Congress consider expanding third-party information reporting to include payments for services to rental real estate owners and payments for services provided by corporations, respectively. In 2010, the Joint Committee on Taxation estimated that, for a 10-year period, tax compliance could potentially increase by $2.5 billion if third parties reported rental real estate service payments, and $3.4 billion if third parties reported service payments to corporations. Congress enacted a more expansive regime in 2010 covering reporting of payments for goods as well as services, and subsequently repealed these provisions. Enhanced electronic filing. Requiring additional taxpayers to electronically file tax and information returns could help IRS improve compliance efficiently. Current law requires entities that file more than 250 returns during a year or partnerships with more than 100 partners to file electronically. In 2014, we suggested that Congress consider expanding the mandate for partnerships and corporations to electronically file their tax returns, as this could help IRS reduce return processing costs, select the most productive tax returns to examine, and examine fewer compliant taxpayers. Increased electronic filing would also allow IRS to obtain timely, accurate data from a significant number of additional employers, and could further enhance the benefits IRS could obtain from the accelerated Wage and Tax Statement (W-2) deadline and prerefund W-2 matching. Treasury has requested authority to reduce the current 250-return threshold for employers electronically filing information returns. In 2014, we suggested that Congress consider authorizing Treasury to lower the threshold for electronic filing of W-2s from 250 returns annually to between 5 to 10 returns, as appropriate. Math error authority. Providing IRS with correctible authority with appropriate safeguards to permit it to correct errors in cases where information provided by the taxpayer does not match information in government databases, among other things, could help IRS correct additional errors and avoid burdensome audits and taxpayer penalties. Congress enacted legislation in December 2015 that expands the circumstances in which IRS may use math error authority in some situations for selected refundable tax credits. While expanding math error authority is consistent with what we have previously suggested, we had suggested that math error authority be authorized on a broader basis with appropriate controls rather than on a piecemeal basis, and that controls may be needed to ensure that this authority is used properly. Our prior work identified potential controls, such as requiring IRS to report on its use of math error authority. Paid preparer regulation. Establishing requirements for paid tax return preparers could improve the accuracy of the tax returns they prepare. In 2014, we suggested Congress consider granting IRS the authority to regulate paid tax preparers, if it agrees that significant paid preparer errors exist. The Joint Committee on Taxation estimated that legislation to regulate paid preparers would increase tax compliance by $135 million in revenue through fiscal year 2025. Tax reform and simplification. A broader opportunity to address the tax gap involves simplifying the Internal Revenue Code, as complexity can confuse taxpayers and provide opportunities to hide willful noncompliance. Fundamental tax reform could result in a smaller tax gap if the new system has fewer tax preferences or complex tax code provisions; such reform could reduce IRS’s enforcement challenges and increase public confidence in the tax system. Short of fundamental reform, targeted simplification opportunities also exist. Amending the tax code to define terms more consistently across tax provisions could help taxpayers more easily understand and comply with their obligations and get the maximum tax benefit for their situations. For example, there are several provisions in the tax code benefiting taxpayers’ educational expenses, but the definition of what qualifies as a higher-education expense varies between these tax expenditures. IRS has met the criterion of demonstrating a strong commitment to, and top leadership support for, improving tax compliance and addressing the tax gap. Some steps IRS has taken include the following: IRS adopted a new, more strategic approach to identifying and selecting budget program priorities. IRS prioritized a subset of its 19 strategic objectives for action and established six themes that represent its “future state” vision for tax administration. In the fiscal year 2017 congressional justification, IRS linked requests for increased funding to the themes and included details on how much would be funded by each appropriation account. IRS also identified enterprise goals to guide the IRS toward the future state. However, as of December 2016, IRS has yet to set targets for meeting the goals, but plans to have targets in place by June 2017. IRS has continued to research the extent and causes of taxpayer noncompliance. We have consistently stressed the importance of IRS conducting tax compliance research. IRS extended a program to encourage taxpayers to voluntarily report their previously undisclosed foreign accounts and assets. IRS has collected over $10 billion since this program was initiated in 2009, and has implemented some of our recommendations on better managing the program. IRS has not met the criterion of having the capacity to demonstrate progress toward improving compliance and addressing the tax gap. IRS’s ability to carry out ongoing enforcement programs and implement new initiatives to improve tax law enforcement, such as those required by PPACA, could be challenged under an uncertain budget environment. IRS is further challenged because it does not calculate ROI estimates for each enforcement program— information IRS could use to inform resource allocation decisions. IRS has also not determined how to best leverage automated processes and stakeholders such as whistleblowers. Between fiscal years 2011 and 2016, IRS’s annual appropriations declined about $900 million. Likewise, staffing has declined: full-time equivalent staff members funded by annual appropriations declined by 12,000 between fiscal year 2011 and fiscal year 2016, a 13 percent reduction. At the same time, IRS’s enforcement performance has declined. For example, the individual examination (or audit) coverage rate declined by 20 percent from fiscal years 2013 to 2015—the most recent years available. Reductions in examinations can reduce revenue collected and may indirectly reduce voluntary compliance. These declines have also contributed to fluctuations in taxpayer service and longer wait times on the phones than taxpayers have historically experienced. IRS partially meets the criterion for having a corrective action plan to improve tax compliance and address the tax gap. Specifically, IRS has a strategic plan that discusses general approaches to make voluntary compliance easier for taxpayers and to ensure taxes owed are paid. However, in some areas, the plan does not include specific tactics for improving compliance strategies. We have identified and made recommendations in several areas that could help IRS improve its corrective action plan. We subsequently designated several of these as priority recommendations, because if implemented, they could yield significant improvements to IRS’s operations. Better measure return on investment. IRS’s budget environment and increased workload underscore the importance of IRS maximizing its resources in fulfilling its mission. By further refining direct revenue ROI measures of its enforcement programs, IRS could improve how it allocates resources across its programs. In 2012, we made various recommendations advising IRS to make better use of ROI measures, subject to other considerations of tax administration, such as minimizing compliance costs and ensuring equitable treatment across different groups of taxpayers. IRS is taking steps to implement these priority recommendations. For example, IRS has made progress developing a methodology for estimating marginal ratios for a limited subset of cases within the correspondence examination program. IRS officials are working to apply this methodology more broadly; however, they expect this effort will be complex and time consuming. As of November 2016, officials do not have a timeline for full implementation. Until IRS takes into account some measure of revenue yield per dollar of cost when making allocation decisions, it may be missing opportunities to collect significant amounts of additional revenue. Better leverage automated processes. Taking greater advantage of automated processes could enhance some IRS enforcement programs. For example, IRS does not routinely match the K-1 information return—on which partnerships and S corporations report income distributed to partners or shareholders—to income information on tax returns for partners and shareholders that are themselves partnerships and S corporations. Matching such information might be another tool for detecting noncompliance by these types of entities. In 2014, we recommended that IRS test the feasibility of such matching. IRS stated it would consider studying such testing if resources become available. Likewise, continuing to enhance automated taxpayer services, such as web services, could result in lower-cost methods of interacting with taxpayers. In 2013, we made various recommendations for IRS to improve web services provided to taxpayers. IRS has made progress in addressing these priority recommendations but has not yet completed its efforts. IRS’s strategy has evolved from a singular focus on online services to a more comprehensive strategy of taxpayer interaction—the Future State Initiative—through all service channels. We will continue to assess the new initiative as IRS continues its development. Improve enforcement data. More complete enforcement data could help IRS better allocate resources across programs. For example, in 2014, we found that IRS did not know the full extent to which partnerships and S-corporations misreported income, and that IRS examinations and automated document matching have not been effective at finding most of the estimated misreported income. Further, IRS does not know how partnerships misreporting income affects taxes paid by partners. We recommended, among other things, that IRS (1) develop and implement a strategy to improve its information on the extent and nature of partnership misreporting, and (2) use the information to potentially improve how it selects partnership returns to examine. IRS agreed with these priority recommendations and developed a strategy, which will involve a multiyear examination effort to collect audit data from a representative, statistical sample of partnerships. Information from the full study will help IRS make better- informed data-based decisions on enforcement decisions. IRS officials also reported that in January 2016, IRS launched a research study on a subset of the population of partnerships with three or fewer individual partners. The results of this study could improve IRS’s ability to estimate the extent and nature of partnership misreporting, and the effectiveness of partnership examinations in detecting misreporting. However, as of December 2016, IRS had not fully implemented the strategy or the research study on small partnerships. IRS partially meets the criterion of having a program to monitor corrective measures. As previously mentioned, IRS continues to research the extent of taxpayer noncompliance, and periodically estimates the voluntary compliance rate—the amount of tax for a given year that is paid on time. However, IRS does not adequately measure the impact of some specific compliance programs, such as the following: Correspondence examinations. IRS does not have information to determine how its program of examining tax returns via correspondence affects the agency’s broader strategic goals for compliance, taxpayer burden, and cost. Thus, it is not possible to tell whether the program is performing better or worse from one year to the next. In 2014, we made several recommendations, including a priority recommendation, related to monitoring program performance. IRS officials provided documents intended to establish correspondence audit program objectives and measures, and link them to the overall IRS goals and objectives; but the objectives, measures, and links were not clear. As of January 2017, officials had no planned date by which to clearly document the objectives, measures, and links. They said they expect to describe the objectives in program guidance changes anticipated in the next 12 to 18 months. Compliance Assurance Process. IRS does not fully assess the savings it achieves through its Compliance Assurance Process (CAP)—through which large corporate taxpayers and IRS agree on how to report tax issues before tax returns are filed. In 2013, we recommended that IRS track savings from CAP and develop a plan for reinvesting any savings to help insure the program is meeting its goals. Although IRS has taken steps to track savings by analyzing and comparing the workload inventory of account coordinators who handle CAP cases against team coordinators who handle non-CAP cases, it did not show how such a workload comparison demonstrated savings from CAP. IRS has also not developed a plan for reinvesting any savings. Without a plan for tracking savings and using the savings to increase audit coverage, IRS cannot be assured that the savings are effectively invested in either CAP or non-CAP cases with high compliance risk. As of November 2016, IRS is evaluating the CAP program to determine how it fits with IRS’s future vision for examinations, but it has no timetable for completing this evaluation. Also, IRS did not accept new CAP applications for 2016. IRS has partially met the criterion of demonstrating progress in implementing corrective measures to improve compliance and reduce the tax gap. For example, IRS is taking steps to better leverage stakeholders by strengthening its nine public referrals programs—which enable individuals to submit information to IRS about tax noncompliance—but has not yet determined how to measure results for other programs intended to leverage third-party information to improve compliance. Specifically, Public Referral Programs. Public referral programs are an important piece of IRS’s overall enforcement strategy and can help reduce the tax gap. We made several recommendations to IRS, including that it establish a coordination mechanism to communicate across the multiple referral programs, develop an online referral submission process, streamline the review process, and improve external communication. IRS has taken some actions to establish a mechanism to coordinate on a plan and timeline for developing a consolidated, online referral submission, which is also a priority recommendation. For example, IRS established a cross-functional team in February 2016 to conduct a comprehensive review of IRS’s referral programs. In November 2016, the cross-functional team proposed creating an online submission referral application to simplify access and filing of information referrals by the public. The team also requested information technology resources for fiscal year 2019 to develop an online system which it said could potentially replace four separate referral forms, filter out incomplete referrals, and electronically route referrals for further IRS action. IRS assessed options for consolidating all forms for the various referral programs and determined that a consolidated single form was not feasible at this time due to the technical nature and complexity of the various referral types. As of December 2016, IRS said it will consider further consolidation of the referral programs once the online application is in place. Whistleblower Office. We also identified key problems specific to the whistleblower program, which is the largest of IRS’s nine referral programs. For example, few large awards have been paid, claims take years to process, and communication with whistleblowers is limited. IRS agreed with our 10 recommendations to strengthen the whistleblower program, has already implemented several of them, and is in the process of implementing the rest. Until IRS completes these actions, it may be missing opportunities to assist the public, collect billions in uncollected taxes owed, and leverage resources to streamline processes, which could help it to better coordinate and identify possible efficiencies, as well as better manage fragmentation and overlap among its referral programs. Efforts to Encourage Voluntary Compliance. Also, as previously mentioned, IRS has collected more than $10 billion through its program to encourage taxpayers to voluntarily report their previously undisclosed foreign accounts and assets. However, for some initiatives—such as those related to the Foreign Account Tax Compliance Act or using payment data from credit card companies to improve compliance among small businesses—IRS is still determining how to best measure results, including the effect on the tax gap. IRS has met the criterion for demonstrating leadership commitment for combating IDT refund fraud. The agency has taken steps to address IDT refund fraud, including recognizing the challenge of IDT refund fraud in its fiscal year 2014-2017 strategic plan, and expanding its automated fraud filters to detect IDT and prevent fraudulent refunds. The IRS Commissioner has testified numerous times about the challenges from IDT refund fraud and the agency’s progress on the issue. Further, the IRS Commissioner convened a Security Summit in March 2015 to bring together representatives of the tax preparation and software industry and state tax administrators to launch a collaborative effort to combat IDT refund fraud. According to IRS officials, this collaboration has resulted in enhanced authentication procedures and data sharing. IRS’s Identity Theft Tax Refund Fraud Information Sharing and Analysis Center—where IRS, states, and industry can share information—is intended to become operational at the start of the 2017 Filing Season in January. IRS has partially met the criterion for having the capacity to combat IDT refund fraud. In fiscal year 2016, IRS reported that it staffed more than 4,000 full-time equivalents (FTE) and spent about $516 million on all refund fraud and IDT activities. Under the Consolidated Appropriations Act 2016, IRS received an additional $290 million to improve customer service, IDT identification and prevention, and cybersecurity efforts. The agency requested an additional $90 million and an additional 491 FTEs for fiscal year 2017 to help prevent IDT refund fraud and reduce other improper payments. At the same time, IRS’s ability to combat IDT refund fraud will continue to be challenged by “adaptive adversaries” that continuously change their methods as IRS improves its defenses. For example, recent schemes have involved fraudsters targeting sources of personal and financial information—such as payroll providers and IRS’s Get Transcript service—in order to file returns that look like past returns filed by legitimate taxpayers. IRS is also constrained in its ability to combat IDT refund fraud because it must balance the need to prevent fraud against increasing the burden on legitimate taxpayers filing their taxes. IRS has met the criterion for having an action plan to address IDT refund fraud. IRS has a strategic plan that identifies refund fraud and IDT as major challenges facing the nation’s tax system over the next several years. IRS has also identified several strategic objectives relevant to its efforts to combat IDT, including balancing the speed of refund delivery with the need to verify taxpayers’ identities; and using third-party data, risk modeling, and a historical view of taxpayer interactions to prevent fraud before issuing refunds. In addition, IRS developed a more detailed Refund Fraud & IDT Strategy in January 2015 and updated it in January 2016. The strategy identifies and assesses the costs and benefits of actions IRS can take to combat IDT refund fraud (both with and without legislative change or a significant change in taxpayer expectations). The strategy has not been updated to reflect new, earlier W-2 filing deadlines enacted in December 2015 as part of the 2016 Consolidated Appropriations Act. However, officials told us that the agency is working with the Social Security Administration to accommodate earlier W-2 data, and plans to use the data, when available, to match to information reported on tax returns. According to IRS, prerefund matching using earlier W-2 data would potentially save a substantial part of the billions of taxpayer dollars currently lost to fraudsters. IRS has partially met the criterion of having a program to monitor corrective measures. IRS’s Identity Theft Taxonomy (Taxonomy) is a research-based effort to provide information to internal and external stakeholders about the effectiveness of IRS’s IDT defenses and help IRS identify IDT trends and evolving risks. While IRS has implemented a new methodology to improve its 2014 estimates in response to our past recommendations, additional action is needed. We will analyze the 2015 Taxonomy estimates to determine the extent to which our recommendations have been implemented. IRS has partially met the criterion for demonstrating progress in implementing corrective measures to address IDT refund fraud. IRS has developed tools and programs to further detect and prevent IDT refund fraud. IRS has also enhanced its authentication efforts for some online services, such as the Get Transcript application. However, IRS could further demonstrate progress by, for example, implementing our previous priority recommendation related to authentication weaknesses. While IRS has taken steps to address this recommendation, the agency has not used cost-benefit-risk analysis to select which authentication tools to use for certain taxpayer interactions. Without analysis of costs, benefits, and risks, IRS and Congress may not have quantitative information that could inform decisions about whether and how much to invest in the various authentication options. While IRS has developed research efforts to assess the effectiveness of its IDT defenses, it is unclear whether yearly changes in the amount of estimated IDT refund fraud prevented and paid are due to: methodological changes (i.e., using a different data source); overall changes in fraud patterns (i.e., an increase or decrease in improvements in IRS IDT defenses; or fraudsters’ ability to file returns using schemes IRS has not yet learned to detect. Specifically, IRS’s 2014 estimates cannot be compared to 2013 estimates because of substantial methodology changes that better reflect new IDT refund fraud schemes and improve the accuracy of its estimates, according to IRS officials. Improving Efficiency of Partnership Audits. Congress enacted legislation that alters the Tax Equity and Fiscal Responsibility Act (TEFRA) audit procedures, as we suggested in September 2014. The Bipartisan Budget Act of 2015, which was enacted in November 2015, repeals TEFRA audit procedures and mandates audit procedures that require partnerships with more than 100 partners to pay audit adjustments at the partnership level, among other changes. The legislative changes enacted to TEFRA we suggested could help with the time constraints of large partnership audits as well as reduce the resource demands of those audits. The Joint Committee on Taxation estimates this should raise $9.3 billion in additional revenue from fiscal years 2019 to 2025. Increasing Tax Compliance through Third-Party Reporting. Our past work underscored that data reported to IRS by third parties about taxpayers’ income is a powerful tool to improve taxpayer compliance. In response, Congress passed legislation in 2008—effective in 2011, which required banks and others to report income that merchants received through certain payment methods such as credit cards or third-party networks like PayPal. IRS compares this information to the merchants’ tax returns to help verify taxpayer compliance, which the Joint Committee on Taxation estimated would increase tax compliance by $3.9 billion between 2013 and 2016. Improving Tax Reporting on the Sale of Securities. We reported that many taxpayers misreported their capital gains or losses from the sale of securities. This often happened because taxpayers failed to accurately report the cost of the securities they sold. We suggested that Congress require brokers to report to both taxpayers and IRS the adjusted cost of the securities sold by taxpayers. In response, Congress enacted this requirement in 2008, which the Joint Committee on Taxation estimated would increase tax compliance by $3.2 billion between 2012 and 2016. Reporting Additional Mortgage Debt Information to Increase Tax Compliance. In 2015, Congress enacted the Surface Transportation and Veterans Health Care Choice Improvement Act. Section 2003 of the act requires taxpayers receiving mortgage interest payments to report the origination date of the mortgage, the amount of outstanding principal at the beginning of the calendar year, and the property’s address. In response to the legislation, IRS updated Form 1098 Mortgage Interest Statement for 2016, which is available for the 2017 filing season. The Joint Committee on Taxation estimated that this change would increase tax compliance by $1.8 billion between 2015 and 2025. Strengthening Controls Over Higher Education Tax Benefits. Congress enacted three provisions in 2015 to strengthen controls over higher education tax benefits to reduce inaccurate claims. These provisions: 1) require educational institutions to report only the aggregate amount of qualified tuition and related expenses actually paid to the educational institution during the calendar year; 2) require taxpayers to receive a completed Form 1098-T to claim a credit or deduction for education expenses for tax years beginning after the date of enactment; and 3) require educational institutions to provide their employer identification number on the Form 1098-T, and taxpayers claiming a credit for qualified tuition and educational expenses to provide this employer identification number. The Joint Committee on Taxation estimated that these changes would increase tax compliance by $2 million, $576 million, and $837 million, respectively, between fiscal years 2016 and 2025. Reducing Funding Requests by Modifying Cost Calculation of New Hires. Prior to the fiscal year 2015 budget request, IRS assumed all new staff requested for new initiatives in the budget request would be hired at the start of the fiscal year, although actual hiring patterns indicated new staff were brought on throughout the fiscal year and primarily in the 3rd and 4th quarters. As a result, IRS modified its calculation for new hires using a later estimated hire date. In the fiscal year 2015 and 2016 request, the estimated hire date was January 1st—the end of the 1st quarter. In the fiscal year 2017 request, the estimated hire date was April 1st—the start of the 3rd quarter. As a result, the funding requests for fiscal years 2015, 2016 and 2017 were approximately $518 million less than if IRS used its prior methodology for calculating FTE costs associated with new initiatives. Expanding Math Error Authority to Enforce First-Time Homebuyer Credit (FTHBC) Repayment Provision. In 2009, we found that IRS lacked math error authority, which must be provided by statute, to automatically correct tax returns on which taxpayers claimed the 2008 version of the FTHBC but did not repay it as required. We suggested that IRS be granted math error authority to enforce the FTHBC repayment provision. In response, Congress enacted legislation in 2009 granting IRS math error authority for this purpose, which we estimate has increased tax compliance by approximately $206 million between 2011 and 2014, after accounting for IRS costs. Redirecting Resources to Improve Taxpayer Services. In December 2012, we reported that IRS had made incremental efficiency gains in delivering taxpayer services, but the agency needed to do more to combat the imbalance between taxpayer demand for services and available resources. IRS acknowledged it needed to adjust its taxpayer service delivery because the agency lacked sufficient resources to answer every telephone call and serve every taxpayer who visits a walk-in site. Consistent with our finding that a more dramatic revision in providing service was necessary, IRS implemented six service initiatives in fiscal year 2014 that shifted taxpayers from using telephone and walk-in services to more cost- effective self-service options. As a result of these initiatives, IRS realized about $50.6 million of IRS resources in fiscal year 2016 dollars. Identifying Taxpayers Using Quiet Disclosures to Circumvent Taxes. In March 2016, IRS officials reported completing research to determine and implement the best option for identifying and pursuing potential quiet disclosures, as we recommended in March 2013. IRS reported that it identified more than 350 cases using its new methodology and as of October 2016 had completed examinations of 179 taxpayers, resulting in approximately $9.1 million in additional tax assessments. Using Data to Improve Taxpayer Services. IRS officials analyzed correspondence response timeliness data through the end of fiscal year 2014 and found that delays were continuing and more improvements were needed, including further revisions to notices and a revised automated recorded telephone message for taxpayers calling about the status of an audit. By analyzing the data as we recommended in June 2014, and using that data to change outgoing recorded messages starting in January 2015, IRS is better able to improve taxpayer service, reduce the need for taxpayer calls, and more efficiently use IRS resources. Taking Steps to Improve Claims Process and Communications to Encourage Tax Whistleblowers. Our 2015 review of the IRS whistleblower program resulted in ten recommendations. IRS concurred with these recommendations and has already implemented several of them. Both whistleblowers and IRS stand to benefit greatly as a result of actions IRS has taken such as streamlining the intake and initial review process of whistleblower claims and improving communications. For example, having a more streamlined staffing strategy will allow the Whistleblower Office to review more claims in a timely manner and get information to examiners more quickly to help IRS collect additional revenue. Also, communicating relevant information earlier to whistleblowers will help address a common complaint of the whistleblower community about the lack of timely communication from the Whistleblower Office and could encourage more whistleblowers to come forward with information. Using Employer Wage Data to Prevent Identity Theft Fraud. In 2014, we found that fraudsters take advantage of IRS’s “look back” compliance model, where the agency issues refunds before completing all compliance checks. If IRS matched employer wage data to tax returns earlier, before issuing refunds, it could help prevent fraud. We recommended that IRS assess the costs and benefits of accelerating W-2 deadlines and provide this information to Congress. Based on our review, in September 2015, IRS presented Congress with a document detailing the costs and benefits of W-2 acceleration. The document discusses the IRS systems and work processes that will need to be adjusted to accommodate earlier, prerefund matching of W-2s, the time frames for when these changes could be made; potential impacts on taxpayers, IRS, other parties; and what other changes will be needed (such as delaying refunds) to ensure IRS can match tax returns to W-2 data before issuing refunds. Congress accelerated W-2 filing deadlines to January 31 as part of the 2016 Consolidated Appropriations Act. This change will provide IRS with earlier access to W-2 data. According to IRS, prerefund matching would potentially save a substantial part of the billions of taxpayer dollars currently lost to fraudsters. Improving IRS’s estimates of IDT refund fraud. Based on our review, in August 2014 IRS changed its methodology for counting fraudulent IDT refunds paid, which increased the estimate of IDT refunds paid in 2013 by about $1 billion (from its original estimate of $4.8 billion to $5.8 billion).The research IRS used to develop these refund fraud estimates is important as it helps IRS better understand how IDT refund fraud is bypassing agency defenses to improve IDT controls. In June of 2016, we made additional recommendations that IRS improve its IDT cost estimates by removing refund thresholds and using return-level data where available. Improving the design and implementation of exempt organization examination selection. The Exempt Organizations Exam unit within IRS completed an action plan for the process of reviewing and updating its Internal Revenue Manual sections on an ongoing basis, as we recommended in July 2015. Implementation of the plan began at the end of 2015. Updated and accurate procedures help ensure that employees follow correct procedures and consistently administer tax laws. For additional information about this high-risk area, contact James R. McTigue, Jr., or Jessica Lucas-Judy at 202-512-9110 or [email protected] or [email protected]. Refundable Tax Credits: Comprehensive Compliance Strategy and Expanded Use of Data Could Strengthen IRS’s Efforts to Address Noncompliance. GAO-16-475. Washington, D.C.: May 27, 2016. GAO Series of Reports on Identity Theft: Identity Theft and Tax Fraud: IRS Needs to Update Its Risk Assessment for the Taxpayer Protection Program. GAO-16-508; Washington, D.C.: May 24, 2016; Identity Theft and Tax Fraud: Enhanced Authentication Could Combat Refund Fraud, but IRS Lacks an Estimate of Costs, Benefits and Risks. GAO-15-119. Washington, D.C.: January 20, 2015; and Identity Theft: Additional Actions Could Help IRS Combat the Large, Evolving Threat of Refund Fraud. GAO-14-633. Washington, D.C.: August 20, 2014. IRS Referral Programs: Opportunities Exist to Strengthen Controls and Increase Coordination across Overlapping Programs, GAO-16-155. Washington, D.C.: February 23, 2016. 2015 Tax Filing Season: Deteriorating Taxpayer Service Underscores Need for a Comprehensive Strategy and Process Efficiencies. GAO-16-151. Washington, D.C.: December 16, 2015. IRS Whistleblower Program: Billions Collected, but Timeliness and Communication Concerns May Discourage Whistleblowers. GAO-16-20. Washington, D.C.: October 29, 2015. Small Businesses: IRS Considers Taxpayer Burden in Tax Administration, but Needs a Plan to Evaluate the Use of Payment Card Information for Compliance Efforts. GAO-15-513. Washington, D.C.: June 30, 2015. Large Partnerships: With Growing Number of Partnerships, IRS Needs to Improve Audit Efficiency. GAO-14-732. Washington, D.C.: September 18, 2014. IRS Correspondence Audits: Better Management Could Improve Tax Compliance and Reduce Taxpayer Burden. GAO-14-479. Washington, D.C.: June 5, 2014. Partnerships and S Corporations: IRS Needs to Improve Information to Address Tax Noncompliance. GAO-14-453. Washington, D.C.: May 14, 2014. We designated Medicare as a high-risk program in 1990 due to its size, complexity, and susceptibility to mismanagement and improper payments. Addressing Medicare’s short-term and long-term challenges is vitally important, not only for the millions of aged and disabled individuals who depend upon the program for health care coverage, but also for the families of these individuals who might otherwise bear the cost of their health care, the taxpayers who finance the program, and the health care providers who depend upon receiving fair compensation for their services. The aging of the population, coupled with the growth in per capita health care costs, will magnify these challenges over time. Therefore, continued close attention will be necessary to ensure that Medicare is sustainable for generations to come. Medicare continues to pose challenges to the federal government for many of the same reasons we designated it a high-risk program. Specifically, Medicare’s substantial size and scope result in the current program having wide ranging effects on beneficiaries, the health care sector, and the overall U.S. economy. In 2016, Medicare was projected to spend $696 billion and provide health care coverage to over 57 million beneficiaries. Medicare pays about 60 percent of the health care costs of beneficiaries enrolled in fee-for-service (FFS) who do not reside in institutions. Over 1 million health care providers, contractors, and suppliers—including private health plans, physicians, hospitals, skilled nursing facilities, durable medical equipment (DME) suppliers, ambulance providers, and many others—receive payments from Medicare. Every year, Medicare pays over a billion claims submitted by these health care providers. Consequently, Medicare must be closely monitored because even relatively small changes can have large short-term effects in the aggregate. For example, Medicare provider payment rates that are set too high unnecessarily financially burden beneficiaries—through higher premiums and cost sharing—taxpayers, and the federal budget. Payment rates that are set too low may diminish providers’ willingness to treat Medicare beneficiaries and adversely affect their access to appropriate, high-quality health care. Medicare also has an outsize effect on the federal budget, which creates challenges when the federal government is determining how to prioritize its spending. The program’s expenditures currently account for about 3.6 percent of the country’s gross domestic product (GDP).The Congressional Budget Office (CBO) projects that in fiscal year 2016, Medicare outlays will total more than is projected to be spent on defense ($579 billion) and almost double federal spending on Medicaid ($365 billion). Medicare spending will account for approximately 17.8 percent of the approximately $3.9 trillion in federal outlays. Medicare also poses substantial long-term financial challenges for the federal government. Program spending is expected to increase significantly over time as the number of beneficiaries grows and per capita health care costs increase. CBO projects that, in just 10 years (in 2026) under current law, Medicare spending will reach almost $1.3 trillion. The Medicare Trustees 2016 report stated that, under current law, Medicare’s share of GDP would rise to 5.6 percent by 2040. As Medicare spending grows disproportionately to other federal spending and the economy, it will put increasing pressure on the federal budget and tend to squeeze out spending for other programs. However, the Trustees have stated that Medicare spending projections, especially those stretching out over decades, are highly uncertain and cautioned that future Medicare spending could be substantially higher than projected. In their 2016 report, they noted that some Medicare cost- reduction provisions may be difficult to sustain. For example, one set of Medicare provisions affecting many types of health care providers reduces the annual payment rate updates to account for economy-wide productivity growth. However, the productivity growth rates historically achieved by health care providers have been lower than the economy- wide rates. If health care providers do not realize sufficiently high productivity growth and these cost-reduction measures are not sustained, Medicare projected spending could rise to 6.2 percent of GDP in 2040 and 9.1 percent in 2090, according to the Trustees. Another uncertainty is whether advances in medical technology will tend to slow or accelerate Medicare spending growth. Technological advances may enhance the ability of providers to diagnose, treat, or prevent health problems. Examples include new drugs, devices, procedures, and therapies, as well as new applications of existing technologies. Although new technologies may decrease or increase health care costs, in 2013 we reported that technological change had likely been the dominant cause (accounting for 36 to 55 percent) of the increases in overall U.S. health care per capita spending over the past several decades. It should be noted, however, that a complete assessment of health care spending for new technologies should also consider the associated value for individuals, often measured by improved health functioning, increased life expectancy, or improved economic productivity. In the past few years, growth in Medicare spending has slowed, as overall health care spending has also slowed. Analysts debate whether this slowdown can be attributed to transitory effects, such as the recent economic turndown, or broader changes in the health care system that may be longer lasting. Nonetheless, Medicare’s historical trends, the aging of the population, and the uncertainties associated with recent reforms and the effects of advances in medical technology all underscore the need for continued efforts to moderate spending growth while ensuring that beneficiaries have appropriate access to high-quality health care. Achieving these goals will likely remain an important challenge and require a continued focus on the Medicare program. In March 2010, the Patient Protection and Affordable Care Act (PPACA) was enacted, which, among other things, made numerous statutory changes to Medicare. CBO estimated that PPACA would reduce Medicare spending by about $400 billion over 10 years from fiscal year 2010 to fiscal year 2019. Major savings were expected from several actions, including constraining annual payment updates to certain Medicare providers, tying Medicare Advantage (MA)—Medicare’s private plan alternative to the traditional Medicare FFS program—maximum payment amounts to near or below FFS spending, reducing payments to hospitals that serve a large number of low-income patients—reflecting the expectation that PPACA’s health insurance expansion provisions would result in far fewer uninsured hospital patients—and modifying the high- income threshold for adjusting beneficiary Part B premiums, among other changes. Some PPACA provisions sought to establish financial incentives for providers to increase the efficiency and quality of Medicare services, or to test new ways of achieving those goals. For example, PPACA required the establishment of a national, voluntary pilot program to bundle payments for physician, hospital, and post-acute care services to improve patient care and reduce spending. Another provision modified payments to hospitals that experience patient readmissions related to certain potentially preventable conditions. Certain PPACA payment changes seek to provide a strong financial incentive for health care providers to enhance productivity, improve efficiency, or otherwise reduce their costs per service. Notably, several of PPACA’s changes seek to implement value-based purchasing of health care and transform the program into one that encourages efficiency and quality, instead of simply compensating providers for the volume of health care services. In April 2015, the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA) was enacted, bringing additional changes to the way Medicare reimburses physicians, among other changes to Medicare. MACRA repealed the sustainable growth rate (SGR) system—which was first implemented in 1998 to moderate spending for physician services—and established a new payment framework to encourage efficiency in the provision of health care and to reward health care providers for higher quality of care. Specifically, MACRA created a Merit-based Incentive Payment System (MIPS) that will be used to increase or decrease certain physicians’ payments based on their performance. Under MIPS, the Centers for Medicare & Medicaid Services (CMS) will assess physician performance in four categories: quality; cost; clinical practice improvement activities; and advancing care information through the meaningful use of electronic health records technology. MACRA also included provisions to incentivize Medicare providers to participate in alternative payment models, such as qualifying accountable care organizations. In addition to reforming physician payment, MACRA made several other changes to Medicare, including making income-related adjustments to premiums in Medicare Parts B and D. It is too early to tell the extent to which these changes in PPACA and MACRA may help constrain Medicare spending over the long run, as the changes have only recently been implemented, or their implementation is ongoing. Moreover, future legislation could modify payment reforms, such as those established by PPACA and MACRA, and affect their impact on program spending. In addition, uncertainty about PPACA’s and MACRA’s effects on spending exists because future spending may also depend on changes in the rest of the health care system. For example, provisions of PPACA are designed to increase the number of individuals with health insurance and reduce the number of uninsured. In 2013, we found that Medicare beneficiaries who had continuous health insurance coverage before enrollment in Medicare reported being in better health in the 6 years after Medicare enrollment and, in the first year of Medicare coverage, had significantly lower Medicare spending. Additional spending uncertainty stems from concerns raised by the Medicare Trustees, CBO, and the Office of the Actuary (OACT) about whether some of the Medicare cost-containment mechanisms included in PPACA can be sustained over the long term, such as the provider productivity payment adjustment, and physician payment updates and incentives included in MACRA. For example, additional payments for alternative payment models provided under MACRA will expire in 2025, and physician payment update amounts, which are not tied to economic conditions, are not expected to keep pace with average physician cost increases. The Medicare Trustees report for 2016 projected that, beginning in 2048, physician payment rates will be lower than they would have been under the SGR formula and will continue to be lower after that. CBO and OACT both produced alternative projections of future spending that assume that certain cost-containment mechanisms are not fully maintained over the long term. Medicare is transitioning from a payment system that largely rewards the volume and complexity of health care services provided to a system that explicitly rewards quality and efficiency. Many of the broad-based reforms being implemented to Medicare’s payment systems in the traditional FFS program have introduced financial incentives into payment structures to explicitly reward quality and efficiency, such as creating the Merit-based Incentive Payment System discussed previously. To help ensure that physicians are able to respond to these new incentives and are able to improve their performance, CMS recently began to provide more frequent feedback to physicians on their performance, as we recommended, to help them identify opportunities to reduce costs and pinpoint high-cost beneficiaries who may benefit from enhanced care coordination. MACRA also required that CMS consider physician and other providers’ improvement and their opportunity for continued improvement when establishing benchmarks for Merit-based Incentive Payment System performance measures. As CMS progresses toward fully implementing its value-based payment system, it will be important for the agency to use reliable quality and cost measures and methodological approaches that maximize the number of physicians for whom value can be determined. As CMS implements these broad-based payment reforms, we have identified additional areas where continued monitoring of payment methods is warranted to encourage efficiency and reduce the risk of overspending. Payment methods for cancer hospitals. Currently, 11 cancer hospitals, designated in the 1980s and 1990s, that meet certain statutory criteria are exempt from Medicare’s inpatient prospective payment system (PPS) and are also receiving payment adjustments under the outpatient PPS. The Medicare PPS introduced better control over program spending and provided hospitals with an incentive for efficient resource use. Yet for decades, as required by law, Medicare has paid these cancer hospitals differently than PPS hospitals in recognition of their specialized focus and concerns that reimbursements under PPS would be inadequate to cover costs for the types of care provided at cancer hospitals. This has remained the case even as the inpatient PPS methodology has been refined to better account for variation in the severity and complexity of beneficiaries and the resource intensity of hospital care. The 11 cancer hospitals currently exempted from the inpatient PPS and receiving payment adjustments under the outpatient PPS are reimbursed largely based on their reported costs and as such have little incentive for containing costs. In 2012, we estimated that PPS-exempt cancer hospitals received, on average, about 42 percent more in Medicare inpatient payments per discharge than what Medicare would have paid a local PPS teaching hospital to treat cancer beneficiaries with the same level of complexity. Similarly, Medicare outpatient payment adjustments to these cancer hospitals resulted in overall payments that were about 37 percent higher, on average, than payments Medicare would have made to PPS teaching hospitals for the same set of services. Had beneficiaries of PPS-exempt cancer hospitals received services at nearby PPS teaching hospitals in 2012, the Medicare program may have saved almost $500 million. We suggested that Congress require Medicare to pay PPS- exempt hospitals as it pays PPS teaching hospitals, or provide the Secretary of Health and Human Services the authority to otherwise modify how Medicare pays these PPS-exempt hospitals. To generate cost savings, we also suggested that Congress provide that all forgone outpatient payment adjustment amounts be returned to the Supplementary Medical Insurance Trust Fund, which funds Medicare Part B services, such as physician visits, and Medicare Part D services, such as prescription drugs. The 21st Century Cures Act, enacted in December 2016, slightly reduces the additional payments cancer hospitals receive for outpatient services and returns savings to the Supplementary Medical Insurance Trust Fund. However, the law keeps in place the payment system for outpatient services that differs from how Medicare pays PPS teaching hospitals. Moreover, the law does not change how PPS-exempt cancer hospitals are paid for inpatient services. Until Medicare pays PPS-exempt cancer hospitals in a way that encourages efficiency, rather than largely on the basis of reported costs, Medicare remains at risk for overspending. Hospital-physician consolidation. Because Medicare often pays more for services when they are performed in a hospital outpatient department than when they are performed in a physician’s office, hospitals may have an incentive to acquire physician practices, hire physicians as salaried employees, or both—financial arrangements commonly referred to as vertical consolidations. After hospitals and physicians vertically consolidate, the same services that were once reimbursed by Medicare at a lower total payment rate could be classified as hospital outpatient department services and reimbursed at a higher rate. In our work, we found that the number of vertically consolidated hospitals increased by about 20 percent from 2007 through 2013 and the number of physicians in these arrangements nearly doubled. Some have questioned whether or to what extent vertical consolidations have contributed to the rapid rise in Medicare expenditures for hospital outpatient departments, which increased by more than eight percent annually from 2007 through 2013. We found that the percentage of evaluation and management (E/M) office visits performed in hospital outpatient departments was generally higher in counties with higher levels of vertical consolidation. The rise in vertical consolidation exacerbates a financial vulnerability in Medicare’s payment policy—paying different rates for the same service, depending on where the service is performed. Estimates from entities such as the Bipartisan Policy Center and the Medicare Payment Advisory Commission suggest that equalizing payments rates for E/M office visits could save nearly $1 billion to $2 billion a year for the Medicare program and beneficiaries. We suggested that Congress direct the Secretary of Health and Human Services to equalize payment rates between settings for E/M office visits and other services as appropriate. Until the disparity in payment rates for E/M office visits is addressed, Medicare could be expending more resources than necessary. Payments for hospital uncompensated care. Hospital uncompensated care costs are a long-standing concern because of their potential to weaken hospitals’ financial stability and thereby hospitals’ abilities to serve their communities. Both Medicare and Medicaid provide funds to help offset hospitals’ uncompensated care costs. In fiscal year 2014, Medicare made over $14 billion in payments to hospitals for uncompensated care through a variety of payment types, including a relatively new type of payment called Medicare Uncompensated Care (UC) payments. We have raised concerns that Medicare UC payments are largely based on hospitals’ Medicaid workload rather than hospitals’ actual uncompensated care costs, which can result in poor alignment between payments and uncompensated care costs. This may be particularly true in states that have expanded Medicaid—that is, coverage expanded through PPACA to nearly all adults with incomes up to 133 percent of the poverty level—and therefore where lower uncompensated care costs are expected. In an April 2016 proposed rule, CMS announced that it is considering making hospitals’ actual uncompensated care costs the sole basis for making Medicare UC payments by fiscal year 2020. Another concern, however, is that when making Medicare UC payments, CMS does not account for payments hospitals received from Medicaid, even though the bulk of Medicare’s payments are made on the basis of Medicaid workloads, for which hospitals may have also received Medicaid payments. We recommended that CMS improve the alignment of Medicare UC payments with hospital uncompensated care costs and account for Medicaid payments received when making Medicare UC payments to individual hospitals. HHS concurred with these recommendations and in its final rule indicated that it planned to implement them beginning in fiscal year 2021 to allow time for hospitals to collect and report reliable uncompensated care cost data. Physician self-referral. Our work has identified opportunities for CMS to introduce additional payment method refinements and controls in Medicare FFS to encourage appropriate use of services. For example, self-referral—when a provider refers patients to entities in which the provider or the provider’s family members have a financial interest— continues to be a concern in relation to the rapid growth of Medicare FFS expenditures. In recent years, we found that certain services—including diagnostic imaging, certain cancer treatments, and diagnostic pathology services—performed by self-referring groups have increased dramatically. For example, from 2004 through 2010, the number of self- referred magnetic resonance imaging (MRI) services increased by more than 80 percent; in comparison, the number of non-self-referred MRI services increased by 12 percent during this time period. We have recommended that CMS determine and implement an approach to ensure providers appropriately self-refer for advanced imaging services. HHS did not concur with this recommendation but is in the process of establishing an appropriate use criteria program for advanced imaging services that would apply to all physicians—including those that self-refer—and which, depending on implementation, could address our recommendation. CMS has yet to take definitive steps to monitor physician self-referral for certain cancer treatment and diagnostic pathology services, and until it does so, the Medicare FFS program and its beneficiaries will continue to be at risk for these rapidly increasing expenditures. High-expenditure Part B drugs. In 2014, Medicare spent over $24 billion on drugs covered under Part B. Part B drugs are those commonly administered by a physician or under a physician’s close supervision, such as vaccines or some oral cancer drugs. The vast majority of these expenditures ($21 billion) were based on the drug’s average sales price (ASP), the amount physicians and other purchasers pay manufacturers for the drug, which CMS calculates based on sales data reported by drug manufacturers. Ensuring the accuracy of the data on which CMS bases payment rates for part B ASP drugs is important given Medicare’s substantial expenditures for these drugs and given beneficiaries’ general responsibility to cover 20 percent of Medicare’s payment for these drugs via cost-sharing requirements, which amounted to about $4 billion in 2014. We found, however, that CMS is not able to assess the accuracy of all sales price data because not all manufacturers are required to submit these data. Further, while CMS conducts certain checks to assess the completeness of the sales data it does receive, the agency does not verify the accuracy of the data by tracing it to source documents, such as sales invoices. We suggested that Congress require all manufacturers of Part B drugs to submit sales price data to CMS and to ensure CMS has the authority to request source documentation and periodically validate such data. Additionally, the ASP does not account for drug coupon discounts that manufacturers provide to privately insured patients, which reduce the effective market price for these drugs. In our work, we found that the ASP for several part B drugs with drug coupon discounts exceeded the effective market price that manufacturers ultimately received. As a result, Medicare may be paying more than necessary for these drugs. Regular monitoring of the implications of coupon programs for Medicare’s payment methodology for part B drugs is needed as CMS works to propose an alternative payment system. CMS, however, lacks the authority to collect data from drug manufacturers on coupon discounts to patients because the authority to collect information relating to ASP is based on manufacturer sales to purchasers. We suggested that Congress consider granting CMS authority to collect data from drug manufacturers on coupon discounts for Part B drugs based on ASP and require the agency to periodically collect these data and report on the implications of coupon programs for Part B drug payment rate methodology. Low-volume payment adjustments. Medicare’s payment adjustment for low-volume dialysis facilities is one of several modifications in Medicare’s payment systems designed to help maintain beneficiaries’ access to care. Low-volume providers in areas where other care options are limited may warrant higher payments, and CMS intended this low-volume payment adjustment (LVPA) to encourage small dialysis facilities to continue operating in areas where beneficiary access might be jeopardized if such facilities closed. However, in 2013 we found that, as designed, the LVPA did not effectively achieve this goal because it did not target all relatively low-volume, high-cost facilities that were in areas where beneficiaries may have lacked other dialysis care options, and it targeted some facilities that appeared unnecessary for ensuring access to dialysis, such as dialysis facilities located in close proximity to other facilities. In response to our report, CMS revised the LVPA, beginning in 2016, to more effectively target low-volume facilities necessary for ensuring access to care; and in 2015, CMS issued clarifying guidance on the LVPA in a final rule and held outreach calls to dialysis facilities and Medicare contractors to ensure their understanding of the guidance. The agency has not acted, however, to implement an improvement we recommended to change the design of LVPA to reduce the incentive for facilities to restrict the services they provide in order to avoid reaching treatment thresholds that determine eligibility for the program. Physician payment rates. The accuracy of Medicare’s payment rate for physician services has major implications for the health care system given spending on these services—$70 billion in fiscal year 2015—and the fact that other payers, such as private insurers, base their payment rates at least in part on Medicare rates. Inaccurate payment rates can create distorted incentives for physicians to either over- or underprovide services or to pursue certain specialties. We and others have identified several weaknesses in CMS’s processes for setting physician payment rates. This process involves CMS assigning relative values to each service by taking into account recommendations made by the American Medical Association’s Specialty Society Relative Value Scale Update Committee (RUC). Some of our concerns with this process include issues with the survey data the RUC uses in part to develop relative value recommendations, including low survey response rates. In 2015, the median survey response rate for over 200 physician services was about 2 percent. Additionally, although CMS officials state that all Medicare services are reviewed every 5 years as required by statute, the agency does not maintain a database to track when services were last valued. CMS officials acknowledge that the agency relies heavily on RUC recommendations. Given the process and data-related weaknesses associated with the RUC’s recommendations, this process could potentially result in inaccurate payment rates. To address these concerns, we recommended that CMS incorporate data and expertise from physicians and other relevant stakeholders into the process for establishing relative values. CMS concurred with this recommendation and has begun to research ways to develop an approach for validating relative values, but until it develops a timeline and a plan for determining its approach, CMS risks continuing to use payment rates that may be inaccurate. The MA program, an alternative to the traditional Medicare FFS program, provides health care coverage to Medicare beneficiaries through private health plans. The number and percentage of Medicare beneficiaries enrolled in MA has grown steadily over the past several years, increasing from 8.1 million (20 percent of all Medicare beneficiaries) in 2007 to 15.8 million (30 percent of all Medicare beneficiaries) in 2014. Congress has taken a number of steps to introduce financial incentives to explicitly reward quality and efficiency in the MA program. For example, PPACA provided that MA plans with a quality rating of four or more stars—with five stars indicating the highest quality—receive bonus payments, and required MA maximum payment amounts to be adjusted to near or below FFS spending. Moreover, in January 2013, Congress enacted the American Taxpayer Relief Act of 2012 (ATRA), which increased the statutory minimum for the annual MA coding intensity adjustment in order to account for differences in the comprehensiveness with which MA plans and FFS providers code medical diagnoses. CBO estimated that this change alone would save Medicare about $1.4 billion over 5 years. The recently enacted 21st Century Cures Act also includes several changes to the MA risk adjustment model that must be implemented beginning in 2019. For example, the MA risk adjustment model will be required to take into account the number of diseases or conditions of enrollees and allows CMS to use 2 years of diagnosis data when determining the health condition of beneficiaries. CMS has yet to take action to improve the accuracy of its payments to MA programs or to ensure that MA beneficiaries have sufficient access to providers. We have identified additional opportunities for CMS to improve the accuracy of MA payments, such as adjusting its methodology to account for diagnostic coding differences between MA and FFS, and improve CMS’s oversight of MA network adequacy. MA plan payment adjustments. Concerns remain about the discrepancy between FFS and MA payments because CMS has yet to improve the accuracy of the adjustment to account for excess payments due to differences in how MA plans and FFS providers code medical diagnoses. We have found that CMS’s risk adjustment model—which uses one year’s diagnoses to predict the following year’s health care costs for each MA enrollee—has led it to overpay MA organizations because of different diagnostic coding patterns between the FFS and MA programs. In 2013, we estimated that these overpayments ranged from at least $3.2 billion to $5.1 billion from 2010 through 2012. We have recommended that CMS take steps to improve the accuracy of its risk score adjustments by, for example, accounting for additional beneficiary characteristics such as sex, health status, and Medicaid enrollment status, as well as including the most recent data available. In April 2016, CMS indicated that after analyzing MA data, the agency planned to implement the statutory minimum for the annual MA coding adjustment mandated in ATRA. However, as of October 2016, CMS had not provided documentation of its analysis to determine, for example, the extent to which the agency’s methodology accounted for additional beneficiary statistics, as we recommended. In addition, CMS has taken steps to collect encounter data—information on the services and items furnished to enrollees—which are more comprehensive than the beneficiary diagnosis data the agency currently uses to risk adjust payments to MA organizations, and has reported that it will use these data in calculating risk adjustments. However, CMS has not fully developed plans for validating and using MA encounter data, missing an opportunity to detect potentially inaccurate or unreliable data that is being used to direct billions of federal dollars. We recommended that CMS fully validate the MA encounter data it is collecting before using these data for payment purposes. In 2015, CMS began using encounter data as an additional source of diagnostic data in calculating beneficiary risk scores but acknowledged that the agency had yet to complete all steps to validate the data before using them for payment purposes, as we had recommended. Without fully validating the completeness and accuracy of MA encounter data, CMS and MA organizations would be unable to confidently use the data for risk adjustment or any other program management purpose. Provider network adequacy. CMS is responsible for ensuring adequate access to care for MA enrollees, but reports that some MA organizations have been narrowing their provider networks raise questions about CMS oversight of MA plans’ network adequacy. In 2015, we reported on shortcomings in CMS’s criteria for determining network adequacy, how the agency oversees MA organizations’ adherence to its requirements, and how it ensures enrollees are properly notified about provider network changes. For example, unlike other managed care programs, CMS’s network adequacy criteria do not consider measures of provider availability, such as appointment wait times and whether providers are accepting new patients. CMS also assesses very few networks (less than one percent) each year against its network adequacy criteria and does little to evaluate the accuracy of the network data MA organizations submit. We made several recommendations, including that CMS augment MA network adequacy criteria to address provider availability. HHS concurred with this recommendation, and in early 2016, officials stated that they will review how to augment the MA network adequacy criteria to address provider availability in future years. However, until this happens, provider networks may appear to regulators and beneficiaries as more robust than they actually are. The Medicare Trustees estimate that Medicare spending will grow at a faster rate than workers’ earnings or the economy overall, which will impose a significant burden on Medicare beneficiaries and the U.S. economy over time. Because most Medicare beneficiaries pay their Part B premium by having it withheld from their monthly Social Security benefits, and because growth in Medicare premiums and cost sharing has outpaced growth in Social Security benefits, beneficiaries and their families may increasingly need to draw on other income or resources to help pay for necessary medical care. Moving forward, it will be important to find approaches that help avert or mitigate this growing financial burden, particularly for those beneficiaries with high health care needs and few economic resources. For example, understanding how beneficiaries make medical decisions and what information would help them identify and use providers that efficiently deliver appropriate, high- quality care could lead to savings for both beneficiaries and taxpayers. Our work has identified additional opportunities to improve how the Medicare program ensures that beneficiaries, including those who are also eligible for Medicaid, receive the appropriate services they need. Care for dual-eligible beneficiaries. The federal government, states, and others have been focusing on care coordination as a key strategy for improving the quality of care for dual-eligible beneficiaries—individuals who qualify for both Medicare and Medicaid—while also reducing costs. Dual-eligible beneficiaries, who are often in poorer health compared with other Medicare and Medicaid beneficiaries, typically receive benefits through each program separately, which can lead to fragmented care due to different program rules for receiving benefits and reimbursing providers. In 2013, CMS began implementing the Financial Alignment Demonstration to integrate Medicare and Medicaid services and financing, and to improve coordination for dual-eligible beneficiaries. While CMS established a framework of monitoring activities to oversee the demonstration, the extent of care coordination is not entirely clear from the information being collected. For example, CMS monitors two core measures related to care coordination, but because these are being used in only one of two models being tested in the demonstration, CMS cannot compare the two demonstration models using these measures. Similarly, demonstration states had state-specific measures that explored aspects of care coordination, but they were not comparable across states. We recommended, among other things, that CMS align existing state- specific measures of the extent to which individualized care plans are being developed to make them comparable. The agency agreed with this recommendation, and CMS officials said they plan to develop a care plan measure that more closely aligns specifications across demonstrations, but data collection is not expected to begin until January 2018. Dual-eligible special needs plans. Special needs plans are MA private plans designed to address the unique needs of certain Medicare populations, and among these plans are those targeted specifically to dual-eligible beneficiaries. CMS and Congress have taken steps to coordinate care for those enrolled in dual-eligible special needs plans to increase benefit integration and care coordination. For example, PPACA established a type of plan referred to as a fully integrated dual-eligible special needs plan, which is designed to integrate program benefits for dual-eligible beneficiaries through a single managed care organization. In addition, dual-eligible special needs plans that meet certain performance and quality-based standards may seek CMS approval to offer benefits beyond what other MA plans offer if such benefits would help bridge the gap between Medicare- and Medicaid-covered services. Although a large percentage of dual-eligible beneficiaries (43 percent in 2012) were under age 65 and qualified for Medicare because they were disabled, we found that few fully integrated dual-eligible special needs plans serve disabled dual-eligible beneficiaries or report lower costs for Medicare services. In addition, moderately better health outcomes for disabled dual-eligible beneficiaries in dual-eligible special needs plans do not necessarily translate into lower levels of costly Medicare services—that is, inpatient stays, readmissions, and emergency room visits. Access to preventive services. Over the past several years, researchers have found that certain preventive services are effective in early diagnosis or reduced prevalence of diseases that contribute to the growth in Medicare spending. To encourage beneficiary use, PPACA removed beneficiary cost-sharing requirements for many Medicare- covered preventive services, such as mammograms and colorectal cancer screening. However, in our work we found that while Medicare beneficiaries’ use of some preventive services—cardiovascular disease screening and cervical cancer screening—generally aligned with clinical recommendations, the use of other preventive services, such as osteoporosis screening and immunizations, did not. Medicare beneficiaries who did not receive certain preventive services commonly reported that they had limited information on prevention; had concerns about discomfort, side effects, or efficacy; or their doctor did not recommend the services. Furthermore, we found better use of preventive services by beneficiaries is unlikely without appropriate Medicare coverage. For instance, low use of some recommended services—such as osteoporosis screenings—may result, in part, from limiting which beneficiaries are covered or how frequently the service is covered. Conversely, the absence of required cost sharing for certain services that are not recommended, such as prostate-specific antigen testing for prostate cancer for men aged 75 or older, may contribute to the inappropriate use of those services. In 2012, we suggested Congress require beneficiaries to share the cost when they receive services that the U.S. Preventive Services Task Force recommends against. CMS has overcome some challenges in managing the Medicare program as it implemented some program improvements in recent years, including a competitive bidding program for durable medical equipment (DME). However, more could be done to improve how CMS manages the Medicare program, including its handling of the growing number of appeals for denied claims. Competitive bidding program. We had previously reported that Medicare sometimes overpaid for DME items relative to other payers. Congress required that CMS implement a competitive bidding program for DME suppliers, which the agency began in 2009. In early assessments, we found that beneficiary access and satisfaction appeared stable and the competitive bidding program has led to savings. More recently in 2016, we found that the number of beneficiaries receiving DME items covered under the competitive bidding program generally decreased after implementation of phases of the program that began in July 1, 2013. Available evidence from CMS’s monitoring efforts indicates no widespread effects on beneficiary access, but some beneficiary advocacy groups have reported specific access issues, such as difficulty locating contract suppliers and delays in delivery of DME items. Changes such as expanding the program into additional competitive bidding areas; using pricing from competitive bidding areas to set prices in non-competitive bidding areas (which was fully phased in as of July 2016); and selecting new contract suppliers for contracts for new rounds of bidding will provide significant new data to further assess the effect of the program. Continued monitoring of the competitive bidding program experience is important to determine the full effects it may have on Medicare beneficiaries and DME suppliers. Appeals process. Medicare has seen significant growth in the number of appeals submitted by providers, beneficiaries, and others dissatisfied with the program’s decisions to deny or reduce payment for claims. The Department of Health and Human Services (HHS) attributes the increase in appeals to several factors, including for example, CMS’s recent increased focus on program integrity activities, which has resulted in more denied claims and more appeals. In fiscal year 2014, Medicare denied 128 million FFS claims, or 10.5 percent of claims submitted. Medicare’s administrative appeals process for FFS claims consists of 4 levels of review (Levels 1 through 4) and allows appellants who are dissatisfied with decisions at one level to appeal to the next level, with separate appeals bodies making decisions at each level. From fiscal year 2010 to 2014, the number of appeals at all levels of Medicare’s administrative appeals process increased significantly but varied by level. The largest rate of increase (over 900 percent) was experienced at Level 3, in which cases are reviewed by administrative law judges. The large volume of appeals has resulted in backlogs in decisions; in fiscal year 2014, more than 90 percent of Level 3 decisions were issued after the 90- day statutory time frame. We recommended that HHS take additional steps to improve its oversight of the appeals process, including collecting more complete and consistent data that would assist in monitoring efforts and addressing inefficiencies in the way certain repetitious claims—such as those for monthly oxygen equipment rentals—are adjudicated. HHS has taken some actions to reduce the backlog of appeals. For instance, CMS has offered administrative agreements to eligible hospitals that are willing to withdraw their pending appeals in exchange for timely partial payments, in order to more quickly reduce the volume of claims pending in the appeals process. As of August 2016, CMS has executed settlements amounting to nearly $1.5 billion with 2,022 hospitals, representing approximately 346,000 claims that were in the appeals system. In September 2016, CMS announced it would execute another round of settlements for hospitals with inpatient claims in appeals. In addition, in July 2016, HHS issued a proposed rule that would revise certain appellate procedures in an effort to improve the Medicare appeals process and reduce the backlog. However, HHS has not yet taken actions to address our specific recommendations, and the backlog shows no signs of abating, as the number of incoming appeals continues to surpass adjudication capacity at certain review levels. For fiscal year 2016, the average length of time to process Level 3 appeals was 877 days, compared with the 90 days generally required by statute, and up from the 662 days for fiscal year 2015. CMS has made progress in improving the health and safety of millions of Medicare beneficiaries, which represent a significant portion of the U.S. population. According to CMS, Medicare Quality Improvement Organizations—which work with providers, beneficiaries, and others to improve health care delivery systems to achieve better care for lower costs—-supported efforts that from fiscal year 2011 through fiscal year 2014 helped to prevent tens of thousands of beneficiaries from being admitted or readmitted to hospitals; reduce the number of health care associated infections; and reduce the number of nursing home patients who experienced pressure ulcers or the use of restraints. CMS has also improved its oversight of quality of care. In 2012, in response to our recommendation, CMS included long-term care hospitals in its validation surveys, which are used to measure the effectiveness of surveys conducted by accrediting organizations on the extent to which facilities meet federal standards for quality of care. However, CMS can further improve how it oversees patient care and safety, as described below. Clinical data registries. Clinical data registries (CDR) have the potential to improve the quality and efficiency of care for all Medicare beneficiaries by collecting extensive, standardized data and providing feedback to physicians on their performance based on their peers. CDRs are entities that collect detailed information on the therapies that patients receive and changes in their clinical condition over time in order to evaluate and improve care practices and outcomes. In 2013, we recommended that HHS adopt several key requirements to ensure qualified CDRs actually improve the quality and efficiency of care that beneficiaries receive. For example, CMS should require qualified CDRs to demonstrate improvements on key measures of quality and efficiency for their target population and establish a process for monitoring qualified CDRs’ compliance with requirements. HHS should also enhance the effect of qualified CDRs on quality and efficiency by making it easier to develop them by promoting the use of health information technology. HHS concurred with each of our recommendations, but also noted some challenges it expects, for example in establishing a set of core measures for qualified CDRs, as we recommended, given the number of clinical specialties on which qualified CDRs may focus. We maintain, however, that a minimum set of core measures—even if small—could help CDRs promote national-level quality improvement initiatives. End-stage renal disease. In 2013, Medicare spent about $11.7 billion on dialysis care for about 376,000 Medicare patients. Dialysis is the most common treatment for individuals with end-stage renal disease, and while the vast majority of dialysis treatments are performed in dialysis facilities, dialysis treatments received at home may increase autonomy and health- related quality of life for some patients. Physicians and other stakeholders estimate that between 15 and 25 percent of patients needing dialysis could realistically be on home dialysis. In 2012, about 11 percent of patients needing dialysis received home dialysis. A number of factors can affect the type of dialysis patients receive, including patients’ preference and clinical factors, but Medicare payment policy may also play a role. In 2015, we found that dialysis facilities have financial incentives in the short term to increase dialysis treatments provided in facilities. Medicare’s monthly payments to physicians for managing the care of home patients are often lower than those for managing in-center patients, which may also discourage physicians from prescribing home dialysis. Further, just a small fraction of Medicare patients have used the Kidney Disease Education benefit—which provides pre-dialysis education and is designed to help patients make informed decisions related to their treatment. Limited use of this benefit may be due to statutory limitations on the types of providers who are permitted to furnish the benefit and on the patients eligible to receive it. We recommended that CMS examine and, if necessary, revise policies for paying physicians to manage the care of dialysis patients, and examine the Kidney Disease Education benefit, and if appropriate, seek legislation to revise the categories of providers and patients eligible for the benefit. HHS concurred with the first recommendation but did not agree with the second, stating that CMS must prioritize its activities to improve care for dialysis patients. We maintain the importance of ensuring that Medicare patients with chronic kidney disease understand their condition and the implications of various treatment options; however, the limited use of the Kidney Disease Education benefit suggests it may be difficult for patients to receive this education. Congress, HHS, and CMS have taken steps to improve the fiscal integrity of Medicare, and CMS has implemented some of our recommendations, such as providing more frequent feedback to physicians so they can identify opportunities to reduce costs and rebasing payments for end- stage renal disease services using more recent data, which resulted in per treatment payment reductions. However, continued federal improvements to the oversight of Medicare are warranted given the size and complexity of the program as well as the number and scope of ongoing changes to the program. We have a number of Matters for Congressional Consideration for addressing Medicare payments, costs, and quality of care. Specifically: To increase beneficiaries’ awareness of providers’ financial interest in a particular treatment, Congress should consider directing the Secretary of Health and Human Services to require providers who self-refer intensity-modulated radiation therapy services—a type of cancer treatment—to disclose to their patients that they have a financial interest in the service. To further align Medicare beneficiary use of preventive services with U.S. Preventive Task Force recommendations, Congress should consider requiring beneficiaries who receive services that the Task Force recommends against to share the cost, notwithstanding that cost sharing may not be required for beneficiaries with different characteristics or under different circumstances. To help HHS better control spending and encourage efficient delivery of care, Congress should consider requiring Medicare to pay PPS- exempt cancer hospitals as it pays PPS teaching hospitals, or provide the Secretary with the authority to otherwise modify how Medicare pays these providers. To generate cost savings from any reduction in outpatient payments to PPS-exempt cancer hospitals, Congress should also provide that all forgone outpatient payment adjustment amounts be returned to the Supplementary Medical Insurance Trust Fund. In order to prevent the shift of services from physician offices to hospital outpatient departments from increasing costs for the Medicare program and beneficiaries, Congress should consider directing the Secretary of Health and Human Services to equalize payment rates between the settings for evaluation and management office visits—and other services that the Secretary deems appropriate—and to return the associated savings to the Medicare program. To help HHS ensure accuracy in Part B drug payment rates, Congress should consider requiring all manufacturers of Part B drugs paid at ASP, not only those with Medicaid drug rebate agreements, to submit sales price data to CMS, and ensure that CMS has authority to request source documentation to periodically validate all such data. To determine the suitability of Medicare’s Part B drug payment rate methodology for drugs with coupon programs, Congress should consider (1) granting CMS the authority to collect data from drug manufacturers on coupon discounts for Part B drugs paid based on ASP, and (2) requiring the agency to periodically collect these data and report on the implications that coupon programs may have for this methodology. In addition, we have made a range of recommendations to HHS and CMS intended to improve program management and control costs that remain open, including the following: To ensure that MA encounter data are of sufficient quality for their intended purposes, the Administrator of CMS should (1) establish specific plans and time frames for using the data for all intended purposes in addition to risk adjusting payments to MA organizations; and (2) complete all the steps necessary to validate the data, including performing statistical analyses, reviewing medical records, and providing MA organizations with summary reports on CMS’s findings, before using the data to risk adjust payments or for other intended purposes. To ensure that future low-volume payment adjustments (LVPA) are made only to eligible facilities and to rectify past overpayments, the Administrator of CMS should (1) require Medicare contractors to promptly recoup 2011 LVPA payments that were made in error, (2) improve the timeliness and efficacy of CMS’s monitoring regarding the extent to which Medicare contractors determine LVPA eligibility correctly and promptly redetermine eligibility when all necessary data become available, and (3) investigate errors that contributed to facilities not consistently receiving the 2011 LVPA and ensure that such errors are corrected. Additionally, to reduce the incentive for facilities to restrict the services they provide to avoid reaching the LVPA treatment threshold, the Administrator of CMS should consider revisions such as changing the LVPA to a tiered adjustment. In order to improve CMS’s ability to identify self-referred advanced imaging services and help CMS address the increases in these services, the Administrator of CMS should (1) insert a self-referral flag on its Medicare Part B claims form and require providers to indicate whether the advanced imaging services for which provider bills Medicare are self-referred or not; (2) reduce payments for self- referred advanced imaging services to recognize efficiencies when the same provider refers and performs a service; and (3) determine and implement an approach to ensure the appropriateness of advanced imaging services referred by self-referring providers. To increase dual-eligible special needs plans’ accountability and ensure that CMS has the information it needs to determine whether dual-eligible special needs plans are providing the services needed by dual-eligible beneficiaries, especially those who are most vulnerable, the Administrator of CMS should evaluate the extent to which dual- eligible special needs plans have provided sufficient and appropriate care to the population they serve, and report the results in a timely manner. To help ensure appropriate payments to MA plans, the Administrator of CMS should take steps to improve the accuracy of the adjustment made for differences in diagnostic coding practices between MA and Medicare FFS. Such steps could include, for example, accounting for additional beneficiary characteristics, including the most current data available, identifying and accounting for all years of coding differences that could affect the payment year for which an adjustment is made; and incorporating the trend of the impact of coding differences on risk scores. For additional information about this high-risk area, contact James Cosgrove at (202) 512-7114 or [email protected], or Kathleen King at (202) 512-7114 or [email protected]. Medicare: CMS’s Round 2 Durable Medical Equipment and National Mail- Order Diabetes Testing Supplies Competitive Bidding Programs. GAO-16-570. Washington, D.C.: September 15, 2016. Medicare Part B: Data on Coupon Discounts Needed to Evaluate Methodology for Setting Drug Payment Rates. GAO-16-643. Washington, D.C.: July 27, 2016. Medicare Part B: CMS Should Take Additional Steps to Verify Accuracy of Data Used to Set Payment Rates for Drugs. GAO-16-594. Washington, D.C.: July 1, 2016. Hospital Uncompensated Care: Federal Action Needed to Better Align Payments with Costs. GAO-16-568. Washington, D.C.: June 30, 2016. Medicare Fee-For-Service: Opportunities Remain to Improve Appeals Process. GAO-16-366. Washington, D.C.: May 10, 2016. Medicare Advantage: Action Needed to Ensure Appropriate Payments for Veterans and Nonveterans. GAO-16-137. Washington, D.C.: April 11, 2016. Medicare: Increasing Hospital-Physician Consolidation Highlights Need for Payment Reform. GAO-16-189. Washington, D.C.: December 18, 2015. Medicare and Medicaid: Additional Oversight Needed of CMS’s Demonstration to Coordinate the Care of Dual-Eligible Beneficiaries. GAO-16-31. Washington, D.C.: December 18, 2015. Medicare Part B: Expenditures for New Drugs Concentrated among a Few Drugs; and Most Were Costly for Beneficiaries. GAO-16-12. Washington, D.C.: October 23, 2015. End-Stage Renal Disease: Medicare Payment Refinements Could Promote Increased Use of Home Dialysis. GAO-16-125. Washington, D.C.: October 15, 2015. Medicare Advantage: Actions Needed to Enhance CMS Oversight of Provider Network Adequacy. GAO-15-710. Washington, D.C.: August 31, 2015. Medicare Physician Payment Rates: Better Data and Greater Transparency Could Improve Accuracy. GAO-15-434. Washington, D.C.: May 21, 2015. Medicare: Payment Methods for Certain Cancer Hospitals Should Be Revised to Promote Efficiency. GAO-15-199. Washington, D.C.: February 20, 2015. Medicare: Bidding Results from CMS’s Durable Medical Equipment Competitive Bidding Program. GAO-15-63. Washington, D.C.: November 7, 2014. We designated Medicare as one of the original high-risk programs in 1990 due to its size, complexity, and susceptibility to mismanagement and improper payments. In 2016, Medicare was projected to finance health services for more than 57 million elderly and disabled beneficiaries at a cost of $696 billion, and account for approximately 17.8 percent of federal spending. Improper payments—payments that are either made in an incorrect amount or should not be made at all—are a significant risk for Medicare and reached an estimated $60 billion in fiscal year 2016. The Centers for Medicare & Medicaid Services (CMS), which administers Medicare for the Department of Health and Human Services (HHS), is responsible for overseeing the program and safeguarding it from loss. While Medicare, the largest federal health program, remains inherently complex and susceptible to improper payments, CMS can continue to take actions to prevent and reduce improper payments in the program. This high-risk rating and assessment focuses on CMS’s efforts to reduce Medicare improper payments. We discuss the broader challenges and risks associated with the Medicare program separately. CMS has continued to demonstrate leadership commitment to preventing and reducing Medicare improper payments, but consistently high improper payment rates and unimplemented improvement opportunities have resulted in the agency partially meeting the four remaining criteria for removal from our High-Risk List—capacity, action plan, monitoring, and demonstrated progress. Since our last high-risk update, agency leadership took action to prevent improper payments by strengthening certain provider enrollment and prepayment controls, as we recommended. CMS also implemented our recommendation to improve oversight of contractors that carry out postpayment reviews, such as the Medicare Administrative Contractors (MAC) and Recovery Auditors (RA). The agency also took certain program integrity actions authorized by the Patient Protection and Affordable Care Act (PPACA) and the Medicare Access and CHIP Reauthorization Act of 2015 (MACRA). However, despite these efforts, Medicare improper payment rates remained high in 2016. According to HHS’s Agency Financial Report for 2016, although reported improper payments decreased for Medicare fee-for-service (FFS) from 12.1 percent in fiscal year 2015 to 11.0 percent in fiscal year 2016, this rate remained above the statutorily defined compliance threshold of 10 percent. In addition, the improper payment rates increased for Medicare Part C (9.5 percent in fiscal year 2015 to 10.0 percent in fiscal year 2016) and improved somewhat for Part D (3.6 percent in fiscal year 2015 to 3.4 percent in fiscal year 2016). These rates suggest that additional actions are needed to reduce improper payments in the Medicare program. By implementing our open recommendations, CMS will be able to reduce improper payments and progress toward fulfilling the outstanding criteria to remove Medicare improper payments from our High-Risk List. Congress has also taken actions aimed at helping CMS address this high-risk issue. For example, Congress passed and the President signed into law MACRA in April 2015, which included several provisions aimed at improving Medicare program integrity, such as requiring and providing funding for CMS to remove beneficiaries’ Social Security numbers (SSN) from Medicare cards, requiring MACs to have improper payments outreach and education programs, and modifying surety bond conditions of participation for home health agencies. Congress has also continued to appropriate discretionary funding for CMS to take action to reduce improper payments. In addition, the House and Senate have held more than 20 hearings in the last 4 fiscal years to identify additional program integrity improvements, including 7 hearings since our 2015 high-risk report. Improper payments in all parts of Medicare remain unacceptably high. As Medicare program spending and enrollment are projected to continue to grow under current law, sustained effort will be needed to ensure program integrity and reduce improper payments. If CMS were to effectively implement our numerous recommendations, it could improve program management, make fewer improper payments, and recover more of those it makes. For example, to improve the effectiveness of efforts to reduce and recover improper payments in Part C, CMS should improve the processes for selecting contracts to include in its risk adjustment data validation (RADV) audits—audits of Medicare Advantage (MA) organizations that help CMS recover improper payments in cases where beneficiary diagnoses are unsupported by medical records. We also recommend that CMS enhance the timeliness of these audits and incorporate recovery audit contractors (RAC) into the RADV audit. CMS should also revise its guidance for verifying provider practice locations so that MACs conduct additional research on questionable practice location addresses to help improve Medicare provider and supplier enrollment- screening procedures. Moreover, CMS should fully implement the following priority recommendations and available procedures authorized by PPACA and MACRA to improve the Medicare improper payment rate and remove this area from our High-Risk List: set clear expectations in contract work statements for Part D RAC, conduct annual RAC performance evaluations, and review the process for developing new audit issues to improve the agency’s Part D RAC program operations and contractor oversight; seek legislative authority to allow the RAs—which typically conduct postpayment reviews—to conduct prepayment claim reviews for Medicare FFS as another means of preventing improper payments before they occur; provide guidance to MACs on how to accurately calculate and report savings from prepayment claim reviews to ensure that CMS has the information it needs to evaluate MAC effectiveness in preventing improper payments and evaluate and compare MACs’ performance to that of other contractors; monitor the database used to track Medicare FFS recovery audit activities to ensure that all postpayment review contractors submit required data and that the data contained in the database are accurate and complete; clarify and standardize as much as possible the requirements for the contents of postpayment claims review contractors’ correspondence with providers and assess regularly whether contractors are complying with content requirements to improve the efficiency of postpayment claims reviews and simplify compliance for providers; and require surety bonds for certain types of at-risk providers and suppliers as authorized by PPACA and MACRA. CMS continues to meet our criterion for leadership commitment to reducing Medicare improper payments. Improper payment reduction remains a strategic priority for HHS, and CMS leadership has taken multiple actions that demonstrate its commitment to reducing such payments in the Medicare program, including implementing several of our recommendations. For example, CMS leadership indicated that the agency took steps since our last high-risk update to co-locate all offices whose primary mission is ensuring the integrity of Medicare FFS claims payments, which it believes will improve efficiency for dealing with program integrity issues. CMS also implemented some of our 2012 and 2013 recommendations to improve postpayment reviews and prepayment control efforts. For example, CMS uses several contractors to conduct postpayment reviews for improper payments and the agency has made changes to standardize contractor requirements as we highlighted as a priority recommendation in the 2015 high-risk update. By aligning these contractor requirements, CMS will likely improve the efficiency and effectiveness of its Medicare program integrity efforts by strengthening the control environment, lessening providers’ confusion, and reducing administrative burdens. In response to our priority recommendations, CMS also began disseminating information about certain contractors’ most successful prepayment edits—controls preprogrammed into payment processing systems—and requested that these contractors share information about their top edits, thereby ensuring more widespread use of effective prepayment controls. In 2015, we also recommended changes to improve CMS’s enrollment screening procedures for Medicare providers and suppliers, and CMS has implemented several updates to its provider enrollment database that will address identified weaknesses. CMS partially met our criterion that it have the capacity to reduce improper payments in the Medicare program. The Medicare integrity program—along with other activities to detect, prevent, and combat factors that contribute to improper payments—is funded through the Health Care Fraud and Abuse Control (HCFAC) program, which has reported returns on investment of $6.10 for every $1 spent from fiscal year 2013 through 2015. In fiscal year 2016, Congress provided more discretionary HCFAC funding than in any prior year. These funds helped CMS implement planned initiatives to protect Medicare dollars. While CMS received increased discretionary funding since 2015, the budgetary environment remains uncertain, as demonstrated by the 6 percent decline in discretionary Medicare integrity funding from fiscal year 2011 to 2014. Given funding uncertainty and projected spending increases, it is even more important for CMS to prioritize its most effective program integrity initiatives and to maximize the effect of those initiatives already underway by implementing our recommendations. CMS has partially met our action plan criterion. While CMS identifies and reports progress on corrective actions related to Medicare improper payments in HHS’s annual Agency Financial Report, the agency has not implemented all of the recommendations we made that could reduce improper payments nor fully developed an action plan for addressing our high-risk area. HHS’s Agency Financial Report for 2016 identified insufficient documentation and medical necessity errors as root causes of improper payments for Medicare FFS, and insufficient documentation and administrative errors as root causes of improper payments for both Parts C and D. The report also identified actions that CMS has taken or is taking to address these causes. For example: CMS took action to revalidate existing Medicare providers and suppliers, as required by PPACA. The provider and supplier revalidation is in the second round of a multiyear process to improve enrollment screening that we reported on in 2016. Specifically, we reported that CMS’s revised enrollment screening process resulted in over 703,000 existing enrollment records being deactivated or revoked but that CMS needed to establish performance measures to assess the revised process. CMS took several corrective actions to address improper payment rates for home health claims, which have historically had improper payment rates over 50 percent. For example, CMS took action to clarify face-to-face requirements for home health providers and implemented prepayment claims reviews in 2015 to help educate home health providers. The improper payment rate for home health claims decreased from 59.0 percent in fiscal year 2015 to 42.0 percent in fiscal year 2016. CMS also expanded the use of prior authorization to prevent improper payments for various suppliers. For example, CMS published a final rule in December 2015 that established a Master List of Durable Medical Equipment, Prosthetics, Orthotics, and Supplies (DMEPOS) items that providers frequently bill to Medicare when recipients don’t need them. The rule, which took effect on February 29, 2016, requires prior authorization for certain DMEPOS items on the Master List, which CMS believes will reduce or prevent questionable billing practices and improper payments for these items. In December 2016, CMS announced that it would begin implementing prior authorization for two types of power wheelchairs not previously covered in a demonstration beginning in March 2016. Despite these efforts, we have found problems with some of the proposed corrective actions. For Part C improper payments, HHS’s 2015 and 2016 Agency Financial Reports identified RADV audits as a primary corrective action. These audits of MA organizations—to which Medicare pays a risk- adjusted monthly amount for each enrolled beneficiary—help CMS recover improper payments from such organizations if they requested CMS to adjust payments based on beneficiary diagnoses unsupported by medical records. However, in April 2016, we reported significant problems with the methods used to select MA contracts for RADV audits and the time it took to complete the audits. For example, using current methods, CMS is unable to select contracts for audit that have the greatest potential for recovering improper payments. These issues limit CMS’s ability to recover the billions of dollars in MA improper payments that occur each year. In addition, CMS has yet to address some problems including those where we have recommended changes. For example, in 2016, we recommended that CMS seek legislative authority to allow RAs to review Medicare FFS claims before they are paid as another means to prevent improper payments before they occur. Although CMS and RA officials told us that a demonstration of RA prepayment reviews was considered successful, the agency disagreed with our recommendation to seek authority to extend this ability and told us that other claim review contractors conduct prepayment reviews and that CMS has implemented other programs as part of its strategy to move away from the “pay and chase” process of recovering overpayments. We continue to believe that prepayment reviews better protect agency funds compared to postpayment reviews, and that seeking the authority to allow RAs to conduct prepayment reviews is consistent with CMS’s strategy to pay claims properly the first time. In not seeking the authority, CMS may be missing an opportunity to reduce the amount of uncollectable overpayments from RA reviews and save administrative resources associated with recovering overpayments. Finally, CMS officials have indicated that the agency is developing an action plan to address our identified high-risk areas, but as of January 2017, the plan was not yet complete. CMS has taken steps to monitor the effectiveness of its corrective measures, but only partially met our monitoring criterion due to data and oversight challenges. For example, in response to our 2011 recommendation, CMS implemented changes to the data systems its contractors use to track spending on Medicare integrity efforts, thereby improving the agency’s ability to assess the effectiveness of these activities. However, other weaknesses limit CMS’s ability to monitor activities of the contractors that review Medicare claims before and after payment. In 2016, we reported that CMS does not have reliable data on savings from prepayment claims reviews to evaluate MACs’ performance in preventing improper payments or to compare performance across contractors. In response to our report, CMS is developing methodologies to estimate amounts CMS would have paid providers had claim denials based on prepayment review not occurred. Until CMS completes these activities and calculates and reports savings from prepayment reviews, this remains a priority recommendation. In 2016, we also found that, although CMS has improved its provider and supplier enrollment screening process, it lacked objectives for monitoring this screening process and performance measures to assess progress toward achieving its goals for revalidating enrollment information. Finally, in 2015, we reported that CMS did not adequately set expectations for the RAC hired to oversee Part D payments, did not conduct timely performance evaluations, and did not have a good process for approving audit work. As a result of these management weaknesses, CMS collected fewer than $10 million in Part D improper payments as of May 2015. Given that Part D improper payments increased from $2.2 billion to $2.4 billion from fiscal year 2015 to 2016, CMS will need to address these issues when it solicits the next Part D RAC contracts. CMS has demonstrated some progress, including a decrease in the Medicare FFS and Part D improper payment rates in fiscal year 2016, but the size of the program and persistently high improper payment rates for some parts of Medicare indicate further progress is needed. As noted, CMS has taken various actions to improve Medicare program integrity, such as updating eligibility enrollment software, revalidating existing providers and suppliers, and reducing differences in contractor postpayment review requirements; however, it has yet to be determined how many of these changes will affect CMS’s long-term ability to prevent and collect improper payments. In addition, Congress enacted MACRA, which, among other things, required and provided funding for CMS to remove beneficiaries’ SSNs from Medicare cards and develop a new, unique identifier—which we also recommended in 2012 and have highlighted as a priority recommendation. In 2016, CMS reported that it had begun the process of removing SSNs from Medicare cards and will begin replacing them with randomly generated Medicare Beneficiary Identifiers in 2018; however, such changes will not be fully implemented until 2019. CMS has indicated that certain other corrective actions—like expanding the use of prior authorization—have successfully reduced improper payments in several demonstration projects and provider education initiatives, and as a result, the agency is in the process of expanding such efforts. Moreover, CMS has yet to implement certain PPACA-authorized actions as we encouraged the agency to do in our 2015 high-risk report. For example, PPACA authorized CMS to impose surety bonds on certain at-risk providers to strengthen provider enrollment protections. MACRA also included a provision to require surety bonds for all home health agencies as a condition of Medicare participation. CMS has stated that the agency is working to implement this requirement, but, as of December 2016, CMS had not issued rules to do so. Continued progress in these and other efforts is needed, as Medicare FFS, Part C, and Part D all remained on the Office of Management and Budget’s list of high-error programs in 2015. Sustained control over payments and program integrity management is needed before Medicare improper payments can fully meet our criterion for demonstrated progress. Our body of work on improper payments has raised the level of attention to this issue, including Medicare improper payments, and contributed to the passage of the Improper Payments Information Act of 2002 (IPIA) and subsequent improper payment legislation. These laws require, among other things, agencies to estimate their annual amount of improper payments and report on actions to reduce them. In part from our continued oversight of CMS’s efforts to meet the requirement of IPIA, both Medicare Part C and Part D have reduced overpayment rates, a component of the total program improper payment rate, since each program began reporting improper payments in 2009 and 2011, respectively. Specifically, we determined that Medicare Part C had cost savings associated with overpayment error rate reductions of $1.2 billion in fiscal year 2010, $5.1 billion in fiscal year 2011, $6.2 billion in fiscal year 2013, and $8.9 billion in fiscal year 2014. Part D had cost reduction of $209.8 million in fiscal year 2014 and $51.1 million in fiscal year 2015. In 2012, we reported that CMS had not integrated its predictive analytics system, known as the Fraud Prevention System (FPS), with its claims processing and payment systems to allow for the automated prevention of potentially fraudulent Medicare claims payments. We recommended that the agency develop schedules for completing integration of these systems. In response, CMS implemented capabilities which allowed FPS to stop payment of certain improper and non-payable claims including a total of $26.2 million of cost savings in 2014 and 2015. In 2012, we made several recommendations to CMS to promote greater use of effective prepayment edits and better ensure proper payment, to promote implementation of effective edits based on national policies, and to encourage more widespread use of effective local edits by MACs. In response to these recommendations, CMS began disseminating information about certain contractors’ most successful prepayment edits—controls preprogrammed into payment processing systems—requested that these contractors share their top edits, and made improvements to certain edits that identify services billed in medically unlikely amounts. The agency also revised its standard operating procedures to ensure consideration of automated edits for all new and existing national coverage determinations— which describe the circumstances under which Medicare will cover services nationwide—as we recommended. These changes help CMS ensure Medicare payments are made properly the first time. Beginning in 2013, CMS took several actions to improve its process for addressing RAC-identified vulnerabilities that led to improper payments as we recommended in 2010. For example, the agency created a protocol to determine the effectiveness of certain corrective actions and established regular meetings to discuss RAC issues. By taking these steps, CMS established monitoring and control activities to ensure that corrective actions are taken that help meet the overall goal of reducing improper payments in the Medicare program. In response to our 2011 recommendation, CMS implemented changes in 2014 to the data systems MACs use to track spending on Medicare integrity efforts, thereby improving the accuracy of spending estimates. These changes improve the agency’s ability to assess the effectiveness of their Medicare integrity activities. In 2015, we reported weaknesses in the screening procedures CMS uses to prevent and detect ineligible or potentially fraudulent providers and suppliers from enrolling in the Medicare Provider Enrollment, Chain and Ownership System (PECOS). Specifically, we found that the computer software CMS uses to validate applicants’ addresses does not flag potentially ineligible addresses. In addition, we found that CMS’s process for verifying providers’ licenses did not always identify providers’ adverse actions when enrolling, revalidating, or reviewing provider’s licenses unless the provider self-reported the action. In response to recommendations we made to address these issues, CMS updated its address verification software and incorporated information from the Federation of State Medical Boards into its automatic screening process thereby improving the integrity of Medicare provider enrollment. In 2012 and 2013, we made recommendations to CMS to remove beneficiary SSNs from the Medicare insurance card in order to protect beneficiaries from identity theft. In response to our recommendations and in accordance with MACRA, CMS initiated a project in 2016 to replace beneficiary SSNs with a non SSN-derived Medicare Beneficiary Number. Removing SSNs from Medicare cards better protects Medicare beneficiaries from identity theft and provides CMS with a useful tool in combatting Medicare fraud and medical identity theft. In 2011, we identified instances of questionable access to prescription drugs in the Part D program and made a recommendation to CMS to improve its efforts to curb overutilization in Part D. In response to our recommendation, CMS conducted a case management pilot in 2012 to improve retrospective drug utilization program controls, developed a drug utilization review methodology to target Part D beneficiaries who are at risk due to high use of opioids, and implemented an overutilization monitoring system to ensure Part D sponsors are implementing effective controls against opioid overutilization. By implementing these changes, CMS has taken an important step toward insuring the safety of Medicare beneficiaries and reducing the abusive practice of doctor shopping for prescription drugs. For additional information about this high-risk area, contact Kathleen King at (202) 512-7114 or [email protected]. Medicare: Initial Results of Revised Process to Screen Providers and Suppliers, and Need for Objectives and Performance Measures. GAO-17-42. Washington, D.C.: November 15, 2016. Skilled Nursing Facilities: CMS Should Improve Accessibility and Reliability of Expenditure Data. GAO-16-700. Washington, D.C.: September 7, 2016. Medicare Fee-For-Service: Opportunities Remain to Improve Appeals Process. GAO-16-366. Washington, D.C.: May 10, 2016. Medicare: Claim Review Programs Could Be Improved with Additional Prepayment Reviews and Better Data. GAO-16-394. Washington, D.C.: April 13, 2016. Medicare Advantage: Fundamental Improvements Needed in CMS’s Effort to Recover Substantial Amounts of Improper Payments. GAO-16-76. Washington, D.C.: April 8, 2016. Health Care Fraud: Information on Most Common Schemes and the Likely Effect of Smart Cards. GAO-16-216. Washington, D.C.: January 22, 2016. Medicare Part D: Changes Needed to Improve CMS’s Recovery Audit Program Operations and Contractor Oversight. GAO-15-633. Washington, D.C.: August 14, 2015. Medicare Program: Additional Actions Needed to Improve Eligibility Verification of Providers and Suppliers. GAO-15-448. Washington, D.C.: June 25, 2015. Medicare: Potential Uses of Electronically Readable Cards for Beneficiaries and Providers. GAO-15-319. Washington, D.C.: March 25, 2015. The size, growth, and diversity of the Medicaid program presents oversight challenges, and we designated Medicaid as a high-risk program in 2003 due to concerns about the adequacy of fiscal oversight. Medicaid is one of the largest sources of funding for acute health care, long-term care, and other services for low-income and medically needy populations. This federal-state program covered an estimated 72.2 million people in fiscal year 2016 and is the largest health program as measured by enrollment and the second largest as measured by expenditures, second only to Medicare. A source of significant pressure on federal and state budgets, estimated Medicaid outlays for fiscal year 2016 were $575.9 billion, of which $363.4 billion was financed by the federal government and $212.5 billion by the states. Medicaid allows states significant flexibility to design and implement their programs, resulting in more than 50 distinct programs; this variability complicates program oversight and has contributed to challenges in overseeing program payments and beneficiaries’ access to services. Each state Medicaid program, by law, must cover certain categories of individuals and provide a broad array of benefits. Populations covered include children in low-income families and low-income individuals who are elderly, disabled, or are experiencing high medical needs. Medicaid’s extensive benefit package includes coverage for acute care services, primary care services, long-term care services, and comprehensive screening and treatment services for children. Within these broad parameters, however, states administer their own programs, deciding whether to cover any health services or populations beyond what are mandated by law, setting provider reimbursement rates, and operating state-specific data systems to enroll eligible beneficiaries and providers and to process and pay claims. For example, states may pay health care providers for each service they provide on a fee-for-service (FFS) basis; contract with managed care organizations (MCO) to provide a specific set of Medicaid-covered services to beneficiaries, and pay them a set amount per beneficiary per month; or rely on a combination of both delivery systems. Variability among state Medicaid programs also results from key Medicaid reform efforts that states may initiate. For example, under Section 1115 of the Social Security Act, the Secretary of Health and Human Services can waive traditional Medicaid requirements and authorize states to expend funds on Medicaid demonstrations to test new ways to deliver services. State Medicaid programs also differ in whether and how they have elected to expand Medicaid as allowed under the Patient Protection and Affordable Care Act (PPACA), which gave states the option to expand Medicaid eligibility to nearly all adults under age 65 with incomes up to 133 percent of the federal poverty level (hereafter referred to as newly eligible adults). States that elected to expand Medicaid received 100 percent federal funding for this newly eligible population through 2016, with the federal share declining to 90 percent for 2020 and subsequent years. As of October 2016, 31 states and the District of Columbia had opted to expand Medicaid eligibility under PPACA. In 2015, the Centers for Medicare & Medicaid Services (CMS) projected that total spending for Medicaid will rise an average of 6.4 percent per year from 2015 to 2024 (see figure 19). States also vary in the extent to which they are affected by economic downturns, which in turn can affect their Medicaid programs. The federal government matches most state expenditures using a statutory formula based in part on each state’s per capita income. We and others have noted that states’ efforts to fund Medicaid can be challenged during economic downturns, when Medicaid enrollment can rise and state revenues can decline. To ensure that federal funding efficiently and effectively responds to the program’s countercyclical nature, we have emphasized the need for timely and targeted federal assistance to stabilize states’ funding of Medicaid during such periods. Such assistance would support states with declining revenues or increased enrollment during a national economic downturn, further stabilizing the financing of this important program. An overarching challenge for the Medicaid program is the lack of accurate, complete, and timely data CMS needs to oversee the diverse and complex state Medicaid programs. Our work has made it clear that insufficient data have affected CMS’s ability to ensure proper payments and beneficiaries’ access to services. CMS’s two primary data sets—the CMS-64, which serves as the basis for calculating the amount of federal matching funds for states, and the Medicaid Statistical Information System (MSIS), which is designed to report individual beneficiary claims data—have the potential to offer a robust view of state financing, payments, and overall spending in the Medicaid program. However, the data’s usefulness is limited because of issues with completeness, timeliness, and accuracy. Improved data would enhance CMS oversight, allowing for improved monitoring of program financing and payments, beneficiary access, and compliance with Medicaid laws and requirements. CMS has acknowledged the need for improved Medicaid data and has undertaken a number of steps aimed at streamlining and improving the quality of data currently reported by states and available to CMS for oversight purposes. Complete and accurate data on state financing and payments to individual providers is essential for CMS to effectively oversee state Medicaid programs. Without more transparent information on state funding sources and program payments, CMS is unable to determine whether program expenditures are appropriate or to ensure the fiscal integrity of the program. Congress has held multiple hearings on these issues, including a November 2015 hearing at which the House Committee on Energy and Commerce, Subcommittee on Health, examined possible legislative remedies to address concerns we have raised in multiple reports about the transparency of Medicaid financing and payments to individual providers. Financing transparency and oversight. In recent years, states have increasingly relied on funds from providers and local governments to finance the nonfederal share of Medicaid, with implications for federal costs. While states finance the nonfederal share in large part through state general funds, they also depend on other sources of funds, such as taxes on health care providers and transfers of funds from local governments. Our 2013 survey of states found that, in 2012, states financed over one-quarter—over $46 billion—of the nonfederal share of Medicaid with funds from health care providers and local governments, an increase of over 21 percent since 2008 from these sources. Our work has illustrated that by requiring providers to supply all or more of the nonfederal share of Medicaid payments, states can claim an increase in federal matching funds without a commensurate increase in state expenditures. This shifts costs from the state to the federal government. Identifying the sources of nonfederal funds is essential to assessing their effect; however, CMS does not collect complete or accurate information on these sources of nonfederal funds. Apart from data on provider taxes and donations, CMS does not require states to provide information on the funds they use to finance Medicaid nor ensure that the data they do collect are accurate and complete. This lack of transparency in states’ sources of funding hinders CMS’s ability to determine whether increasing payments to providers provides fiscal relief to the state or whether increasing payments to providers improves beneficiary access. Without accurate information on how states finance their Medicaid programs, CMS is also unable to ensure that states comply with federal requirements. For instance, under federal law, at least 40 percent of the state share must be from state funds, which includes state general funds, provider taxes and donations, and transfers from other state agencies. CMS disagreed with our recommendation to take action to improve the information available on states’ sources of the nonfederal share of Medicaid payments. In 2015, legislation was introduced that would require CMS to take such action. Oversight of payments to institutional providers. Over the years, we and others have reported on CMS’s oversight of payments that states often make to institutional providers, such as hospitals and nursing facilities, which have raised questions. In particular, concerns have been raised about states making large Medicaid supplemental payments— payments in addition to the regular, claims-based payments made to providers for services they provided—often to government providers, such as local government and state-operated hospitals and other health care facilities. In fiscal year 2015, the latest date for which data are available, these payments totaled about $55 billion. Supplemental payments that result in total Medicaid payments well in excess of a provider’s costs raise questions about whether payments are consistent with the statutory requirement that payments be economical and efficient and are actually for covered Medicaid services. Among other concerns related to CMS oversight of supplemental payments, we have found the agency lacks a policy and process for determining whether payments made to individual providers are economical and efficient, as required by law, and lacks clear guidance on appropriate methods for states to distribute payments. For example, in 2015, we reported that three hospitals in New York received supplemental payments that resulted in overall Medicaid payments to the hospitals that greatly exceeded their cost of providing Medicaid services. CMS, in response, required New York to retroactively reduce supplemental payments to the hospitals by more than $1.5 billion— including $771 million in federal funds—over 4 years. Further, in a 2016 report, we found that selected states distributed supplemental payments to hospitals largely based on the availability of local government funds to finance the nonfederal share, rather than on the volume of services each hospital provided. In addition, officials from hospitals that received payments above costs reported using the excess revenues from these supplemental payments broadly, from covering the costs of uninsured patients to funding general hospital operations, maintenance, and capital purchases, such as for a helicopter. Based on the findings from these reports, we have recommended that CMS (1) clarify criteria for determining the economy and efficiency of payments to individual providers, (2) issue guidance clarifying its policies that supplemental payments should be linked to the provision of Medicaid services and not be contingent on the availability of local financing, and (3) require provider-specific reporting of certain types of supplemental payments. In 2015, legislation was proposed that would require CMS to collect provider-specific data on states’ supplemental payments. As of fall 2016, CMS was pursuing regulatory actions to address some of the concerns we raised, including requiring states to report information about how they distribute supplemental payments. As of 2014, the latest date for which this information is available, more than three-fourths of Medicaid beneficiaries received some of their services in a managed care delivery system, in which the state typically contracts with managed care organizations (MCO) to provide a specific set of services for beneficiaries for a set amount per beneficiary per month. Federal spending for managed care in fiscal year 2014 was $107 billion, which accounted for over one-third of federal Medicaid spending that year and represented a significant increase from 2013. Increased enrollment and spending for Medicaid managed care makes effective federal and state oversight of this large and complex component of the Medicaid program critical, and underscores the need for reliable data to assess the appropriateness of states’ payments to MCOs and beneficiaries’ access to MCO services. In our work examining federal expenditures for MCOs, we determined that state payments to MCOs in 2014 varied widely across and within 8 states as did the average annual MCO payments per beneficiary, which ranged from $2,784 in California to $5,180 in Pennsylvania. While this variation could be due, in part, to differences in the enrolled population and geographic costs and utilization patterns, it suggests the need to further examine the relationship between higher MCO spending and beneficiaries’ experiences. Further, federal law requires states to collect encounter data—records of health care services for which MCOs pay—and submit these data to CMS using MSIS. Having reliable encounter data that provides information on service utilization is important as MCOs receive a fixed amount per beneficiary regardless of the number of services used and therefore may have financial incentives to limit beneficiaries’ access to services. However, in our work examining beneficiary utilization of services, we could not fully assess utilization patterns for Medicaid managed care beneficiaries in 19 states because MSIS data were either not available (11 states) or were unreliable (8 states). In May 2016, CMS issued a final rule for Medicaid managed care that includes provisions aimed at improving Medicaid managed care encounter data submissions. For example, for contracts with MCOs and limited benefit health plans beginning on or after July 1, 2017, states are required to include provisions regarding the maintenance of encounter data, and, by July 1, 2018, to have procedures in place to validate that the enrollee encounter data these entities submit are complete and accurate. Medicaid demonstrations have become a significant proportion of Medicaid expenditures, growing steadily from about $50 billion, or about 14 percent of total Medicaid expenditures in fiscal year 2005, to $165 billion, or close to one-third of total Medicaid expenditures in fiscal year 2015. Section 1115 of the Social Security Act authorizes the Secretary of HHS to waive certain federal Medicaid requirements and allow costs that would not otherwise be eligible for federal matching funds for experimental, pilot, or demonstration projects that are likely to assist in promoting Medicaid objectives. The demonstrations can provide a way for states to test and evaluate new approaches for delivering Medicaid services. By policy, demonstrations should be budget neutral to the federal government; that is, they must not increase federal costs. In July 2015, CMS changed its organizational structure and increased its staffing to oversee section 1115 demonstrations and their growing role in the Medicaid program, and we continue to assess CMS’s approval and oversight of spending for these demonstrations. Expenditure authorities in Medicaid demonstrations. Using its authority under Section 1115 of the Social Security Act to approve costs that would not otherwise be matchable under Medicaid, HHS has approved Medicaid spending for a wide range of purposes beyond extending coverage to new populations or for new benefits. For example, HHS approved demonstrations that allowed 5 states to spend up to $9.5 billion to fund state health programs that were previously financed at least in part by the state or potentially other federal programs. HHS also approved 8 states to make more than $26 billion in supplemental payments to hospitals and other providers. We found that HHS’s criteria and approval documents were not always clear as to how approved spending would further Medicaid objectives. For example, some of these state programs appeared to be only tangentially related to improving health outcomes for low-income individuals and lacked documentation explaining how approving them would promote Medicaid objectives. We also found that demonstration approvals sometimes lacked assurances that demonstration spending would not duplicate other federal funds received by states. In response to our work, HHS issued general criteria for determining whether demonstrations met Medicaid objectives, which it had not delineated before. HHS also committed to identifying in approval documents how each expenditure authority promoted Medicaid objectives and providing assurances that demonstration funds would not duplicate other federal funds. While issuing the general criteria is a useful first step, we maintain that given the breadth of the Secretary’s authority under section 1115—the exercise of which can result in billions of dollars of federal expenditures for costs that would not otherwise by allowed under Medicaid—more explicit criteria are needed. Budget neutrality of Medicaid demonstrations. We remain concerned about the Secretary of HHS’s lack of an adequate budget neutrality policy including the criteria and process for reviewing and approving demonstration spending limits and the lack of a written, up-to-date policy that is readily available to state Medicaid directors and others. In multiple reports, we have found that federal spending on Medicaid demonstrations could be reduced by billions of dollars if HHS were required to improve the process for reviewing, approving, and making transparent the basis for spending limits approved for Medicaid demonstrations. For example, in 2014, we reported that HHS had approved a spending limit for Arkansas’s demonstration—to test whether providing premium assistance to purchase private coverage through the health insurance exchange would improve access for newly eligible Medicaid beneficiaries—that was based, in part, on hypothetical, not actual, costs. We estimated that by allowing the state to use hypothetical costs, HHS approved a demonstration spending limit that was over $775 million more than what it would have been if it was based on the state’s actual payment rates for services under the traditional Medicaid program. Another troubling precedent is that HHS granted Arkansas and 11 other states additional flexibility in their demonstrations to increase the spending limit if costs proved higher than expected. Our report on Arkansas was the latest in a series of reports showing significant concerns with HHS’s process for reviewing and approving spending under demonstrations. For example, in 2013 we reported that, for 4 of 10 demonstrations we reviewed, HHS approved spending limits that exceeded those that were supported in documentation and by HHS’s own policy by an estimated $32 billion. We have recommended that HHS (1) better ensure that valid methods are used to demonstrate budget neutrality, (2) clarify criteria for reviewing and approving demonstration spending limits, (3) document and make public the basis for approved spending limits, and (4) update its written budget neutrality policy to reflect the actual criteria and processes used to develop and approve demonstration spending limits. HHS has generally disagreed that changes to its policy and process are needed. Congress has held hearings, sent letters to CMS, and proposed legislation regarding how CMS reviews and approves demonstration spending limits. Although HHS has not issued a written budget neutrality policy as of October 2016, HHS has taken some steps to improve its oversight, including issuing a report in October 2015 to Congress on actions taken with respect to Medicaid demonstrations. The report discussed some steps HHS has taken and planned to take to improve access to program information and the transparency of its criteria for approving expenditures. Further, in 2016 HHS took steps to change its budget neutrality methodology that are intended to result in more appropriate demonstration spending limits. Nonetheless, we maintain that HHS must take the additional actions specified in our recommendations to improve the transparency of its demonstration approvals. Access to appropriate care has been a concern because of the needs and vulnerability of the individuals covered by Medicaid, including children, the elderly, and the disabled. National survey data have suggested that access reported by Medicaid beneficiaries is comparable to that of individuals with private health insurance in many areas, but that Medicaid beneficiaries do face particular challenges in accessing certain types of care. To help assess Medicaid enrollees’ access to care, CMS needs better data. Access to preventive, oral, and mental health services. The higher prevalence of some health conditions among Medicaid beneficiaries nationally that can be identified and managed by preventive services suggests that more can and should be done to ensure Medicaid beneficiaries receive these services. For example, states are required to provide preventive services for children through the Early and Periodic Screening, Diagnostic, and Treatment (EPSDT) benefit. However, national data collected by HHS suggest that Medicaid beneficiaries receive these services at rates below established goals. In addition, our 2016 work showed that, due to variation across states in the scope, functionality, and availability of resources on provider information, Medicaid beneficiaries in FFS arrangements may face challenges in identifying available providers in their respective states. State Medicaid programs have also struggled to ensure that beneficiaries, particularly children, receive appropriate oral health and mental health services when needed. High rates of dental diseases remain prevalent across the nation, especially in vulnerable and underserved populations. Medicaid beneficiaries, children in particular, have increased their use of dental services but still visited the dentist less often than privately insured children. These visits are essential to preventing future high cost dental services. Medicaid children may also have problems accessing mental health providers and may not be receiving appropriate mental health treatment and services. For example, national survey data indicate concerns that some children enrolled in Medicaid may be inappropriately prescribed psychotropic drugs and are not receiving needed mental health services, such as counseling and therapy. Better data needed to assess enrollees’ access to care. CMS’s ability to assess beneficiaries’ access to services is complicated by insufficient data. For example, in reviewing states’ EPSDT reports for our 2011 report, we found reporting errors large enough to overstate the extent to which children received services, and we found that states did not always report required data on the number of children referred for additional services. Further, the currently reported state data do not indicate whether children referred for preventive services actually received the services. CMS has taken steps to better identify reporting errors and obtain corrected data, but as of September 2016, CMS has no plans to require states to report whether children received the treatment services for which they were referred. Our 2015 work on MCOs described above also points out the need for better data to understand MCO beneficiaries’ access to covered services, including differences in access that could help explain the wide variation in MCO payments per beneficiary we identified. Finally, given that PPACA requires states to cover certain recommended preventive services for newly eligible adults in states that expanded Medicaid under the law, data are needed to determine whether this coverage helps improve beneficiaries’ access to and receipt of these services. Medicaid is the nation’s primary payer of long-term care services and supports (LTSS) for aged and disabled individuals. Medicaid spending (federal and state) on LTSS is significant—in 2016, we reported LTSS spending was an estimated $152 billion in fiscal year 2014 (see figure 20), or about one-quarter of the program’s total expenditures annually. The demand for LTSS is expected to increase as the nation’s population ages and life expectancy increases, including individuals with disabilities and complex health needs who require long-term services and supports. Monitoring of long-term care services provided in the community. Medicaid LTSS spending for services provided to beneficiaries in home- and community-based settings has grown rapidly and now exceeds spending for care provided in institutional settings, such as nursing homes. Monitoring and oversight of these services is important for ensuring quality of care, as the individuals who rely on these services are among Medicaid’s most vulnerable, and while home- and community- based services can enable people to live more independently, the services are not without risk. In the case of personal care services—an important type of long-term care service to help individuals who have limited ability to care for themselves—beneficiaries receiving these services include aged individuals and individuals with physical, developmental, or intellectual disabilities. When personal care services are provided in a private home, other providers or community members may not be present to help discourage or report questionable activities. Further, depending on the state and the personal care services program, personal care attendants who provide personal care services may not be required to have specialized training. Personal care services—for which Medicaid paid $15 billion on a fee-for-service basis in calendar year 2015—are also among the highest at risk for improper payments, including for services which were billed but never provided to the beneficiary. In 2014, CMS estimated over $2 billion of payment errors for Medicaid personal care services. In 2016, we found that while CMS has taken several steps to improve oversight of personal care services, it has not collected all required state reports on beneficiaries’ health and welfare for some programs, and it could do more to harmonize the patchwork of federal program requirements intended to oversee beneficiary safety and assure that billed services are provided. Such harmonization would help ensure a more consistent administration of policies and procedures and could enhance oversight. Finally, another important change in the delivery of Medicaid-funded LTSS is the rapid growth in managed care, which in 2014 accounted for almost 15 percent of Medicaid LTSS expenditures. We will continue to monitor Medicaid’s use of managed care to deliver LTSS as well as other aspects of the program’s growing support for LTSS and examine the implications for oversight. We have a number of Matters for Congressional Consideration and recommendations to HHS and CMS for addressing issues related to financing, payment oversight, demonstration spending, and access- related issues. We have suggested Congress take the following actions: To improve the transparency of and accountability for certain high-risk Medicaid payments that total tens of billions of dollars annually, Congress should consider requiring CMS to improve reporting of and guidance related to certain supplemental payments and to require states to submit annual independent audits of such payments. To improve the fiscal integrity of Medicaid, Congress should consider requiring increased attention to fiscal responsibility in approving Section 1115 Medicaid demonstrations by requiring the Secretary of HHS to improve the demonstration review process through steps such as (1) clarifying criteria for reviewing and approving states’ proposed spending limits, (2) better ensuring that valid methods are used to demonstrate budget neutrality, and (3) documenting and making public material explaining the basis for any approvals. To ensure that federal funding efficiently and effectively responds to the countercyclical nature of the Medicaid program, Congress should consider enacting a federal matching formula that targets variable state Medicaid needs and provides automatic, timely, and temporary increased federal assistance in response to national economic downturns. In addition, we have made recommendations to HHS and CMS, including: To improve CMS’s oversight of Medicaid payments, the Administrator of CMS should develop (1) a policy establishing criteria for when such payments at the provider level are economical and efficient; and (2) a process for identifying and reviewing payments to individual providers, once criteria are developed, in order to determine whether they are economical and efficient. To improve the transparency of the process for reviewing and approving spending limits for comprehensive section 1115 demonstrations, the Secretary of Health and Human Services should update the agency’s written budget neutrality policy to reflect actual criteria and processes used to develop and approve demonstration spending limits, and ensure the policy is readily available to state Medicaid directors and others. To meet HHS’s fiduciary responsibility of ensuring that section 1115 waivers are budget neutral, the Secretary should better ensure that valid methods are used to demonstrate budget neutrality, by developing and implementing consistent criteria for considering proposals for section 1115 demonstration waivers. To better understand the effect of certain personal care services on beneficiaries and more consistently administer policies and procedures across personal care services programs, the Secretary of HHS should direct the Administrator of CMS to (1) collect and analyze required state information on the impact of certain personal care services programs, and (2) take steps to further harmonize federal requirements across programs providing personal care services. In light of the need for accurate and complete information on children’s access to health services under Medicaid and State Children’s Health Insurance Program (CHIP), CMS should work with states to identify additional ways to improve reports used to monitor children’s access to services, including identifying how to capture information related to whether children receive treatment services for which they are referred. For additional information about this high-risk area, contact Katherine Iritani at (202) 512-7114 or [email protected], or Carolyn L. Yocom at (202) 512-7114 or [email protected]. Medicaid Personal Care Services: CMS Could Do More to Harmonize Requirements Across Programs. GAO-17-28. Washington, D.C.: November 23, 2016. Medicaid Fee-For-Service: State Resources Vary for Helping Beneficiaries Find Providers. GAO-16-809. Washington, D.C.: August 29, 2016. Medicaid: Federal Guidance Needed to Address Concerns About Distribution of Supplemental Payments. GAO-16-108. Washington, D.C.: February 5, 2016. Medicaid Managed Care: Trends in Federal Spending and State Oversight of Costs and Enrollment. GAO-16-77. Washington, D.C.: December 17, 2015. Medicaid: Improving Transparency and Accountability of Supplemental Payments and State Financing Methods. GAO-16-195T. Washington, D.C.: November 3, 2015. Medicaid: Overview of Key Issues Facing the Program. GAO-15-746T. Washington, D.C.: July 8, 2015. Medicaid: Key Issues Facing the Program. GAO-15-677. Washington, D.C.: July 30, 2015. Medicaid Demonstrations: More Transparency and Accountability for Approved Spending Are Needed. GAO-15-715T. Washington, D.C.: June 24, 2015. Medicaid: Service Utilization Patterns for Beneficiaries in Managed Care. GAO-15-481. Washington, D.C.: May 29, 2015. Medicaid Demonstrations: Approval Criteria and Documentation Need to Show How Spending Furthers Medicaid Objectives. GAO-15-239. Washington, D.C.: April 13, 2015. Medicaid: CMS Oversight of Provider Payments Is Hampered by Limited Data and Unclear Policy. GAO-15-322. Washington, D.C.: April 10, 2015. Medicaid and CHIP: Reports for Monitoring Children’s Health Care Services Need Improvements. GAO-11-293R. Washington, D.C.: April 5, 2011. The Centers for Medicare & Medicaid Services (CMS) in the Department of Health and Human Services (HHS) has taken several actions that demonstrate its commitment to reduce improper payments, including using rulemaking to strengthen state capacity and oversight of managed care organizations (MCO) and the ongoing implementation of a new claims data system that could address issues with incomplete, inaccurate, and untimely state data. Despite these efforts, however, overall Medicaid improper payments continue to increase, rising to about $36.3 billion in fiscal year 2016 compared with $29.1 billion in fiscal year 2015. We designated Medicaid as a high-risk program in 2003 in part due to concerns about the adequacy of the fiscal oversight that is necessary to prevent inappropriate program spending. This federal and state program covered acute health care, long-term care, and other services for an estimated 72.2 million low income and medically needy individuals in fiscal year 2016, making it one of the largest sources of funding for medical and health-related services. Under current law, the program is expected to continue to grow—covering as many as 13.2 million additional individuals by 2025—as states may expand their Medicaid programs under the Patient Protection and Affordable Care Act (PPACA). As with any estimate, changes to PPACA or other laws could affect the projected federal spending on major federal health care programs and federal revenues. By design, Medicaid allows significant flexibility for states to design and implement their programs, which has resulted in over 50 distinct state- based programs. The federal government matches state expenditures for most Medicaid services using a statutory formula. The federal matching rate varies under the program, with increased federal matching funds for individuals newly eligible through the expansion of Medicaid under PPACA. The program is a significant expenditure for the federal government and the states, with total estimated expenditures of $575.9 billion in fiscal year 2016, of which $363.4 billion was financed by the federal government and $212.5 billion by the states. Within broad federal guidelines, states have some discretion in setting Medicaid eligibility standards and provider payment rates, and in determining the amount, scope, and duration of covered benefits and how these benefits are delivered. For example, states may pay health care providers for each service they provide on a fee-for-service (FFS) basis; contract with MCOs to provide a specific set of Medicaid-covered services to beneficiaries and pay them a set amount per beneficiary per month; or rely on a combination of both delivery systems. Roughly three-fourths of Medicaid beneficiaries receive some or all of their services from MCOs, and payments to MCOs account for over one-third of federal Medicaid spending. Increased enrollment and spending for Medicaid-managed care makes effective federal and state oversight of this large and complex component of the Medicaid program critical. The size and diversity of the Medicaid program make it particularly vulnerable to improper payments—including payments made for people not eligible for Medicaid or made for services not actually provided. Over recent years, improper payments have increased substantially and represent a significant cost to the program, an estimated $36.3 billion in federal dollars in fiscal year 2016. While states have the first-line responsibility for preventing improper payments, CMS has an important role in overseeing and supporting state efforts to reduce and recover improper payments. This high-risk assessment focuses solely on CMS’s efforts to prevent and reduce improper payments. Medicaid vulnerabilities include more than improper payments, and we discuss the broader challenges and risks associated with the Medicaid program separately (see page 520). As mentioned above, the continued growth in the overall estimated improper payment rate—10.5 percent in 2016 compared with 9.8 percent in 2015—underscores the need for additional federal action and has resulted in the agency partially meeting the 5 key criteria for removal from our High-Risk List: leadership commitment, capacity, action plan, monitoring, and demonstrated progress. Until additional actions are taken, gaps in oversight remain that will challenge CMS’s ability to reduce improper payments. Congress has taken action to address improper payments and oversight challenges in the Medicaid program. For example, HHS identified provider screening and enrollment as a main area contributing to increased estimates in Medicaid improper payments, and Congress recently enacted legislation requiring MCOs only use providers that have been screened and enrolled by the appropriate state Medicaid program. The legislation also requires states to report information about terminated Medicaid providers to CMS and requires CMS to include such information, as appropriate, in the agency’s Medicaid provider termination notification system. Additionally, Congress has held several hearings related to Medicaid improper payments, including a May 2016 hearing held by the House Energy and Commerce Subcommittee on Oversight and Investigations and an October 2015 hearing held by the Senate Committee on Finance. Further indicating a continued focus on agency action on Medicaid program integrity, the chairmen of two congressional committees and subcommittees sent letters to CMS regarding Medicaid program integrity, including a letter on eligibility determinations and one on how CMS sets its target improper payment rate for the Medicaid program. CMS has taken steps to improve the improper payment rate in recent years, including implementing certain recommendations we previously made and using rulemaking to strengthen program integrity efforts. Several of these efforts are in progress, with staggered compliance dates for changes to oversight of MCOs and continued state implementation of the Transformed Medicaid Statistical Information System (T-MSIS). For example, the requirement in the May 2016 managed care rule for states to audit the accuracy, truthfulness, and completeness of the financial data submitted by MCOs will not take effect until July 2017. Additionally, T- MSIS, which aims to collect more complete and timely state data, including claims and utilization data, is not fully implemented across all states. Continued oversight and leadership will be necessary in these areas. Further, there are several areas where CMS needs to take action to address issues and recommendations that have not been fully implemented, including: considering which additional databases that states and Medicaid managed care plans use to screen providers, which could be helpful in improving the effectiveness of these efforts, and determining whether any of these databases should be added to the list of databases identified by CMS for screening purposes; developing a plan to regularly assess the effectiveness of checks for duplicate coverage between Medicaid and federally facilitated exchanges, including thresholds for the level of duplicate coverage it deems acceptable; continuing its efforts to work with Social Security Administration to share its Death Master File with states and providing additional guidance to states to better identify beneficiaries who are deceased; and conducting systematic assessments of federal determinations of Medicaid eligibility in states that delegated this authority to the federal marketplace until it is part of the regular review processes that are expected to resume in 2018. Fully addressing these recommendations would help CMS address the growing levels of improper payments. Until CMS takes additional actions to address these and other gaps in oversight, the Medicaid program remains at risk for unacceptable levels of improper payments and therefore remains on our High-Risk List. CMS continues to partially meet the criteria for leadership commitment to reducing improper payments; however, questions remain about the success of its efforts. Since 2014, the agency has reorganized its program integrity activities with the aim of creating more streamlined operations; established an agency-wide Program Integrity Board to identify and set priorities for addressing vulnerabilities in its programs; and taken steps to improve coordination activities with Medicare. CMS also published a final rule on Medicaid managed care in May 2016 that is intended to improve oversight of MCOs. The rule is responsive to our priority recommendations that CMS should hold states accountable for Medicaid MCO program integrity by requiring states to audit payments to and by MCOs, and updating its guidance on Medicaid managed care program integrity practices and effective handling of MCO recoveries. As 1 example, the rule requires that states, at least once every 3 years, audit the data submitted by MCOs with contracts starting on or after July 1, 2017. Prior to issuance of this rule, there had been no requirement for states to audit payments to and by MCOs. However, given that CMS only recently reorganized its program integrity activities, and issued the new rule, and that the rule’s provisions will be implemented in staggered time frames that extend to 2018, the effects on program integrity efforts are unclear. Further, additional leadership is needed to address remaining weaknesses in federal oversight, including ensuring complete, accurate, and timely data to support oversight and program integrity efforts. CMS is continuing its national effort to implement the T-MSIS. However, implementation has been delayed for several years, and it remains unclear when data will be available from all states or how CMS will use these data for oversight purposes. CMS continues to partially meet the criteria for capacity. The agency has taken actions to enhance the resources and guidance available to states for program integrity purposes. For example, CMS issued a final rule in December 2015 that permanently extends the availability of a 90 percent federal match for states’ expenditures related to enhancing or replacing their Medicaid eligibility and enrollment information technology (IT) systems, and aims, in part, to enhance states’ program reporting and management tools to support program integrity efforts. In addition, the May 2016 managed care rule includes provisions to strengthen data available on managed care utilization and imposes financial consequences on states that do not submit MCO utilization data. For example, state contracts with MCOs must provide for the collection and maintenance of sufficient data on managed care service utilization, also known as encounter data, and states must have procedures to ensure that these required enrollee encounter data are complete and accurate. However, these provisions do not take effect until July 2017 or 2018, so their success in improving data available for program integrity is unknown and will depend on how states and CMS implement them. In response to our 2015 priority recommendation to support state third- party liability efforts, CMS produced an updated guide to compile and share effective and innovative Medicaid third-party liability practices reported by states, an important tool that could help states ensure that Medicaid pays only after other liable third parties. In response to our priority recommendation to provide guidance to states on their oversight of third-party liability efforts conducted by Medicaid managed care plans, CMS subsequently published a handbook, which provides guidance to states on third party liability efforts, including such efforts conducted by Medicaid MCOs. Finally, our recent work has also identified limitations in program integrity efforts in Puerto Rico and other U.S. territories that put Medicaid funding in these areas at risk for fraud, waste, and abuse, and underscore the need for CMS to develop a cost-effective approach to protecting Medicaid funding in these territories. CMS has documented a strategic approach to reducing improper Medicaid payments, but only partially meets the criteria due to a missing report the agency is legally required to provide to Congress. In July 2014, CMS issued the Comprehensive Medicaid Integrity Plan for fiscal years 2014 through 2018, in which CMS established goals to expand its capacity to protect the program’s integrity and manage risk in administering federal grants to states. The agency is required to report to Congress annually on the use and effectiveness of funds appropriated for the Medicaid Integrity Program. The agency reported for fiscal years 2013 and 2014 in July 2016, well after the required timeframes, and the agency is out of compliance with the requirement for fiscal year 2015 because it has not submitted a report for fiscal year 2015, as of December 2016. With regard to specific actions, CMS has taken steps to identify duplicate coverage for individuals transitioning from Medicaid to federally facilitated exchanges created under PPACA, and had performed three checks as of October 2016. In response to our priority recommendation that CMS establish a schedule for regular checks for duplicate coverage, CMS reported that it intends to check for duplicate coverage at least two times per coverage year going forward. CMS also reported that it was reviewing these data to assess whether the checks were effective. However, the agency has not developed a plan, including thresholds for the level of duplicate coverage it deems acceptable, to routinely monitor the effectiveness of these checks. CMS continues to partially meet the criteria for monitoring. CMS has enhanced its oversight of states’ program integrity activities, particularly by increasing its focus on collaborative audits and working with states to improve compliance with PPACA’s provider screening requirements. In focusing on collaborative audits, CMS has engaged more states than before, targeted federal audit resources to state needs, and identified an increasing amount of overpayments. In addition, CMS now provides states with federal data to strengthen Medicaid provider enrollment screening and has provided guidance and technical assistance to assist states on their revalidation efforts. CMS also recently provided additional guidance to states on specific provider screening and reporting provisions included in the 21st Century Cures Act. Our prior work has shown that available federal data do not include all of the information necessary for states to effectively and efficiently process Medicaid provider applications. Due to this issue and other challenges, we found that states and managed care plans rely on fragmented information from multiple and disparate databases to screen managed care providers, and often struggle to access and use these databases because of difficulties conducting provider matches across databases. CMS also needs to take additional steps to better monitor states’ beneficiary eligibility determinations. Specifically, we found that CMS is not always able to assess the accuracy of federal Medicaid eligibility determinations, which is particularly problematic where states delegate this determination authority to the federal government through federally facilitated exchanges. While CMS is relying upon operational controls within the federal marketplaces to ensure accurate eligibility determinations, without a systematic review of these determinations, the agency lacks a mechanism to ensure that only eligible individuals are enrolled in the program and to identify associated improper payments until CMS’s updated eligibility review program resumes in 2018. CMS continues to partially meet the criteria for demonstrated progress. The agency has taken actions to improve federal and state oversight of Medicaid MCOs, to extend funding to help states modernize their eligibility systems, and to help states come into compliance with recent legislation by providing updated guidance. Nonetheless, additional actions are warranted to identify and reduce improper payments, given the rise in the Medicaid improper payment rate and expected growth of the Medicaid program. Several factors will complicate CMS efforts to identify improper payments. Specifically, CMS’s improper payment rate estimates may be inaccurate because the agency has frozen a component used to calculate improper payments based on beneficiary eligibility through fiscal year 2018. Additionally, CMS estimates of improper payments to MCOs do not consider underlying medical data such as the use of medically unnecessary services and other contributing factors. Finally, CMS will not fully implement certain provisions to strengthen program integrity in Medicaid managed care—such as requiring MCOs to only use providers that have been screened and enrolled by the appropriate state Medicaid program—until January 2018. Thus, it is critical that CMS take other actions to ensure that only providers in good standing participate in the program during this interim period. CMS is conducting collaborative audits with states, which allows the states to augment their own program integrity audit capacity by leveraging the resources of CMS and its audit contractors. These efforts have increased the amount of identified Medicaid overpayments. CMS provided training to states through the Medicaid Integrity Institute on correct reporting of program integrity recoveries. Efforts to ensure correct reporting of recoveries will make it easier for CMS to determine whether states are returning the federal share of recovered overpayments. CMS posted guidance on its website regarding the requirements that must be met in order for Medicaid administrative expenditures to be eligible for federal matching funds. A CMS official said that the agency ensures that the policies are applied consistently across all states through internal training. These efforts should improve CMS’s financial management of Medicaid administrative claiming activities. CMS reconfigured the National Medicaid Audit Program to eliminate the review contractor function altogether in response to concerns that the federal review was duplicative of actions undertaken by audit contractors within a state or geographic area. By eliminating duplication in the review function, CMS will realize greater efficiencies in its audits and reduce state burden. Medicaid: Program Oversight Hampered by Data Challenges, Underscoring Need for Continued Improvements. GAO-17-173. Washington, D.C.: January 6, 2017. Medicaid Program Integrity: Improved Guidance Needed to Better Support Efforts to Screen Managed Care Providers. GAO-16-402. Washington, D.C.: April 22, 2016. Medicaid and CHIP: Increased Funding in U.S. Territories Merits Improved Program Integrity Efforts. GAO-16-324. Washington, D.C.: April 8, 2016. Nonemergency Medical Transportation: Updated Medicaid Guidance Could Help States. GAO-16-238. Washington, D.C.: February 2, 2016. Medicaid: Additional Federal Controls Needed to Improve Accuracy of Eligibility Determinations and for Coordination with Exchanges. GAO-16-157T. Washington, D.C.: October 23, 2015. Medicaid: Additional Efforts Needed to Ensure That State Spending Is Appropriately Matched with Federal Funds. GAO-16-53. Washington, D.C: October 16, 2015. Medicaid and Insurance Exchanges: Additional Federal Controls Needed to Minimize Potential for Gaps and Duplication in Coverage. GAO-16-73. Washington, D.C.: October 9, 2015. Medicaid: Key Issues Facing the Program. GAO-15-677. Washington, D.C.: July 30, 2015. Medicaid: Additional Actions Needed to Help Improve Provider and Beneficiary Fraud Controls. GAO-15-313. Washington, D.C: May 14, 2015. Medicaid: Additional Federal Action Needed to Further Improve Third- Party Liability Efforts. GAO-15-208. Washington, D.C.: January 28, 2015. programs that support employment can divert individuals from the disability rolls, these programs lack a unified vision, strategy, or set of goals to guide their outcomes. We first designated improving and modernizing federal disability programs as high risk in 2003. The federal government’s progress in improving and modernizing disability programs remains mixed. We assessed progress across five broad areas: two reflecting SSA’s and VA’s actions to manage their disability claims workloads; two reflecting SSA’s and VA’s progress to modernize their criteria for deciding who is eligible for disability benefits; and, lastly, the Office of Management and Budget’s (OMB) efforts to create unified strategies and goals for programs that support employment for people with disabilities. Some of the agencies we assessed met certain criteria while others did not, and when combined, the resulting summary rating shows that the five criteria were partially met. SSA and VA have continued to make progress managing their claims workloads, but both agencies currently face challenges managing their appeals backlogs. SSA and VA also have made progress updating the criteria they use to determine eligibility for disability benefits, especially with respect to developing action plans. In terms of plans to mitigate the potential effects of program fragmentation, OMB—which performs a management role for the executive branch—has made some progress developing plans to test interventions that may improve employment outcomes in the private as well as public sector, but has not yet developed a unified vision, or government-wide goals and related strategies for improving employment outcomes outside of the federal sector. With respect to SSA updating the criteria it uses to determine eligibility for benefits, more needs to be done to address this high-risk issue, but in response to our 2012 recommendation, SSA took action that resulted in cost savings. Specifically, SSA replaced its earlier, highly ambitious plans to develop its own occupational information system (OIS) (to house occupational data used to make disability determinations) with a potentially more cost-effective approach that uses existing expertise and resources in the federal government. In doing so, SSA partnered with the Bureau of Labor Statistics (BLS) to collect and update occupational information by surveying employers. As a result of SSA implementing our recommendation, we determined that, as of 2015, SSA saved approximately $27 million dollars. council to run early intervention demonstration programs, which has the potential to uncover approaches worth pursuing at a national level. However, to date, the proposed council to achieve that vision has not been funded. Further, while common measures recently implemented will help assess the relative success of specific programs across agencies, the prior administration did not develop goals or strategies for measuring and tracking the cumulative effect of disparate programs on employment outcomes beyond the federal sector—which could also help inform and target the types of interventions to be piloted by the new administration. Since our 2015 update, SSA has demonstrated mixed progress in addressing its workload challenges, such that partially met ratings did not change from 2015. Specifically, SSA made progress reducing its backlog of initial disability claims, while its appeals workload continued to grow. Since our 2015 high-risk report, SSA has continued to meet our leadership criterion. As described below, SSA officials told us that they continued to develop plans to implement its Vision 2025—a long-term strategic plan that articulates how SSA will serve its customers in the future. SSA also designated reducing wait times for hearings decisions as a priority goal for fiscal years 2016 and 2017. SSA continued to partially meet our criterion for building capacity. With respect to ensuring sufficient capacity at the initial claims level, while SSA has reduced the number of pending initial claims each year since 2010, efforts to further reduce costs and process claims more efficiently using technology were stalled. Specifically, SSA halted development of its Disability Case Processing System (DCPS), after a consulting firm contracted by SSA reported the agency spent about $288 million with few results. Subsequently, SSA selected a new development path for the DCPS, and officials still expect that DCPS will improve workflows and reduce administrative costs; however, SSA’s Office of Inspector General found that SSA did not evaluate all alternatives or consider all costs required to maintain a new system before pursuing a DCPS alternative. SSA officials reported in October 2016 that the agency was developing an initial product to deliver to three test sites focused on processing certain fast-track claims. To address its priority goal of reducing the time for hearing decisions, officials reported that SSA increased the number of administrative law judges (ALJ) who decide appeals cases by 349 in fiscal years 2015 and 2016—about a 24 percent increase. In its plan to address its appeals backlog, SSA noted that it is exploring ways to improve ALJ hiring in difficult-to-staff locales, leverage SSA’s Office of Quality Review to obtain assistance with critical case processing activities, and use judges from the Appeals Council to hold hearings on some cases. However, SSA officials noted in October 2016 that plans to increase hiring and leverage other resources are on hold due to a hiring freeze expected to extend into fiscal year 2017. their hearings, and sharing resources across the agency to help process appeals at backlogged hearing offices; and improving the use of information technology (IT), such as expanding the use of video hearings, providing online records access to medical and vocational experts, and reducing the use of physical paperwork at hearings-level cases. While this plan is a positive step, the extent to which proposed actions will reduce the hearings backlog remains to be seen. In September 2016, SSA’s OIG reported that more than half of the initiatives in the agency’s plan duplicated past backlog initiatives, including a 2007 plan that did not result in long-term reductions of the backlog. Additionally, SSA notes in its plan that some efforts, such as increased hiring, will depend on the agency receiving additional funding. Regarding SSA’s broader Vision 2025 effort, officials told us that SSA is still in the process of developing plans to implement it. Among other things, Vision 2025 touches on the agency’s capacity to process initial claims and appeals. SSA officials told us that SSA is integrating aspects of Vision 2025 into its fiscal year 2018- 2022 strategic plan—scheduled to be issued in January 2018—and conducting working sessions with a cross-section of SSA employees to gather input about how to realize Vision 2025 priorities. SSA continued to meet our criterion for monitoring by continuing to monitor and report on the timeliness of its initial claims and appeals workloads. SSA partially met our criterion, demonstrating mixed progress. In addressing its initial claims backlogs, SSA continued to reduce the number of pending claims in each fiscal year since 2010—from about 842,000 in fiscal year 2010 to 621,000 in fiscal year 2015. However, the timeliness of its appeals workload worsened. The number of hearings pending as of the end of 2016 was over 1.1 million and the average time needed to complete appeals increased from 353 days in fiscal year 2012 to 545 days in fiscal year 2016. SSA’s goal is to eventually reduce this time to 270 days, as articulated in its appeals reform plan. Since our 2015 high-risk update, VA has demonstrated mixed progress in addressing its workload challenges. Progress is evident in regards to VA’s efforts to reduce the Veterans Benefit Administration’s (VBA) compensation claims backlog. However, VA’s appeals workload continued to grow, and several efforts to address this challenge are still underway. In particular, VA’s proposed framework to reform the appeals process—developed by VBA and the Board of Veterans’ Appeals (Board)—requires legislative authority to pursue. We have ongoing work related to VA’s efforts to address appeals workloads and timeliness that we plan to issue in the first quarter of 2017. VA continued to meet our criterion for leadership commitment. Since 2015, VA tracked progress toward eliminating the disability compensation claims backlog, an agency priority goal set for fiscal years 2014 and 2015. It also renewed its commitment to reducing appeals inventories and improving timeliness of appeals decisions by updating its appeals strategic plan in 2016, making development of a simplified appeals process 1 of VA’s 12 breakthrough priorities for 2016, and working closely with veterans service organizations (VSO) and other stakeholders to propose a new framework and associated legislation to reform the current appeals process. evidence is received. VA states that these automation capabilities will increase the efficiency of compensation claims processing; and implementing a national work queue distribution tool at all regional offices that should allow VA to electronically distribute claims across regional offices to even out workloads. According to VA, these efforts have resulted, to date, in reducing the compensation claims backlog by 88 percent from a peak of 611,073 claims in March 2013 to a low of 71,690 as of September 30, 2016. Further, VA reported that it increased compensation claim productivity per full-time equivalent (FTE) by 25 percent since 2011. However, it remains to be seen if VA can maintain these gains as workloads are projected to increase in the future. At the appellate level, VA proposed a streamlined appeals framework through which it hopes to gain efficiencies; however this new framework—which is still in the planning stages—requires legislative authority to implement. VA is developing and implementing technology improvements that could result in enhanced productivity, such as a new appeals processing system that would better support a paperless process. VA also added 300 FTEs at VBA to help process appeals in fiscal years 2015 and 2016, and according to agency officials, VA received a 42 percent increase in funding for the Board in fiscal year 2017 that will support the hiring of additional FTEs. VA plans further improvements related to capacity, such as increasing human resources and training support, and is developing a recruitment plan with the Office of Personnel Management (OPM) to hire additional staff, primarily in the attorney role. However, these staffing increases and technology improvements were underway as of January 2017, and it is too early to determine the extent to which the sum of these efforts will improve VA’s capacity to process appeals. providing veterans with a more simple, timely, transparent, and fair appeals process. While potentially promising, as of October 2016, VA was still developing implementation plans and did not have legislative authority to pursue its proposed reforms. Regarding staffing, VA officials reported in March 2016 that they were working with OPM on a strategic recruitment plan, but had not finalized this plan. VA partially met our criterion for monitoring. VA continued to have clear goals for processing compensation claims and a system for monitoring them on a regular basis; however, gaps exist in VA’s ability to measure performance and proposed process changes related to appeals. In fiscal year 2015, VA developed new measures to publicly report appeals processing performance in its Annual Performance Reports, which VA officials said focus on the discrete steps in the appeals process and help show where bottlenecks exist. However, VA no longer publicly reports the total average amount of time needed across VBA and the Board to resolve an appeal. As we noted in our 2015 update, not reporting broad measures—such as the average time needed to resolve appeals across VA—reduces the transparency of VA’s progress. Additionally, VA currently lacks data that could help it more fully understand factors currently affecting appeals decision timeliness, such as data on the number of actions taken on cases or the number of times claims were re- reviewed because new evidence was submitted. To help address this, VA officials told us that they are developing a data dashboard as a part of IT improvements, but it is too early to tell how the agency will use the dashboard to evaluate proposed improvements to the appeals process. VA partially met our criterion for demonstrating progress. VA continued to make progress with reducing its compensation claims backlog. Specifically, VA decreased the total inventory of compensation claims by 57 percent from a peak of 883,930 in fiscal year 2012 to 377,107 in fiscal year 2016. Additionally, VA has improved its claim processing timeliness by reducing the average length of time a claim is pending from an average of 282 days in fiscal year 2013 to 85 days in fiscal year 2016. 2012 to 936 days in fiscal year 2015. Appeals that were decided by the Board in fiscal year 2015 required an average of 1,789 days for a decision, compared to an average of 1,691 days in fiscal year 2012. Since 2015, SSA has continued to make progress on several fronts to update the criteria that it uses to determine eligibility for disability benefits. SSA’s progress is evident across the five high-risk criteria, especially with respect to capacity and action plans, which improved from partially met to met. However, SSA has not yet finished reviewing all medical listings, and is still developing and testing its approach for updating occupational information that is also used to determine eligibility. It is also unclear how SSA will consider incorporating the results of a study on accommodations in the workplace into its decision-making process. SSA continued to meet our criterion for leadership commitment, by maintaining focus and ensuring progress toward updating the medical criteria and occupational information used to determine eligibility for disability benefits, as well as by agreeing to study the role of assistive technologies and workplace accommodations in mitigating impairments, and how this might be considered in its disability decision making. the first update of occupational data (due to be completed in 2024) will be $178 million. We found SSA’s cost estimate to contain sufficient analysis and information to support its scaled-back and more feasible approach for developing an OIS. Thus, SSA met the intention of our prior recommendation that it develop life-cycle cost estimates for the project in accordance with best practices, which may help SSA make program decisions and ensure sufficient resources are allocated to the effort. With respect to our prior recommendation to consider the roles of assistive technologies and workplace accommodations in disability decision making, SSA built capacity by tasking the Health and Medicine Division (HMD) of the National Academies of Sciences, Engineering, and Medicine under a contract to study this issue. Its final report is due in July 2017. SSA has also met our criterion for developing action plans, improving from partially met in 2015. As we noted earlier, SSA has plans in place for updating its medical criteria, and it continued to make progress towards its goals. With respect to updating its OIS, SSA has developed a project plan for developing the OIS, and recently provided a life-cycle cost estimate as noted earlier. Lastly, SSA tasked HMD under a contract to further study the issue of how assistive technologies and workplace accommodations can affect disability determination decisions, with a proposed completion date of July 2017. SSA continued to meet the criterion of monitoring progress toward updating its medical criteria, and has project plans and schedules against which to monitor its progress toward developing a new OIS to replace its outdated Dictionary of Occupational Titles. SSA partially met our criterion for demonstrating progress. With respect to updating its medical listings, SSA officials reported that, as of October 2016, the agency had published final rules for 13 of the 14 body systems for adults, and drafted a proposed rule for the remaining system. SSA expects to publish that final rule in 2017 once OMB under the new administration has reviewed it. Officials stated they are on track to revisit the 14 body systems every 3 to 5 years once the first round of comprehensive updates is complete. SSA officials also reported steady progress updating its occupational information. In 2016, SSA and BLS completed the first year of its 3-year cycle of collecting survey data for the OIS, which followed its completion of a large-scale, preproduction test involving collecting occupational information from about 2,500 employers. In May 2016, SSA officials also reported that they are working with a contractor to develop a Web-based system to house its occupational data, which they expect to complete in fiscal year 2017. With respect to assistive technologies and workplace accommodations, officials reported progress under SSA’s contract with HMD to study workplace accommodations and assistive technologies. Officials reported that HMD held public forums in July and September 2016 and invited experts to present information on various aspects of workplace accommodations and assistive technologies, which HMD plans to incorporate into its report findings. SSA expects HMD to conclude its study by July 2017, but it remains to be seen whether and how SSA will consider the results of the study in its decision-making process. VA continued to make progress toward updating the medical criteria that it uses to determine eligibility for disability compensation, and has now improved to met for action plan and monitoring. However, VA has experienced delays, and officials told us that VA will not meet its prior target for completing this effort by March 2017. VA met our criterion for leadership commitment. As noted in sections below, VA leadership continued to dedicate attention and resources to completing an initial revision of its medical criteria and developing plans to keep them updated. VA partially met our criterion for capacity. Since 2015, VA has taken steps to ensure it has the capacity to revise and maintain its medical criteria, and officials told us that VA has drafted or is in the process of drafting revised regulations for 14 of the 15 body systems. However, VA will not meet its target date for completing a final review and revision of all body systems by March 2017. Specifically, officials told us that VA: finished impact analyses—studies of how revisions will affect veterans’ disability ratings—for 10 of 15 body systems and extended timelines for completing analyses for the remaining body systems to the end of calendar year 2017; promulgated proposed regulations for 5 of 15 body systems with plans to finalize 4 of those 5 by its original target date of March 2017, and extended its target dates for finalizing new rules for all body systems until the end of fiscal year 2018; and plans to assemble cross-functional teams to identify what changes VA will need to make to its policies, procedures, communications, training, and computer systems to implement the regulations, which VA officials said is in accordance with the agency’s standard process for implementing new and revised regulations. In addition, officials told us that VA lacks the necessary internal resources or expertise to conduct earnings loss studies, which take into account how advances in medical treatments and assistive technologies might be used to reduce functional loss due to disability. As such, VA requested funding for a new earnings loss study to begin in 2017. If funding is not provided, VA officials noted that they will use any available information to meet VA’s goal of reviewing and revising its medical criteria on a staggered 5-year cycle. We will continue to monitor VA’s efforts toward making fact-based and timely revisions to the VA ratings schedule, and ultimately implement these revisions in its decision making process. VA has now met our criterion for action plans, up from partially met in 2015. VA made noteworthy progress in accordance to its original project plan, as noted above, and updated timeframes in its plan in response to delays. VA officials currently expect to promulgate final rules for all body systems by the end of fiscal year 2018. Moreover, officials also told us that VA is on track to achieve its plans to keep criteria current once initial updates are complete by placing each of the 15 body systems into a 5- year cycle of staggered reviews, and intends to document work plans and maintain working groups for each system to ensure that medical advancements and new research are incorporated as necessary. VA met our criterion for monitoring, up from partially met in 2015. Since August 2013, VA has tracked its progress against its project plan for finishing its first round of updates of medical criteria, completing earning loss studies, and ensuring all body systems are updated once every 10 years. In doing so, it has also updated its project plan to include new timeframes for completing its first round of updates in response to delays described below. VA partially met our criterion for demonstrated progress. Since 2015, VA has continued to make progress updating its medical criteria, but, as previously mentioned, VA will not meet its target to review and revise regulations for all body systems by March 2017. Specifically, it is not on target to promulgate regulations for 11 of the 15 body systems it is updating, and now expects to promulgate proposed regulations for the 11 systems by the end of fiscal year 2017, and final regulations by the end of fiscal year 2018. Officials also reported progress in completing impact analyses; as of August 2016, VA had completed analyses for 10 of the 15 body systems. VA extended timeframes for the 5 remaining analyses to be completed by the end of 2017, prior to the new target date for promulgating final regulations. We will continue to monitor VA’s progress toward finalizing regulations for all body systems, and, as referenced earlier, how it will keep earnings loss information updated. Since our 2015 update, OMB has made some progress towards enhancing coordination and capacity across programs that support employment for people with disabilities. Some progress is evident in all five high-risk criteria. However, the scope of its current efforts to improve employment outcomes and coordination is limited to federal agencies and contractors, and OMB has not yet articulated a broader vision for supporting employment for people with disabilities outside the federal sector that includes appropriate government-wide goals and strategies for achieving them. promising, they continue to fall short of developing government-wide strategies and measurable goals to help people with disabilities attain employment in both the public and private sectors. Finally, OMB officials told us that they are preparing transition plans to help ensure current efforts continue under the new administration, but it remains to be seen whether the administration will support and sustain these efforts. OMB continued to partially meet our criterion for building capacity. In addition to proposing the creation of the Council and issuing a resource guide for employers regarding people with disabilities, OMB officials noted that the prior administration took two other actions to improve the capacity for agency coordination: The Departments of Education and Labor finalized regulations under the Workforce Innovation and Opportunity Act (WIOA), which includes a provision that requires states to set aside funds to assist students with disabilities transition from school to postsecondary education or the workforce, and allows state vocational rehabilitation agencies to prioritize serving students with disabilities. The administration proposed increased funding for supported employment programs in fiscal years 2016 and 2017 that could, for example, provide supported employment services for up to 2 years for individuals already in vocational rehabilitation programs. These efforts, however, are limited in scope or have not yet been implemented. Moreover, they do not relate to creating capacity for establishing goals and other mechanisms to ensure agencies are accountable for having a measureable impact on employment outcomes outside the federal sector. OMB continued to not meet our criterion for developing action plans. As mentioned previously, the prior administration proposed establishing the Council. While the proposed Council is a promising approach, the Council has not received—as of January 2017—funding for fiscal year 2017, and it remains to be seen whether this proposal will be funded in the future. Moreover, the administration has yet to establish government-wide goals for people with disabilities achieving employment outside the federal sector. To help ensure focus through the new administration, OMB officials noted that, in addition to OMB developing transition plans, a number of agencies have 5-year strategic plans that will span the outgoing and incoming administrations. OMB officials also noted that it is ultimately up to the new administration to decide how to plan and coordinate across federal disability programs. OMB partially met our criterion for monitoring. Since 2015, the administration continued to track and work toward increasing employment for people with disabilities at federal agencies, achieving the former President’s goal of hiring 100,000 employees with disabilities over 5 years. With respect to the goal to have people with disabilities comprise 7 percent of federal contractors, OMB officials told us that Labor is updating its case management system to track progress toward this goal. They added that Labor will collect information on contractor performance against this goal as it conducts compliance evaluations, thereby creating a good source of trend data over time. With respect to standardizing the way programs and agencies measure employment, OMB officials told us that the prior administration took a number of steps: The Departments of Labor and Education promulgated a joint final rule, pursuant to a requirement in WIOA, which defines common measures to be used by the six core job training programs under the two departments. Other programs, such as the Supplemental Nutrition Assistance Program’s Employment and Training program, have adopted similar measures. OMB officials stated that it is coordinating an interagency group to ensure all relevant agencies develop the necessary data infrastructure to collect information on these common measures. OMB officials said that the administration worked with VA to add employment-oriented measures to its Vocational Rehabilitation and Employment Program. Relatedly, officials noted that it is reasonable to expect the manner in which programs and agencies measure employment to vary to reflect the different challenges they face. While common measures are helpful in measuring across programs, they do not provide and OMB still lacks a comprehensive picture of how disparate federal efforts support employment of those with disabilities outside the federal sector. permanent employees with disabilities—including 98,000 full-time employees—exceeding the former President’s goal of hiring 100,000 over this period. However, additional hiring goals have not been set and OMB officials said it is up to the new administration whether and how to do so. With respect to the administration’s goal to have people with disabilities comprise 7 percent of most federal contractors, OMB officials reported that Labor’s initial results from this effort will not be available until mid- 2017. With respect to implementing measures across programs, OMB officials told us that, although the administration has yet to develop government-wide goals for the employment of people with disabilities across all sectors, they anticipate that demonstration projects overseen by the Council, if implemented, would identify successful early intervention approaches, which would inform the development of reasonable outcome measures. SSA Workloads: In response to a past recommendation, SSA appointed a chief strategic officer responsible for coordinating agency- wide planning efforts, including those related to managing SSA’s disability claims workloads. VA Workloads: Consistent with our past recommendation, in 2013 VA published its Strategic Plan to Eliminate the Compensation Claims Backlog, which identified implementation risks and metrics for the major initiatives mentioned in the Plan. SSA Modernizing: In response to past recommendations, SSA developed a project plan to assess risks to the success of the OIS, and has taken steps to estimate costs for necessary data collection and planned IT expenditures. SSA also worked with BLS to contract with experts to ensure they had the appropriate expertise to complete the OIS. products and technologies for adults, and a final report for SSA is expected in July 2017. VA Modernizing: In response to a past recommendation, in 2013 VA developed a project management plan that included plans for initiating subsequent updates to its disability rating schedule at regular intervals—whereby reviews of each body system are initiated on a staggered 5-year cycle to ensure no more than 10 years transpires without a review and possible revision of each body system. VA Modernizing: In response to a past recommendation, in 2014 VA updated its project management plan to reflect planned actions—such as identifying human resources to assist in developing and implementing proposed changes, and needed updates to guidance, training and systems—that would ensure smooth and timely implementation of revisions to its ratings schedule. For additional information about this high-risk area, contact Barbara Bovbjerg at (202) 512-7215 or [email protected]. Social Security Disability: SSA Could Increase Savings by Refining Its Selection of Cases for Disability Review. GAO-16-250. Washington, D.C.: February 11, 2016. Veterans Disability Benefits: VA Can Better Ensure Unemployability Decisions are Well Supported. GAO-15-464. Washington, D.C.: July 2, 2015. Veterans’ Disability Benefits: Improvements Could Further Enhance Quality Assurance Efforts. GAO-15-50. Washington, D.C.: November 19, 2014. Social Security Administration: Long-Term Strategy Needed to Address Key Management Challenges. GAO-13-459. Washington, D.C.: May 29, 2013. Veterans’ Disability Benefits: Timely Processing Remains a Daunting Challenge. GAO-13-89. Washington, D.C.: December 21, 2012. VA Disability Compensation: Actions Needed to Address Hurdles Facing Program Modernization. GAO-12-846. Washington, D.C.: September 10, 2012. Employment for People with Disabilities: Little Is Known about the Effectiveness of Fragmented and Overlapping Programs. GAO-12-677. Washington, D.C.: June 29, 2012. Modernizing SSA Disability Programs: Progress Made, but Key Efforts Warrant More Management Focus. GAO-12-420. Washington, D.C.: June 19, 2012. With nearly $100 billion in assets, the Pension Benefit Guaranty Corporation’s (PBGC) financial portfolio is one of the largest of any federal government corporation. Through its single-employer and multiemployer insurance programs, PBGC insures the pension benefits of nearly 40 million American workers and retirees who participate in nearly 24,000 private-sector defined benefit plans. PBGC’s financial future remains uncertain, due in part to a long-term decline in the number of traditional defined benefit plans and the collective financial risk of the many underfunded pension plans that PBGC insures. We designated the single-employer program as high risk in July 2003 and added the multiemployer program in January 2009. Since fiscal year 2013, PGBC’s financial deficits have more than doubled. At the end of fiscal year 2016, PBGC’s net accumulated financial deficit was over $79 billion—an increase of about $44 billion since 2013. At the same time, PBGC estimated that its exposure to future losses for underfunded plans was nearly $243 billion. The single-employer program, composed of about 22,200 plans, accounted for $20.6 billion of PBGC’s overall deficit (see figure 21). The multiemployer program, composed of only about 1,400 plans, accounted for about $59 billion. According to PBGC, these dramatic increases were attributable to broad economic factors and financial conditions of the plans PBGC insures. Various laws have been enacted to strengthen PBGC’s financial position. For instance, the Pension Protection Act of 2006 (PPA) strengthened pension funding requirements for plans, the Moving Ahead for Progress in the 21st Century Act (MAP-21) included measures to increase premium rates and the Bipartisan Budget Act of 2013 increased premium rates further. However, some of this legislation also included provisions that would allow single employer plan sponsors to defer mandatory contributions to their defined benefit pension plans. To the extent that sponsors reduce contributions in the short term, they may increase plan underfunding and expose PBGC to greater risk. Recognizing the dramatic increase in PBGC’s deficit because of particular financial and demographic challenges facing many multiemployer plans, the Multiemployer Pension Reform Act of 2014 (MPRA) was enacted in December 2014 with a number of provisions to promote the long-term viability of the multiemployer program. As with our last report in 2015, there is no rating for this high-risk area because addressing the issues in this area primarily involves congressional action, while the high-risk criteria and subsequent ratings were developed to reflect the status of agencies’ actions and the additional steps they need to take. While PBGC faces a significant long-term challenge with its single- employer program, it faces an immediate and critical challenge with its multiemployer program. In a 2013 report, we recommended that Congress consider comprehensive and balanced structural reforms to reinforce and stabilize the multiemployer system. In December 2014, Congress took action to address the growing crisis in the multiemployer pension system by passing MPRA, which enacted several reforms responsive to our 2013 report on PBGC’s multiemployer program. Specifically, MPRA provided severely underfunded plans, under certain conditions and only with the approval of federal regulators, the option to reduce the retirement benefits of current retirees to avoid plan insolvency and expanded PBGC’s ability to intervene when plans are in financial distress. In addition, MPRA doubled the premiums paid by multiemployer plans (from $13 to $26 per participant). While these reforms are intended to improve the program’s financial condition, projections suggest that the future insolvency of the multiemployer program remains likely. Prior to passage of MPRA, PBGC estimated that the multiemployer insurance fund would likely be exhausted by 2022 as a result of current and projected plan insolvencies. PBGC officials noted that the act did not fully address the crisis in the multiemployer program and they predict that the changes will only forestall insolvency of the program probably by about an additional 3 years. Current estimates indicate that these changes will allow some plans to stay solvent and will reduce the cumulative unmet need for financial assistance to multiemployer plans by about half. As of January 2017, 10 pension plans had submitted 11 applications to suspend benefits under MPRA. (4 applications have been denied, 2 were withdrawn, 4 are under review, and 1 has been approved.) In addition, the Bipartisan Budget Act of 2013 and the Bipartisan Budget Act of 2015 increased premium rates for the single-employer program. PBGC continues to face long-standing funding challenges for its single- employer insurance program as well, due to an overall decline in the defined benefit pension system. While tens of thousands of companies continue to offer traditional defined benefit plans, the total number of plans has declined significantly, as has participation in those plans. Since 1985, there has been a 79 percent decline in the number of plans insured by PBGC to 23,769 plans in 2014 and more than 11 million fewer workers are actively participating in these plans. As a result, PBGC’s premium base has been eroding over time as fewer sponsors are paying premiums for fewer participants. Additionally, the structure of PBGC’s premium rates—a key component of PBGC’s funding—has long been another area of concern. Despite periodic increases in premium rates, which are set according to statute, the level of premiums has not kept pace with the magnitude and multiplicity of risks that PBGC insures against. Moreover, plan underfunding is the only risk factor currently considered in determining a sponsor’s premium rate. Since 2011, the administration has proposed legislative reforms that would authorize the PBGC board to adjust premiums and to explore designing a more risk-based premium structure. Under the current premium structure for its single-employer program, PBGC collects from sponsors a per-participant flat-rate premium and a variable-rate premium that is based on a plan’s level of underfunding. In 2012, we recommended that Congress consider authorizing a redesign of PBGC’s premium structure for single-employer plans to allow incorporation of additional risk factors, such as consideration of a sponsor’s financial health. PBGC officials stated that they have continued efforts to enhance understanding of alternative premium structures by analyzing the limitations of the current system and by modeling various alternative risk-based options. However, to date no legislation incorporating additional risk factors into PBGC’s premium structure has been enacted. PBGC’s governance structure is another area of weakness noted in several of our past reports. In particular, we have long recommended that PBGC’s board—currently composed of the Secretaries of the Treasury, Commerce, and Labor—be expanded to include additional members with diverse backgrounds who possess knowledge and expertise useful to PBGC’s mission. This recommendation has not yet been enacted into law, but MAP-21 included provisions to improve PBGC’s governance by prescribing in greater detail the working relationships between its Board of Directors and its Inspector General, General Counsel, Advisory Committee, and Director. It also called for the National Academy of Public Administration (NAPA) to review PBGC’s governance structure and to report on the ideal size and composition of its board. In its September 2013 report, NAPA recommended to Congress that if the agency is provided greater responsibility over its policies, PBGC’s board should be expanded. Furthermore, we have long emphasized that PBGC requires strong and stable leadership to ensure that it can meet its future financial challenges. In August 2016, the Secretary of Labor provided updated information related to several of these areas of concern. Regarding the long-term financial stability of both insurance programs, the Secretary noted that the President’s 2017 budget again proposed that the PBGC Board be granted the authority to adjust premiums, and with that authority directed the Board to raise $15 billion in additional premium revenue from the multiemployer program. With regard to the recommendation to improve PBGC’s governance structure, the PBGC Board has declined to pursue the matter further absent authorizing legislation. PBGC has recently established an Enterprise Risk Management function and plans to hire a Risk Management Officer to identify and determine appropriate actions to mitigate the risks identified. As of October 2016, PBGC had not yet filled this position or determined the areas of potential risk to be targeted. Although Congress and PBGC have taken significant and positive steps to strengthen the agency over the past 3 years, concerns persist related to the multiemployer program and challenges related to PBGC’s overall funding structure and governance. While changes were made with passage of MPRA, PBGC officials believe there is a 50 percent chance that the multiemployer program will be insolvent by the year 2025, and after that, the risk of insolvency rises rapidly—reaching 90 percent by 2032. Further, the premium structure for PBGC’s single-employer program continues to result in rates that do not align with the risk the agency insures against and the effectiveness of PBGC’s board remains hampered by its size and composition. Moreover, PBGC continues to face the ongoing threat of losses from the termination of underfunded plans, while grappling with a steady decline in the defined benefit pension system. With each passing year, fewer employers are sponsoring defined benefit plans and the sources of funds to finance future claims are becoming increasingly inadequate. Absent additional steps to improve PBGC’s finances, the long-term financial stability of the agency remain uncertain and the retirement benefits of millions of American workers and retirees could be at risk of dramatic reductions. To improve the long-term financial stability of both PBGC’s insurance programs, Congress should consider: authorizing a redesign of PBGC’s single employer program premium structure to better align rates with sponsor risk; adopting additional changes to PBGC’s governance structure—in particular, expanding the composition of its board of directors; strengthening funding requirements for plan sponsors as appropriate given national economic conditions; working with PBGC to develop a strategy for funding PBGC claims over the long term, as the defined benefit pension system continues to decline; and enacting additional structural reforms to reinforce and stabilize the multiemployer system that balance the needs and potential sacrifices of contributing employers, participants and the federal government. For additional information about this high-risk area, contact Charles A. Jeszeck at (202) 512-7215 or [email protected]. Pension Plan Valuation: Views on Using Multiple Measures to Offer a More Complete Financial Picture. GAO-14-264. Washington, D.C.: September 30, 2014. Private Pensions: Timely Action Needed to Address Impending Multiemployer Plan Insolvencies. GAO-13-240. Washington, D.C.: March 28, 2013. Private Pensions: Multiemployer Plans and PBGC Face Urgent Challenges. GAO-13-428T. Washington, D.C.: March 5, 2013. Pension Benefit Guaranty Corporation: Redesigned Premium Structure Could Better Align Rates with Risk from Plan Sponsors. GAO-13-58. Washington, D.C.: November 7, 2012. Pension Benefit Guaranty Corporation: Improvements Needed to Strengthen Governance Structure and Strategic Management. GAO-11-182T. Washington, D.C.: December 1, 2010. Private Pensions: Changes Needed to Better Protect Multiemployer Pension Benefits. GAO-11-79. Washington, D.C.: October 18, 2010. The National Flood Insurance Program (NFIP) is a key component of the federal government’s efforts to limit the damage and financial effect of floods. However, it likely will not generate sufficient revenues to repay the billions of dollars borrowed from the Department of the Treasury (Treasury) to cover claims from the 2005 and 2012 hurricanes or potential claims related to future catastrophic losses. This lack of sufficient revenue highlights what have been structural weaknesses in how the program is funded. Since the program offers rates that do not fully reflect the risk of flooding, NFIP’s overall rate-setting structure was not designed to be actuarially sound in the aggregate, nor was it intended to generate sufficient funds to fully cover all losses. Instead, Congress authorized the Federal Emergency Management Agency (FEMA)—the agency within the Department of Homeland Security (DHS) responsible for managing NFIP—to borrow from Treasury, within certain limits, when needed. Until the 2005 hurricanes, FEMA had used its authority to borrow intermittently and was able to repay the loans. As of March 2016, FEMA owed Treasury $23 billion, up from $20 billion as of November 2012. FEMA made a $1 billion principal repayment at the end of December 2014—its first such payment since 2010. The Biggert-Waters Flood Insurance Reform Act of 2012 (Biggert-Waters Act) contained provisions to help strengthen the financial solvency of the program, including phasing out almost all discounted insurance premiums (for example, subsidized premiums). However, the extent to which its changes would have reduced NFIP’s financial exposure is unclear. In July 2013, we reported that FEMA was starting to implement some of the required changes. However, on March 21, 2014, the Homeowner Flood Insurance Affordability Act of 2014 (HFIAA) was enacted. HFIAA reinstated certain premium subsidies and slowed down certain premium rate increases that had been included in the Biggert-Waters Act. Aspects of HFIAA were intended to address affordability concerns for certain property owners, but may also increase NFIP’s long-term financial burden on taxpayers. Further, an outdated policy and claims management system has also placed the program at risk. As a result of its substantial financial exposure and management and operations challenges, the program has been on our High-Risk List since 2006. Congress and FEMA have made progress in meeting the criteria for removing NFIP from the High-Risk List. In July 2012, the Biggert-Waters Act was enacted. The Biggert-Waters Act contained provisions to help strengthen the financial solvency of the program, including phasing out almost all discounted insurance premiums (for example, subsidized premiums). In March 2014, HFIAA was enacted. HFIAA reinstated certain premium subsidies and slowed down certain premium rate increases that had been included in the Biggert-Waters Act. FEMA leadership has also shown a commitment to taking a number of actions to implement our recommendations. However, implementing required changes under the Biggert-Waters Act, as amended by HFIAA, and addressing allegations of improper claims adjusting practices after Hurricane Sandy have created capacity challenges for FEMA in addressing the financial exposure created by NFIP as well as improving program administration. FEMA has identified actions to implement our recommendations, but it has not yet developed a comprehensive plan to address all the issues that have placed NFIP on our High-Risk List. For example, FEMA has a process in place to monitor progress in taking actions to implement our recommendations related to NFIP. But broader monitoring of the effectiveness and sustainability of its actions would help ensure that FEMA takes appropriate corrective actions. While FEMA has demonstrated progress toward improving NFIP’s financial stability and program efficiency, these efforts are not complete. For example, FEMA has addressed our recommendations to improve the monitoring and reporting of NFIP contractor performance and validate data system changes before they become effective. FEMA also has initiated actions to improve the accuracy of full-risk rates, but some of these efforts will continue over the next 5 to 10 years. In addition, we estimate that policyholders with certain subsidized premiums paid $216 million more in premiums as of the end of fiscal year 2015 than they would have paid prior to the enactment of the Biggert-Waters Act as a result of changes FEMA made in rates for these properties. However, FEMA still does not have all the necessary information to appropriately revise premium rates for certain subsidized properties. Other important actions, such as modernizing its policy and claims management system, also remain to be completed. While FEMA leadership has displayed a commitment to addressing the challenges that have placed NFIP on the High-Risk List and has made progress in a number of areas, FEMA needs to take the following actions. Complete Biggert-Waters Act and HFIAA requirements that have not been fully met. Develop a comprehensive plan for removing NFIP from the High-Risk List. Initiate broader monitoring of the effectiveness and sustainability of its actions to help ensure that appropriate corrective actions are being taken. Continue ongoing efforts to improve its NFIP rate-setting methods and evaluate approaches to obtain flood risk information needed to determine full-risk rates for properties with previously subsidized rates. Complete efforts to establish a new information technology system for NFIP. By completing the actions noted above, FEMA will likely improve its ability to address the financial exposure of the program and help ensure that the funds allocated to NFIP and premiums paid to the program are used effectively. In addition, Congress should continue to consider changing the program to further address the competing goals of financial solvency and affordability. FEMA partially meets this criterion. FEMA’s leadership continues to show a commitment to implement our recommendations designed to help strengthen NFIP’s future financial solvency and administrative efficiency. However, the 2014 enactment of HFIAA continues to present administrative challenges for FEMA leadership and affect the program’s capacity to address the financial exposure created by NFIP. For example, HFIAA reinstated certain premium subsidies and slowed down some premium rate increases that had been included in the Biggert-Waters Act. In addition, the Biggert-Waters Act required that FEMA establish a reserve fund to be available for meeting the expected future obligations of NFIP, and HFIAA includes an annual surcharge for all policies ($25 for most policies) to be added to the reserve fund. However, FEMA stated in its June 2016 Quarterly NFIP Reserve Fund Report to Congress that it would not reach the required reserve fund balance of $12.8 billion for fiscal year 2015. FEMA stated that as long as the NFIP maintains outstanding debt, it would expect that the reserve fund will not reach the required balance, as amounts collected may be periodically transferred to Treasury to reduce the NFIP’s debt or to pay claims and expenses in years when claims are high. For example, according to DHS officials, FEMA notified Congress in October 2016 that it planned to use reserve funds to pay for claims related to the 2016 flooding in Louisiana and Hurricane Matthew because the National Flood Insurance Fund had been exhausted. FEMA further stated in its June 2016 report that in order to make any significant progress toward increasing the reserve fund balance or paying down the NFIP debt, the reserve assessment would need to be significantly increased. In January 2017, FEMA obtained reinsurance for NFIP effective January 1, 2017 through January 1, 2018. A FEMA official noted that securing reinsurance was a key step toward building a stronger financial framework for NFIP. Under the agreement, reinsurers agreed to cover 26 percent of NFIP claims between $4 billion and $8 billion on losses from events that occur in 2017. FEMA partially meets this criterion. FEMA’s capacity continues to be strained as it deals with multiple challenges, including implementing required changes under the Biggert-Waters Act, as amended by HFIAA. For example, as we reported in December 2016, FEMA officials told us that the agency’s progress implementing the Biggert-Waters Act requirement to revise its compensation methodology had slowed as litigation over Hurricane Sandy claims escalated and more resources were assigned to that issue. FEMA has made some progress to address weaknesses that we previously noted could limit its ability to effectively and efficiently implement NFIP. For example, we made two recommendations in a January 2014 report aimed at improving FEMA’s monitoring and reporting of contractor performance, such as ensuring that federal contracting officials have complete and timely information about contractor performance. FEMA provided us with documentation describing how the agency plans to ensure the timeliness of contractor performance assessments and address our other concerns. We also recommended in a December 2014 report that FEMA institute controls to validate changes to the NFIP data system. In March 2015, FEMA instituted the use of a new procedure manual, including a testing plan, for data system programming changes required to implement NFIP rate and rule changes. This procedure manual outlines the steps and approvals needed to plan, develop, test, and deploy NFIP data system changes. However, FEMA faces challenges implementing required Biggert-Waters Act and HFIAA requirements, including the complexity of the legislation and timing of the enactment of HFIAA, resource constraints, and the competing program goals of financial solvency and affordability. In October 2016, DHS officials told us that FEMA had met requirements to complete 20 of the 34 Biggert-Waters sections and 14 of the 25 HFIAA sections and was taking action on other sections. FEMA partially meets this criterion. FEMA has identified actions to address the recommendations from our individual reports. In January 2017, a FEMA official noted that the agency tracks GAO recommendations through its internal controls program. The official added that FEMA is planning to enhance its Enterprise Risk Management approach to track those GAO recommendations that impact its risk profile. However, FEMA lacks a comprehensive plan that addresses the issues that have placed NFIP on our High-Risk List. While addressing our recommendations is part of such a plan, a comprehensive plan defines the root causes, identifies effective solutions, and provides for substantially completing corrective measures near term. Such a plan could help FEMA ensure that all important issues, and all aspects of those issues, are addressed. FEMA partially meets this criterion. FEMA has a process in place to monitor progress in taking actions to implement our recommendations related to NFIP. For example, the status of efforts to address the recommendations is regularly discussed both within FEMA and at the DHS level, according to a DHS official. However, FEMA lacks a specific process for independently validating the effectiveness or sustainability of those actions. According to a DHS official, once FEMA implements a recommendation related to NFIP, it does not track separately the effects of the actions taken to do so, but instead regularly reviews the effectiveness of the entire program. Additional monitoring of the effectiveness and sustainability of its specific actions taken to address our recommendations would help ensure that appropriate corrective actions are being taken. FEMA partially meets this criterion. FEMA has demonstrated progress toward improving NFIP’s financial stability and program operations. As previously discussed, FEMA has taken steps to address our recommendations to improve how it monitors and reports NFIP contractor performance and validates data system changes before they become effective. However, progress is needed in other areas. For example, in 2008 we recommended that FEMA take steps to ensure that rate-setting methods and the data used to set rates result in full-risk premiums that accurately reflect the risk of flooding. We found that FEMA’s method for setting its full-risk rates may not ensure that the rates accurately reflect the actual risk of flood damage. In 2013, we also recommended that FEMA develop and implement a plan to obtain flood risk information needed to determine full-risk rates for properties with previously subsidized rates. We found that FEMA generally lacks information needed to apply full-risk rates to certain subsidized properties. As of March 2016, FEMA officials identified a number of actions the agency has taken or has underway to improve its NFIP rate-setting methods, but the officials noted that some of these efforts would continue over the next 5 to 10 years. In addition, as a result of changes FEMA has made in rates for certain subsidized properties (specifically, subsidies for primary residences, non-primary residences, and residential severe repetitive loss properties), we estimate that policyholders with these subsidized premiums paid $216 million more in premiums as of the end of fiscal year 2015 than they would have paid prior to the enactment of the Biggert-Waters Act. FEMA officials also said that they are evaluating approaches, including using new technologies, to collect elevation information for subsidized properties without financially burdening policyholders. FEMA has demonstrated progress in improving other areas of the program’s operations, such as continuity planning. However, some important actions, such as modernizing its information technology systems—including those for financial reporting and its policy and claims management system—remain to be completed. In 2011, we recommended that FEMA develop guidance and a related plan for continuing operations during federal disasters to help ensure consistent day-to-day operations when staff are deployed to disaster sites or reassigned to work on disaster-related issues. As part of developing its 2012 continuity plan, FEMA identified critical staff as well as the key operations that need to continue when staff are deployed in response to a federal disaster and how operations will continue during such periods. In 2011, in our review of FEMA’s financial management, we reported that staff faced multiple challenges in their day-to-day operations due to limitations in the systems they must use to perform these operations. In this same report, we also noted that FEMA faces challenges modernizing NFIP’s insurance policy and claims management system. After 7 years and $40 million, FEMA ultimately canceled its NextGen effort in November 2009 because the system did not meet user expectations. Since that time, FEMA established a steering committee tasked with overseeing FEMA’s next attempt to modernize its policy and claims processing system and began implementing some changes to its acquisition management practices. It remains to be seen if these efforts will help FEMA avoid some of the problems that led to NextGen’s failure. In late-November 2014, FEMA officials told us that the agency was in the acquisition stage for a new system called “Phoenix” that will replace NextGen and NFIP’s current financial and reporting system. In January 2017, a FEMA official stated the DHS acquisition review board had granted FEMA permission to procure and build the new system. For additional information about this high risk area, contact Alicia Puente Cackley at (202) 512-8678 or [email protected]. Flood Insurance: FEMA Needs to Address Data Quality and Consider Company Characteristics When Revising Its Compensation Methodology. GAO-17-36. Washington, D.C.: December 8, 2016. Flood Insurance: Review of FEMA Study and Report on Community- Based Options. GAO-16-766. Washington, D.C.: August 24, 2016. Flood Insurance: Potential Barriers Cited to Increased Use of Private Insurance. GAO-16-611. Washington, D.C.: July 14, 2016. National Flood Insurance Program: Continued Progress Needed to Fully Address Prior GAO Recommendations on Rate-Setting Methods. GAO- 16-59. Washington, D.C.: March 17, 2016. National Flood Insurance Program: Options for Providing Affordability Assistance. GAO-16-190. Washington, D.C.: February 10, 2016. Flood Insurance: Status of FEMA's Implementation of the Biggert-Waters Act, as Amended. GAO-15-178. Washington, D.C.: February 19, 2015. Flood Insurance: Forgone Premiums Cannot Be Measured and FEMA Should Validate and Monitor Data System Changes. GAO-15-111. Washington, D.C.: December 11, 2014. Overview of GAO’s Past Work on the National Flood Insurance Program. GAO-14-297R. Washington, D.C.: April 9, 2014. Flood Insurance: Strategies for Increasing Private Sector Involvement. GAO-14-127. Washington, D.C.: January 22, 2014. National Flood Insurance Program: Progress Made on Contract Management but Monitoring and Reporting Could Be Improved. GAO-14- 160. Washington, D.C.: January 15, 2014. Flood Insurance: More Information Needed on Subsidized Properties. GAO-13-607. Washington, D.C.: July 3, 2013. FEMA: Action Needed to Improve Administration of the National Flood Insurance Program. GAO-11-297. Washington, D.C.: June 9, 2011. Since designating Department of Veterans Affairs (VA) health care as a high-risk area in 2015, we continue to be concerned about VA’s ability to ensure its resources are being used cost-effectively and efficiently to improve veterans’ timely access to health care, and to ensure the quality and safety of that care. VA’s Veterans Health Administration (VHA) operates one of the largest health care delivery systems in the nation, with 168 medical centers and more than 1,000 outpatient facilities organized into regional networks. VA has faced a growing demand by veterans for its health care services—due, in part, to servicemembers returning from the United States’ military operations in Afghanistan and Iraq and the needs of an aging veteran population—and that trend is expected to continue. For example, the total number of veteran enrollees in VA’s health care system rose from 7.9 million to almost 9 million from fiscal year 2006 through fiscal year 2016. Over that same period, VHA’s total budgetary resources have increased substantially, from $37.8 billion in fiscal year 2006 to $91.2 billion in fiscal year 2016. Although VA’s budget and the total number of medical appointments provided have substantially increased for at least a decade, there have been numerous reports in this same period of time—by us, VA’s Office of the Inspector General, and others—of VA facilities failing to provide timely health care. In some cases, the delays in care or VA’s failure to provide care at all reportedly have resulted in harm to veterans. In response to these serious and longstanding problems with VA health care, the Veterans Access, Choice, and Accountability Act of 2014 (Pub. L. No. 113-146, 128 Stat. 1754) was enacted, which provided temporary authority and $10 billion in funding through August 7, 2017 (or sooner, if those funds are exhausted) for veterans to obtain health care services from community (non-VA) providers to address long wait times, lengthy travel distances, or other challenges accessing VA health care. Under this authority, VA introduced the Veterans Choice Program in November 2014. The $10 billion is meant to supplement VA’s medical services budget and is funded through a separate appropriations account, the Veterans Choice Fund. The 2014 law also appropriated $5 billion to expand VA’s capacity to deliver care to veterans by hiring additional clinicians and improving the physical infrastructure of VA’s medical facilities. agency officials projected a fiscal year 2015 funding gap of about $3 billion in its medical services appropriation account. The projected funding gap was largely due to administrative weaknesses that slowed the utilization of the Veterans Choice Program in fiscal year 2015 and resulted in higher-than-expected demand for VA’s previously established VA community care programs. In particular, VA officials expected that the Veterans Choice Program would absorb much of the increased demand from veterans for health care services delivered by non-VA providers, but instead the slow utilization resulted in veterans continuing to receive care through previously established VA community care programs that drew funds from VA’s medical services appropriation account. To avoid a projected funding gap in VA’s medical services appropriation account, the VA Budget and Choice Improvement Act provided VA temporary authority to use up to $3.3 billion from the Veterans Choice Program appropriation for obligations incurred for other specified medical services, starting May 1, 2015, until October 1, 2015. While timely and cost-effective access to needed health care services is essential, care coordination between VA and community providers, and between VA and the Department of Defense (DOD) (for transitioning servicemembers), is also critical to preventing unfavorable health outcomes for veterans. With the increased utilization of community providers that has occurred as a result of the Veterans Access, Choice, and Accountability Act, veterans are required to navigate multiple complex health care systems—the VA health care system and those of community providers—to obtain needed health care services. The quality of veterans’ care may be adversely affected if VA and community providers do not promptly communicate important clinical information. In addition, servicemembers transitioning from DOD to VA health care may experience problems if, for example, VA inappropriately discontinues medications, such as those for mental health conditions, because of a lack of clarity in VA’s medication continuation policy, potentially increasing the risk for adverse health effects. Overall, VA has partially met the criteria for leadership commitment and an action plan to address the five areas of concern we identified when we placed VA health care on our High-Risk List in 2015. These five areas of concern are: (1) ambiguous policies and inconsistent processes; (2) inadequate oversight and accountability; (3) information technology (IT) challenges; (4) inadequate training for VA staff; and (5) unclear resource needs and allocation priorities. VA has not met the other criteria for removal: capacity to address the areas of concern, monitoring implementation of corrective actions, and demonstrating progress. Although we concluded in our overall assessment that VA’s actions partially met two of our five criteria for removal from the High-Risk List, it is worth noting that the department made significantly less progress in addressing the action plan criterion than it has in demonstrating leadership commitment. Specifically, VA partially met the action plan criterion for only one of the five areas of concern—ambiguous policies and inconsistent processes—whereas VA partially met the leadership commitment criterion for four out of five areas of concern (VA did not meet the leadership commitment criterion for inadequate training for VA staff). The department must make significant progress on the action plan criterion for all five areas of concern we identified in order to meet this criterion for removal from our High-Risk List. VA officials have expressed their commitment to addressing the department’s High-Risk List designation, and have taken actions such as establishing a task force, working groups, and a governance structure for addressing the issues contributing to the designation. For example, in July 2016, VA chartered the GAO High-Risk List Area Task Force for Managing Risk and Improving VA Health Care (task force) to develop and oversee implementation of VA’s plan to address the root causes of the five areas of concern we identified. VHA’s Deputy Under Secretary for Health (USH) for Organizational Excellence serves as the executive agent for the task force, with support from a combination of permanent and temporary staff. This senior VHA position was created in 2015 and is responsible for overseeing offices focused on assessing and improving health care quality and safety, providing VA leadership with analytics to assess VHA’s performance, and addressing issues related to public trust and integrity. For each of the five areas of concern we identified, VA has established a working group with two senior-level VA officials as leaders. These workgroups and officials are responsible for developing and executing VA’s high-risk mitigation plan for each of our five areas of concern. VA has also contracted with two entities to support VA’s actions to address the high-risk designation. The first contract—with a Federally Funded Research and Development Center operated by the MITRE Corporation—is focused on (1) developing and executing an action plan, (2) creating a plan to enhance VA’s capacity to manage High-Risk List areas, and (3) recommending changes to the organizational structure VA set up to address the high-risk designation. The total contract value is $5.2 million, with an 8-month performance period that began on June 20, 2016 and 1 option year. The second contract—with Atlas Research, LLC—is for project management staff who will help establish a program executive office within the office of the VHA Deputy USH for Organizational Excellence, and assist with establishing the management functions necessary to oversee the five high-risk area working groups. The total contract value is $2.6 million, with a 1-year performance period that began on September 9, 2016 and the option to extend services for up to 6 additional months. Since we added VA health care to our High-Risk List in 2015, VA’s leadership has increased its focus on implementing our recommendations. Between January 2010 and February 2015 (when we designated VA health care as a high-risk area), we issued products containing 178 recommendations related to VA health care. When we made our designation in 2015, the department had only implemented about 22 percent of them—39 of the 178 recommendations. In the last 2 years, VA has made good progress, but additional work is needed. Since we designated VA health care as a high-risk area, we have made 66 new recommendations related to VA health care, for a total of 244 recommendations from January 1, 2010 through December 31, 2016. VA has implemented about 50 percent of the recommendations we have made since 2010—122 of the 244 recommendations. (See table 9.) It is critical that VA implement our recommendations not only to remedy the specific weaknesses identified, but because they may be symptomatic of larger underlying problems that also need to be addressed. On August 18, 2016, VA provided us with an action plan for addressing the High-Risk List designation that acknowledged the deep-rooted nature of the areas of concern we identified, and stated that these concerns would require substantial time and work to address. Although the action plan outlined some steps VA plans to take over the next several years to address its high-risk designation, the overall document did not satisfy the action plan criterion for removal. Specifically, several sections were missing actions that support our criteria for removal, such as analyzing the root causes of the issues and measuring progress with clear metrics. In our feedback to VHA on drafts of their action plan, we highlighted these missing actions and also stressed the need for specific timelines and an assessment of needed resources for implementation. For example, VA plans to use staff from various sources, including contractors and temporarily detailed employees, to support their high-risk area working groups, so it will be important for VA to ensure that these efforts are sufficiently resourced. While VA has demonstrated partial leadership commitment in most of the five areas of concern, significant gaps remain between VA’s stated plans and its actual progress. This lack of progress is evidenced by findings from our recent work, which have led us to make new recommendations that relate to each of the five areas of concern we highlighted in 2015. (See table 10.) Managing Risks and Improving VA Health Care Number of recommendations prior to GAO high-risk designation (Jan. 1, 2010 through Feb. 11, 2015) Number of recommendations added since GAO high-risk designation (Feb. 11, 2015 through Dec. 31, 2016) Recommendation counts listed include both implemented and not implemented recommendations as of the dates indicated. Since we added VA health care to our High-Risk List in 2015, VA has acknowledged the significant scope of the work that lies ahead. VA took an important step toward addressing our criteria for removal by establishing the leadership structure necessary to ensure that actions related to the High-Risk List are prioritized within the department. It is imperative, however, that VA maintain strong leadership support as it completes its transition into a new presidential administration. strategies that link strategic goals to actions and guidance. In addition, VA will need to demonstrate that it has the capacity to sustain efforts by devoting appropriate resources—including people, training, and funds—to address the high-risk challenges we identified. VA’s action plan for addressing its high-risk designation describes many planned outcomes with overly ambitious deadlines for completion. We are concerned about the lack of root cause analyses for most areas of concern, and the lack of clear metrics and needed resources for achieving stated outcomes. This is especially evident in VA’s plans to address the IT and training areas of concern. In addition, with the increased use of community care programs, it is imperative that VA’s action plan include a discussion of the role of community care in decisions related to policies, oversight, IT, training, and resource needs. We will continue to monitor VA’s institutional capacity to fully implement and sustain needed changes, including those related to its IT transformation, comprehensive training management plan, and resourcing decisions. Finally, to help address our high-risk designation, VA should continue to implement our recommendations and recommendations from other reviews such as the Commission on Care. The Veterans Access, Choice, and Accountability Act of 2014 established the Commission on Care to examine, assess, and report on veterans’ access to VA health care and to strategically examine how best to organize VHA, locate health resources, and deliver health care to veterans during the next 20 years. The Commission’s June 2016 report to the President included 18 recommendations to improve veterans’ access to care and, more broadly, to improve the quality and comprehensiveness of that care. For example, the Commission recommended that VHA create local, networked systems of care that integrate VA-based care and community care and remove restrictions to veterans seeking care from community providers. On September 1, 2016, the President concurred with 15 of the 18 recommendations and directed VA to implement them. including its policy development and dissemination process; controls and oversight for controlled substances; Veterans Choice Program implementation; physician recruitment and retention; the process for enrolling veterans in VA health care. In particular, the following selected recommendations require VA’s immediate attention: improving oversight of access to timely medical appointments, including the development of wait-time measures that are more reliable and not prone to user error or manipulation, as well as ensuring that medical centers consistently and accurately implement VHA’s scheduling policy. improved oversight of VA community care to ensure—among other things—timely payment to community providers. improved planning, deployment and oversight of VA/VHA IT systems, including identifying outcome-oriented metrics and defining goals for interoperability with DOD. ensuring that recommendations resulting from internal and external reviews of VHA’s organizational structure are evaluated for implementation. This process should include the documentation of decisions and assigning officials or offices responsibility for ensuring that approved recommendations are implemented. It is critical that Congress maintain its focus on oversight of VA health care to help address this high-risk area. Congressional committees responsible for authorizing and overseeing VA health care programs held more than 70 hearings in 2015 and 2016 to examine and address VA health care challenges. In addition, as VA continues to change its health care service delivery in the coming years, some changes may require congressional action—such as VA’s planned consolidation of community care programs after the Veterans Choice Program expires. Sustained congressional attention to these issues will help ensure that VA continues to improve its management and delivery of health care services to veterans. When we designated VA health care as a high-risk area in 2015, we reported that ambiguous VA policies led to inconsistent processes at local VA medical facilities. Based on actions taken since 2015, VA has partially met our criteria for removal for its leadership commitment and action plan. However, VA has not met our criteria for removal for capacity, monitoring, and demonstrated progress for this area of concern. one example of an action that would contribute to meeting the leadership commitment criterion for removal from our High-Risk List. VA has not met the capacity criterion because of significant gaps between its stated goals and the resources available to achieve them. VA’s high- risk working group on ambiguous policies and inconsistent processes is a first step towards establishing the capacity necessary to address this area of concern. VA has allocated staff and awarded contracts to support the department’s overall high-risk effort, but its action plan for this area does not explain how VA will allocate staff and resources to support its plans to address ambiguous policies and inconsistent processes, such as the professional policy writers VA states it needs to ensure consistent policy content and quality. Other actions VA needs to take to demonstrate capacity in this area of concern include maintaining procedures that have recently been established; training appropriate staff in policy development, implementation, and oversight; and addressing gaps such as unofficial policy documents. One example of unofficial policy is memoranda sent by the VHA Deputy USH for Operations and Management to regional network offices and VA medical centers. These memoranda are treated as new policy, but they have not been vetted by other VA offices, potentially creating confusion at the local level between mandatory and suggested actions. fully-established policy revision process in place, or the professional policy writers available to revise policies, VA cannot effectively meet these milestones. VA needs to use the root cause analysis results to develop more realistic milestones and metrics for this area, and ensure that critical actions and outcomes are prioritized given any identified limitations in capacity. VA has not met the monitoring criterion for our concerns related to ambiguous policies and inconsistent processes. VA has many planned actions that have not yet been implemented, including plans to ensure policy is implemented consistently at local and national levels, as well as plans to identify and address unofficial sources of policy. We also have continued to find evidence in our recent work of inconsistencies in policy application that will need to be addressed to show that VA is monitoring policies. For example, we highlighted the inconsistent application of policies in two recent reports examining mental health and primary care access at VA medical facilities in 2015 and 2016, respectively. In both reports, we found wide variation in the time that veterans waited for primary and mental health care, which was in part caused by a lack of clear, updated policies for scheduling—therefore, we recommended that VA update these policies. These ambiguous policies contributed to errors made by appointment schedulers, which led to inconsistent and unreliable wait-time data. For mental health, we also found that two policies conflicted, leading to confusion among VA medical center staff as to which wait-time policy to follow. In 2015, VA resolved this policy conflict by revising its mental health handbook, but other inconsistent applications of mental health policy have not yet been addressed, such as our recommendation to issue guidance about the definitions used to calculate veteran appointment wait times, and communicate any changes to those definitions within and outside VHA. VA has not met the demonstrated progress criterion for removal. We are unable to assess VA’s actions in this area because without the clear milestones and metrics necessary to track performance, VA cannot demonstrate that its actions are linked to identified root causes and that it is effectively managing this area of concern. We have ongoing work examining VA’s actions to ensure that policies related to veterans’ health care are consistently communicated and implemented, and we will continue to monitor VA’s progress in this area. In our 2015 high-risk report, we found that VA has had problems holding its facilities accountable for their performance because it relied on self- reported data from facilities, its oversight activities were not sufficiently focused on compliance, and it did not routinely assess policy implementation. VA has partially met the leadership commitment criterion for this area of concern because it established a high-level governance structure and adopted a new model to guide the department’s oversight and accountability activities. However, VA has not met our criteria for removal for capacity, action plan, monitoring, or demonstrated progress because the department continues to rely on existing processes that contribute to inadequate oversight and accountability. yet approved the draft directive establishing this office and authorizing it to carry out its planned functions. VA has not taken sufficient actions to meet the capacity criterion for removing this area of concern from our High-Risk List. Although VA has begun to allocate staff and resources by establishing the VHA office of the Assistant Deputy USH for Integrity, the success of its new oversight and accountability model depends on establishing consistent policies and ensuring that staff at all levels are complying with them. VA staff will need sufficient guidance and training to address skills gaps and to correct identified deficiencies, and VA’s new office of Internal Audit and Risk Assessment (a key component of its new oversight and accountability model) will need to be fully resourced, staffed, and operational. In addition, VA identified a need for increased training in ethics, as well as a need for staff with this specific expertise at the local level. However, VA’s action plan does not discuss how these actions will be resourced, including hiring staff or obtaining other resources necessary to ensure that such knowledge is in place. VA also has not met the action plan criterion for addressing our concerns about oversight and accountability. In its action plan, VA identifies root causes based on an “environmental analysis” of its health care oversight structure, such as the lack of a formal audit capacity. However, the identified root causes are not linked to clear milestones, metrics, or processes for reporting on progress. VA plans to include metrics in every new or revised policy to allow officials to determine whether the policy is being appropriately implemented and meets objectives. However, as described earlier, VHA’s new policy development and revision process is still in its early stages. Without clear milestones and metrics linked to root causes of the problem, VA cannot assess its implementation status or demonstrate progress against goals. For example, in our May 2016 report on the Veterans Crisis Line (a 24-hour telephone line staffed by responders who assist veterans in emotional crisis), we found VA established key performance indicators to evaluate crisis line operations but had no measureable targets or time frames established for their completion. One of the indicators related to rate at which crisis line callers abandoned their calls prior to speaking with a responder, but VA did not set a minimum or ideal performance target for this indicator. We recommended that VA document clearly stated and measurable targets and time frames for key performance indicators needed to assess Veterans Crisis Line performance, in order to improve the timeliness and quality of crisis line responses to veterans. VA has not met the criterion for monitoring its progress in improving oversight and accountability. VA’s action plan for this area of concern does not explain how it will ensure that medical facilities are consistently reporting reliable data, which is critical to monitoring actions. We have continued to find instances where VA lacked reliable data to determine whether its medical centers were following policies, which will continue to make it difficult for VA to monitor improved oversight and accountability. For example, in 2015, as part of our review of VA’s primary care oversight, we found inaccuracies in VA’s data on primary care panel sizes, which are used to help medical centers manage their workload and ensure that veterans receive timely and efficient care. We found that while VA’s primary care panel management policy requires facilities to ensure the reliability of their panel size data, it does not assign responsibility for verifying data reliability to regional- or national-level officials or require them to use the data for monitoring purposes. As a result, VA could not be assured that local panel size data were reliable, or whether its medical centers have met VA’s goals for efficient, timely, and quality care. We recommended that VA incorporate an oversight process in its primary care panel management policy that assigns responsibility, as appropriate, to regional networks and central office for verifying and monitoring panel sizes. safety, and dignity of women veterans when they receive care at VA medical facilities. In our 2015 high-risk report, we identified limitations in the capacity of VA’s existing IT systems, including the outdated, inefficient nature of certain systems and a lack of system interoperability—the ability to exchange and use electronic health information—as contributors to VA’s IT challenges related to VA health care. These challenges present risks to the timeliness, quality, and safety of VA health care. VA has partially met our leadership commitment criterion by involving top leadership in this area of concern, but it has not met our four remaining criteria for removing IT challenges from the High-Risk List. VA has partially met the leadership commitment criterion for addressing IT challenges. Specifically, VA outlined in its action plan a high-level governance structure that designates an official within VA’s department- level Office of Information and Technology (OI&T) as responsible for this area of concern. In addition, VA’s Chief Information Officer (CIO) has recently initiated an effort to transform the focus and functions of OI&T in response to the Secretary’s goal of making VA a more veteran-focused organization. The CIO’s transformation strategy, initiated in January 2016, calls for the office to stabilize and streamline processes, mitigate weaknesses highlighted in our assessments, and improve outcomes by institutionalizing a new set of IT management capabilities. As part of this transformation, in January 2016, the CIO began transitioning the oversight and accountability of IT projects to a new project management process called the veteran-focused integration process, in an effort to streamline its systems development and delivery of new IT capabilities. intended to serve as OI&T’s portfolio management and project tracking organization; (2) account management, led by three account managers responsible for managing the IT needs of VA’s major components; (3) quality and compliance, responsible for establishing effective policy governance and standards, and ensuring VA adheres to the policies and standards; (4) data management, intended to improve both service delivery and the veteran experience by engaging with data stewards to ensure the accuracy and security of the information collected by VA; and (5) strategic sourcing, which is expected to be responsible for establishing an approach to working with vendors that can supply solutions to VA’s IT requirements. However, VA is in the early stages of implementing these new functions, and it will need to sustain leadership commitment by maintaining OI&T’s transformation through the presidential transition. VA has not taken sufficient action to demonstrate it has the capacity to address the IT challenges we identified. VA has extensive IT resources in terms of staff and funding. In fiscal year 2016, VA’s IT appropriations were approximately $4.1 billion, and in our August 2016 report on VA’s IT management, OI&T reported nearly 7,300 federal employees and approximately 7,800 contractor staff working in support of IT-related functions. However, VA has not demonstrated improvement in several capacity actions, such as establishing specific responsibilities for its new functions, improving collaboration between internal and external stakeholders, and addressing skill gaps. For example, in our August 2016 report, we found that OI&T was still in the process of fully defining the roles and responsibilities of its new organizational units, as of July 2016. With regard to collaboration, VA designated an account manager for VHA as of May 2016, which has the potential to improve VHA and VA collaboration on IT needs. However, its August 2016 action plan for IT challenges describes plans rather than actions already taken to implement the account management function. In addition, we have repeatedly reported on the importance of VA working with DOD to achieve electronic health record interoperability. In August 2015, we reported on the status of these interoperability efforts and noted that the departments have engaged in several near-term efforts focused on expanding interoperability between their existing electronic health record systems. However, we were concerned by the lack of outcome-oriented goals and metrics that would more clearly define what VA and DOD aim to achieve from their interoperability efforts. Accordingly, we recommended that the departments establish a time frame for identifying outcome-oriented metrics and define related goals for achieving interoperability. Finally, in our August 2016 report, we found that while OI&T conducted annual skill gap analyses and developed training courses, and recommended other actions for addressing these gaps, the office had not identified potential gaps that may exist in future years. This led us to recommend that OI&T identify IT skills needed beyond the current fiscal year to assist in identifying future skill gaps. By focusing on the current year, OI&T may not be aware of skill gaps that need to be filled to assure its staff can deliver long-term IT support that contributes to improved services for veterans. VA has not met the action plan criterion for addressing the IT challenges we identified. VA’s action plan for this area provides a descriptive problem statement—reflecting our previously stated concerns—and high-level information about VA-wide IT strategies and initiatives. However, it does not contain a root cause analysis that would help identify and prioritize critical actions and outcomes to address IT challenges. As a result, VA’s stated milestones and dates appear unrealistic and disconnected from the challenges identified. For example, VA set a goal of having 50 percent of its active IT projects on budget and on schedule by the end of 2016, but it does not state what supporting actions and processes would be necessary to achieve this ambitious goal. Also, without a root cause analysis, VA cannot be certain this action will address its IT challenges. A significant concern we identified in our August 2015 report on VA’s and DOD’s interoperability efforts is that the two departments had not identified outcome-oriented goals and metrics that would more clearly define what they aim to achieve from their interoperability efforts and the value and benefits these efforts are intended to yield. VA has not met the criterion related to monitoring actions to address IT challenges. Without outcome-oriented goals and metrics to measure progress, VA cannot demonstrate that it is effectively monitoring implementation and tracking progress against goals. As we have stressed in our prior work, assessing the performance of a program should include measuring its outcomes in terms of the desired results of products or services. In this case, such outcomes could include improving the quality of health care or clinician satisfaction. Establishing outcome-oriented goals and metrics is essential to determining whether a program is operating as intended and delivering value. sustained. A key action within the criterion for demonstrated progress is implementing recommendations. We have made several recommendations to VA to address outdated systems such as its scheduling and community care claims processing systems, but VA has not yet implemented these recommendations. For example, in May 2016, we recommended that VA develop a sound plan for modernizing its claims processing system. We found that, due to recent increases in utilization of community care, VA has had difficulty with the timely processing of claims from community providers and the contractors responsible for administering the Veterans Choice Program. VA officials and claims processing staff indicated that IT limitations, manual processes, and staffing challenges had delayed claims processing. The department had implemented interim measures to address some of the system’s challenges, but it did not expect to deploy solutions to address all challenges, including those related to IT, until fiscal year 2018 or later. When identifying this area of concern in our 2015 high-risk report, we described several gaps in VA’s training, as well as burdensome training requirements, that we found in our prior work. Since we issued the 2015 report, VA has expressed its desire to improve the department’s standardization and management of training, but has not met any of our criteria for removing this area of concern from the High-Risk List. process, VA’s action plan states that it will set goals that enable VA medical center involvement in training planning, but those goals are not fully articulated in the document. The high-level nature of the descriptions in the action plan and lack of action to update outdated policies and set goals for improving training shows that VA lacks leadership commitment to address the concerns that led to our inclusion of this area in the 2015 high-risk report. VA also has not demonstrated that it has the capacity to address our concerns regarding inadequate training. Since identifying these concerns in our 2015 high-risk report, we have continued to find VA health care training gaps that need to be addressed. VA needs to determine the resources needed, actions required, and systems that need to be established to support improvements in how it manages training. In our September 2015 report on nurse recruitment and retention, for example, we found that VA did not know whether its medical center staff had sufficient training to support its national initiatives to recruit and retain nurses. As a result, we recommended that VA evaluate the adequacy of these training resources to help ensure the effective recruitment and retention of nurses across VA medical centers. In our December 2016 report on VHA’s human resources (HR) capacity, we found that VA’s competency assessment tool did not address two of the three personnel systems under which VHA staff may be hired. We recommended that VHA (1) develop a comprehensive competency assessment tool for HR staff that evaluates knowledge of all three of VHA’s personnel systems and (2) ensure that all VHA HR staff complete it so that VHA may use the data to identify and address competency gaps among HR staff. Without such a tool, VHA will have limited insights into the abilities of its HR staff and be ill-positioned to provide necessary support and training. VA also has not met the action plan criterion for this area of concern. In its action plan, VA identified an outdated 2002 policy and a decentralized approach to training as potential root causes of the lack of effective training management and oversight we previously identified. VA did not, however, take the additional steps in its action plan of conducting an analysis to confirm its assumptions. It is also not clear from the action plan whether VA plans to establish clear milestones and metrics to review and measure its progress in addressing the root causes of inadequate training for VA staff. measures and its progress against goals. One key monitoring action is reporting on program progress to senior managers. VA’s action plan for this area states that VHA leadership, including the VHA Under Secretary for Health, will review and approve an annual training plan, but the action plan does not describe what data will support that review, and how it will define progress against goals. Because VA’s comprehensive training management strategy is in the early stages of development, VA has not met the criterion for demonstrated progress in addressing this high-risk area of concern. Without clear priorities and goals for improving training, an action plan with clear milestones and metrics, and data to support reports on progress, it is not possible for VA to demonstrate progress in effectively addressing this area. In our prior work, we reported on gaps in the availability of data needed for VA to identify the resources it needs and ensure they are effectively allocated across VA’s health care system. We included this area of concern when we designated VA health care as a high-risk area in 2015. Over the past 2 years, VA’s actions have partially met our criterion for leadership commitment but not met the other four criteria for removing this area of concern from the High-Risk List. cycles. However, VA’s planned actions do not make clear how VHA, as the agency managing VA health care, is or will be incorporated into VA’s department-level framework, or how that framework will be communicated and reflected at the regional network and medical center levels. Actions that will assist VA in demonstrating progress in leadership commitment for this area of concern include clarifying the role and responsibilities of VHA in the Managing for Results framework, and ensuring continued oversight and accountability of the framework’s implementation. VA has not met our criterion for capacity for this area of concern. In its action plan, VA names several initiatives that are underway to enable Managing for Results, including establishing a mission-requirements- planning function to supply the ground rules and assumptions necessary to inform cost analysis of major VA initiatives. However, VA does not explain how it intends to establish the mission-requirements-planning function, or what resources may be necessary to establish and maintain that function at the national and local levels. Understanding the resources necessary to establish a new process can help to identify skills gaps and training that VA staff may need to facilitate implementation. VA has not met our action plan criterion for this area of concern because it has not established performance measures based on a root cause analysis of its unclear resource needs and allocation priorities. VA’s action plan states that the fragmented nature of the department’s data and information management systems limits its ability to integrate priorities, requirements, and solutions. While Managing for Results is intended to facilitate that integration, the action plan does not contain an analysis or explanation for how VA determined that fragmented systems was a cause of unclear resource needs and allocation priorities, or how their chosen framework would address that cause. As a result, VA lacks reasonable assurance that planned actions are addressing the root cause of the problem. correspond to all of its strategic goals and objectives, VHA’s regional networks and medical centers had limited guidance to help them operationalize VA’s strategic goals and objectives. Moreover, the day-to- day activities and initiatives developed by VHA regional networks and medical centers may not appropriately align with national goals and objectives for VA health care. Directly aligning strategic goals and their associated strategies is important in assessing an organization’s ability to achieve those goals. VA has not met our criteria for monitoring because its planned actions do not address our previously stated concerns about data quality. VA’s planned actions to address unclear resource needs and allocation priorities include incorporating information from VHA’s resource allocation model, enrollment projection model, and health care staffing utilization data to improve the accuracy of its resource decisions. However, we have described our concerns about the accuracy of data used for health care resourcing decisions in our 2015 high-risk report, as well as in our June 2016 report examining VA’s projected fiscal year 2015 funding gap. In the 2016 report, we found that VA’s weaknesses in estimating costs and tracking obligations as use of VA’s community care programs increased was one reason for VA’s projected funding gap. To better align cost estimates for community care services with associated obligations, we reported that VA was examining options for replacing its outdated financial IT systems, a plan that is reiterated in VA’s high-risk action plan, with a projected completion date of fiscal year 2020. However, VA’s high- risk action plan states that updating its financial management system will only partly address the capability gap associated with having the systems necessary to extract cost data. VA has made previous, unsuccessful, attempts to update its financial IT systems. To show progress in monitoring actions, VA will need to ensure data quality and regularly review its status and performance compared to its goals. care to the nation’s veterans will improve. We recommended that VA develop a process to ensure that it evaluates organizational structure recommendations resulting from internal and external reviews of VHA. This process should include documenting decisions and assigning officials or offices responsibility for ensuring that approved recommendations are implemented. Such a process will help VA ensure that it is using resources efficiently, monitoring and evaluating implementation, and holding officials accountable. Both Congress and VA have taken action to address our high-risk designation. In July 2015, the VA Budget and Choice Improvement Act directed VA to, among other things, include in its annual budget submission a new appropriations account for medical care delivered by community providers. Beginning in fiscal year 2017, Congress began funding community care through this new Medical Community Care appropriations account. This should allow VA to better ensure that sufficient funds are available for community care in the future. In November 2014, we reviewed data that VA collects on veteran suicides. We found that the data were not always complete, accurate, or consistent because the medical centers we reviewed differed in how they interpreted and used templates for collecting the data. We made six recommendations, including that VA clarify guidance on how to complete these templates and ensure that medical centers have a process to review them. In response, VA took several actions in 2015, including analyzing diagnostic coding practices at medical centers, adding more specific guidance on how to complete the templates, and requiring medical center leadership to review the templates. These actions positioned VA to collect consistent data to better inform its suicide prevention efforts, and we closed all six report recommendations as implemented in fiscal year 2016. centers to assess the degree they were using alternative processes to address the root causes of adverse events when a root cause analysis is not required. By collecting this information, VA increased its awareness of medical center actions to address the root causes of adverse events. For our 2011 review of VA’s purchasing, tracking, and reprocessing of expendable medical supplies (e.g., needles) and reusable medical equipment (e.g., endoscopes), we examined VA’s requirements as well as VA central office and regional network oversight processes. We found that both the tracking and reprocessing requirements we reviewed were inadequate to help ensure the safety of veterans who receive care at medical centers. We also found that VA central office did not analyze regional network reports on noncompliance with reusable medical equipment policies to inform its oversight. As such, we made four recommendations, including that VA develop and implement an approach for providing standardized training for reprocessing reusable medical equipment; hold VAMCs accountable for implementing the training; and use the regional network reports of noncompliance to take action to improve compliance in areas such as those that occur frequently, pose high risks to veterans’ safety, or have not been addressed. In 2015 and 2016, VA took action to require standardized training for reprocessing reusable medical equipment and oversight of reprocessing activities, issue guidance to clarify regional networks’ oversight responsibility, and identify areas of noncompliance that occur frequently and issue guidance to help address this noncompliance. All recommendations from this report have been closed as implemented. For additional information about this high-risk area, contact Debra Draper at (202) 512-7114 or [email protected], or Randall Williamson at (202) 512-7114 or [email protected]. Veterans Health Administration: Management Attention Is Needed to Address Systemic, Long-standing Human Capital Challenges. GAO-17-30. Washington, D.C.: December 23, 2016. VA Health Care: Improved Monitoring Needed for Effective Oversight of Care for Women Veterans. GAO-17-52. Washington, D.C.: December 2, 2016. Veterans Health Care: Improvements Needed in Operationalizing Strategic Goals and Objectives. GAO-17-50. Washington, D.C.: October 21, 2016. VA Health Care: Processes to Evaluate, Implement, and Monitor Organizational Structure Changes Needed. GAO-16-803. Washington, D.C.: September 27, 2016. Veterans’ Health Care: Improved Oversight of Community Care Physicians’ Credentials Needed. GAO-16-795. Washington, D.C.: September 19, 2016. VA IT Management: Organization Is Largely Centralized; Additional Actions Could Improve Human Capital Practices and Systems Development Processes. GAO-16-403. Washington, D.C.: August 17, 2016. Veterans Affairs: Sustained Management Attention Needed to Address Numerous IT Challenges. GAO-16-762T. Washington, D.C.: June 22, 2016. VA’s Health Care Budget: In Response to a Projected Funding Gap in Fiscal Year 2015, VA Has Made Efforts to Better Manage Future Budgets. GAO-16-584. Washington, D.C.: June 3, 2016. Veterans Crisis Line: Additional Testing, Monitoring, and Information Needed to Ensure Better Quality Service. GAO-16-373. Washington, D.C.: May 26, 2016. Veterans’ Health Care: Proper Plan Needed to Modernize System for Paying Community Providers. GAO-16-353. Washington, D.C.: May 11, 2016. VA Health Care: Actions Needed to Improve Newly Enrolled Veterans’ Access to Primary Care. GAO-16-328. Washington, D.C.: March 18, 2016. DOD and VA Health Care: Actions Needed to Help Ensure Appropriate Medication Continuation and Prescribing Practices. GAO-16-158. Washington, D.C.: January 5, 2016. VA Mental Health: Clearer Guidance on Access Policies and Wait-Time Data Needed. GAO-16-24. Washington, D.C.: October 28, 2015. VA Primary Care: Improved Oversight Needed to Better Ensure Timely Access and Efficient Delivery of Care. GAO-16-83. Washington, D.C.: October 8, 2015. VA Health Care: Oversight Improvements Needed for Nurse Recruitment and Retention Initiatives. GAO-15-794. Washington, D.C.: September 30, 2015. Electronic Health Records: Outcome-Oriented Metrics and Goals Needed to Gauge DOD’s and VA’s Progress in Achieving Interoperability. GAO-15-530. Washington, D.C.: August 13, 2015. Since 2015, the Program Manager (Program Manager) for the Information Sharing Environment (ISE) and key departments and agencies have made significant progress to strengthen how intelligence on terrorism, homeland security, and law enforcement, as well as other information (collectively referred to in this section as terrorism-related information) is shared among federal, state, local, tribal, international, and private sector partners. As a result, the Program Manager and key stakeholders have met all five criteria for addressing our high risk designation, and we are removing this issue from our High-Risk List. While this progress is commendable, it does not mean the government has eliminated all risk associated with sharing terrorism-related information. It remains imperative that the Program Manager and key departments and agencies continue their efforts to advance and sustain the ISE. Continued oversight and attention is also warranted given the issue’s direct relevance to homeland security as well as the constant evolution of terrorist threats and changing technology. As we have with areas previously removed from the High-Risk List, we will continue to monitor this area, as appropriate, to ensure that the improvements are sustained. If significant problems again arise, we will consider reapplying the high risk designation. terrorism-related information. Figure 22 depicts the relationship between the various stakeholders and disciplines involved with the sharing and safeguarding of terrorism-related information through the ISE. The federal government has made significant progress in promoting the sharing of information on terrorist threats, and has met all of our criteria for removal from the High-Risk List. The Program Manager and key departments and agencies met the leadership commitment and capacity criteria in 2015, and have subsequently sustained efforts in both these areas. For example, the Program Manager clearly articulated a vision for the ISE that reflects the government’s terrorism-related information sharing priorities. Key departments and agencies also continued to allocate resources to operations that improve information sharing, including developing better technical capabilities. Implementation Plan (Implementation Plan), which includes the overall strategy and more specific planning steps to achieve the ISE. Further, they have demonstrated that various information sharing initiatives are being used across multiple agencies as well as state, local, and private sector stakeholders. For example, the Project Manager has developed a comprehensive framework for managing enterprise architecture to help share and integrate terrorism-related information among multiple stakeholders in the ISE. Specifically, the Project Interoperability initiative includes technical resources and other guidance that promote greater information system compatibility and performance. Furthermore, the key departments and agencies have applied the concepts of the Project Interoperability initiative to improve mission operations by better linking different law enforcement databases, and facilitating better geospatial analysis, among other things. accomplishments (e.g., related to maritime domain awareness) where the Program Manager helped connect previously incompatible information systems. The Program Manager has also partnered with DHS to create an Information Sharing Measure Development Pilot that intends to better measure the effectiveness of information sharing across all levels of the ISE. Further, the Program Manager and key departments and agencies have used the Implementation Plan to track progress, address challenges, and substantially achieve the objectives in the National Strategy for Information Sharing and Safeguarding. The Implementation Plan contains 16 priority objectives, and by the end of fiscal year 2016, 13 of the 16 priority objectives were completed. The Program Manager transferred the remaining 3 objectives, which were all underway, to other entities with the appropriate technical expertise to continue implementation through fiscal year 2019. In our 2013 high-risk update, we listed nine action items that were critical for moving the ISE forward. In that report, we determined that two of those action items—demonstrating that the leadership structure has the needed authority to leverage participating departments, and updating the vision for the ISE—had been completed. In our 2015 update, we determined that the Program Manager and key departments had achieved four of the seven remaining action items—demonstrating that departments are defining incremental costs and funding; continuing to identify technological capabilities and services that can be shared collaboratively; demonstrating that initiatives within individual departments are, or will be, leveraged to benefit all stakeholders; and demonstrating that stakeholders generally agree with the strategy, plans, time frames, responsibilities, and activities for substantially achieving the ISE. For the 2017 update, we determined that the remaining three action items have been completed: establishing an enterprise architecture management capability; demonstrating that the federal government can show, or is more fully developing a set of metrics to measure, the extent to which sharing has improved under the ISE; and demonstrating that established milestones and time frames are being used as baselines to track and monitor progress. Achieving all nine action items has, in effect, addressed our high-risk criteria. Manager, departments, and agencies. Although no longer a high-risk issue, sharing terrorism-related information remains an area with some risk and continues to be vitally important to homeland security, requiring ongoing oversight as well as continuous improvement to identify and respond to changing threats and technology. Table 11 summarizes the Program Manager’s and key departments’ and agencies’ progress in achieving the action items. In our 2013 high-risk update, we reported that the federal government had fundamentally met this high-risk criterion—primarily because it had established an interagency policy committee to leverage the efforts of participating departments and agencies. In addition, the Program Manager has continued to update the vision for the ISE as information sharing initiatives have evolved. Further, since 2013, the government has issued and largely executed the Implementation Plan and taken other actions, which demonstrate continued leadership commitment. With the majority of Implementation Plan priority objectives completed in fiscal year 2016, the Program Manager has updated the vision and led the establishment of new goals to strengthen the ISE. For example, now that terrorism-related information sharing among key federal departments and agencies has matured, the Program Manger is expanding collaboration on information sharing initiatives with state, local, tribal, territorial, and private sector partners. This includes promoting the use of interoperable systems and disseminating best practices for sharing and safeguarding information. According to the Program Manager, this expanded stakeholder engagement is necessary given the increasing overlap of national security and public safety. assumed key roles in governing ISE activities. The SCC is the focal point for advancing core interoperability frameworks and standards, and the CICC is a key forum for federal and non-federal entities to develop, implement, and align information sharing platforms, according to the 2016 Information Sharing Environment Annual Report to the Congress. In addition, the SCC and CICC will have key roles in overseeing the three Implementation Plan priority objectives not completed in fiscal year 2016. Updating the vision for the ISE, including the expanded leadership roles for entities like the SCC and CICC, helps ensure terrorism-related information is accessible and identifiable to relevant federal, state, local, private, and foreign partners. As we reported in 2015, key departments and agencies have also played an increased leadership role by serving as stewards for the priority objectives in the Implementation Plan. For example, DHS led the implementation of the priority objective on fusion centers, which was completed in fiscal year 2015, and has continued to lead efforts in this area as the vision for the ISE evolves. Additionally, departments and agencies have taken various actions to govern their own information sharing activities and to coordinate with the ISE. For example, DHS has used a governance board to serve as the decision-making body for DHS information-sharing issues since 2007. This board has identified information-sharing gaps and has developed a list of key initiatives to help address those gaps. Many of these initiatives—such as those related to safeguarding information—are consistent with established priorities for the ISE. Among other things, the federal government met this high-risk criterion in 2015 by changing its approach to funding information-sharing activities. Specifically, key departments are funding ISE-related activities as part of mission activities and operations instead of seeking separate funds. Additionally, the Implementation Plan defines the fundamental technological capabilities and services for advancing the ISE. The Program Manager and key departments and agencies also satisfied this high-risk criterion through their progress in identifying technological capabilities and services that can be shared collaboratively within and across the ISE, consistent with a federated architecture approach. As we reported in 2015, regarding the government’s approach to funding, senior officials in each key department or agency explained that any incremental costs related to implementing the ISE continue to be embedded within each department’s mission activities and operations and do not require separate funding. The Program Manager and department and agency officials also noted that the Implementation Plan assigned priority objectives to those departments and agencies whose missions most align with the initiatives under each objective, thereby helping to ensure that the activities received funding. begun to adopt these standards, an important step in developing federal capabilities to establish individual accountability and facilitate the appropriate level of information access. There are multiple priority objectives in the Implementation Plan that further the capacity to identify and share technical capabilities within and across the ISE. For instance, the priority objective on discovering and accessing information addresses the ability to discover that information exists and retrieve it. According to the results of a 2014 questionnaire administered by the Office of the Program Manager, over 80 percent of agencies reported improvements over the previous year in their ability to discover, access, and retrieve information necessary to accomplish their missions. As of December 2016, the remaining milestones associated with this priority objective were expected to be completed by fiscal year 2019, according to the Program Manager and key department documentation. The Implementation Plan also contains an objective dedicated to standards-based acquisition, which seeks to ensure that future products and services are interoperable and can easily exchange and interpret data. The goal of this objective is to develop common technical standards to guide all departments and agencies when they acquire new technologies. The five milestones contained under this objective were completed in fiscal year 2016, including developing a standards handbook. The Implementation Plan also identifies capacity-related activities consistent with a federated architecture approach, such as identifying technological capabilities and services to be used across communities of interest. For example, ISE stakeholders developed a repository of capabilities and services as part of the priority objective on interoperability. These knowledge resources include a web-based collection of tools, best practices, and frameworks for improving information interoperability. The government has met this high-risk criterion by developing and largely executing the Implementation Plan, leveraging information-sharing initiatives across the government, and improving enterprise architecture management as recommended in our 2011 report on the ISE. Developing and executing the Implementation Plan were important steps for the ISE, and as we have reported, are characteristics that can enhance the usefulness of national strategies. Specifically, the Program Manager and key departments and agencies generally agreed with the plan’s actions and time frames to advance the ISE. Further, the Program Manager has demonstrated that ISE stakeholders have taken steps to implement concepts promoted by the Project Interoperability initiative, including those contained in the Information Interoperability Framework (I2F). In addition to identifying key initiatives—such as those intended to control information access, safeguard information, increase a user’s ability to search for relevant information, and increase interoperability among data systems—the Implementation Plan seeks to address gaps in information sharing that ISE stakeholders identified and that we highlighted in our 2013 and 2015 high-risk reports. For example, the plan establishes a priority objective dedicated to information sharing with the private sector. This objective seeks to ensure that processes and procedures are in place for identifying threats, including those related to cybersecurity and to critical infrastructure—such as financial institutions, commercial facilities, and energy production and transmission facilities, among others. The Program Manger and key departments and agencies reached agreement on and completed all four milestones associated with the private sector priority objective by the end of fiscal year 2016. Among other things, this effort is intended to make appropriate fusion center products accessible to critical infrastructure owners and operators, and identify systems tools that provide near real time situational awareness of critical infrastructure vulnerabilities across the law enforcement and intelligence communities. survey administered by the Program Manager, numerous agencies also mentioned that they were leveraging the fusion center information sharing initiative. Specifically, all agencies that answered the 2014 question related to fusion center progress reported satisfaction with improvements made in the last year to enhance the capabilities and performance of the national network of fusion centers. This included improving how threat and encounter information is shared between the federal government and state, local, and private partners. In November 2014, we reported on federal efforts to improve fusion center capabilities and results. Additionally, in April 2013, we reported that fusion centers, along with other field-based information sharing entities, provided a variety of analytical activities that resulted in benefits, such as intelligence products. We also recommended that DHS, DOJ, and the Office of National Drug Control Policy (ONDCP) collaborate to (1) identify practices that could enhance the coordination and reduce unnecessary overlap across field-based information sharing entities, and (2) develop a mechanism that will allow them to hold field-based information-sharing entities accountable for coordinating with each other. Since our report DHS, DOJ, and ONDCP have made significant progress toward addressing our recommendations. Specifically, the three agencies have taken the necessary steps to assess the extent to which practices that can enhance coordination are being implemented at fusion centers and other field-based information sharing entities. They have also developed a mechanism to hold fusion centers and other field-based information sharing entities accountable for coordinating their analytical and investigative activities. However, the FBI has not taken action on our recommendations for the field-based information sharing entities it leads and, as a result, the recommendations from our report have not been fully addressed. milestones associated with establishing aspects of the ISE architecture. Such milestones include developing Project Interoperability and the I2F, key elements intended to help link systems across departments to enable information sharing (i.e., interoperability). For instance, the I2F calls for a common profile for achieving interoperability among systems, which among other things, can enable a user to access different departments’ or agencies’ databases from a single workstation. In March 2014, the Program Manager issued an initial version of I2F to guide the implementation of information-sharing capabilities. In 2016, the Program Manager identified several ongoing initiatives that implemented I2F concepts. For example, officials from the Office of the Program Manager provided documentation that illustrated how I2F was used and stated that the framework helped: identify security specifications for successfully exchanging data across various maritime partners to share information via the Maritime ISE, including services to publish and search for information about a ship’s location; create a virtual nationwide event deconfliction system to alert affected agencies or officers of potential conflicts between officers who are conducting law enforcement operations at the same time and in close proximity; and bridge data standards to enhance geospatial exchange capabilities (e.g., data embedded in maps) among mission partners, such as homeland security, law enforcement, emergency management, and public safety. Information Network, Regional Information Sharing Systems, Law Enforcement Enterprise Portal, and Intelink-U) are now interoperable, providing an array of services and information through a simplified sign- on using existing credentials. The Program Manager also stated that ongoing efforts to improve information sharing have informed future architecture efforts, including guidance associated with Project Interoperability 2.0, which is to provide the framework for building the next generation of the ISE. The Program Manager has also made progress in using the Implementation Plan to hold key departments and entities accountable over time for executing priority objectives and milestones associated with establishing aspects of the ISE architecture. Specifically, the Implementation Plan established architecture-related milestones and time frames to track and monitor progress. Importantly, the Program Manager and key stakeholders collaborated to create the plan and generally agreed with its timeframes and delegation of responsibilities to advance the ISE. In September 2015 and July 2016, the Program Manager updated us on the status of executing these priority objectives, including milestones with revised target dates and new entities that will assume responsibilities to complete the priority objectives, thereby demonstrating that the priority objectives and milestones are monitored over time. The Program Manager has not yet demonstrated outcomes associated with all of the priority objectives because several milestones are not complete. We will continue to monitor these enterprise architecture activities to ensure that they are sustained over time. The Program Manager and key departments and agencies have made sufficient progress to meet this high-risk criterion of monitoring by (1) implementing initiatives that show the extent to which information sharing has improved under the ISE and (2) continuing to develop metrics and processes to measure results achieved, both from individual projects and activities, as well as from the overall ISE. Developing effective performance metrics for information sharing initiatives is challenging given the complexity of information sharing, and the Program Manger acknowledged in 2016 that additional work is needed in this area. However, considering the collective efforts of the Program Manager’s performance management framework—including the Implementation Plan—key departments and agencies, and the ongoing Information Sharing Measure Development Pilot, we consider this high-risk criterion to be met. The Program Manager has created a performance management framework to measure the performance of key departments and agencies in completing ISE initiatives, many of which are included in the Implementation Plan. At a high level, performance is monitored by executing the Implementation Plan. For example, there are clear linkages between the plan’s 16 priority objectives, which in turn are linked to the 5 overarching goals in the 2012 National Strategy for Information Sharing and Safeguarding: collective action, common standards, shared services, safeguarding, and privacy. In this context, achieving milestones are a means of measuring progress toward the overarching strategic goals. For example, the 4 completed milestones under the governance priority objective helped advance all 5 strategic goals by identifying governance best practices and establishing a governance roadmap to implement information sharing initiatives. Table 12 illustrates the alignment between Implementation Plan priority objectives and national strategic goals. The performance management framework also consists of several measures, including the Performance Assessment Questionnaire. For example, through the annual questionnaire, the Program Manager measured results from key ISE initiatives, such as the extent that information gathered from international partners is integrated into the process the government uses to screen individuals for potential terrorist threats. In 2016, the Program Manger reported that his office was revising the format of the questionnaire, in part because the Implementation Plan was mostly complete, but that collecting certain performance data would continue. The Program Manager also developed a set of homeland security scenarios in 2011 to assist key departments in planning for and executing the ISE’s initiatives. The scenarios were designed to demonstrate information-sharing capabilities relevant to an agency’s mission, as well as to allow the Program Manager and departments to determine if the ISE is achieving desired capabilities. For example, 1 scenario described how departments need to mature their capabilities over the next 7 years such that an analyst does not have to manually check numerous databases to find information related to a suspicious activity, but rather can conduct 1 search of linked databases from a single point of entry. Similarly, in 2016, the Program Manger referred to the eight “mission stories” documented on the Office of the Program Manager’s website as qualitative indicators of improved information sharing over time. The mission stories include issue areas such as cybersecurity, counterterrorism, domain awareness, and interoperability, and according to the Program Manager, represent causal outcomes of ISE initiatives and are evidence of improved decision-making capability. Although the mission story information does not encompass quantitative metrics, it provides means to demonstrate the extent to which information sharing has improved, and results have been achieved through individual projects. For example, in the cybersecurity issue area, the Program Manager partnered with the International Association of Chiefs of Police, among other entities, to create the Law Enforcement Cyber Center, an online portal to facilitate information sharing about cyber-crime investigations. safeguarding measures between 2011 and 2016. Specifically, the Program Manger solicited agency responses to 16 questionnaires that measured agency implementation of policy recommendations related to removable media, online identity management, insider threat programs, access control, and enterprise audit. The results of this program—which directly links to the Implementation Plan’s priority objective on information safeguarding—were used to inform executive and legislative leadership of the government’s progress in simultaneously sharing and protecting sensitive terrorism-related information, and provided a quantitative measure of results achieved Separately, DHS and other stakeholders have been collecting performance data on fusion center capabilities since 2011, which are assessed and reported in annual reports. DHS uses an online self- assessment survey, which in 2015 included 128 questions and 10 data tables, to collect information from individual fusion centers. The results provide various output and outcome measures related to such areas as information gathering, analysis, and dissemination, and enhanced threat and domain awareness. The Program Manager’s and DHS’s efforts to establish performance metrics for areas such as information safeguarding and fusion centers are other means to help monitor and gain insight into the overall state of the ISE. In addition, in October 2016, the Program Manager and DHS initiated a pilot to help measure and monitor the overall performance of information sharing across the ISE. Specifically, the Information Sharing Measure Development Pilot intends to develop a new set of information sharing measures by analyzing how information is exchanged in various networks. According to DHS officials, algorithms will be used to calculate an Information Sharing Index that can quantify information sharing efficiencies across organizations, agencies, and departments regardless of information topic or use. The pilot project, scheduled for completion by the end of fiscal year 2017, will focus in part on fusion center information sharing. According to the Program Manager and DHS officials, the resulting metrics will then be applied more broadly across the ISE. The Program Manager and DHS have compiled a detailed Memorandum of Agreement, which clearly defines the project’s scope, objectives, time frames, and deliverables. If completed and broadly implemented, this performance measures initiative could be a valuable tool to assess and improve information sharing across the ISE. The Program Manager and key departments and agencies have met this criterion primarily by using the Implementation Plan to track progress in implementing priority objectives and in substantially achieving the overall ISE. The Implementation Plan assigns stewards to each priority objective—in most cases, a senior official within a key department or agency—who have primary responsibility for coordinating, integrating, and synchronizing activities to achieve the priority objectives within the time frames established. The steward is responsible for ensuring that participating agencies communicate and collaborate to complete the objective, while also raising to senior management any issues that might hinder progress. Stewards are to communicate these issues via the Information Sharing Council (ISC), a body consisting of senior officials from a variety of federal departments and agencies. The Program Manager stated that 13 of the 16 priority objectives were completed by the end of fiscal year 2016. The Program Manager transferred the remaining 3 objectives—Data Tagging, FICAM, and Discovery and Access—to other entities to implement through fiscal year 2019. Table 13 describes the 13 completed Implementation Plan priority objectives and examples of demonstrated progress. For example, work on several priority objectives—such as reference architecture and standards-based acquisitions—resulted in concrete guidance based on best practices that was then made available for stakeholders to use in their own organizations. The interoperability objective resulted in products, such as the I2F framework, that were used by multiple entities to improve terrorism-related information sharing across different information systems. Among other things, the fusion center and private sector priority objectives resulted in new processes that facilitated greater and more secure information sharing with critical infrastructure owners and operators. Activity Reporting (SAR) Initiative programs while expanding training and outreach beyond law enforcement to the rest of the public safety community. and secured funding for related training materials. Achieve the four Critical Operational Capabilities, four Enabling Capabilities, and other prioritized objectives across the National Network of Fusion Centers to help them effectively and lawfully execute their role as a focal point within the state and local environment for receiving, analyzing, gathering, and sharing threat-related information. Ensured appropriate federal analytic products are posted, shared, and cataloged within DHS’s secure information network. that clearly documented the status of all priority objectives and milestones. Among other information, these tracking documents detailed whether milestones were completed, on track, needed attention, or deleted, along with due dates. The Program Manger reported that his staff request documentation from stewards—such as white papers, emails, project completion notifications, and formal memorandums—to prove that milestones are complete. In this manner, over time, the Program Manager and key departments track milestones and adjust project baselines as needed. The status of modifying milestones was documented in regular priority objective and milestone updates. For instance, in cases where milestones were added, such as under the Data Tagging and FICAM priority objectives, the Program Manger noted that the new milestones were not creating additional tasks. Rather, the new milestones were written at a finer level of detail, which allowed departments and agencies to demonstrate incremental progress that was not visible under the original milestones. Milestones were deleted if stewards and stakeholders agreed that the milestones were no longer relevant to accomplishing priority objectives. The Program Manager and officials from key departments and agencies generally agreed that the Implementation Plan and process used to track and adjust priority objectives and milestones were effective, and we reviewed documentation that justified the status determinations for several milestones. Overall, the Program Manager and key departments have demonstrated progress in advancing the ISE by using processes to track and assess the status of priority objectives and milestones, and to make adjustments if needed. The majority of milestones were met within the given timeframes of the Implementation Plan, which enabled the work of the ISE to move forward. For additional information about this high-risk area, contact Diana Maurer at (202) 512-9627, or [email protected]. Information Sharing: DHS Is Assessing Fusion Center Capabilities and Results, but Needs to More Accurately Account For Federal Funding Provided to Centers. GAO-15-155. Washington, D.C.: November 4, 2014. Maritime Critical Infrastructure Protection: DHS Needs to Better Address Port Cybersecurity. GAO-14-459. Washington, D.C.: June 5, 2014. DHS Intelligence Analysis: Additional Actions Needed to Address Analytic Priorities and Workforce Challenges. GAO-14-397. Washington, D.C.: June 4, 2014. Intelligence, Surveillance, and Reconnaissance: DOD Has Taken Steps to Improve Data Management, but Key Guidance Is Incomplete. GAO-13-398SU. Washington, D.C.: May 8, 2013. Intelligence, Surveillance, and Reconnaissance: DOD Has Partially Implemented GAO’s Recommendations to Enhance Intelligence Information Sharing. GAO-13-440SU. Washington, D.C.: April 26, 2013. Information Sharing: Agencies Could Better Coordinate to Reduce Overlap in Field-Based Activities. GAO-13-471. Washington, D.C.: April 4, 2013. Information Sharing: Additional Actions Could Help Ensure That Efforts to Share Terrorism-Related Suspicious Activity Reports Are Effective. GAO-13-233. Washington, D.C: March 13, 2013. Terrorist Watchlist: Routinely Assessing Impacts of Agency Actions since the December 25, 2009, Attempted Attack Could Help Inform Future Efforts. GAO-12-476. Washington, D.C.: May 31, 2012. Information Sharing Environment: Better Road Map Needed to Guide Implementation and Investments. GAO‑11‑455. Washington, D.C.: July 21, 2011. The areas on our 2017 High-Risk List are shown in table 15. The following GAO reports reflect our High-Risk Series reports issued since 2000. For additional GAO related products issued specific to each of the 34 high-risk areas on our updated list, see our High-Risk List website, http://www.gao.gov/highrisk/. High-Risk Series: Key Actions to Make Progress Addressing High-Risk Issues. GAO-16-480R. Washington, D.C.: April 25, 2016. High-Risk Series: An Update. GAO-15-290. Washington, D.C.: February 11, 2015. High-Risk Series: An Update. GAO-13-283. Washington, D.C.: February 14, 2013. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 16, 2011. High-Risk Series: An Update. GAO-09-271. Washington, D.C.: January 22, 2009. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 31, 2007. High-Risk Series: An Update. GAO-05-207. Washington, D.C.: January 1, 2005. High-Risk Series: An Update. GAO-03-119. Washington, D.C.: January 1, 2003. High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 1, 2001. Determining Performance and Accountability Challenges and High Risks. GAO-01-159SP. Washington, D.C.: November 1, 2000. | The federal government is one of the world's largest and most complex entities: about $3.9 trillion in outlays in fiscal year 2016 funded a broad array of programs and operations. GAO's high-risk program identifies government operations with greater vulnerabilities to fraud, waste, abuse, and mismanagement or the need for transformation to address economy, efficiency, or effectiveness challenges. This biennial update describes the status of high-risk areas listed in 2015 and actions that are still needed to assure further progress, and identifies new high-risk areas needing attention by Congress and the executive branch. Solutions to high-risk problems potentially save billions of dollars, improve service to the public, and strengthen government performance and accountability. GAO uses five criteria to assess progress in addressing high-risk areas: (1) leadership commitment, (2) agency capacity, (3) an action plan, (4) monitoring efforts, and (5) demonstrated progress. Since GAO's last high-risk update, many of the 32 high-risk areas on the 2015 list have shown solid progress. Twenty-three high-risk areas, or two-thirds of all the areas, have met or partially met all five criteria for removal from the High-Risk List; 15 of these areas fully met at least one criterion. Progress has been possible through the concerted efforts of Congress and leadership and staff in agencies. For example, Congress enacted over a dozen laws since GAO's last report in February 2015 to help address high-risk issues. GAO removed 1 high-risk area on managing terrorism-related information, because significant progress had been made to strengthen how intelligence on terrorism, homeland security, and law enforcement is shared among federal, state, local, tribal, international, and private sector partners. Sufficient progress was made to remove segments of 2 areas related to supply chain management at the Department of Defense (DOD) and gaps in geostationary weather satellite data. Two high-risk areas expanded—DOD's polar-orbiting weather satellites and the Department of the Interior's restructuring of offshore oil and gas oversight. Several other areas need substantive attention including VA health care, DOD financial management, ensuring the security of federal information systems and cyber critical infrastructure, resolving the federal role in housing finance, and improving the management of IT acquisitions and operations. GAO is adding 3 areas to the High-Risk List, bringing the total to 34: Management of Federal Programs That Serve Tribes and Their Members. GAO has reported that federal agencies, including the Department of the Interior's Bureaus of Indian Education and Indian Affairs and the Department of Health and Human Services' Indian Health Service, have ineffectively administered Indian education and health care programs and inefficiently developed Indian energy resources. Thirty-nine of 41 GAO recommendations on this issue remain unimplemented. U.S. Government's Environmental Liabilities. In fiscal year 2016 this liability was estimated at $447 billion (up from $212 billion in 1997). The Department of Energy is responsible for 83 percent of these liabilities and DOD for 14 percent. Agencies spend billions each year on environmental cleanup efforts but the estimated environmental liability continues to rise. Since 1994, GAO has made at least 28 recommendations related to this area; 13 are unimplemented. The 2020 Decennial Census. The cost of the census has been escalating over the last several decennials; the 2010 Census was the costliest U.S. Census in history at about $12.3 billion, about 31 percent more than the 2000 Census (in 2020 dollars). The U.S. Census Bureau (Bureau) plans to implement several innovations—including IT systems—for the 2020 Census. Successfully implementing these innovations, along with other challenges, risk the Bureau's ability to conduct a cost-effective census. Since 2014, GAO has made 30 recommendations related to this area; however, only 6 have been fully implemented. GAO's 2017 High-Risk List This report contains GAO's views on progress made and what remains to be done to bring about lasting solutions for each high-risk area. Perseverance by the executive branch in implementing GAO's recommended solutions and continued oversight and action by Congress are essential to achieving greater progress. |
In 2004, Medicaid HCBS waiver expenditures totaled $20.5 billion, with about 74 percent ($15.2 billion) devoted to supporting community-based care for individuals with developmental disabilities. About 40 percent (415,053) of individuals served through such waivers had developmental disabilities. Expenditures per person on this population are higher than for other groups served through the waivers, such as the elderly, because developmentally disabled individuals often require supportive care on a 24-hour basis. In 2004, annual Medicaid HCBS waiver expenditures per person served were $36,697 on average for individuals with developmental disabilities compared with $6,266 on average for elderly individuals. Fifty states had 1915(c) waiver programs for individuals with developmental disabilities in 2006. Waiver services vary by state but include services intended to help individuals live as independently as possible in the community. To be eligible for Medicaid HCBS waiver services, including services for individuals with developmental disabilities, individuals must meet the state’s criteria for needing the level of care provided in an institution, such as an ICF/MR, and be able to receive care in the community at a cost generally not exceeding the cost of institutional care. As described in CMS’s guidance for HCBS waivers, a developmental disability is defined as a severe, chronic disability, attributable to mental or physical impairments, with onset before age 22. Individuals with developmental disabilities are limited in their ability to carry out several major life activities, including self-care and mobility. To receive federal funds for Medicaid HCBS waiver services, states must satisfactorily provide the statutory assurances for the 1915(c) waiver program that include having necessary safeguards to protect the health and welfare of beneficiaries. CMS requires that states submit waiver applications that identify and describe how they will provide each of the statutory assurances. On the waiver application, CMS expects as part of the health and welfare assurance that states specify (1) which critical incidents states require to be reported to developmental disabilities agencies and appropriate authorities for review and (2) the follow-up actions required if the state identifies a situation in which a beneficiary was not being safeguarded. CMS guidance for waiver applications instructs that incidents of abuse, neglect, and exploitation, at a minimum, be reported and reviewed; states may define other events as critical, as well. For example, CMS identifies death as an event that states may include as a critical incident. When reviewing HCBS waiver applications, CMS determines whether states meet program expectations, such as including the entity responsible for managing critical incidents to demonstrate necessary safeguards are in place. Initial waiver applications, if approved, are approved for a 3-year period, and subsequent applications are approved for an additional 5-year period, unless CMS determines that the assurances provided during the preceding term have not been met. In a 2003 report, we examined the adequacy of CMS’s oversight of state Medicaid waiver programs and recommended that the Administrator of CMS develop and provide states with more detailed criteria regarding the necessary components of an HCBS waiver quality assurance system. In response to our recommendation, CMS added an expectation to its Medicaid HCBS waiver program for states to improve the quality of waiver services and has implemented this new expectation in the form of an additional section on the HCBS waiver application. CMS defines quality improvement as the process of collecting information about Medicaid HCBS waiver programs to identify and correct concerns and to identify areas for improving the care provided to waiver beneficiaries. States can use information gathered from their critical incident reviews to determine whether strategies are needed to improve the quality of care. States applying for new waivers or waiver renewals after May 2005 were asked to submit a detailed description of their quality improvement strategies. For example, CMS guidance directs states to describe processes used to measure the performance of their waiver programs and to develop initiatives for quality improvement. CMS is encouraging and helping states to develop quality improvement strategies. As of October 2007, CMS had provided technical assistance to more than 40 states and more than 140 waiver programs that requested assistance in developing and implementing their quality improvement strategies for the Medicaid HCBS waiver programs. In addition, a provision of the Deficit Reduction Act of 2005 requires the Agency for Healthcare Research and Quality to develop HCBS quality-of-care measures, which CMS may incorporate into its waiver program if the measures reinforce the agency’s expectations for states regarding quality improvement. When a state receives a Medicaid HCBS waiver, the state’s Medicaid agency is accountable to CMS for compliance with waiver program expectations. State Medicaid agencies may delegate administrative and operational responsibility for waiver programs to the department or agency with jurisdiction over the specific population served or services provided. For waivers serving individuals with developmental disabilities, operational responsibility is often delegated to the state developmental disabilities agency. State developmental disabilities agencies may then contract with local providers, networks, or agencies to provide or arrange for beneficiary services. Some states use state employees to provide waiver services to individuals with developmental disabilities, such as case management services that include individual assessments and monitoring of care. State protection and advocacy agencies may be involved with state developmental disabilities agencies in the review of critical incidents among individuals with developmental disabilities where there is suspicion of abuse or neglect. The Developmental Disabilities Assistance and Bill of Rights Act of 1975 established the protection and advocacy system to protect the legal and human rights of people with developmental disabilities. In order to receive federal protection and advocacy funding, states must have a protection and advocacy agency, independent of any service provider. Given that abuse and neglect among individuals with developmental disabilities might not always be evident, protection and advocacy agencies play an important role in monitoring services provided to such individuals. The Developmental Disabilities Assistance and Bill of Rights Act, as amended, authorizes funding for protection and advocacy agencies to (1) investigate allegations of abuse or neglect when reported; (2) investigate suspected abuse or neglect when there is probable cause that incidents occurred; (3) pursue legal, administrative, and other appropriate remedies on behalf of individuals with developmental disabilities; and (4) provide information on developmental disability programs to the public, among other things. As a condition of funding, the act requires protection and advocacy agencies to have access to individuals with developmental disabilities and to their records, including reports prepared by agencies or staff on injuries or deaths. The act also requires, as a condition of funding, that states provide information—to the extent it is available—on the adequacy of HCBS waiver services to their protection and advocacy agencies. All 14 states whose officials we interviewed included death among individuals with developmental disabilities as a critical incident in their waiver programs. Officials in these states told us that the developmental disabilities agency required waiver services providers to report to the agency deaths of individuals with developmental disabilities. Consistent with CMS’s expectation that states review critical incidents, the developmental disabilities agencies in 13 of the 14 states we interviewed had processes in place to review deaths. We do not know if states other than these 14 define, report, and review deaths as critical incidents. Because most states have laws that require reporting to coroners or medical examiners when the cause of a death is unknown or unnatural, it is likely that at least some deaths of individuals with developmental disabilities in the remaining 36 states are investigated. However, we did not review the extent to which information about such investigations is shared with the developmental disabilities agencies. All but 1 of the 14 states whose officials we interviewed included most of the six basic mortality review components experts identified as important when reviewing deaths among individuals with developmental disabilities; however, states varied somewhat in how they implemented these components. For example, some states’ officials said they reviewed unexpected deaths only, whereas others reviewed deaths of all developmentally disabled individuals receiving state-funded services. Screening and reviews in most states were typically conducted at a local level, such as a county or region, and review findings led to local actions, such as tailored training with individual providers, to address quality of care. Officials in most of the 14 states in which we conducted interviews reported that they aggregated mortality information. Officials in several of the 14 states in which we conducted interviews told us they believed mortality reviews reduced the risk of death and improved the quality of services provided; however, these states had not documented the impact of reviews on mortality. We identified and defined six basic components for state mortality reviews, based on interviews with five developmental disabilities experts and documents they authored (see table 1). The five experts believed that these components were important when reviewing deaths among individuals with developmental disabilities. Our literature review added support to the identification of these components for mortality reviews. First, standard information is collected about the individual’s death, and this information is screened by developmental disabilities agency staff to determine if further review of the death is needed (component 1). If it is determined that a mortality review is warranted—for example, if the death was unexpected or the screening suggests a possible quality-of-care concern—officials may conduct a more in-depth review to evaluate the cause and circumstances of the death and the individual’s medical condition (component 2). Mortality reviews include medical professionals (component 3). The mortality review process is documented (component 4) and may result in recommendations that address any quality-of-care concerns identified (component 5). Mortality data for deaths among individuals with developmental disabilities are aggregated to identify trends over time (component 6). For example, aggregated data can indicate patterns by cause of death, age, services received, or other programmatic factors. Figure 1 illustrates how a state incorporated the six components in an actual mortality review involving a 44-year-old woman with developmental disabilities. The woman died of pancreatitis while living in a community group home and receiving Medicaid HCBS waiver services. All but 1 of the 14 states whose officials we interviewed included most of the basic mortality review components identified by experts as important when reviewing deaths, but some variation existed (see table 2). The one state that did not include most of these components was Texas. While developmental disabilities agency officials in Texas told us that state-level officials screened some standard information about deaths, they said the agency did not have a systematic process for reviewing deaths to identify and address quality-of-care issues. Instead, information was referred to investigative authorities, such as adult protective services, if the screening process revealed the death was suspicious. Texas state officials also told us that they did not currently aggregate mortality data. However, there was variation among the states in how they implemented the six components. Officials in some states in which we conducted interviews told us they reviewed only deaths determined to be unexpected or suspicious, but in other states all deaths among individuals receiving agency services were reviewed. Some states also used criteria other than the cause of death to determine whether a case warranted further review. In Washington, for example, all suspicious deaths in community settings were reviewed regardless of cause of death, but unanticipated deaths were reviewed on a case-by-case basis, depending on the outcome of a local- level screening process. In Massachusetts, officials routinely reviewed the deaths of all individuals, including those residing in a private home, if they had been receiving more than 15 hours of agency-funded community support services. Agency officials in other states we interviewed also told us that they did not generally have enough information to conduct a thorough mortality review for individuals receiving limited waiver services. Moreover, the extent to which states used mortality review information to address quality of care varied. For example, while officials in 13 of 14 states told us they used information from individual cases to take actions on the basis of mortality review findings (e.g., to enhance provider training), officials in 3 of 14 states reported conducting further research on issues identified during mortality reviews. In 11 of the 14 states whose officials we interviewed, the screening of similar mortality information, such as the circumstances surrounding a death, was conducted by county-level or regional developmental disabilities agency officials, and the results were used to identify cases for further review. Similarly, in most of these states local developmental disabilities officials undertook a more in-depth mortality review of those cases identified during the screening process as unexpected or suspicious for abuse or neglect, or those in which a possible quality-of-care concern was identified. According to developmental disabilities officials in 11 of the 14 states in which we conducted interviews, similar mortality information, such as the cause of death, was routinely screened at a local level. Local officials collected and used this information to identify suspicious or unexpected deaths, often as part of states’ critical incident management systems. Specifically, local officials screened mortality information such as the cause of death, the circumstances surrounding a death (e.g., whether the death was an accident or witnessed by a direct care provider), and the individual’s diagnoses or clinical conditions prior to death. Screening this information allows local agency officials to identify cases of possible abuse or neglect of Medicaid HCBS waiver beneficiaries and respond to such cases by providing for the safety of other individuals with developmental disabilities cared for in the same setting, as well as referring the cases to the appropriate authorities for criminal investigations. In Florida, for example, local nurses, who were developmental disabilities agency officials, screened information about the circumstances surrounding deaths to determine if they warranted further review. When the local nurses suspected abuse or neglect, adult protective services and law enforcement officials were notified to conduct an investigation. State developmental disabilities officials in a few of the 14 states told us that they also used the screening process to determine if further review should be conducted for expected deaths or for cases not considered suspicious but where possible quality-of-care concerns existed. Based on the results of the screening process, reviews of deaths among individuals with developmental disabilities also occurred at the local level in 11 of 14 states. These 11 states conducted reviews locally because the developmental disabilities agency oversight for waiver services was delegated to counties or regions. In addition to reviewing in greater depth the cause and circumstances surrounding the death and the individual’s clinical diagnoses and health conditions, officials in most of the 14 states told us that they also reviewed hospital records and health care professionals’ progress notes, as well as autopsy findings when available. Lab reports and individual support or behavioral plans might also be reviewed to better understand each case. Reviewing multiple pieces of information surrounding the death is useful because they can show whether appropriate medical care was provided in the days and months before death and whether individual support plans were followed. For example, the mortality review process could reveal that an individual choked to death on solid food but that the individual’s support plan indicated he or she was supposed to receive a pureed diet. Similarly, a review of the medical records of an individual who died from influenza or pneumonia could show whether he or she had received vaccines for these conditions. Mortality reviews also were used to determine whether quality-of-care issues unrelated to the death existed. For example, officials in Ohio told us that in reviewing one death, the documentation in the individual support plan outlining the care that was supposed to be delivered did not match the care that had actually been provided. While the mortality review determined that the care the person received did not contribute to the death, concerns were raised that direct care staff was not following the individual’s support plan. While developmental disabilities agency officials in the 14 states aggregated mortality information statewide, they told us that local-level officials use mortality review information to take local actions to address quality-of-care concerns. Based on mortality review findings, nearly all 14 states had provided tailored training or technical assistance to direct care providers in a particular county or region. For example, when officials in Washington identified an increase in drowning among individuals with seizure disorders in a particular region, the developmental disabilities agency retrained its providers in that region to try to prevent future occurrences. In addition, based on their mortality reviews, officials in Pennsylvania told us they provided targeted training on choking to a local provider because of a trend in choking deaths among individuals with developmental disabilities served by that provider. Officials we interviewed in other states also cited targeted training or assistance to local providers. As shown in table 2, 13 of the 14 states aggregated mortality data. These states aggregated data by variables including age, cause of death, the type of program or services provided to individuals with developmental disabilities, or other programmatic factors to identify trends over time. Officials in these states told us that aggregating mortality data was useful because it allowed them to identify trends, such as determining if particular types of deaths are isolated or part of a pattern. For example, in March 2007, officials from California’s developmental disabilities agency observed an increased mortality rate among individuals with developmental disabilities in one region, and further analysis revealed the increase was attributable to several choking deaths among individuals living in private family homes. This region increased its educational outreach to families on the topic of choking prevention. In addition to aggregating mortality data, Connecticut, Massachusetts, and California calculated mortality rates among individuals with developmental disabilities. Connecticut and Massachusetts officials used aggregated mortality data to make broad comparisons with each other as well as with mortality rates for the general population in their states and across the nation. Officials in Massachusetts also calculated cause-specific mortality rates for individuals with developmental disabilities; they recently found that breast-cancer mortality rates were higher over a 5-year period for Massachusetts’s women with developmental disabilities than for the general state population and nationwide. All but 1 of the 14 states in which we conducted interviews reported aggregating mortality data, and 24 of the 36 states that completed our e-mail survey reported doing so. Combined, 13 of 50 states did not aggregate mortality data, and 37 did. Among these 37 states, more than 80 percent aggregated mortality data on variables that included the cause of death, age, and other factors, such as the county or region where the death occurred, diagnosis at time of death, and whether an autopsy was performed or a medical examiner was involved in the case. In addition, nearly two-thirds of the 37 states nationwide that aggregated mortality data also aggregated on the variable of program type or type of services provided to the individual with developmental disabilities prior to his or her death. Thirteen states nationwide reported they did not aggregate mortality data for these individuals at the time we did our work. Officials in several states in which we conducted interviews said they believed that their mortality review processes had reduced the risk of death and served as one means for improving the quality of services provided in their HCBS waiver programs. However, these states had not documented the impact of reviews on mortality. Officials in some states also said that the reviews had contributed to a decrease in critical incidents, which might have resulted in reduced mortality. For example, a Connecticut state official told us that the implementation of mortality review recommendations, such as improving the competency of direct care staff in managing swallowing risks, had likely reduced the number of critical incidents among individuals with developmental disabilities. In addition, developmental disabilities agency officials in Oregon told us that they believed mortality review findings and subsequent actions, such as enhancing providers’ procedures for handling critical incidents that can result in death, had led to quality-of-care improvements for this population. Officials in 11 of the 14 states we interviewed told us that they considered their mortality review processes for deaths among individuals with developmental disabilities to be one aspect of their waiver’s overall quality improvement strategy. Four of the 14 states whose officials we interviewed—Connecticut, Massachusetts, Minnesota, and Ohio—incorporated all of the additional mortality review components, resulting in more comprehensive mortality reviews. We identified and defined four additional components based on information provided by experts and state officials. In general, these additional components—using state-level interdisciplinary mortality review committees, involvement of external stakeholders, taking statewide actions based on mortality information to improve care, and public reporting—gave the mortality reviews in these states greater accountability and transparency. Eleven of the 14 states had adopted at least one of the additional components. For example, 6 of the 14 states had interdisciplinary mortality review committees that provided additional oversight and added value to local mortality review efforts. Seven of the 14 states routinely included stakeholders external to the developmental disabilities agency in their mortality reviews, and several state officials told us that stakeholder involvement promoted independence or shared accountability. Four of the 14 states whose officials we interviewed incorporated all four additional mortality review components that we identified and defined for more comprehensive review processes. The additional components were identified based on interviews with five developmental disabilities experts and state officials. Another 7 of the 14 states incorporated one or two additional components (Florida, Illinois, New York, Oregon, Pennsylvania, Washington, and Wisconsin). Eleven of the 14 states had adopted at least one of the additional components. The inclusion of these four components—using a state-level interdisciplinary mortality review committee, including external stakeholders in the review process, taking statewide actions based on mortality information to improve care, and publicly reporting mortality information—generally gave the mortality review processes in these states greater accountability and transparency (see table 3). State-level committees include professionals with various experiences in the field of developmental disabilities who review selected deaths to assess factors that may have contributed to death, such as medical or supportive care. Having a representative of the state’s protection and advocacy agency sit on the state-level mortality review committee is one example of how a developmental disabilities agency may routinely involve stakeholders not directly associated with the agency in its review process. When significant quality-of-care concerns are identified by mortality reviews, the state developmental disabilities agency uses such information to take statewide actions, such as requiring specific training for providers’ direct care staff statewide in order to improve care for all waiver beneficiaries. The developmental disabilities agency publicly reports mortality information, such as posting on its Web site aggregated data about the number and causes of deaths among individuals who received care by the agency. States that incorporated additional mortality review components varied in how they implemented them. For example, in Ohio the developmental disabilities agency oversaw its state-level interdisciplinary committee, while in Minnesota the Office of the Ombudsman for Mental Health and Developmental Disabilities provided oversight of its state-level committee, but the committee in Minnesota included a member from the state developmental disabilities agency. In Minnesota, the Office of the Ombudsman, not the state developmental disabilities agency, was also responsible for publicly reporting mortality information on the state’s Web site. Appendix II provides detailed information about the more comprehensive mortality review systems in Connecticut, Massachusetts, Minnesota, and Ohio. In 6 of the 14 states, developmental disabilities agency officials told us that they used state-level interdisciplinary mortality review committees to oversee local review efforts and to add overall value to the review process (see table 4). One aspect of oversight is ensuring consistency in the local- level mortality reviews conducted by developmental disabilities officials across a state. For example, for the purposes of quality assurance, state- level mortality review committees in both Connecticut and Massachusetts reviewed at least 10 percent of cases that local officials had determined did not warrant further review. Massachusetts officials told us that the state’s committee reviewed these cases to ensure that its review procedures were followed, these cases were being appropriately closed locally, and there was consistency across the different local levels conducting reviews. In addition, state-level committees examined in greater depth cases that were medically complex or unusual. For example, in Ohio, the state-level committee recently reviewed a case where an individual died suddenly. The individual had multiple medical conditions, including a history of heart disease, and upon review, the committee found that this individual was taking a medication contraindicated for persons who have or had heart problems. The committee issued a safety alert—a notice to community providers to increase their awareness of a particular risk or safety concern—about the use of this medication by individuals with developmental disabilities who have heart conditions. In another example, the Minnesota state-level review committee reviewed an unusual case where an individual was hospitalized for a minor surgical procedure and discharged. Three days later the individual was readmitted to the hospital with a diagnosis of aspiration pneumonia and an overdose of sedatives and prescription pain medications; after being placed on life support the individual’s condition worsened and life support was withdrawn, resulting in death. After review of the death by the state-level review committee, the developmental disabilities agency issued a safety alert, including a recommendation by the committee for improving the care provided to individuals receiving pain medication. State-level committee reviews were more likely than those at the local level to be conducted by physicians, specifically, physicians with experience treating individuals with developmental disabilities. Of the 6 states that used state-level interdisciplinary mortality review committees, officials in 4 states told us that physicians sat on their committees and routinely reviewed deaths. By contrast, only 1 of the 14 states reported that physicians routinely participated in the local review process. Physician participation is important given the complex medical conditions of individuals with developmental disabilities. For example, Ohio officials told us that it is important for physicians with experience treating individuals with developmental disabilities to review medically complex cases because such physicians are able to assess the adequacy or appropriateness of the medical care provided prior to death. Officials also said that such physicians are highly qualified to evaluate actions taken by other physicians or hospital staff—especially medical personnel without experience caring for individuals with developmental disabilities. For example, one physician serving as Medical Director for a state developmental disabilities agency noted that a death may be inappropriately attributed to natural causes by nonmedical reviewers but a physician’s in-depth review of medical records and medication logs could uncover poor care that contributed to the death. In addition to physicians, state-level interdisciplinary mortality review committees incorporated the knowledge and perspectives of a variety of professionals with differing experiences and responsibility. While physicians and nurses contributed medical and other clinical expertise to the mortality review committees, licensing, public health, investigative, and quality assurance professionals brought other important kinds of expertise. One state official told us that the participation of various types of professionals improved the quality of mortality review findings. Some state officials we interviewed described the value that different professionals brought to mortality reviews. For example, they said that state licensing professionals are best able to assess whether a provider followed state regulations and standards of practice for care. Similarly, an investigator is best suited to evaluate the circumstances of death for possible abuse or neglect. Finally, quality assurance professionals have expertise in monitoring and improving delivery systems and, as a result, can evaluate whether statewide actions may be needed to address identified quality-of-care concerns. According to the 36 states that completed our e-mail survey, the prevalence of state-level interdisciplinary mortality review committees was similar to that in the 14 states whose officials we interviewed—about half had such a committee (18 of 36 states). Combined, 24 of 50 states reported having a state-level review committee, and 26 did not. The types of members on state-level committees in the 36 states we surveyed were similar to those in the 14 states in which we conducted interviews. Among the 24 of 50 states that we interviewed or surveyed that reported having committees, about 80 percent included physicians or nurses, and 67 percent included quality assurance professionals. Nearly half of all states with committees also reported that they included investigative or forensic professionals as well as representatives from the provider community. Seven of the 14 states routinely included stakeholders external to the developmental disabilities agency in their mortality review process. State officials told us they included external stakeholders as a way to promote independence or shared accountability. Four of 7 states used state protection and advocacy agencies regularly for this purpose. For example, in Connecticut an official of the protection and advocacy agency was a member of the developmental disabilities agency’s state-level interdisciplinary mortality review committee. In several of these 7 states, other organizations or state offices with a role in protecting and advocating for the rights of individuals with developmental disabilities also participated in the state developmental disabilities agency mortality reviews, or they conducted their own reviews. In Massachusetts, for example, a representative of the Disabled Persons Protection Commission was a member of the agency’s state-level interdisciplinary mortality review committee, while in Minnesota the Office of the Ombudsman for Mental Health and Developmental Disabilities—a state office separate from the developmental disabilities agency—independently reviewed each death among individuals with developmental disabilities. Several developmental disabilities experts and state agency officials told us that external stakeholder involvement in states’ mortality review processes can promote independence and shared accountability. According to experts, a natural incentive exists for state agency officials to minimize errors or program weaknesses identified through the mortality review process, making independence important. A federal district court found that the District of Columbia’s developmental disabilities agency deleted factual information about eight deaths among individuals with developmental disabilities from death investigation reports in order to minimize quality-of-care concerns. Specifically, information was deleted about delays in obtaining consent for medical procedures and gaps in case management. During our interviews with developmental disabilities agency officials in 14 states, we observed that external stakeholder involvement could also result in shared accountability for improving the quality of care. Because stakeholders may influence how the agency addresses identified quality-of-care concerns, stakeholders may be more likely to support the agency’s efforts to improve the quality of care for individuals with developmental disabilities. The protection and advocacy agencies are of particular value as external stakeholders because of their authority to investigate certain deaths. Moreover, states that receive protection and advocacy funding are required to provide information on the quality of HCBS services to their protection and advocacy agencies, to the extent information is available. We found that state developmental disabilities agencies in 8 of the 14 states were required to report deaths among individuals with developmental disabilities to their state’s protection and advocacy agency. The protection and advocacy agencies received notification in several ways, such as on a case-by-case basis or through the distribution of weekly reports of deaths. Developmental disabilities agency officials in 2 states told us that they granted access to their electronic critical incident management system databases to the protection and advocacy agencies in their states. For example, while the protection and advocacy agencies were not notified of all deaths in Pennsylvania and Ohio, protection and advocacy officials told us they could access death reports among individuals with developmental disabilities by monitoring the critical incident database. In 6 of the 14 states in which protection and advocacy officials were not notified of deaths among individuals with developmental disabilities, protection and advocacy agency officials told us that state developmental disabilities agencies should be required to notify their protection and advocacy agencies of these deaths. Protection and advocacy agencies that did not receive notification of deaths relied on the media or concerned family members to alert them of deaths, but such notification was inconsistent and sometimes happened long after the death occurred. Because abuse and neglect can be difficult to detect among individuals with developmental disabilities, developmental disabilities agency officials may attribute some deaths to known or natural causes, even though abuse or neglect contributed to death. As a result, such cases may not have been referred to investigative authorities, such as medical examiners or the state protection and advocacy agency. One state’s protection and advocacy officials told us that their own investigation of a death after notification by a family member identified care concerns that state developmental disabilities agency and law enforcement officials had not detected. Protection and advocacy officials in two other states found neglect when they conducted reviews of two deaths that the states had determined were due to natural causes. In 11 of the 14 states, mortality reviews resulted in statewide actions to address similar quality-of-care concerns and to help prevent avoidable deaths among individuals with developmental disabilities. The statewide actions resulting from mortality reviews included the issuance of safety alerts, additional or enhanced training of staff, and new risk-prevention practices. The most common statewide action—taken by 9 of the 14 states—was the issuance of safety alerts. For example, after several individuals with developmental disabilities in Minnesota died, in part because of delayed emergency medical care, the agency sent a statewide safety alert to service providers with recommendations to prevent similar incidents, including that community providers authorize their direct care staff to call 911 when they suspect a medical emergency without first obtaining approval from a manager. In Ohio, officials alerted agency staff to an increase, from 2005 to 2006, in the number of deaths statewide resulting from aspiration pneumonia. As a result, these officials encouraged agency staff statewide to closely examine hospitalization cases resulting from pneumonia and to train care providers on risk factors to help prevent this condition. In 7 of the 14 states, developmental disabilities agencies provided additional or enhanced training to staff statewide, and in 6 of the 14 states they developed new risk prevention interventions for providers statewide. As a result of several choking deaths, the Connecticut developmental disabilities agency developed a training program on swallowing risks that addressed the responsibilities of providers when caring for individuals with swallowing disorders. The agency also required that all direct care staff who provided care to individuals with developmental disabilities receive this training. Based on mortality review findings, Oregon’s developmental disabilities agency developed an assessment tool to be completed and regularly updated on individuals with developmental disabilities to identify and properly address risks associated with deaths among this population, including choking, dehydration, constipation, seizures, and falls. Several nurses in Oregon told us that they believed the use of the risk assessment tool had led to improvements in the quality of care provided to individuals with developmental disabilities. According to responses to our e-mail survey by the other 36 states, 19 state developmental disabilities agencies reported taking a statewide action to improve care based on mortality information. When combined with the 14 states in which we conducted interviews, 30 of 50 states took a statewide action, while 20 did not. The most frequently cited statewide actions nationwide—including the 36 states that completed our e-mail survey— were the issuance of safety alerts, additional or enhanced training of staff, and new risk-prevention practices. In total, 60 percent of states nationwide addressed quality-of-care concerns through such actions. Based on examples provided, choking was the most frequently addressed quality-of- care concern nationwide. For example, among states that reported taking a statewide action, 43 percent addressed choking with a statewide action, such as additional training. Other quality-of-care concerns for which multiple states took statewide actions included treating bowel disorders, addressing problems with emergency procedures and medications, and coordinating care across various providers and settings. Four of the 14 states publicly reported mortality information by publishing summaries of aggregated data or more detailed reports about their mortality review processes and findings. For example, Ohio annually reported aggregated mortality data on its agency Web site, which included the number of deaths among individuals with developmental disabilities and a list of the most common causes of death. Massachusetts and Connecticut have posted annual mortality reports on their agency Web sites, which included mortality statistics for the population of individuals with developmental disabilities served by their agencies as well as trend analyses of those deaths over time. According to agency officials in Massachusetts, publicly reporting information about mortality review findings helps to ensure transparency in the mortality review process and demonstrates to the public areas where the agency should direct its efforts to improve the quality of care. While 10 of the 14 states we interviewed told us that they do not make their findings publicly available, state officials in California, Pennsylvania, and Washington told us that they had provided such information to select stakeholders or to others when requested. Reviewing the deaths of individuals with developmental disabilities as critical incidents in the Medicaid HCBS waiver program is one of several mechanisms states can use to ensure that this vulnerable population is protected from harm and to address quality-of-care concerns. All 14 states whose officials we interviewed included death among individuals with developmental disabilities as a critical incident in their waiver programs. Nearly all of the 14 states had some processes in place for conducting mortality reviews of individuals with developmental disabilities, even though CMS does not have an expectation for states to review deaths as critical incidents under the waiver program. Most of the 14 states implemented basic components of mortality review processes that experts we interviewed agreed were important, such as the review of unexpected or suspicious deaths. Several states also implemented additional components, such as using a state-level interdisciplinary committee to review individual deaths and routinely including external stakeholders, for more comprehensive mortality review systems. We do not know the extent to which all components were implemented in states we did not interview. However, based on information provided by all states nationwide, (1) 13 states did not aggregate mortality data (a basic component for mortality reviews), (2) 26 states did not utilize an interdisciplinary mortality review committee to review deaths among individuals with developmental disabilities (an additional component), and (3) 20 states had not taken a statewide action to improve care based on mortality review information (an additional component). Moreover, the extent to which states other than the 14 whose officials we interviewed identified death as a critical incident has not been established. Given the concern that agency officials may minimize identified program weaknesses, routinely including external stakeholders—such as the state office of protection and advocacy—is especially important because it promotes accountability and independence to the state mortality review process. When alerted to suspicious deaths, state protection and advocacy agencies can conduct their own investigations, but not all protection and advocacy agencies were systematically notified of deaths by state developmental disabilities agencies and instead relied on the less consistent or less timely notification of deaths by the media or concerned family members. Many of the states whose officials we interviewed told us that they considered their mortality review system to be one aspect of their strategy to improve the quality of care in their Medicaid HCBS programs. CMS has recently made some important changes in an effort to clarify its quality expectations for HCBS waivers, such as requesting that states describe their quality improvement strategies as part of the waiver application. In addition, a provision of the Deficit Reduction Act of 2005 requires the development of specific quality measures, and CMS may adopt the measures if it determines that they reinforce the agency’s expectations for states regarding quality improvement. To help states identify and address quality-of-care concerns among individuals with developmental disabilities receiving Medicaid HCBS waiver services, we recommend that the Administrator of CMS take the following two actions: Disseminate information to states about basic and additional components for mortality reviews. include death as a critical incident and conduct mortality reviews if they do not already do so and broaden their mortality review processes if they already include death as a critical incident and conduct mortality reviews. To provide additional oversight of the quality of care provided to these individuals, we also recommend that the Administrator of CMS establish as an expectation for HCBS waivers that state Medicaid agencies report all deaths among individuals with developmental disabilities receiving such waiver services to their state office of protection and advocacy. We obtained written comments from HHS on our draft report. HHS generally concurred with two of our three recommendations, and did not respond as to whether it agreed or disagreed with one recommendation. HHS’s comments are included in appendix III. In its general comments, HHS stated that not all deaths in the community are adverse events and that the ability to die at home with appropriate supports is a positive outcome. Our report does not state or suggest that all such deaths are adverse outcomes; however, we did report that all deaths of individuals with developmental disabilities served by Medicaid HCBS waiver programs should be screened to determine whether further review is warranted. HHS also stated the importance of ensuring that any actions taken to address our recommendations are applicable to all populations served by HCBS waiver programs (e.g., the aged) and not just individuals with developmental disabilities. While the focus of our report was specifically on individuals with developmental disabilities who are vulnerable and often have complex medical needs, we support HHS’s encouraging states to utilize mortality reviews as one aspect of their quality improvement strategy for all populations served by 1915(c) waiver programs. Our evaluation of HHS’s specific comments on each of our recommendations follows. Disseminate information to states about basic and additional components for mortality reviews. HHS responded that CMS concurred with our recommendation and will disseminate the information through its stakeholders, including the National Association of State Directors of Developmental Disabilities Services, the National Association of State Medicaid Directors, and the National Association of State Units on Aging. HHS also stated that CMS will involve these stakeholders in a discussion on the topic of mortality reviews to help determine whether the six basic components we identified are applicable to other populations served by Medicaid 1915(c) waiver programs. Encourage states to include death as a critical incident and conduct mortality reviews if they do not already do so; and encourage states to broaden their mortality review processes if they already include death as a critical incident and conduct mortality reviews. HHS responded that CMS concurred with this recommendation. However, the agency did not fully address it. HHS’s comments state that CMS will initiate a meaningful dialogue with its stakeholders to encourage states’ broader use of processes to review suspicious deaths. As noted in our report, however, screening mortality information about all deaths among individuals with developmental disabilities is a basic component of a mortality review system and is necessary to determine whether further review of each death is warranted—including but not limited to those deaths involving suspected abuse or neglect, or that were unexpected. CMS did not directly address part of our recommendation that it should encourage states that do not already do so to include death as a critical incident. We continue to believe that this is important because states are expected to report and review critical incidents and take follow-up actions when a beneficiary is not being safeguarded. In addition, states may use information from their critical incident reviews to identify areas for improving care provided to waiver beneficiaries. Establish an expectation that state Medicaid agencies report all deaths among individuals with developmental disabilities receiving waiver services to their state’s office of protection and advocacy. HHS did not respond as to whether CMS agreed or disagreed with this recommendation but recognized independent third-party reviews as important. HHS also believes it is important that CMS’s actions taken to address our recommendations apply uniformly to all populations served by 1915(c) waiver programs. According to a CMS official, the agency’s goal is to have a consistent set of expectations for all waiver populations served instead of expectations tailored to specific populations. The elderly would be one such population. Given this goal, HHS commented that it may be difficult to require the reporting of all deaths of individuals being served by these waiver programs to the state offices of protection and advocacy because these offices focus primarily on individuals with developmental disabilities. We continue to believe that the state protection and advocacy agencies are the most appropriate entities for reporting deaths among individuals with developmental disabilities, a vulnerable population that often has complex medical needs. However, in developing a uniform approach to individuals served by waiver programs, we agree that CMS should focus on the benefit of independence in the review process, recognizing that it may not be appropriate for the same entities to be involved for all populations served by waivers. HHS also provided a technical comment and clarification, which we responded to as appropriate. As arranged with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Secretary of Health & Human Services, the Administrator of CMS, and appropriate congressional committees. We will also make copies available to others upon request. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. To assess state mortality review processes for individuals with developmental disabilities served by Medicaid HCBS waivers, we (1) worked with experts in the field of developmental disabilities to identify mortality review components, (2) collected detailed information on death as a critical incident and mortality review processes in 14 states, and (3) conducted a brief e-mail survey focusing broadly on aspects of mortality review processes in the other 35 states and the District of Columbia. We did not evaluate the effectiveness of state mortality review systems. However, the data we collected allowed us to make comparisons across states and to identify states with comprehensive mortality review processes. To identify basic components of state mortality review processes, we conducted a literature review, interviewed five experts in the field of developmental disabilities, and reviewed documents authored by these experts (e.g., a criteria-and-standards checklist for conducting mortality reviews). These experts were either recommended by CMS officials, referred to us by other officials that we interviewed during the engagement, or were individuals we had contacted during a previous engagement. Along with state developmental disabilities agency officials who conduct mortality reviews, these experts also contributed to the identification of additional components for more comprehensive state mortality review processes. There may be other components for mortality reviews that were not brought to our attention. In addition, these experts guided our selection of states for on-site visits by identifying states they knew to have well-established mortality review processes. We collected information and interviewed officials about death as a critical incident and mortality review processes for individuals with developmental disabilities in 14 states. These 14 states served approximately two-thirds of Medicaid waiver beneficiaries with developmental disabilities nationally. The mortality review processes of this sample of 14 states cannot be generalized to all states nationwide. First, we visited four states (Connecticut, Ohio, Oregon, and Texas) to gain an understanding of state developmental disabilities systems and mortality review processes and to facilitate the development of interview protocols for the remaining 10 states. We used the following criteria to select these four states: (1) the extent to which a state had a well- established mortality review process, as recommended by experts; (2) the raw number of individuals in a state with developmental disabilities being served by Medicaid HCBS waivers relative to other states; (3) the proportion of all individuals in a state with developmental disabilities receiving services in the community under Medicaid HCBS waivers rather than in institutions, relative to other states; and (4) geographic variation. During the four site visits, we collected and reviewed mortality review documents such as policies and procedures, annual mortality review reports, and health and safety alerts distributed to providers based on mortality review findings. The officials we interviewed included Medicaid directors, developmental disabilities agency medical directors and administrators, members of state mortality review committees, quality assurance and critical incident professionals, or other professionals knowledgeable about the state’s mortality review processes. We also interviewed representatives from the state offices of protection and advocacy or other external stakeholders involved in these states’ mortality review processes. Second, to expand our understanding of how states review and use mortality information, we collected similar information from and conducted focused telephone interviews with developmental disabilities officials in the other 10 states that served the largest number of individuals with developmental disabilities through Medicaid HCBS waivers. We also conducted focused telephone interviews with officials from state protection and advocacy agencies in these 10 states and in the District of Columbia. We sent a three-question e-mail survey that focused on three aspects of state mortality review processes to developmental disabilities agency officials in the other 35 states and the District of Columbia. Specifically, we asked agency officials if they had a statewide interdisciplinary mortality review committee, if they aggregated mortality information for this population, and if they had implemented a statewide action based on mortality review findings. We focused on these three issues because of the value identified by experts and state officials in (1) using an interdisciplinary approach to reviewing certain deaths, (2) using aggregated data in addition to individual mortality cases to identify trends or patterns of deaths among individuals with developmental disabilities, and (3) using mortality information to take statewide actions to improve the system of care overall. We followed up with nonrespondents using e-mail reminders and telephone calls, and achieved a 100 percent response rate to our survey. developmental disabilities offices manage 23 local area offices responsible for managing and monitoring services provided to individuals with developmental disabilities. State’s central developmental disabilities office provides oversight to regional and local area offices. developmental disabilities officials in 87 county offices provide operational oversight of the local provision of waiver services to individuals with developmental disabilities. State’s central developmental disabilities office provides oversight to the counties. developmental disabilities agency staff oversees the local provision of waiver services to individuals with developmental disabilities. State’s central office provides oversight to 88 county developmental disabilities agency offices. Components of mortality review process developmental disabilities officials collect and screen standardized information about deaths among persons with developmental disabilities, including demographic information, location and cause of death, and whether the death was anticipated or unexpected. If a death is considered suspicious for abuse or neglect, appropriate authorities are notified to ensure the safety of other community-based residents or to initiate a criminal investigation, as appropriate. information about deaths among persons with developmental disabilities is collected and screened by area and state-level agency staff. This information includes cause and manner of death, whether the death was unexpected or occurred under suspicious circumstances, the level of mental retardation (including whether the individual had Down’s syndrome), and whether or not the medical examiner took jurisdiction over the body. developmental disabilities officials collect and screen standardized information about deaths among persons with developmental disabilities, including demographic information, location and cause of death, circumstances of the death, and the clinical diagnoses of the deceased. investigative agents for the developmental disabilities agency collect standard information about deaths among persons with developmental disabilities, including location of death, whether the death was unexpected, and circumstances surrounding the death. If a death is considered suspicious for abuse or neglect, appropriate authorities are notified to ensure the safety of other community-based residents or to initiate a criminal investigation, as appropriate. If a death is considered suspicious for abuse or neglect, appropriate authorities (including the county coroner) are notified to ensure the safety of other community- based residents or to initiate a criminal investigation, as appropriate. If a death is considered suspicious for abuse or neglect, appropriate authorities are notified to ensure the safety of other community-based residents or to initiate a criminal investigation, as appropriate. Ombudsman for Mental Health and Developmental Disabilities also screens standardized information about deaths among persons with developmental disabilities. All unexpected or suspicious deaths among individuals with developmental disabilities receiving community care by the state developmental disabilities agency are routinely reviewed at a regional level. Nonsuspicious and expected deaths are also reviewed at the regional level. All unexpected or suspicious deaths among individuals with developmental disabilities receiving more than 15 hours of residential support, or who die in a day support or habilitation program or who die during transportation arranged by the state developmental disabilities agency, are routinely reviewed. Nonsuspicious and expected deaths among this population are also routinely reviewed but at the regional level. individuals with developmental disabilities receiving community care by the state developmental disabilities agency are reviewed at the county and state levels. Deaths under suspicion for involving abuse or neglect are also reviewed by county- based investigators. All unexpected or suspicious deaths among individuals with developmental disabilities receiving community care by the state developmental disabilities agency are routinely reviewed. Nonsuspicious and expected deaths among this population receive a less- extensive review at the state level. include developmental disabilities nurse investigators and members of the regional mortality review committee, which is composed of (at a minimum) a registered nurse not employed by the developmental disabilities agency, the regional office health services or nursing director, the case management supervisor, the quality improvement director, and a client advocate. In addition, regional reviews may also include the nurse investigator, the former case manager of the deceased, and a nurse involved with the person’s care prior to death. include developmental disabilities agency nurses and members of the regional mortality review committee, which is composed of (at a minimum) a nurse or physician, or both, and an agency quality assurance professional. In addition, regional mortality review discussions may also include additional regional nurses or area office directors or assistant directors. include primarily case managers but also nurses or other developmental disabilities officials with previous experience providing direct services to individuals with developmental disabilities. These professionals consult with public health nurses or the agency medical director, as needed, to complete their reviews. investigative agents include registered nurses, case workers, or licensed social workers. These agents consult with physicians on the statewide mortality review committee, as needed, if they have questions during the course of their local-level mortality review. disabilities agency nurse investigators covering the regions conduct desk reviews into the circumstances surrounding the death; interview parties associated with the death; review medical professional progress notes and autopsy reports; and provide this information to the regional mortality review committees in a written report. developmental disabilities case managers or other reviewers conduct desk reviews into the circumstances surrounding the death and review medical professional progress notes from the direct care provider(s), when available. These officials share their reviews with county- level developmental disabilities managers. review committee reviews the overall care, quality-of-life issues, and health care preceding the death of each individual with conduct desk reviews and complete mortality review forms addressing the circumstances surrounding the death and the overall care provided prior to death, including but not limited to medical and medication histories, functional status of the individual, and information from death certificates and autopsy reports, when available. Local area nurses also interview care providers. investigators conduct independent reviews of cases that are suspicious for abuse or neglect. investigative agents collect and review 14 standard pieces of information on each case to determine if the case warrants further review of quality-of-care concerns. This information includes but is not limited to medical diagnoses prior to death; death certificate; narrative surrounding the circumstances of death; at least 72 hours’ worth of caregiver notes prior to time of death; medication use; and autopsy findings or coroner’s report, developmental disabilities. This committee may close the case or refer it to the state-level review committee. as appropriate. mortality review committees discuss the area nurses’ reviews and determine if a death should be referred to the state-level mortality review committee. investigative agents can specifically refer a case to the state-level interdisciplinary committee for discussion. review committee documents and maintains its findings and recommendations on a standard form. committee documents its mortality review process. review committee documents its meetings, including the agenda and recommendations. recommendations from the mortality review process are documented in the incident tracking system. aggregated on the basis of the following factors: cause of death, age, location of death, gender, program service type, the individual’s level of functioning, and service delivery provider(s). aggregated on the basis of the following factors: cause of death, age, location of death, gender, and program service type. aggregated on the basis of the following factors: cause of death, age, and service delivery provider. aggregated on the basis of the following factors: cause of death, age, location of death, gender, program service type, level of functioning, and county. developmental disabilities agency assesses trends over time in the leading causes of death among individuals with developmental disabilities. developmental disabilities agency assesses trends over time and analyzes aggregated mortality data. developmental disabilities agency and the mortality review committee review aggregated data and assess trends over time in the leading causes of death among individuals with developmental disabilities. developmental disabilities agency and mortality review committee assess trends over time in the leading causes of death for individuals with developmental disabilities. Each county has a designated quality assurance person(s) responsible for identifying and discussing critical incident trends (including deaths) with other county- or state- level quality assurance professionals. membership includes directors of Health and Clinical Services, Quality Assurance, and Investigations for the developmental disabilities agency; the state medical examiner; a physician; a supervising nurse consultant from the Department of Public Health; two individuals appointed by the protection and advocacy agency; and a director of nursing from the developmental disabilities agency. membership includes the following professionals from the developmental disabilities agency: physicians, nurses, quality assurance officials, and legal staff. Membership also includes representatives from the public health department and investigative unit, pharmacists, and members of the office of protection and advocacy and the stakeholder group Disabled Persons Protection Commission. includes a psychiatrist, forensic pathologist, registered nurse, pharmacist, internist, and a quality assurance official from the state developmental disabilities agency. membership includes physicians; professionals with expertise in the field of developmental disabilities; state protection and advocacy agency and other advocacy organization representatives; and state agency officials from the critical incident management, quality assurance, and licensure divisions. state-level interdisciplinary independent mortality review committee in 2002 specifically to review deaths of individuals with developmental disabilities. state-level interdisciplinary mortality review committee in 1999 specifically to review deaths of individuals with developmental disabilities. state-level interdisciplinary mortality review committee in 2001 specifically to review deaths of individuals with developmental disabilities. state-level interdisciplinary mortality review committee in 1987 to systematically review deaths of individuals receiving services or treatment for developmental disabilities, mental illness, chemical dependency, or emotional disturbance. operates at the state level to provide an independent review by qualified professionals unrelated to the deceased and ensures that regional reviewers fully evaluated the health and overall care provided to the individual, including quality-of-life issues. The committee identifies both regional and systemic issues, and makes recommendations and identifies corrective operates at the state level as part of the developmental disabilities agency’s quality management strategy. The committee uses its findings through the mortality review process to improve the quality of care and supports provided by the developmental disabilities agency to persons with developmental disabilities. overseen by the Office of the Ombudsman for Mental Health and Developmental Disabilities. It is designed to objectively and systematically monitor circumstances surrounding deaths and to provide an opportunity to evaluate quality of care from an individual and operates at the state level to review all deaths of such individuals to identify and address any case- specific, facility- specific, or systemwide issues that could improve the care provided to other individuals in this community. the committee review reports submitted by county-level investigative agents on all deaths and may actions accordingly. systemwide perspective. discusses all cases identified by the regional review committees as needing further discussion and also reviews at least 10 to 15 percent of those cases closed at the regional level for quality assurance purposes—i.e., to ensure consistency in the review process throughout the state and ensure that cases do not escape scrutiny in terms of quality-of- care or systemic issues. established criteria to determine which types of deaths it will review in-depth. For example, it reviews deaths that may have resulted from undiagnosed conditions or delayed medical care as well as those that may be related to abuse or neglect. The committee also reviews cases where family members have requested a review. close out the case or refer it to the full committee for discussion when quality-of-care concerns are identified. The committee also discusses cases referred to it by county-level investigative agents. The committee meets quarterly and reviews mortality information on selected developmental disabilities deaths as well as quarterly and annual trends in mortality. at least quarterly and more frequently as necessary. discusses all deaths that meet set criteria for review, including but not limited to those deaths that are sudden, unanticipated, or accidental; or those related to accidental choking, bowel impaction, or an adverse drug event. The committee also reviews any other cases referred to it by the regional committees because of other concerns identified. It also reviews 10 percent of those cases closed at the regional level for quality assurance purposes—to ensure consistency across regions and the closure of appropriate cases— and routinely reviews nonsuspicious or expected deaths. In contrast to the more in-depth reviews conducted by the committee, a registered nurse within the Office of the Ombudsman reviews all deaths among individuals with developmental disabilities using a less comprehensive procedure. monthly. meets every other month. its annual mortality review report and other mortality data on its developmental disabilities agency Web site. committee makes mortality information available publicly on its developmental disabilities agency Web site. It distributes mortality information to the Governor’s office, advocacy organizations, regional and area developmental disabilities staff, and providers. Ombudsman makes public a biannual report to the Governor on the Ombudsman’s Web site, which includes information on the number of deaths and their causes. incident tracking system, information about each death, including local- and state-level reviews, is available to providers and developmental disabilities agency professionals across the state and to the state’s protection and advocacy agency. committee also presents its findings annually to the agency’s quality councils. disseminate critical information related to particular deaths to providers and other stakeholders through the electronic incident tracking system and are required to be reviewed by all developmental disabilities agency employees as part of annual training. are posted on the agency’s Web site. and advocacy agency receives information weekly about deaths among individuals with developmental disabilities. By the Governor’s systematically report information about deaths among individuals with developmental disabilities to the state protection and advocacy agency. Executive Order, an independent fatality review board was created and is housed in the state’s protection and advocacy agency to conduct independent mortality reviews, “outside” of the developmental disabilities agency. and advocacy agency is notified of deaths among individuals with developmental disabilities who were receiving services from the state developmental disabilities agency. The protection and advocacy agency rarely conducts its own investigation of these deaths because of the reviews being conducted by both the developmental disabilities agency and the Disabled Persons Protection Commission, which the protection and advocacy agency helped establish to protect individuals with developmental disabilities. advocacy agency can conduct investigations of deaths on a case-by- case basis. and advocacy agency has direct access to the electronic incident tracking system, which includes information on all deaths among persons with developmental disabilities as well as mortality review information. Ombudsman provides independence to the review of deaths because the office is a state entity independent of the developmental disabilities agency. advocacy agency and another active developmental disabilities advocacy organization in the state participate as standing members on the statewide mortality review committee. Persons Protection Commission is a state government entity independent of the state developmental disabilities agency. It is notified by the agency of all deaths and conducts investigations of some deaths (e.g., unexpected deaths or those considered suspicious for abuse or neglect). A representative from the commission also sits on the agency’s state-level mortality review committee. In 2006, after several individuals with developmental disabilities died from preventable choking incidents, the developmental disabilities agency initiated a statewide safety campaign with a focus on swallowing disorders as an area of risk. In 2007, the state developmental disabilities agency required that all current direct care staff receive ongoing training on swallowing disorders and that all service delivery providers have internal policies about how they will identify and manage swallowing risks for individuals with developmental disabilities that they serve. higher mortality rate for female breast cancer in the developmentally disabled population compared with other populations, in 2005 the state developmental disabilities agency began developing computer-based training targeted to direct care staff on preventive screenings, including cancer screenings. In 2007, after several individuals developed a serious condition or died prior to receiving treatment, the developmental disabilities agency sent an alert to service providers with recommendations to reduce the likelihood of similar incidents. For example, the alert recommended that programs authorize caregivers to call 911 without approval from a management staff person when a medical emergency is suspected. developmental disabilities agency issued a safety alert on choking in 2006 because of concerns about an increased number of deaths from choking that occurred in 2006 compared with 2005. Based on a trend in unplanned hospitalizations related to pneumonia, and higher death rates from aspiration pneumonia than in previous years, the agency issued a safety alert in 2006 about pneumonia and encouraged the use of vaccinations to prevent similar deaths. several individuals with developmental disabilities whose deaths involved swallowing disorders, the agency developed protocols in 2006 on how to treat swallowing disorders and trained direct care staff on symptoms and treatment. In addition to the contact named above, key contributors to this report were Walter Ochinko, Assistant Director; Stefanie Bzdusek; Pamela Dooley; Sara Imhof; Elizabeth T. Morrison; and Andrea E. Richardson. | Deaths of individuals with developmental disabilities due to poor quality of care have been highlighted in the media. Prior GAO work has raised concerns about inadequate safeguards for such individuals receiving care through state Medicaid home and community-based services (HCBS) waivers. CMS approves and oversees these waivers. Safeguards include the review of, and follow-up action to, critical incidents--events that harm or have the potential to harm waiver beneficiaries. GAO was asked to examine the extent to which states (1) include, as a critical incident, deaths among individuals with developmental disabilities in waiver programs; (2) have basic components in place to review such deaths; and (3) have adopted additional components to review deaths. GAO interviewed state developmental disabilities agency officials and external stakeholders in 14 states, e-mailed a survey to 35 states and D.C., interviewed experts, and reviewed documents. All 14 states whose officials GAO interviewed included death among individuals with developmental disabilities as a critical incident in their waiver programs. The developmental disabilities agencies in all 14 states required waiver service providers to report such deaths to the agencies. Consistent with CMS's expectation that states review critical incidents, nearly all states had processes in place to review these deaths. The extent to which states other than these 14 identified death as a critical incident has not been established. All but 1 of the 14 states included most of the six basic mortality review components identified as important by experts when reviewing deaths among individuals with developmental disabilities, but states varied somewhat in how they implemented components. For example, some states reviewed unexpected deaths only, while other states reviewed all deaths of individuals receiving Medicaid HCBS services. Mortality reviews were typically conducted at a local level, such as a county or region. Review findings led to local actions, such as tailored training with individual providers, to address quality of care. Officials in 13 of the 14 states reported that they aggregated mortality data, for example, by cause of death and age, whereas nationwide, 37 of 50 states aggregated mortality data and 13 states did not. For example, one California region observed an increase in choking deaths among individuals with developmental disabilities in 2007 and increased its educational outreach to families about choking prevention. Officials in several states said they believed their mortality reviews had reduced the risk of death and led to improvements in the quality of their HCBS waiver services. Four of the 14 states incorporated all additional components for more comprehensive mortality reviews. In general, these four additional components--state-level interdisciplinary mortality review committees, involvement of external stakeholders, statewide actions to address problems, and public reporting--gave the mortality reviews in these states greater accountability and transparency. Eleven of the 14 states had adopted at least one of these additional components. For example, 6 of the 14 states had interdisciplinary mortality review committees that reviewed deaths and that provided additional oversight to local review efforts, whereas nationwide, 24 of 50 states had review committees, and 26 states did not. In 6 of the 14 states, developmental disabilities agencies were not required to report deaths to the state protection and advocacy agencies, a key external stakeholder with authority to investigate deaths involving suspected abuse and neglect. Mortality reviews in 11 of the 14 states resulted in statewide actions, such as the issuance of safety alerts or new risk-prevention practices, to address quality-of-care concerns. Nationwide, 30 of 50 states took a statewide action to improve care, while 20 states did not. Four of the 14 states publicly reported mortality review information, such as posting annual mortality reports on their agency Web sites. |
The Sentencing Reform Act of 1984 (1) created the U.S. Sentencing Commission to develop a set of federal sentencing guidelines,(2) replaced parole with supervised release for postprison supervision, and (3) made probation a separate sentence. Prior to these changes, federal offenders could be sentenced to a term of probation as part of a suspended prison sentence, meaning that they were released from custody but had to routinely report to officers of the court (probation officers), or be sentenced to prison terms. Offenders who exhibited good behavior while in prison could be released on parole after serving as little as one-third of their prison terms. The United States Parole Commission (USPC) determined whether and when an offender was granted parole. The Sentencing Reform Act of 1984 made probation a separate sentence and restricted an offender’s eligibility for probation. The sentencing guidelines, in implementing the provisions of the act, are more detailed and provide judges less sentencing discretion than the system they replaced. The implementation of the sentencing guidelines, laws providing mandatory minimum sentences for certain offenses (mostly drug and violent offenses), and laws broadening federal criminal jurisdiction have together resulted in a steadily growing federal prison population. From fiscal years 1990 through 1996, the number of inmates in federal prisons grew from 58,021 to 94,695. Under the sentencing guidelines, offenders sentenced to a prison term of 1 year or more usually also receive a term of postprison supervision (about 1 to 5 years) called supervised release. Offenders must serve at least 85 percent of their prison terms before they are eligible for supervised release. The primary goals of community supervision are to control risk to the community, enforce conditions of supervision, and provide for correctional treatment. Appendix II includes flowcharts of the supervision process that depict how offenders under each type of supervision enter and proceed through the community supervision program. Probation officers are responsible for supervising offenders on community supervision. They are to evaluate each offender’s needs and prepare a supervision plan, enforce any conditions of release, monitor offender behavior, and report violations to the courts. According to AOUSC officials, the higher the perceived risk to the community, the more intensive the supervision, including more frequent contacts with the offender. Further, AOUSC has also indicated that risk is associated with several factors. These factors include the extent to which offenders had serious criminal histories, had special conditions imposed on their supervision, or had violated the terms of their supervision. As noted earlier, AOUSC also believes that postprison offenders generally require more intensive supervision because these risk factors are more prevalent among this population. Some offenders under community supervision may have special conditions placed on them. For example, offenders may be placed on home confinement with or without electronic monitoring; be required to participate in drug, alcohol, or mental health treatment or counseling programs; be required to provide community service; or receive any combination of these conditions. These special conditions may be imposed by the judge at sentencing, or the probation officer may determine that such special conditions are required when preparing the supervision plan or when monitoring the offender’s behavior while on community supervision. If the probation officer determines that such conditions are necessary, the probation officer may petition the court to impose special conditions during the course of the offender’s supervision. According to AOUSC, offenders are removed from supervision because they violate the terms of their supervision or their term (1) expires, (2) terminates early, or (3) terminates for various noncriminal-related reasons, such as death or medical conditions. AOUSC classifies violations of supervision as technical, minor, or major. A technical violation is a violation of the conditions of supervision other than the conviction for a new offense. A minor violation is a conviction for a minor offense, such as disorderly conduct or drunken driving, for which the sentence is imprisonment for 90 days or less, probation for 1 year or less, or a fine. A major violation is the involvement in or conviction for a new major offense, including absconding from custody, having been arrested on another charge, or convicted and sentenced to more than 90 days of imprisonment or more than 1 year of probation. Offenders who violate their release conditions may be imprisoned, particularly if they have been convicted of a new offense, or may be sanctioned in other ways, such as having more restrictive conditions placed on their release. Violations generally create additional work for probation officers. First, when an offender violates one or more of his or her release conditions, the probation officer may petition the court to impose more restrictive release conditions, such as more frequent drug testing, which the probation officer must monitor. The probation officer may, at his or her option, choose to file a violation report with the court and petition the court to have the violator removed from community supervision and incarcerated. If the officer chooses to petition the court for removal (through the local U.S. Attorney’s office), the officer must prepare a violation report and usually must appear at a court hearing to consider the probation officer’s request. Although the total federal population on community supervision grew only 10 percent from fiscal years 1990 through 1996 (compared to a 63 percent growth in the federal prison population), two noteworthy changes occurred in that population, both caused by the implementation of the Sentencing Reform Act of 1984. First, the percentage of offenders sentenced directly to community supervision (probation) decreased, and the percentage of offenders sentenced to prison terms with required supervised release increased. Second, the percentage of offenders released from prison to parole also decreased, reflecting the decrease in the number of offenders who were sentenced under the preguidelines system. BOP estimates project that these trends will continue and that a larger proportion of offenders who could pose a higher risk of recidivism are scheduled to be released to community supervision over the next 5 years. As shown in figure 1, during fiscal years 1990 through 1996, the total federal population under community supervision grew by about 10 percent, from 80,592 to 88,966. During this period, the probation population decreased by about 35 percent; the parole population declined about 59 percent; and the supervised release population increased about 648 percent. Overall, the parole and supervised release—i.e., postprison—population rose 94 percent in the period. Additionally, as figure 2 shows, the distribution of this population for the three major types of supervision—probation, parole, and supervised release—changed considerably. Despite the growth in the community supervision population, figure 3 shows that the distribution of offenders on supervision for the major crime types—violent, white collar, drugs, and all other—did not change significantly. Between fiscal years 1992 and 1996, the largest group of convicted offenders on supervision were drug offenders. These offenders increased moderately from about 32 percent of the total supervision population in fiscal year 1992 to over 38 percent in fiscal year 1996. Offenders convicted of white collar crimes remained relatively unchanged at between 27 and 28 percent of the supervision population. Together, offenders in these two crime categories accounted for more than 60 percent of all offenders on supervision for each year during this period. BOP provided us with estimates of the number of offenders serving prison terms as of September 30, 1996, who are scheduled to be released from prison to community supervision between fiscal years 1997 and 2001. These estimates include those offenders sentenced prior to the sentencing guidelines who are scheduled to enter the parole program and those offenders who were sentenced under the sentencing guidelines and are to enter the supervised release program. BOP provided its estimates of release by the major offense category for which the offender was originally convicted and sentenced—drugs, violent, homicide, white collar, and all others. As shown in table 1, BOP estimates that the number of offenders released on parole will continue to decline, while the number of offenders released to the supervised release program will continue to increase. In fiscal years 1997 through 2001, BOP expects that about 55,700 of the offenders who were inmates as of September 30, 1996, will be released to a term of supervised release and about 5,200 released on parole. Over 70 percent of these approximately 61,000 offenders were convicted of violent or drug-related crimes. As previously noted, AOUSC has indicated that workload can be affected by the extent to which offenders had serious criminal histories. A 1993 BOP report on a sample of inmates released from BOP prisons suggests that an offender’s criminal history score is related to the risk of recidivism. The higher the criminal history category the greater the risk of recidivism. Criminal history is also one of the variables in the risk-assessment scale probation officers use to determine the level of supervision an offender on community supervision may require. The inmates released from BOP prisons in fiscal years 1997 through 2001 may include a greater number of higher risk offenders than the population released through fiscal year 1996. Since the sentencing guidelines apply to all offenses committed on or after November 1, 1987, only a very small percentage of offenders have been sentenced under the preguidelines system in the 1990s. Offenders sentenced under the preguidelines system may apply for release on parole after serving one-third of their sentence. Thus, offenders remaining in prison in fiscal year 1996 or later under the preguidelines system are likely to be those who have received long sentences, which are usually associated with more serious crimes; have been denied parole because of behavioral problems in prison that may heighten the risk they pose to the community once released; or both. According to AOUSC officials, such offenders may pose a higher risk of recidivism than offenders with shorter sentences who were released after serving one-third of their sentences. Offenders sentenced under the guidelines and released after fiscal year 1996 are likely to include more offenders with extensive criminal histories who have received longer sentences and who thus may pose a higher risk of recidivism than those released before fiscal year 1996. Under the guidelines, offenders are assigned a criminal history category based on the extent of their prior criminal behavior. The categories range from I, for those with virtually no prior criminal history, to VI, for those with the most serious criminal history. Offenders with more serious criminal histories generally receive longer sentences for the same offense than those with less extensive criminal histories. Figure 4 shows that, in fiscal years 1991 through 1995, the number of offenders sentenced in the three most serious criminal history categories—IV, V, and VI—grew at greater rates than did the number of offenders with less serious criminal histories. Offenders with special conditions may be placed on home confinement with or without electronic monitoring; be required to participate in drug, alcohol, or mental health treatment or counseling programs; be required to perform community service; or receive any combination of these conditions. As discussed earlier, AOUSC has indicated that workload can be affected by the extent to which offenders had special conditions imposed on their terms of supervision. Figure 5 shows that, between fiscal years 1992 and 1996, the number of offenders with special conditions remained relatively stable. In addition, as shown in greater detail in table 2, the proportion of the total supervision population with special conditions remained relatively stable within a range of 42 to 46 percent during the same period. For each year in this 5-year period, the data showed that about 60 percent or more of the offenders with special conditions received treatment for drug or substance abuse. As shown in table 3, the proportion of the total supervision population with special conditions varied within the three major types of supervision. Specifically, probation offenders with special conditions increased from about 39 to 50 percent. The percentage on parole decreased from about 44 to 41 percent, while those on supervised release declined from 45 to about 37 percent. The percentage of the parole and supervised release—i.e., postprison—population with special conditions decreased from about 45 to 38 percent. Offenders can be removed from supervision because (1) they violate the terms of their supervision; or because (2) their term expires, they terminate early, or they terminate for noncriminal-related reasons. As noted earlier, AOUSC has indicated that workload can be affected by the extent to which offenders violate their terms of supervision. Figure 6 shows that, between fiscal years 1990 and 1996, the number of offenders removed from supervision for violating the terms of their supervision increased from 7,360 to 8,922 (about 21 percent). As shown in more detail in table 4, in fiscal years 1990 through 1996, from 9 to 10 percent of the total federal supervision population were removed from their supervision annually because they had violated their terms. During the same period, from about 28 to 31 percent of the total population were removed from supervision without a violation. Table 5 shows that, in fiscal years 1990 through 1996, violation ratesremained relatively constant for probation and parole offenders, from 6 to 7 and 14 to 18 percent, respectively. After an initial jump from over 5 to nearly 12 percent from fiscal year 1990 to 1992, the violation rate for supervised release offenders remained relatively unchanged at about 11 percent. Parole and supervised release—i.e., postprison—offenders had violation rates over 60 percent higher than that for offenders on probation. Offenders can be removed from supervision for committing one of three types of violations: major, minor, or technical. In fiscal years 1990 through 1996, a higher percentage of postprison—i.e, parole and supervised release—offenders were removed for major violations (from 23 to 29 percent) than were offenders on probation (from 16 to 18 percent). Overall, technical violations accounted for an average of about 70 percent of all offenders removed for violations annually in fiscal years 1990 through 1996. During the same period, an average of about 8 percent were removed for committing a minor violation, while an average of 23 percent were removed for committing a major violation. On July 17, 1997, AOUSC provided us with written technical comments and clarifications on a draft of this report, which we incorporated into the report where appropriate. AOUSC generally agreed with the contents of the draft report. We are providing copies of this report to the Director of AOUSC and other interested parties. Copies will be made available to others upon request. The major contributors to this report are listed in appendix IV. Please contact me on (202) 512-3610 if you or your staff have any questions. We initiated this assignment to provide Congress with information on the size and growth of the community supervision population as a result of the implementation of the Sentencing Reform Act of 1984. Our overall objective was to identify changes in the federal community supervision population that could affect probation officers’ workload. Specifically, we determined trends in (1) the growth of the total supervision population and any changes in the composition of that population by type of supervision; (2) the number of offenders who had special conditions imposed on their term of supervision, such as home confinement or drug treatment; and (3) the number of persons who were removed from supervision for violating the terms of their supervision. To develop information on the growth trends in the supervision population, we obtained AOUSC annual reports for fiscal years 1990 through 1996 and other documents. The data for these reports were derived from AOUSC’s Federal Probation Supervision Information System. We also analyzed AOUSC statistics on the number of individuals currently under supervision, the number removed from supervision—with and without a violation—and the principal reasons for their removal, for fiscal years 1990 through 1996. We chose fiscal year 1990 as our base year because it was the first full year in which the federal sentencing guidelines were implemented on a national basis. To obtain some data on potential future trends in the postprison community supervision population, we reviewed BOP’s estimates of the number of inmates who were expected to be released to community supervision in fiscal years 1997 through 2001. BOP estimated release dates for inmates in its prisons as of September 30, 1996. BOP provided these estimates by major offense for inmates sentenced under the preguidelines (parole) and guidelines (supervised release) sentencing rules. These data did not include estimates of the number of inmates who may be sentenced to prison and subsequently released in the years 1997 through 2001. BOP could not provide estimates of this population until its revision of its prison population projection model is complete. BOP said that these data were derived from its management information system, SENTRY. In addition, we analyzed data from the U.S. Sentencing Commission’s annual reports for fiscal years 1991 through 1995 on the average length of imprisonment for offenders sentenced, by criminal history category.These data were derived from the Commission’s MONFY data file, which contains sentencing information on offenders sentenced under the guidelines. To describe the special conditions that may be imposed on supervisees, we analyzed information provided by AOUSC on special conditions for fiscal years 1992 through 1996, as well as the per diem cost of administering each condition. This information included the number of offenders who had received each type of treatment or who had been placed on electronic monitoring or community service in each of these years. It is possible for an offender to be counted in more than one of these categories, but the data AOUSC provided did not identify how many offenders had more than one special condition or the duration for which a special condition was imposed. To obtain information on the number of offenders removed from supervision with and without violations, we obtained and analyzed AOUSC annual reports on removals. We did not conduct an independent assessment of the databases or of the policies and procedures used to assess and ensure their reliability and validity. Community supervision consists of three major programs: probation, parole, and supervised release. Persons on probation have usually been sentenced directly to probation at sentencing and may begin their term of probation immediately after sentencing. Persons on parole and supervised release enter community supervision after serving a term of imprisonment. The following sections describe how individual offenders proceed through the community supervision program. Prior to the Sentencing Reform Act of 1984, a term of probation operated as a suspended sentence. Under the terms of the act, as reflected in the federal sentencing guidelines, probation is a separate sentence that may have elements of punishment, incapacitation, deterrence, and correctional treatment. Special conditions that may be imposed as part of a sentence of probation include home confinement with or without electronic monitoring; participation in drug, alcohol, or mental health treatment or counseling programs; community service; or any combination of these conditions. The judge may impose some special conditions as part of the sentence, and the probation officer may impose additional conditions as part of the supervision plan prepared for each offender. In addition to special conditions, there are mandatory conditions of supervision that apply to all offenders. These include prohibitions on (1) committing another federal, state, or local crime during the term of probation; (2) possessing a firearm; and (3) possessing controlled substances. In addition, the judge may order the offender to pay a fine and/or restitution as part of the sentence. As figure II.1 indicates, if the offender does not violate the conditions set by the court or imposed by the probation officer during his or her term of probation, the offender is to be released at the end of the term. Court sets term of probation and conditions of supervision conditions? If, however, the offender violates a condition or a set of conditions, the probation officer may report the offense to the court and recommend that probation be revoked and the offender be incarcerated. The court then determines whether the offender will be incarcerated. In the case of a new felony or misdemeanor, the offender may be tried for a new crime. Not all violations lead to court hearings. For example, instances of noncompliance may be addressed initially through an administrative case conference involving the deputy chief probation officer or supervising probation officer, the probation officer, and the offender. The conference is to involve a complete review of the case and consideration of possible interventions or sanctions, including community service, drug or alcohol in-patient treatment, and electronically monitored home confinement. For these sanctions to be imposed, the offender must waive his or her right to counsel and a hearing. Figure II.2 shows that offenders imprisoned under the presentencing guidelines system can be released on parole after serving a portion of their prison terms. These offenders committed crimes prior to November 1, 1987. Offenders who exhibit good behavior while in prison may be released on parole after serving as little as one-third of their prison terms. The United States Parole Commission (USPC) determines whether and when an offender will be granted parole. Completes at least 1/3 sentence Offender paroled? violates conditions? As is the case with probation, mandatory and special conditions may be imposed on parolees. Offenders convicted of crimes committed before November 1, 1987, may receive a sentence of incarceration followed by a period of parole. Offenders receiving prison terms must complete a minimum of one-third of the sentence before they are eligible for parole to the community. Some offenders are not paroled to the community because the USPC deems them to be a risk to the community. These offenders are to remain in prison until they have served their entire sentence, less a minimum period for community supervision. They are then released to the community under mandatory release. After an offender has served one-third of the sentence, USPC may approve parole and impose special and mandatory conditions. If the offender does not violate any of the conditions, he or she completes supervision. If, however, the offender violates a condition or a set of conditions, USPC can either modify the conditions of supervision by making them more restrictive or revoke parole and have the offender reincarcerated. In the event the offender has committed a new crime, he or she may be prosecuted for the offense. Offenders who committed offenses on or after November 1, 1987, may be given both a term of imprisonment and a term of supervised release by the sentencing judge. The offender serves his or her entire prison sentence, less a maximum reduction of 54 days per year for satisfactory behavior. As in the cases of probation and parole, the supervised release offender is also assigned mandatory and, if needed, special conditions. Figure II.3 shows that mandatory and special conditions may be imposed by the sentencing judge, as well as by the probation officer, in cases where the need for a special condition has arisen after sentencing. The conditions imposed by the probation officer may have been specified in the prerelease plan developed by BOP prior to the offender’s release from prison. The probation officer may also determine that special conditions are required when preparing the supervision plan or when monitoring the offender’s behavior while on supervised release. Offender serves term of supervised release violates conditions? Violation 1. Minor 2. Major 3. Technical violation? If the offender does not violate any of the conditions, he or she can complete supervision as planned. If, however, he or she violates the conditions, the probation officer can exercise some discretion in either modifying the special conditions or referring the case to the court for disposition. Unlike parole, where revocation and reincarceration decisions can be made by USPC, in the case of supervised release, these decisions are made by the district court. In the event the offender has committed a new crime, he or she may be prosecuted for the offense. As previously outlined in the discussion of probation, not all infractions are reported to the courts or result in revocation of supervision. The probation officer has some discretion in deciding whether to refer a case to the court or to an administrative case conference. As shown in table III.1, the federal community supervision population rose by about 10 percent between fiscal years 1990 and 1996. The corresponding population growth in the federal prison system was about 63 percent, from 58,021 in fiscal year 1990 to 94,695 in fiscal year 1996. Table III.2 shows that, from fiscal years 1990 to 1996, the probation and parole populations decreased about 35 and 59 percent, respectively; while the supervised release population increased 648 percent. Overall, the postprison population increased 94 percent during the same period. Table III.3 shows the distribution of offenders on community supervision for the major crime types. As shown, drug offenders, who accounted for the largest number of offenders on community supervision, increased from nearly 32 percent of the total community supervision population in fiscal year 1992 to about 38 percent in fiscal year 1996. Table III.4 shows the number of offenders sentenced each year, by criminal history category, in fiscal years 1991 through 1995. As shown, the number of offenders sentenced each year in the three most serious criminal history categories (IV, V, and VI) grew at greater rates than those for offenders with lesser criminal histories. Number of offenders sentenced by criminal history category I (0 or 1) II (2 or 3) III (4-6) IV (7-9) V (10-12) VI (13 or more) A form of release from prison mandated by statute, which has been phased out by the Sentencing Reform Act of 1984. Mandatory release can be distinguished from either probation or parole in that mandatory releasees essentially are denied regular parole because they are dangerous offenders or have committed serious acts. The statute provided for release 180 days prior to the expiration of the prisoner’s sentence to allow for a minimal period of supervision. A form of early release from a military prison through the exercise of discretion by the United States Parole Commission (USPC) and the operation of the good-time laws that were in effect before the Sentencing Reform Act of 1984. A form of early release from prison through the exercise of discretion by the USPC and the operation of the good-time laws that were in effect before the Sentencing Reform Act of 1984. Parole can be distinguished from either probation or supervised release in that parolees are released from custody early but remain in the legal custody of the Attorney General while in the community. If parole is revoked, the parolee may be returned to custody to continue serving the sentence. Prisoners can be released again to parole and reincarcerated until the maximum sentence imposed has been served. A sentence to supervision in the community by a probation officer. In addition to some mandatory conditions, other conditions may apply. The maximum term of probation supervision varies by offense class. An additional term of supervision, which has been phased out by the Sentencing Reform Act of 1984. A term of special parole begins upon completion of any period on parole or mandatory release supervision from the regular sentence. If the prisoner is released by expiration of good time without any supervision, the special parole term begins upon such release. Following completion of the offender’s term of imprisonment, a period of supervision in the community imposed by a judge at the time of sentencing. In addition to some mandatory conditions, other conditions may apply. Under the sentencing guidelines, the court must order supervised release to follow any term of imprisonment that exceeds 1 year or if required by a specific statute. The court may order supervised release to follow imprisonment in any other case. The maximum term of supervised release varies by offense class. Offenders on supervised release are supervised by probation officers. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO reviewed the trends in the number of federal offenders serving terms of community supervision during fiscal years 1990 through 1996, focusing on: (1) the growth of the total supervision population and any changes in the composition of that population by type of supervision; (2) the number of offenders who had special conditions imposed on their terms of supervision, such as home confinement or drug treatment; and (3) the number of persons who were removed from supervision for violating the terms of their supervision. GAO noted that: (1) the total population of federal offenders under community supervision rose 10 percent during fiscal years 1990 and 1996; (2) the most notable change in the mix of this population occurred in the percentage of offenders serving a term of community supervision following a prison term; (3) specifically, the probation population decreased about 35 percent, while those on postprison supervision rose 94 percent; (4) the increase in the postprison supervision population is entirely due to the large increase in the number of offenders on supervised release; (5) during fiscal years 1991 through 1995, the number of offenders sentenced with serious criminal histories grew at a significantly greater rate than did those with less serious criminal histories; (6) further, available data suggest that inmates released from the Bureau of Prisons prisons in fiscal years 1997 through 2001 may include a greater number of high-risk offenders than did the population released through fiscal year 1996; (7) the total number of offenders with special conditions remained relatively stable between fiscal years 1992 and 1996; (8) in addition, the total number of offenders removed from supervision for violating their terms of supervision increased by nearly 18 percent between fiscal years 1990 and 1996; (9) to the extent that the trends continue in the: (a) mix of offenders under federal supervision; (b) number of offenders sentenced with more serious criminal histories; and (c) number of offenders removed from supervision due to violations, the workload of probation officers would likely increase; and (10) if the trend in the number of offenders with special conditions remains stable, it would not likely affect the workload of probation officers. |
Of the $5.55 billion the Recovery Act provided to GSA’s Federal Buildings Fund, $750 million is being used by GSA for new federal buildings and U.S. courthouses, $300 million is being used for new border stations and land ports of entry, and $4.5 billion is being used for measures necessary to convert existing GSA facilities to high-performance green buildings. Overall, for its Recovery Act program, GSA selected 263 projects in all 50 states, the District of Columbia, and 2 U.S. territories. As shown in table 1, GSA’s Recovery Act projects fall into the following four main categories: (1) new construction, (2) full and partial building modernizations, (3) limited scope projects, and (4) small projects. The following information describes the four main categories for GSA’s Recovery Act projects: New construction: Projects associated with building entirely new structures or significant extensions to existing structures, including the construction of new federal buildings and courthouses, as well as border stations and land ports of entry. Full and partial building modernizations: Projects associated with the replacement or upgrade of multiple building systems and components (such as windows, roofs, and plumbing, electrical, and mechanical systems), which are intended to significantly increase the usable life of the buildings. Full modernizations are comprehensive renovations that replace or restore nearly all the major systems in a building. Partial modernizations are more limited and address one or a few systems in the building. Limited scope projects: Projects associated with a single building system—such as lighting or plumbing—that could include upgrading existing systems or installing energy and environmental improvements, such as installing energy-generating photovoltaic panels on the roof of a building. Small projects: Limited scope projects whose costs are below the prospectus level. GSA officials told us that in selecting Recovery Act projects, they gave priority to those projects that would help transform federal buildings into high-performance green buildings and obligate funds quickly. Obligating funds quickly was important because the Recovery Act requires GSA to obligate $5 billion by September 30, 2010, and to obligate the full Recovery Act funding amount, $5.55 billion, by September 30, 2011. To reflect these priorities, GSA developed selection criteria for full and partial building modernization projects, which are presented in table 2 in descending order of weight. GSA scored projects in accordance with the relative priority it assigned to each criterion and then ranked potential Recovery Act projects on the basis of these results. GSA assigned the highest priority to the first three criteria listed in table 2. The execution timing and minimizing execution risk criteria are designed to identify projects that could be started quickly, would create jobs as soon as possible, and would also have a low risk of not being completed within the Recovery Act’s deadlines. Recovery Act funds must be spent no later than 5 years after the end of the fiscal year in which the funds are required to be obligated. Typically, the funds for a large construction project are obligated throughout the life of the project, and the 5-year limitation on expenditures generally does not apply to funds made available to GSA for acquisition and construction. Therefore, the Recovery Act’s establishment of deadlines for obligating and spending funds differs from the typical time frames for GSA’s construction projects. Many of the projects GSA selected for new construction and full and partial building modernizations had previously received partial funding for design or for early project phases. For example, 41 of the 63 new construction and full and partial building modernization projects had received funding from previous fiscal year appropriations. GSA officials said that they used Recovery Act funding to quickly start or expand construction on these projects, while also identifying ways to incorporate energy savings or environmental improvements into their design. Additionally, GSA funded cost escalation for some ongoing projects—that is, projects that needed additional funding to start or to complete construction. For example, according to GSA officials, the renovation of the Thurgood Marshall U.S. Courthouse in New York, a full building modernization, needed Recovery Act funding to address an increase in cost after bids from contractors came in higher than expected. According to GSA officials, the other five criteria listed in table 2 are those GSA typically uses when selecting capital projects, such as improving facility condition. In GSA’s supplemental information to its financial statements for fiscal year 2009, GSA reported an inventory of capital repairs and alterations estimated to cost approximately $5.0 billion. The buildings GSA selected for its Recovery Act program account for about $3.7 billion of this estimate, but the Recovery Act funding will not fully address the needs of each selected building, since reducing GSA’s capital repairs and alterations inventory was not the intent of the Recovery Act, according to GSA officials. GSA officials also stated that they will use Recovery Act funds for projects or elements of projects that are not among the estimated capital improvement needs, such as projects to incorporate high-performance green building features. While improving facility condition was one of GSA’s selection criteria, making facilities greener and obligating funds quickly received higher priority. GSA officials estimated that Recovery Act projects will reduce the agency’s total capital repairs and alterations estimate by $1.5 to $2.0 billion. According to the Web site, www.recovery.gov (Recovery.gov), the Recovery Act has three immediate goals: (1) create new jobs and save existing ones, (2) spur economic activity and invest in long-term growth, and (3) foster “unprecedented” levels of accountability and transparency in government spending. In addition, GSA’s Recovery Act program plan states that GSA will maintain an unprecedented level of openness and transparency in operations. GSA has published information on its Recovery Act program on both its own Recovery Act Web site and Recovery.gov. The information includes the following documents: The Agencywide Recovery Plan details GSA’s broad Recovery Act goals for the entire agency, GSA programs funded by the Recovery Act, contracting operations, and agency accountability efforts. The agencywide plan also outlines the public benefits GSA expects from its investments, such as job creation and environmental benefits. The Federal Buildings Fund Program Plan contains a summary of the objectives and activities that GSA’s Public Buildings Service (PBS) plans to implement with the $5.55 billion in Recovery Act funds. The plan also includes information on the projects’ selection, delivery schedule, and performance measures. Additionally, the plan describes how GSA will address issues such as monitoring and evaluation, transparency, and accountability for its Recovery Act program. The PBS Project Plan details how GSA will spend its $5.55 billion in Recovery Act funds. The project plan lists all of the GSA building projects that will receive Recovery Act funds and, for each project, includes the name, location (city and state), and estimated cost. GSA has the ability to shift funds from one project to another but must give the Senate and House Committees on Appropriations 15 days notice before doing so. Agency officials stated that they will continue to revise GSA’s project plan in the future. The weekly financial and activity reports contain information on GSA’s Recovery Act weekly appropriations, obligations, and disbursements, along with activities and planned actions. The Federal Buildings Fund Investments Map shows where GSA is spending its Recovery Act funds and provides information on spending to date, measured in obligations and expenditures, for individual projects or states. GSA posted an interactive map on its Web site, which graphically depicts its Recovery Act obligations and expenditures by state and project. Recipient reporting guidance for registration and reporting offers assistance for prime recipients of Recovery Act funds, who must register with the government and report on how Recovery Act funds were used. GSA posts its recipient reporting data on Recovery.gov, along with other participating agencies. GSA also reports frequently to OMB and congressional committees on Recovery Act plans, progress, and accomplishments. For example, at the request of OMB and the White House, GSA produced a 100 Days Report, which updated current Recovery Act obligations and reported planned obligations to the end of calendar year 2009. GSA also produces monthly reports on obligations versus expenditures for the House Committee on Transportation and Infrastructure. Since the 1970s, federal statutes and executive orders have established and revised a number of requirements and goals for changing the way federal agencies use or obtain energy. For example, EISA established new energy management requirements and goals, such as energy-efficiency performance standards for new buildings and major renovations. In addition, EISA defined a high-performance green building, which includes eight elements, as shown in table 3. While the Recovery Act specifies that GSA should use Recovery Act funds for measures necessary to convert GSA facilities to high-performance green buildings, as defined in section 401 of EISA, GSA also has to follow federal energy and water conservation requirements and goals established in federal statutes and executive orders. The federal energy and water conservation requirements and goals which we refer to later in this report are summarized in table 4. In March 2009, GSA created a national program management office (PMO) to oversee its Recovery Act program and established interim obligation milestones to help it achieve its Recovery Act obligation deadlines. The PMO is supported by the Recovery Program Executive Steering Committee headed by the PBS Deputy Commissioner. The Executive Steering Committee has developed a nationwide program strategy and priorities for the program. Figure 1 illustrates the organization of the PMO. A program management recovery executive heads the PMO and is supported by zone and regional recovery executives, who are responsible for monitoring and reviewing the performance of Recovery Act projects and managing risks at the regional level. In addition, subject matter experts support the regional teams in delivering projects, and two contractors are responsible for project tracking and for reporting and communication. The PMO uses data from projects to look for trends in cost and schedule performance for the program. As shown in figure 2, GSA has grouped its 11 regions into three Recovery Act zones. GSA officials stated that the objectives of the zone structure are to create and foster the sharing of ideas and resources and to provide project oversight. Also, the zone structure provides a link between the project leadership and the PMO. According to GSA officials, the PMO’s efforts and success have also contributed to improvements in GSA’s other operations. For example, GSA is reorganizing PBS’s internal structure to create more national coherence by having all 11 regions work together, as under the Recovery Act zone structure, rather than independently. Furthermore, GSA is realigning its Office of Design and Construction to directly coordinate with the PMO, which will allow the two offices to w the two offices to share ideas. share ideas. The PMO established interim milestones to help GSA achieve the two Recovery Act obligation deadlines. As we have previously noted, the Recovery Act requires GSA to obligate $5.0 billion by September 30, 2010, and to obligate the full Recovery Act funding amount, $5.55 billion, by September 30, 2011. Table 5 shows the four interim milestones that the PMO set and the cumulative amount that GSA obligated by each of the milestones. As of April 30, 2010, GSA had obligated just over $4.0 billion. According to GSA officials, GSA remains on track to achieve its overall Recovery Act obligation deadlines. According to GSA’s Agencywide Recovery Plan, GSA’s goal is to award 99 percent of Recovery Act dollars through competitive awards. GSA has identified approximately 1 percent of Recovery Act funds that may be awarded through other-than-fully-competitive means. To help achieve this goal, GSA plans to add Recovery Act projects to existing, competitively awarded contracts when they are within the scope of work, award ceiling, and terms of the agreement. In March 2010, the GSA Office of Inspector General (OIG) reported that GSA incorrectly executed the construction portion of the contract to which a Recovery Act project was added—a federal courthouse in Austin, Texas— and concluded that the award was not competitive. PBS disagreed with the OIG’s findings. GSA has awarded additional work to this project using Recovery Act funding and considered it to be competitively awarded because it considers the initial contract to have been competitively awarded. GSA’s $5.55 billion in Recovery Act funding, which must be obligated over 2 fiscal years, is over three times the agency’s 2009 funding for new construction and renovations. To address this increase in its workload, GSA determined that it would need to add over 200 full-time-equivalent personnel, including contracting officers. Additionally, GSA officials said they have transferred experienced personnel from other work to Recovery Act projects. GSA is also hiring temporary federal personnel and contractors, both to address the increased workload and to fill the gaps created by transferring experienced staff to Recovery Act work. As of April 23, 2010, GSA had hired 96 full-time-equivalent personnel and 38 contractors, and it plans to hire an estimated 68 additional personnel by the end of fiscal year 2010. The Recovery Act requires recipients to report data on jobs funded each calendar quarter. GSA established an outreach and call center to assist recipients in meeting their reporting requirements. According to GSA officials, 99.0 percent of GSA’s prime recipients have reported during the April 2010 reporting period, which represents 99.8 percent of GSA’s Recovery Act obligations for PBS. For the most recent reporting period— January 1, 2010, to March 31, 2010,—GSA recipients reported 2,847 jobs funded. GSA officials stated that the requirement for recipient reporting, including jobs data, is a contractual obligation, and if recipients do not report it is considered a breach of contract. The GSA OIG received $7 million from the Recovery Act for oversight and audit of programs, grants, and projects. To promote accountability and transparency on the use of Recovery Act funds, the Recovery Accountability and Transparency Board worked with Federal Inspectors General to establish a multiphased approach for reviewing agencies’ oversight of recipients’ Recovery Act data. The first phase, conducted before the start of the first recipient reporting cycle, provided a snapshot of agencies’ data review processes. The second phase, conducted after the first reporting cycle ended, reviewed data oversight at seven agencies, including GSA, by their respective OIG. The GSA OIG is currently examining the effectiveness of GSA’s review process, comparing GSA and OMB guidance to determine whether any conflict exists, and will issue a report no later than June 2010. We did not evaluate recipient-reported data as part of this review. However, we have reported on problems with data reported by recipients of Recovery Act funds administered by federal agencies generally, though not by GSA specifically. For example, in November 2009, we reported that although the job data reported by recipients provided some insight into their use of Recovery Act funding, a range of significant reporting and quality issues needed to be addressed. In December 2009, OMB issued guidance to further improve the quality of the data that Recovery Act recipients submit. Furthermore, in March 2010, we reported that while progress was achieved in addressing some data quality and reporting issues identified in the first round of recipient reporting, data errors, reporting inconsistencies, and decisions made by some recipients not to use the new job reporting guidance for the second round compromised data quality and the ability to aggregate the data. Overall, while significant issues remain, the second round of reporting appears to have gone more smoothly as recipients have become more familiar with the reporting system and requirements. While GSA has provided information on the goals of its Recovery Act program, the projects selected to receive Recovery Act funding, and its own progress in obligating and expending Recovery Act funding, it has not included details on the nature of the work being conducted on individual projects or clearly identified or explained why it has added or removed projects from its program in GSA’s project plan revisions. According to Recovery.gov, one of the goals of the Recovery Act is to foster “unprecedented” levels of accountability and transparency in government spending. In addition, GSA states in its Federal Buildings Fund program plan that it will maintain an unprecedented level of openness and transparency in operations. As we have previously discussed, GSA posted information on its program plans, project plan, funding activities, and recipient-reported data on its Web site and Recovery.gov. The lack of information on the nature of work being conducted on individual projects and their expected outcomes makes it difficult for the public to determine what improvements are being funded by the Recovery Act, such as which building systems are being upgraded or what types of building improvements are being made. Project scopes can cover a range of activities, including improvements to lighting, mechanical/electrical system upgrades, water use, roof repair, or window work. Individual projects can also address multiple areas and can be designed to achieve renewable energy targets. Such information on the nature of the work being conducted, while not required, could provide context for the public to understand how Recovery Act funds are being used to meet these goals. GSA’s project plan, which is available on the agency’s Web site and Recovery.gov, contains information for each GSA Recovery Act project, such as its name, location (city and state), and estimated cost. Descriptive information about the projects is limited to their category—new construction, full and partial building modernization, and limited scope. Additionally, full and partial building modernizations are listed together, without information on which project falls under which category, thereby making it difficult to distinguish between the two types. This distinction is important because a full building modernization, which is a complete renovation of an entire building, would be expected to incorporate more green features than a partial building modernization. Moreover, without this distinction, the public lacks context for evaluating GSA’s efforts to convert existing federal facilities to high-performance green buildings, as provided in the Recovery Act. OMB reviewed GSA’s project plan, and on March 31, 2009, GSA submitted the plan, with the list of selected projects, to the Senate and House Committees on Appropriations as required by the Recovery Act. GSA later published project plan revisions—dated November 2009, January 2010, and March 2010—which reflected adjustments to the original project plan’s allocations for existing projects. GSA officials said they made these adjustments, in part, to take advantage of cost savings that they realized when bids came in lower than expected, partly because of current economic conditions. These adjustments led to changes in the amounts of funds allocated for certain project categories, primarily affecting small projects, as shown in table 6. While the revisions to GSA’s project plan to date track the changes in project cost estimates, they do not fully explain the addition or removal of projects, nor do they address the lack of information on project scope. For example, in the November 2009 revised project plan, GSA states that it removed a project because it was no longer appropriate to go forward. GSA did not clearly highlight or mention which project it removed or the type of project. The removed project can be identified only by looking through the entire list of all Recovery Act projects and comparing the previous and new project cost totals. In the January 2010 revision, GSA added nine new projects to its program—one new construction project, two projects in the full and partial building modernization category, and six limited scope projects. These nine projects are expected to cost a total of approximately $86 million, but the project plan did not clearly highlight which projects were new additions to the plan. GSA has an opportunity to further meet its Recovery Act transparency goals by clearly identifying projects that have been added to or deleted from its program. GSA has developed minimum performance criteria that will help it convert buildings to high-performance green buildings and address energy and water conservation requirements and goals, although these criteria do not align completely with federal requirements. The resulting modernized buildings will likely vary greatly in the extent of their green improvements, for several reasons. Finally, GSA does not yet have sufficient data on the progress of its Recovery Act improvements, but it is implementing a system to track this. GSA has developed minimum performance criteria (MPC) to help ensure that Recovery Act funding results in improvements to buildings’ energy and water conservation performance. The MPC are to be incorporated into the project designs and cover the areas of energy, water, indoor environmental quality, materials, and building design. The following are examples of the MPC that are expected to be incorporated in GSA’s Recovery Act projects: install advanced meters that measure the building’s consumption of electricity, natural gas, steam, and other sources of energy; use high-efficiency water fixtures to help reduce water consumption; use occupancy sensors on lighting to help conserve energy in areas of the building that are unoccupied; and salvage, recycle, or reuse at least 50 percent of construction and demolition waste generated on a project. Each Recovery Act project is required to meet all MPC that are applicable to its scope of work, unless it receives a waiver from the Regional Recovery Executive and the PMO. Meeting the MPC for reducing water consumption by 20 percent could be waived for projects that do not include significant plumbing system upgrades, for example. As we have noted previously, federal energy and water conservation requirements and goals differ for different building categories. Therefore, GSA has established two sets of MPC, one for new construction and full building modernization projects and a second, less stringent set for partial building modernizations and limited scope projects. (App. II provides more detailed information on the two sets of MPC.) We found that both sets of MPC generally align with most of the elements of a high-performance green building, as established by EISA, and with key federal energy and water conservation requirements and goals (see tables 3 and 4). However, the MPC do not address one statutory high- performance green building element—to reduce the environmental and energy impacts of transportation through building location and site design. For example, a project could address this element by installing the infrastructure necessary for alternative fuel vehicles or giving priority parking to carpool and van-share participants. According to GSA officials, they did not include this element in the MPC because the MPC are based on the Guiding Principles for Federal Leadership in High Performance and Sustainable Buildings, which does not specifically address transportation. GSA officials noted that a number of the GSA Recovery Act projects are making transportation-related improvements as part of their efforts to obtain a Leadership in Energy and Environmental Design (LEED) Silver rating. However, because the MPC do not require such improvements, project managers may not be systematically determining whether transportation-related improvements can be included in projects, as they are for energy and water conservation improvements, thereby missing opportunities to incorporate that high-performance green building element. Furthermore, because GSA has not given transportation-related improvements the MPC designation, GSA will not be collecting data on those improvements that are being done as part of Recovery Act projects. We also found that the MPC are expected to contribute toward meeting the federal conservation requirements and goals to reduce energy and water intensity, although they do not explicitly address these objectives. The MPC do not mention the specific percentages and dates set out in law and executive order for reducing energy and water intensity. GSA officials said that this is because the objectives apply to GSA’s building inventory as a whole, rather than to individual buildings. Nevertheless, the officials stated that they expect Recovery Act projects to contribute significantly toward meeting the agency’s inventorywide federal requirements and goals for both energy and water. According to the officials, new construction and full building modernization projects should exceed these requirements and goals because they must meet other, more stringent, MPC for energy and water conservation. For example, they explained, the MPC require new construction and full modernization projects to exceed ASHRAE Standard 90.1-2007 by 30 percent, which is a higher energy conservation standard than the federal requirement to decrease energy intensity by 3 percent per year. GSA officials said they expect partial building modernizations and limited scope projects to make a more modest contribution toward meeting these requirements due to their reduced scope. According to GSA officials, all buildings receiving Recovery Act funds are expected to move toward becoming high-performance green buildings. The officials stated they have not developed an exact number of projects that could result in a high-performance green building because the definition from EISA is too broad and is a relative measure. For example, two projects that reduce water consumption by 1 percent and 10 percent, respectively, both meet the high-performance green buildings element of reducing water usage. In addition, GSA officials said that the high- performance green building criteria in EISA can sometime be at odds. Applying high-performance green building criteria by increasing the amount of space for tenants in an effort to improve worker productivity, for example, can actually result in an increase in the building’s energy use as opposed to a decrease. Consequently, GSA officials said that they developed the MPC in an attempt to provide a better structure for gauging the expected energy and water conservation performance of Recovery Act projects. Furthermore, the buildings are likely to vary greatly in the extent of their energy and water conservation improvements because of a variety of factors. Some Recovery Act projects, for example, are broad in scope and are being used to modernize multiple building systems—such as electrical; water; and heating, ventilation, and air conditioning systems (HVAC)— while others are modernizing relatively few systems or a specific component of a building. Additionally, existing infrastructure may affect the extent of energy and environmental improvements for certain buildings. For example, it will likely be more difficult to make certain green improvements to historic federal buildings because of the need to preserve features of the buildings, such as historic windows or ornate wall coverings. Finally, some projects were designed prior to the Recovery Act and may only have included a small number of green improvements. To include more green improvements at this juncture may mean that the projects would have to undergo significant redesign. Finally, the number of green improvements employed for a project may also be affected because of unanticipated problems discovered during the modernization. The discovery of asbestos on a project, for example, may result in the need to shift project funds originally slated for green improvements to asbestos abatement. In general, according to GSA officials, the new construction and full modernization projects are expected to significantly improve their energy and water conservation performance and exceed some federal energy and water conservation requirements and goals, especially those related to energy and water reduction. Conversely, GSA officials expect smaller projects to have less significant green improvements and to address only those federal energy and water conservation requirements and goals that fall within their scope of work. For example, a project primarily involving plumbing upgrades might only address the federal water conservation goal concerning reductions in water intensity. The 12 GSA Recovery Act projects (8 full and 4 partial modernizations) we examined differed significantly in their planned green improvements. (App. III provides more detailed information on the 12 projects we examined.) For 3 of the projects, GSA is either implementing or planning to implement a broad array of green improvements that will touch on multiple systems throughout the buildings. These full building modernizations will principally focus on replacing older, less efficient mechanical, electrical, and plumbing systems with newer, high-efficiency systems. While these projects had already been receiving agency funding for some time, Recovery Act funding, according to some project managers, has enabled them to add features that will enhance buildings’ energy and water conservation performance. Many of these features were not originally planned. Examples of full building modernization projects that are expected to result in extensive improvements include the following: Edith Green-Wendell Wyatt Federal Building in Portland, Oregon. GSA plans to transform the deteriorating 30-year-old federal building into a high-performance green building by replacing the building’s electrical, plumbing, and HVAC systems. GSA also plans to upgrade the building’s life safety, mechanical, elevator, and security systems as well as install photovoltaic panels and rain harvesting features on the building’s roof. The project management staff said that Recovery Act funding gave them the opportunity to vacate the entire building during the renovation, rather than proceeding two floors at a time, a key decision that allowed them to expand the scope of the project and add significant green improvements to the building. GSA is exploring the option of adding wire mesh or a perforated metal screen up the side of the building to shade the facade from the sun, thus helping to reduce the amount of energy needed for cooling the building. Mary Switzer Building in Washington, D.C. GSA is also planning extensive green improvements for the Switzer building. The project includes new HVAC, plumbing, and emergency power systems; replacement of aged plumbing; asbestos abatement; and restoration work performed on the building’s historic windows. According to project management staff, the Recovery Act allowed them to accelerate the modernization of the building by 1 year. It also allowed them to exceed some of the MPC issued by GSA, including an estimated 55 percent reduction in water use—above the 20 percent called for in the MPC for water use. In addition, the project estimates that it will address 30 percent of its hot water demand using solar hot water equipment. GSA also expects that approximately 70 to 75 percent of all the materials from the demolition phases of the project will be recycled. In five of the full building modernization projects we examined, GSA is planning to implement green improvements that are less extensive but that still address major systems or building components. These projects will generally focus on upgrades to current building components, but some building systems will also be replaced. Two projects contain historical elements that will have to be addressed as well. Several of the project managers stated that many of the green improvements slated for their projects would not have been funded without the Recovery Act. Examples of these projects include the following: John W. Peck Federal Building in Cincinnati, Ohio. The modernization of the 44-year-old John W. Peck Federal Building in Cincinnati, Ohio, includes extensive exterior upgrades, such as installing insulated, dual- glass windows to decrease the heating and cooling loads for the entire building. GSA estimates the improved windows alone will reduce energy consumption for heating and cooling by about 24 percent compared with the industry standard. The project also includes extensive interior work that will save energy—for example, new lighting fixtures and controls. The lighting improvements are expected to reduce energy consumption for lighting by about 50 percent, according to the project manager. This reduction would be significant since lighting consumes about 30 percent of the building’s energy. Birch Bayh U.S. Courthouse in Indianapolis, Indiana. The project involves numerous system upgrades while preserving the historical character of the 1905 courthouse. For example, the project will upgrade the courthouse’s HVAC system, where most of the air handling units and associated controls and equipment will be replaced. This change will allow the building managers to keep a more constant temperature and humidity in the historic courtrooms, while conserving energy in other areas of the building when they are not in use. Another green improvement will be the installation of a vegetative roof and a 10,000 gallon rainwater collection system. The system will allow the building to meet the federal requirement for storm water control, according to the project manager, and reduce indoor potable water use by using the collected rainwater for toilets. The project manager anticipates a 20 to 30 percent reduction in indoor potable water use. Finally, four partial modernization projects we examined plan to implement relatively few green improvements. The focus of each project was primarily to improve the efficiency of individual building components, as opposed to replacing or upgrading an entire building system. In general, project managers stated that these projects would have been slow to receive funding or would probably not have received funding at all if had it not been for the Recovery Act. Examples of these projects include the following: Denver Federal Center in Lakewood, Colorado. The Lakewood project will upgrade an approximately 70-year-old utility system that provides both water and sewer services to the center. According to the project manager, the current system leaks profusely. Since 2001, there have been 90 water line breaks exceeding $1 million in repair costs. GSA officials further stated that although the project is not specifically building-related, it is an important project to GSA and its tenants because the federal center houses approximately 6,000 federal employees from 30 agencies. Failure of this system could force the center to close, with associated lost wages of about $1.5 million per day, according to the GSA manager for the project. 26 Federal Plaza in New York City. The project will address severe water damage to the plaza’s underground parking garage caused by leaks in the plaza. The project’s green improvements include photovoltaic lighting and security cameras that will work with lower-intensity lighting, a new chiller, and lighting controls on several floors of the building. Table 7 shows details of the 12 GSA Recovery Act projects we examined. In adhering to the MPC that include both high-performance green building and energy and water conservation requirements and goals, GSA’s Recovery Act projects are making the buildings greener and addressing the requirements and goals. However, GSA cannot measure the extent of progress because it does not have sufficient data on improvements resulting from the projects. In October 2009, GSA began collecting energy and performance information on Recovery Act projects through a “data call” that asked project managers to categorize the status of each of a project’s MPC as either “not started,” “in progress,” “complete,” “not applicable,” or “waiver.” However, GSA officials said their guidance was not detailed enough to clearly define the response categories, thereby making it difficult for project managers to determine when each status should be selected. In December 2009, GSA reported that the data collected through this effort were, in some instances, incomplete and unreliable. GSA concluded that it needed to revise future data calls to gather more specific information on how projects would address their MPCs and to facilitate the tracking and reporting of the data. Furthermore, the data were limited to about 28 percent of the Recovery Act projects because those were the only projects that had progressed far enough to have such data. Several of the project managers from the 12 Recovery Act projects we examined reported problems in responding to the data call. For example, two project managers stated that they initially misinterpreted the appropriate response category for their projects and consequently inadvertently completed the incorrect MPC checklist. However, these mistakes were corrected in subsequent updates to the MPC checklists for the projects. To obtain more complete and reliable data, GSA is rolling out a new centralized system for collecting data on Recovery Act projects’ energy and water conservation performance. GSA officials told us the goals of the system are to (1) collect information on the MPC for each project and to aggregate that information, thereby allowing GSA to know the extent to which projects are collectively addressing MPC; (2) provide subject matter experts with a means of reviewing projects’ progress in achieving the MPC and suggesting changes as appropriate; and (3) generate customized reports upon request. GSA officials said the agency began using the system in April 2010 and expects it to be available online to all project managers soon. According to GSA officials, the new system will include more detailed information on each project’s MPC, such as the types of green improvements that will be installed, as well as supporting documentation that demonstrates exactly how the MPC will be accomplished. Moreover, the system will include supporting documentation for cases in which a project was scheduled to meet a MPC, like using renewable energy, but was unable to do so. Supporting documentation could include such things as projections, calculations, milestones, constraints, and associated cost- benefit analyses. GSA officials cautioned, however, that energy and environmental performance is difficult to project accurately and can be affected by a number of variables beyond GSA’s control, such as tenants’ behavior and changes in a tenant agency’s mission. For example, GSA’s estimate of energy savings for a building could be based on a tenant’s expected 13-hour workday, while the tenant’s actual workday might be longer. Similarly, an agency may need to hire additional staff in order to respond to an emergency, which would unexpectedly increase energy use. According to the GSA officials, a design-phase estimate that falls within about 20 percent of actual performance would be considered “pretty good.” GSA officials stated that the system will be used to track the progress of Recovery Act projects until their completion. According to GSA officials, they have nearly finished developing guidance for project staff who will use the system. GSA has also begun to train staff, starting with those with new construction or full and partial building modernization projects that are far enough along in the design process to have information on how they will achieve the MPC. To date, six project managers have been trained in using the system, according to GSA officials. GSA plans to use a separate training module for managers of limited-scope projects because less information is required for them than for new construction and full and partial building modernization projects. GSA officials have not estimated when all project managers would be trained. However, these officials said they expect to have preliminary or high-level data in the system for all projects by the end of July 2010. GSA has identified risks to its Recovery Act program and risk mitigation strategies. GSA’s approach to risk management is generally consistent with best practices we have developed. GSA focuses on broad risks that could affect GSA’s ability to address objectives for the agency as a whole, such as ensuring program goals are achieved and fraud, waste, and abuse are minimized; stimulating the economy; and improving the environmental performance of federal buildings. Broadly defined, risk management is a strategic process for helping policymakers make decisions about assessing risk and typically involves appraising and evaluating risks to a program or project and selecting mitigation strategies. In April 2009, GSA developed a plan to guide risk management efforts for agencywide risks to its Recovery Act program and developed an initial inventory of those risks. In March 2010, PMO developed a Recovery Risk Mitigation Plan specific to PBS. This plan identified 48 risks to PBS’s program, 14 of which were considered key risks, shown in table 8. This plan also contains assessments of the likelihood and potential impact of the key risks, identifies mitigation strategies, and establishes mechanisms for monitoring the risks and mitigation actions. The key risks are associated with areas such as financial tracking and reporting, acquisitions, and project management. For example, as indicated in table 8, GSA identified a risk that Recovery Act funds could be used for unauthorized purposes, limiting GSA’s ability to meet Recovery Act accountability goals. To mitigate this risk, GSA identified various internal processes, including national and regional approval of a project’s scope, multiple levels of review of project expenditures, and a process for reviewing contractor invoices to ensure services are valid and authorized. Agency officials told us that internal auditors, as part of GSA’s existing internal audit program, will test the mitigation actions put in place for the 14 key risks. In addition, they plan to assess and update the key risks on a monthly basis. We assessed GSA’s risk management approach against best practices that we developed in the areas of strategic planning, risk assessment, evaluation and selection of alternatives for addressing risks, and implementation and monitoring of risk-mitigation strategies (see table 9). We found that GSA’s approach generally reflected the best practices in all four areas noted in table 9. In the area of strategic planning, GSA clearly identifies Recovery Act goals and objectives as well as GSA program goals when considering potential risks to the program, such as stimulating the economy by spending Recovery Act funds quickly and improving the environmental performance of federal facilities. In addition, in the area of assessing risks, GSA established a process for documenting its assessment of risks that allows for updates and results in a qualitative assessment of the likelihood and potential impact of the risks on its Recovery Act goals and strategic objectives. Also, for monitoring the implementation of risk responses, GSA officials said the risk management team holds monthly meetings with senior officials to review key risks, identify any new risks, and ensure that proper controls are in place. However, there were areas where GSA could improve its risk management efforts. For example, in the area of evaluating and selecting alternatives for addressing risks, GSA had limited information in its plan and other risk management documents about its process for evaluating and selecting alternative mitigation strategies. GSA officials said that many of the mitigation strategies were put in place before the formal risk assessment was completed as part of GSA’s planning to implement the program and during ongoing discussions about risks facing the program. Therefore, a full analysis of potential risk mitigation alternatives was not completed. During our review of 12 Recovery Act case study projects, project management staff told us about some of the key project-level risks that could affect the success of the projects. Staff at 5 of the 12 case study projects we examined cited risks associated with the accelerated timelines imposed by the Recovery Act. Project management staff with whom we spoke at one case study said the tight timeline imposed by the Recovery Act was the most serious risk to their project. They said the project faces a challenge to complete all of the work necessary to achieve its environmental and energy goals, including completing a study of the building to identify potential energy-reducing upgrades, working through the study recommendations for upgrading the building with all of the stakeholders on the project, and completing the additional design work related to the selected upgrades. This study must be completed at an accelerated pace to enable the additional work to be awarded and the associated funding to be obligated within the Recovery Act’s time frames. In addition, 8 of the 12 case study project staff with whom we spoke said that they faced the more typical project risks associated with uncertainty about aspects of a building that is slated to receive upgrades, such as the degree of contamination with hazardous material, the absence of building system and structural drawings, or questions about the drawings’ accuracy. For example, project management staff for one project said that they had concerns about the accuracy of the as-built drawings—the plans that detail the construction of the building and other work performed on the building. These staff noted that if the building needs more structural work than originally planned, the project’s cost could increase and less funding might be available for green improvements to the building. Although GSA has developed a systematic process for identifying and planning for risks for its Recovery Act program, GSA officials said that to address project-level risks, such as those we have previously discussed, they rely on informal communication between headquarters and project management staff in the regions. Specifically, regional staff discuss project-level risks or challenges during weekly telephone calls with the PMO. In addition, GSA officials said they track whether projects are on budget and on schedule so they can identify when projects are encountering problems. GSA officials said that because so many projects are being implemented, it would be difficult for GSA to systematically assess and respond to individual project risks at the PMO level. In addition, because of the accelerated pace necessary to implement the program within Recovery Act deadlines and the additional responsibilities for regional staff associated with Recovery Act funding, such as new reporting requirements, GSA officials said they were reluctant to add new risk management reporting requirements for project management staff. GSA officials said they rely on project management staff in the regions to manage project risks and complete risk planning documents that are required by GSA’s Project Management Guide for the Public Buildings Service. The guide, issued by the PBS Office of the Chief Architect, is GSA’s road map for project management and details what project management staff should do to manage risks at the project level. The guide discusses two planning documents for projects, the Comprehensive Project Plan (CPP) and the Project Definition Rating Index (PDRI), both of which GSA project management staff identified as related to risk planning. The guide says the CPP ensures efficient and effective project delivery by articulating project goals and implementation strategies and should be updated throughout a project to evaluate the success of the plan to date and to adapt it to changing circumstances. In addition, the guide says the PDRI provides an objective evaluation of the project at various stages of its development and its benefits include a more refined definition of the scope of a project and an assessment of risk. Instructions for filling out the PDRI say the tool should be updated during the development of the project, from the preliminary stages to the start of construction. Finally, OMB’s Capital Programming Guide cites the need for developing and documenting a systematic plan to address project risk and calls for risk planning to continue throughout the life of the project. In September 2009, GSA’s OIG found that the PMO was not requiring full CPPs for Recovery Act projects and raised concerns about the adequacy of risk planning at the project level. During our review, we found that 9 of our 12 case study projects had not fully completed the required risk planning documents. For example, for 1 project we visited, the CPP had not been updated since before Recovery Act funding was received and did not list Recovery Act funding in the section detailing project funding sources. For 1 project we visited, staff said that although they did not complete a PDRI, they continually work to identify potential risks and develop risk mitigation strategies as needed. Some of the project management staff with whom we spoke for our 12 case studies said they have regular meetings with regional management about their projects to discuss potential risks or challenges facing the project. Staff from 1 project that had not completed GSA’s risk planning documents said they had completed other documents that were similar. Finally, some project staff told us that they considered the PDRI a requirement for projects that go through GSA’s normal project approval process, but that GSA’s Recovery Act-funded projects were unique and they did not think it was required. GSA officials said that the PDRI is typically completed during the approval process for prospectus-level projects, but that Recovery Act projects did not go through this process to get funding. However, GSA officials from the PMO said that a CPP was required for all full and partial modernizations, adding that Recovery Act projects should complete the risk planning documents called for in the guide. In addition, project management staff in the regions said that Recovery Act projects are being implemented at an accelerated pace and that this presents challenges to the agency. Finally, as we have previously mentioned, OMB’s Capital Programming Guide calls for risk planning at the project level. OMB’s guide calls for project managers to develop and document a systematic approach to risk planning that continuously identifies, assesses, responds to, and monitors project-level risks, adding that risk management is an integral part of project management. It is important for GSA to ensure that risk planning at the project-level meets the agency’s standards, as laid out in GSA’s guide or other guidance, such as OMB’s Capital Programming Guide. GSA’s reliance on informal communication channels for overseeing project-level risks, without ensuring that project-level risks are being identified and planned for, could result in some vulnerabilities going unidentified and increase the potential for risks to negatively affect GSA’s program as projects move from preliminary stages to construction. The Recovery Act has provided GSA with an unprecedented opportunity to repair or restore aging, deteriorating federal buildings and, in so doing, to enhance their energy and environmental performance. With this opportunity comes a responsibility to be accountable for how the funds are spent and to ensure that the projects are successful and the buildings progress toward becoming high-performance green buildings. GSA has the opportunity to enhance its accountability by making publicly available information about the nature of work being performed through its Recovery Act projects. In addition to knowing which buildings are receiving funding, this will enable the public to understand how Recovery Act funding is being used to improve GSA’s buildings. While GSA has made progress in moving buildings modernized under the Recovery Act toward high-performance green buildings, by not including criteria for reducing transportation’s energy and environmental impacts for Recovery Act projects, GSA’s minimum performance criteria for projects are not in alignment with the definition of a high-performance green building called for by the Recovery Act. GSA may also be missing opportunities to include transportation-related improvements in the projects, where appropriate, and to track those improvements. Finally, given the accelerated pace at which many projects are being implemented, taking steps to ensure that project management staff are systematically addressing risks to the projects could decrease the potential for risks to negatively affect GSA’s program as projects move from preliminary stages to construction. We recommend that the GSA Administrator take the following three actions: Consistent with GSA’s Recovery Act transparency goal of providing the public with an understanding of how its tax dollars are being spent, make information on the nature of the work being conducted and its expected outcome publicly available for each Recovery Act project. To reduce the environmental and energy impacts of transportation through site designs that support a full range of transportation choices for users of buildings, revise the MPC to require that project managers consider transportation-related improvements for Recovery Act projects, as appropriate. To ensure that steps are being taken to identify and plan for project-level risks, require Recovery Act project management staff to complete risk planning documents. The GSA Administrator provided written comments on a draft of this report, which are reproduced in appendix IV. The Administrator agreed with our recommendations and noted that GSA has begun to take action to implement them. GSA officials also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees, the GSA Administrator, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have questions about this report, please contact Terrell Dorn at (202) 512-2834 or [email protected] or Mark Gaffigan at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. To examine the steps the General Services Administration (GSA) has taken to implement the program and make its Recovery Act projects transparent to the public, we collected publicly available supporting documentation, including GSA’s Recovery Act program plans, spending plans, weekly financial activity reports, and recipient reported data on the number of jobs created or retained and funded. In addition, we collected documentation of GSA’s hiring resources and competitive contract awards. Furthermore, we collected information on individual project scopes, master schedules, the factors considered when selecting projects, and estimates of needed capital improvements in buildings receiving Recovery Act funds. We also interviewed senior staff from GSA’s Recovery Act Program Management Office (PMO), including the Recovery Executive, Directors, Zone Executives, Zone Managers, and subject matter experts. In addition, we interviewed senior staff from GSA’s Office of Federal High-Performance Green Buildings (OFHPGB). Specifically, we discussed GSA’s goals for its Recovery Act program, efforts to identify and select projects, progress in meeting Recovery Act goals for obligating funds, and efforts to collect data and report on the program. We also interviewed and coordinated with officials from the GSA Office of Inspector General and collected their reports identifying GSA’s Recovery Act implementation challenges and reviewing specific Recovery Act projects. Furthermore, we collected a report examining the data quality of recipient reported data for GSA and several other agencies, which was the result of coordinated efforts of various Federal Inspectors General and the Recovery Accountability and Transparency Board. To determine the extent to which GSA’s Recovery Act projects will help the agency convert buildings to high-performance green buildings and meet federal energy and water conservation requirements and goals from statutes and executive orders, we compared GSA’s minimum performance criteria with the elements of a high-performance green building as set forth in the Energy Independence and Security Act (EISA) of 2007. We also compared GSA’s minimum performance criteria with federal energy and water conservation requirements and goals from statutes and executive orders. These include EISA, the Energy Policy Act of 2005, Executive Orders 13423 and13514, and the Interagency Sustainability Working Group’s Guiding Principles for Sustainable New Construction and Major Renovations. Also, we interviewed senior staff and subject matter experts from the PMO and OFHPGB to determine what information GSA was collecting with regards to energy and water conservation performance and what type of system GSA used for gathering this type of information. We interviewed senior staff and subject matter experts from the PMO and OFHPGB. Furthermore, we selected 12 GSA Recovery Act projects as case studies and collected information on the types of improvements being made to help convert the buildings to high-performance green buildings and the extent to which the projects are expected to meet future energy and environmental performance requirements. We selected 12 full and partial modernizations—since GSA allocated the majority of its Recovery Act funds to these project categories—on the basis of a number of factors, including whether the project had been identified by GSA as having information on its expected performance. In addition, we selected a range of project types and sizes and projects from various geographic locations. We did not select any projects from the new construction, limited scope, or small project categories for our case studies. Because the sample is judgmental, the information we obtained from them cannot be generalized to all of GSA’s Recovery Act projects. We visited 5 of our case study projects, including the following: 26 Federal Plaza, New York, New York; Birch Bayh U.S. Courthouse, Indianapolis, Indiana; Mary Switzer Building, Washington, D.C.; Minton-Capehart Federal Building, Indianapolis, Indiana; and Thurgood Marshall U.S. Courthouse, New York, New York. At the remaining 7 case study projects, we spoke with senior staff from the regions and project managers: Denver Federal Center Infrastructure, Lakewood, Colorado; Edith Green-Wyndell Wyatt Federal Building, Portland, Oregon; Federal Building, Huntington, West Virginia; Federal Building, Hilo, Hawaii; G.T. Leland Federal Building, Houston, Texas; John W. Peck Federal Building, Cincinnati, Ohio; and Prince Jonah Kuhio Kalanianaole Federal Building Courthouse, Honolulu, Hawaii. To determine the extent to which GSA has taken steps to identify potential risks to its Recovery Act program and and developed strategies to mitigate those risks, we reviewed supporting documentation, including GSA’s risk management plan, risk mitigation plan, assessments of identified risks and mitigation strategies, and GSA’s project management guide for the Public Buildings Service. We also assessed GSA’s risk management documents against GAO-developed best practices. Furthermore, we collected documentation of project-level risk planning efforts from our case study projects and compared them with the risk planning efforts called for in GSA’s project management guidance. In addition, we interviewed senior staff from the Office of the Chief of Financial Officer and the PMO. Finally, we interviewed managers from our 12 case study projects to discuss project-specific risks and GSA’s efforts to mitigate them. We conducted this performance audit from June 2009 to June 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Use an integrated design process to establish performance goals for sustainable design principles and develop a plan to ensure implementation of high-performance green building goals throughout the project. Hire a qualified, independent commissioning agent working for GSA at the beginning of design. Include commissioning tailored to the size and complexity of the project, including an experienced commissioning provider from the project initiation through the project closeout. Use Energy Star Target Finder to set an energy goal that achieves a fossil-fuel reduction of 55 percent for 2010 design starts. Achieve at least 30 percent reduction in energy use compared with an American Society of Heating, Refrigerating and Air-Conditioning Engineers (ASHRAE) Standard 90.1-2007 baseline building. Install advanced meters. Include meters for electricity, natural gas, steam, and water. Use Energy Star or Federal Energy Management Program (FEMP)-designated Energy Efficient Products. Install solar thermal systems to meet at least 30 percent of the hot water demand. If not life-cycle cost- effective, provide an engineering study and letter of explanation signed by the Regional Recovery Executive. Plan for on-site renewable energy systems (photovoltaic, wind, geothermal, and solar thermal/hot water). If no on-site renewable energy systems are included, provide a letter of explanation signed by the Regional Recovery Executive. Assess the effects of solar heat gain based on site conditions and building orientation. Provide a complete envelope design to include thermal breaks, insulation, continuous air barriers, external sun control devices, and green roof potential. Choose glazing systems, including frames, glass, films, and gasses based on visual needs, elevation, orientation, heat loss, and solar load. Cooling and heating plants will use a Life Cycle Cost (LCC) methodology (e.g., National Institute of Standards and Technology Handbook 135) for equipment selection to include lifetime operating costs based on efficiency, reliability, and maintainability of equipment. variable frequency drives, high-efficiency chillers and boilers with modular design for part load efficient operations in HVAC design; radiant space conditioning and thermal storage systems; energy recovery ventilators to recover heat from exhaust to preheat outdoor air; separate HVAC for 24x7 spaces; and evaporative cooling (direct or indirect) strategies, in suitable climates. Reduce indoor potable water use by at least 20 percent compared with EPAct 1992, Uniform Plumbing Code (UPC) 2006, and International Plumbing Code (IPC) 2006. Reduce outdoor potable water use for irrigation by at least 50 percent compared with conventional baseline for the building. Smart controllers using evapotranspiration and weather data are required for irrigation systems. Evaluate strategies to capture rainwater for nonpotable uses, including flushing fixtures, cooling tower, and irrigation. Consider harvesting condensation from all cooling coils for nonpotable use. (See GSA Recovery Act Program Management Office Design Build Guidance Criteria—Water Efficiency Requirements issued 5/29/2009.) Evaluate alternative strategies to reduce cooling tower use of potable water. Strategies include the use of captured rainwater and HVAC condensate recovery. Manage the 95th percentile rain event on-site through infiltration, reuse, or evapotranspiration. Strategies include permeable paving, vegetated roofs, or other low-impact development techniques. Environmental Protection Agency (EPA) guidance is under development. Where available, use EPA’s WaterSense labeled products—faucets, toilets, urinals, showerheads, and irrigation controls. Use high-efficiency fixtures in accordance with new GSA water guidance. Meter cooling tower water makeup. Provide occupant lighting controls in accordance with new GSA lighting specifications. Provide occupancy sensors. Provide daylight sensors for fixtures within 15 feet of windows. At a minimum, comply with ASHRAE Standard 55-2004 and ASHRAE Standard 62.1-2007. Consider moisture control strategies to reduce risk for mold and damaging moisture. Use demand control ventilation to control indoor air quality. Use low-emitting building materials. Follow Sheet Metal and Air Conditioning Contractors’ National Association Indoor Air Quality Guidelines for Occupied Buildings under Construction. Flush out space for a minimum of 72 hours. Select products with lesser or reduced effect on human health and the environment. See http://www.epa.gov/epp. Use products with recycled content according to the Comprehensive Procurement Guidelines. See http://www.epa.gov/cpg/products. Use products with biobased content according to U.S. Department of Agriculture’s (USDA) BioPreferred program. See http://www.biopreferred.gov/DesignationltemList.aspx. Salvage, recycle, or reuse at least 50 percent of construction and demolition waste generated on a project. Develop a construction waste management plan to quantify material diversion goals and maximize the materials to be salvaged, recycled, or reused. Eliminate the use of ozone-depleting compounds where alternative environmentally preferable products are available. Use an integrated team to assess conditions, identify areas for improvement, establish performance goals for sustainable design principles, and develop a plan to ensure implementation of high- performance green building objectives. Hire a qualified, independent commissioning agent working for GSA at the beginning of design. Include commissioning tailored to the size and complexity of the project, including an experienced commissioning provider from the project initiation through 1 year after occupancy. Recommission the building to determine performance improvement goals. Target an Energy Star score of 80 or higher. Achieve at least 20 percent reduction in energy use from the 2003 baseline for the building. Achieve at least 20 percent reduction in energy use compared with an ASHRAE Standard 90.1-2007 baseline building. Use Energy Star or FEMP-designated Energy Efficient Products. Consider renewable energy generation through photovoltaic, building integrated photovoltaic, solar thermal, and building integrated wind power, when life-cycle cost-effective. Evaluate lighting in office areas, stairwells, parking garages, exterior parking lots, and mechanical spaces for redesign in accordance with new GSA lighting specifications. HVAC retrofits must consider the use of an LCC methodology (e.g., National Institute of Standards and Technology Handbook 135) for cooling and heating plant equipment selection to include lifetime operating costs based on efficiency, reliability, and maintainability of equipment; variable frequency drives, high efficiency chillers and boilers with modular design for part load efficient operations; radiant space conditioning and thermal storage systems; energy recovery ventilators to recover heat from exhaust to preheat outdoor air; separate HVAC systems for 24x7 spaces; and evaporative cooling (direct or indirect) strategies, in suitable climates. Reduce indoor potable water use by at least 20 percent from the 2003 baseline for the building. Reduce water use by 20 percent compared with 120 percent of UPC 2006 or IPC 2006 for fixtures installed after 1994 or 160 percent for fixtures installed before 1994. Reduce outdoor potable water use for irrigation by at least 50 percent compared with conventional baseline or compared with 2003 measured baseline for the building. Smart controllers using evapotranspiration and weather data are required for irrigation systems. Consider harvesting condensation from cooling coils for nonpotable use. Evaluate alternative strategies to reduce cooling tower use of potable water. Strategies include increased cycles of concentration, use of captured rainwater, and systems that treat the water for a longer use without chemicals. Manage the 95th percentile rain event on-site through infiltration, reuse or evapotranspiration. Strategies include permeable paving, vegetated roofs or other low impact development techniques. EPA guidance is under development. Where available, use EPA’s WaterSense labeled products - faucets, toilets, urinals, showerheads and irrigation controls. Consider fixture retrofits in accordance with new GSA water guidance, including high-efficiency single or dual flush handles or the installation of automatic flush valves. Meter cooling tower water makeup. Provide occupant lighting controls in accordance with new GSA lighting specifications. Provide occupancy sensors. Provide daylight sensors for fixtures within 15 feet of windows. At a minimum, comply with ASHRAE Standard 55-2004 and ASHRAE Standard 62.1-2007. Use demand control ventilation to enhance indoor air quality. Consider moisture control strategies to reduce risk for mold and damaging moisture. Use low-emitting building materials. Select products with lesser or reduced effect on human health and the environment. See http://www.epa.gov/epp. Use products with recycled content according to the Comprehensive Procurement Guidelines. See http://www.epa.gov/cpg/products. Use products with bio-based content according to USDA’s BioPreferred program. See http://www.biopreferred.gov/DesignationltemList.aspx. Salvage, recycle or reuse at least 50 percent of construction and demolition waste generated on the project. Develop a construction waste management plan to quantify material diversion goals and maximize the materials to be salvaged, recycled or reused. Eliminate the use of ozone depleting compounds where alternative environmentally preferable products are available. The 18-story building contains 510,659 gross square feet, including 199 inside parking spaces, and houses approximately 1,200 federal employees. A comprehensive modernization is planned for the project. The modernization will include the replacement and upgrades to building systems, including the exterior façade, accessibility, life safety, mechanical, electrical, elevator, and security. The overall objective of this project is to provide a full building modernization of the Federal Building located at 330 C Street, SW, in Washington, D.C. This two-phase major modernization will replace all major building systems and includes historic restoration. The American Recovery and Reinvestment Act (ARRA) project comprises Phase II of the modernization of the Mary E. Switzer building. Work items include new HVAC systems, automatic sprinkler systems where not currently in place, new emergency generator, new emergency power distribution system, replacement of electric branch circuit wiring and selected panel boards, replacement of aged plumbing equipment and piping, new Americans with Disabilities Act (ADA)/Uniform Federal Accessibility Standards water coolers, toilet room finish restoration and modification, minor exterior repairs and lighting, selective asbestos abatement, modifications to C and D Street lobbies, security modifications, forced pressure (blast) resistance upgrades, and an additional floor and new telecommunications backbone. The Prince Jonah Kuhio Kalanianaole Federal Building and Courthouse consists of a nine-story and a five-story concrete and glass complex built in 1977. A two-phased, full modernization and renovation is scheduled for the building. ARRA funding will be used to fund Phase I of the project, which includes design for both the courthouse and federal building and construction for the courthouse. The building’s HVAC systems will be upgraded to meet required energy performance standards, the building’s plumbing and electrical systems will be upgraded, the building will be renovated to meet ADA requirements, the building’s elevators will be improved, the building’s life safety systems will be improved, the building’s hazardous materials will be abated, and the interior spaces will be altered to result in a more modern and efficient facility. The proposed project is focused on transforming the Federal Building into a high-performance green building through upgrades to the building’s infrastructure. The project includes upgrades to the HVAC, plumbing, electrical service, and fire protection systems. New energy-efficient lighting will be installed. The roof will be replaced, and windows will be replaced or restored as needed, resulting in energy savings. The HVAC improvements will result in improved air quality, temperature control, and energy efficiency. The project proposes to transform the building into a high-performance green building through improvements to the building envelope as well as interior upgrades to the building infrastructure. The project includes window replacements, energy- efficient HVAC and electrical system upgrades, security enhancements, fire alarm system replacement, and sprinkler protection improvements. The Minton-Capehart Federal Building is a 636,000 gross square feet office building that was constructed in 1974. The scope of this project includes upgrades to the HVAC system to align with high-performance green building goals. The HVAC upgrades will improve air quality and temperature control and will significantly reduce energy consumption. This project will also provide a new fire alarm system, sprinkler system installation and other fire protection improvements. Lighting and ceiling in the building will be upgraded with energy-efficient light fixtures and occupancy sensors. In addition, electrical upgrades will be accomplished in support of the HVAC and fire and life safety upgrades. The project will upgrade the infrastructure of the Thurgood Marshall U.S. Courthouse and extend the useful life of the asset. The project will also address life safety and accessibility issues. The project is a two-phased modernization. Phase I work includes bulk demolition and exterior facade work. Phase II work is discussed in the next column. ARRA funding will be used for Phase II work, which includes selective interior demolition and new mechanical, electrical, plumbing, and architectural work associated with the mechanical work. The window system at the 22-story Leland Federal Building has been leaking for several years. There are also air infiltration issues, which make the facility expensive to heat and cool. The modernization is two-phased and is intended to remedy those issues and create a more comfortable environment for the building’s tenants. Major tenants of the building include the Internal Revenue Service, U.S. Department of State, Equal Employment Opportunity Commission, and Social Security Administration. Phase I for the project will include some or all of the following: replacing and upgrading the window systems; improving and upgrading the outdoor plaza; installing a new breezeway; making garage improvements, including a new elevator from tunnel to breezeway; building exterior repairs and interior upgrades to public spaces inclusive of finish, ceilings, lighting fixtures, ADA upgrades, and first-floor upgrades; and will include an option for significant improvements to the HVAC system. Phase II of this project includes full HVAC modernization and advanced lighting controls in the window zone of the building. The Federal Building in Huntington is a seven-story office building containing 94,307 usable square feet, 125,246 rentable square feet, and 138,588 gross square feet with no parking spaces on a 1.33 acre lot. This seven-story building was constructed in 1956 and is made of brick with a polished granite base. The ARRA project for this building will reduce energy consumption. Work on the project will include installing a new high- performance HVAC system, replacing windows, facade replacement, and installing solar panels on the roof to generate electricity. The Hilo Federal Building and Post Office was built in 1917 and is a two-story Classical Revival style building. The building is scheduled to receive a partial modernization. Major work to be performed includes a seismic upgrade. The building’s plumbing and electrical systems will be upgraded, the building will be altered to meet ADA requirements; the building’s security and life safety systems will be improved; and the building’s hazardous materials will be abated. The Denver Federal Center in Lakewood, CO, contains 52 buildings on a 670-acre site, housing 6,000 employees from 30 federal agencies. The utilities include 13.4 miles of underground fire lines, 11.3 miles of domestic water and drain lines, 8.3 miles of sanitary sewer lines, 25 miles of sidewalks, and 9 miles of roads. The primary goal of the project is to provide a reliable utility infrastructure to service tenant agencies for the next 50 years. Work on the project will include replacement of the water systems and sanitary sewer lines, removal of an inactive gauging station, installation of storm drainage, and repair of site drainage. This project will repair and upgrade the grand plaza on the Lafayette Street side of 26 Federal Plaza above the underground parking garage, which is leaking. Work on the project will include waterproofing and replacing the plaza. In addition to the contacts named above, Maria Edelstein, Assistant Director; Karla Springer, Assistant Director; Daniel Cain; Elizabeth Eisenstadt; Brandon Haller; John Johnson; Susan Michal-Smith; Ben Shouse; and Adam Yu made significant contributions to this report. | The American Recovery and Reinvestment Act of 2009 (Recovery Act) provided the General Services Administration (GSA) with $5.55 billion to invest in federal buildings and promote economic recovery. This funding includes $4.5 billion to convert buildings to high-performance green buildings (HPGB), which seek to reduce energy and water use, among other goals. GAO was asked to address the (1) steps GSA has taken to implement the program and make its Recovery Act projects transparent to the public, (2) extent to which GSA's Recovery Act projects are helping the agency convert buildings to HPGB and addressing federal energy and water conservation requirements and goals, and (3) extent to which GSA has identified potential risks to its Recovery Act program and developed strategies to mitigate those risks. GAO reviewed GSA documents and relevant laws and executive orders, and interviewed GSA officials at headquarters and staff for 12 projects, which varied in type, size, and location. GSA has put an organizational structure in place to implement its Recovery Act program and, as of April 30, 2010, had obligated just over $4 billion of its $5.55 billion appropriation, and is on track to meet the act's obligation deadlines. GSA also has published information on its Recovery Act program, such as agencywide plans for spending funds and lists of projects, but this information does not identify the nature of the work being conducted or describe the 263 projects GSA has selected for Recovery Act funding. Without this information, the program is less than fully transparent--a key GSA Recovery Act goal--because the public cannot readily discern what individual projects entail or are expected to achieve with Recovery Act funding. GSA's Recovery Act projects will enhance energy and water conservation performance in the 263 projects to varying degrees. GSA has begun collecting the data it would need to measure the likely extent of improvement. GSA set minimum performance criteria for its projects, which include reducing energy use by 30 percent. The criteria do not, however, include reducing the energy and environmental impacts of transportation through building location and site design, although this is part of the statutory definition of a HPGB. Under the Recovery Act, GSA is to use this definition when converting existing buildings. According to GSA, some managers are designing transportation-related improvements into their projects. However, because it is not part of GSA's criteria, other managers may not be systematically considering such improvements. According to GSA, the agency has begun to roll out a new centralized data system to collect and report on specific information for Recovery Act projects' green improvements and performance. GSA has identified risks to its Recovery Act program, such as the risk that Recovery Act reporting is inaccurate or incomplete, and risk mitigation strategies. In addition, GSA's approach to risk management is generally consistent with best practices we have developed. However, GSA relies on informal communication to identify project-level risks and has not taken steps to ensure the completion of project-level risk planning documents required by GSA. GAO found that the required documents, which are intended to help plan for project-level risks, had not been fully completed for 9 of the 12 projects reviewed. Unidentified risks to GSA's Recovery Act projects could potentially limit GSA's ability to achieve Recovery Act goals. |
The Department of Defense’s (DOD) lodging programs were established to maintain mission readiness and improve productivity. They were intended to provide quality, temporary lodging facilities and service for authorized personnel and to reduce official travel costs for DOD’s mobile military community. DOD’s lodging programs are classified as either permanent- change-of-station (PCS) or temporary duty (TDY). The major differences between PCS and TDY lodges are the number of rooms (fewer PCS rooms); the type of traveler they primarily serve; and their primary source of funding and support. TDY lodging typically receives more appropriated funding than does PCS lodging, which relies primarily upon nonappropriated funds generated from lodge operations. Historically, DOD’s lodging programs have had varying linkages to the department’s morale, welfare, and recreation (MWR) programs. The assistant secretary of defense for force management policy is responsible for establishing uniform policies for service lodging programs. DOD’s lodging programs are classified as TDY or PCS on the basis of the type of traveler they primarily serve. Table 1 shows the magnitude of DOD’s lodging programs. TDY lodges serve mainly individual military or civilian travelers who are temporarily assigned to a duty station other than their home station. In addition, they can serve military personnel and their families who are changing permanent duty stations. On a space available basis, they also serve military retirees and other people authorized by installation commanders. Room rates at these lodges are set at the lowest rate possible to reduce travel costs yet recover authorized nonappropriated fund expenses. While departmental regulations state that the cost of major upgrades and new lodges is expected to be paid with appropriated funds, in recent years some services have added a surcharge to the nightly room rate, which they accumulate and use for lodge construction and major renovation. The revenues from TDY lodging must be maintained in a separate nonappropriated fund account, designated as a lodging or billeting fund, and used only to operate and maintain the lodging facilities. Prior to 1991, Army TDY lodges were part of its MWR program. However, based on a GAO report that found the Army was overcharging TDY travelers to subsidize MWR activities, the Army, in 1991, established a separate lodging fund for TDY lodging revenues. PCS lodges primarily serve military personnel or DOD civilians (traveling outside the continental United States) who are changing permanent duty stations and their families. On a reservation basis, PCS lodges can also accommodate families, relatives, and guests of hospitalized military or their families and official guests of the installation as determined by the installation commander. On a space available basis, they can serve other authorized patrons, such as civilian PCS (personnel traveling inside the continental United States); military and civilian TDY personnel; military members not on official travel; military retirees; and relatives and guests of service members assigned to the installation. According to DOD’s current guidance, the military services can choose how they provide PCS lodging services: (1) through a lodging or billeting fund with all of its revenue used to support lodging activities, as do the Air Force, the Army, and the Navy or (2) through an MWR fund as does the Marine Corps. When services are provided through an MWR fund, revenue is deposited into a single MWR installation account and used for the benefit of the local MWR program. The Marine Corps PCS lodging program is currently the only DOD lodging program operating in this manner. The cost of new PCS lodge construction for all the services is paid with nonappropriated funds, but the department’s regulations permit some maintenance and repair to be paid with appropriated funds. Because the department allows the services to choose their method of managing PCS lodging, it has two sets of instructions providing guidance on managing lodging operations. One applies to PCS lodges operated as revenue-generating MWR or exchange service activities, and the other applies to all lodges not operated as such. Both sets of instructions implement policy, assign responsibility, and prescribe procedures for operating the lodges. However, the instructions differ in their program goals and authorized patronage, allowing wide latitude in the operation of PCS lodging programs. DOD’s MWR program provides for the physical, cultural, and social needs and the well-being of service members, their families, and eligible civilians by providing an affordable source of goods and services like those available to civilian communities. DOD has determined that these programs are vital to mission accomplishment, are an integral part of the non-pay compensation system, and provide quality-of-life benefits for authorized patrons. The services’ MWR programs—such as gymnasiums, fast food operations, and libraries—are intended to provide a sense of community among patrons in order to make individuals more satisfied with military life and to attract people to military careers. MWR programs receive financial support primarily from two sources: nonappropriated funds—generated from profitable business activities such as retail outlets, restaurants, and golf courses—and funds appropriated by Congress. DOD regulations classify MWR activities into three categories, which relate to the degree of appropriated fund support they are expected to receive. Category A activities—such as athletic fields, gymnasiums, and libraries— are considered the most essential to supporting MWR. Such activities promote the physical and mental well-being of the military member, supporting the basic military mission. They are generally not expected to support themselves financially. Accordingly, DOD policy provides that a minimum of 85 percent of total expenditures should come from appropriated funds. The use of nonappropriated funds is limited to specific instances where appropriated funds are prohibited by law or where nonappropriated funds are essential to operate a facility or program. Category B activities—such as swimming pools, automotive hobby shops, and child care centers—are closely related, in terms of mission support, to those in Category A. These activities provide, to the extent possible, the community support systems that make DOD installations temporary hometowns for a mobile military population. DOD views these activities as having a limited ability to generate nonappropriated fund support and thus requiring less appropriated support than activities in Category A. The DOD standard for appropriated fund support is a minimum of 65 percent of total expenditures. Category C activities—such as golf courses, clubs, and bowling alleys—are revenue-generating activities. Although they may lack the ability to completely sustain themselves, they are expected to generate enough income to cover most of their operating expenses. In many cases, they also generate enough income to help support Category A and B activities. Thus, they may receive limited support from appropriated funds. DOD has established separate but similar classifications for its lodging program. TDY lodges are classified as Category A activities and are thus authorized a higher degree of appropriated support. PCS lodges may be classified, at the option of the service, as either Category A or Category C activities. In the past, the Army, Navy, and Marine Corps operated PCS lodges as Category C activities. In these cases, the lodges were part of the services’ MWR programs and lodging revenues were often used to financially support other MWR programs. Currently, the Marine Corps’ lodging program is the only one that still has any significant financial connection with MWR operations. DOD’s proposed change to its PCS lodging policy is intended to sever this last connection and ensure that no PCS lodging revenues are used to support MWR programs. This change, if adopted, would require the services to deposit all PCS lodging revenues into a lodging fund separate from the MWR fund, which would be dedicated to supporting the service’s lodging program. Except for the Marine Corps, DOD’s proposed policy change will not impact the services’ MWR programs. The Marine Corps still uses PCS lodging earnings to help support its MWR programs. Without these earnings, Marine Corps officials told us that they would have to seek additional appropriations or local installations would have to make changes to their MWR programs that could affect the quality of life of marines and their families. Therefore, Corps officials may request a waiver from the policy if it is adopted. However, the Corps has options that could lessen the effect of the policy on both its MWR and lodging programs if necessary. With regard to the Army, prior to October 2000, the Army also used PCS lodging funds to support its MWR program. Presuming adoption of the policy change, the Army took a number of actions to minimize the impact on its MWR program. Therefore, it will no longer be affected by the policy change. However, as part of these provisions, the Army now permits its installations to charge its patrons not on official orders, such as military retirees, a surcharge that can be used by the local installation’s MWR program. This practice violates department and Army regulations. According to DOD, the Navy and Air Force PCS lodging programs already conform to the proposed policy, which would then have no impact on their MWR programs. The Marine Corps has 14 PCS lodges at 12 of its 19 installations. Since 1996 the PCS lodges have reported steadily increasing earnings. For example, in fiscal year 1996 they reported a net profit of about $1.8 million, and by fiscal year 2000, they reported a net profit of about $5.1 million, which was used to operate the lodging program as well as help support MWR programs at the local installations. Marine Corps officials believe that the proposed policy is inappropriate for the Marine Corps, considering its size, decentralized organization, and the manner in which it operates its MWR and its TDY lodging programs. In addition, they believe that the lodges are a good source of future revenue for the MWR programs. If these lodging earnings are no longer available to the MWR programs, Marine Corps officials said that they would have to make changes to their MWR programs, such as reducing the quality-of-life services, raising rates, or seeking additional appropriations to compensate for lost revenues. Additionally, they are concerned that some of the lodges will not be able to operate profitably if they are removed from the MWR program. Currently, the MWR program provides the funds needed to expand, renovate, and construct new lodges. Without this support, officials said some installations might not be able to afford to renovate or build new lodges. They were also concerned that the proposed change might result in additional costs for overhead and common support and were unsure whether a separate lodging fund would be able to reimburse the MWR fund for the value of the lodging assets previously financed and built by the MWR fund. For these and other reasons, Marine Corps officials said they may ask for a waiver if the policy is implemented. Earnings from what the Marine Corps terms its MWR business activities,including its PCS lodges, help to support a number of MWR programs that cannot support themselves. In fiscal year 2000, the Marines’ MWR business activities at installations that had PCS lodges reported profits of approximately $49 million. (See table 2.) Profits shown in table 2 are those reported for installations with PCS lodges before these profits were used to help support local MWR programs that may either collect no revenue, or insufficient revenue, to offset their operating costs (e.g., parks and picnic areas, swimming pools, and child development centers). After this support was provided, the Marine Corps’ MWR program reported profits of about $7.8 million. If the PCS lodging profits of about $5.1 million had been set aside to support only the lodging programs, the MWR would still have earned about $2.7 million more than MWR expenses. The impact of losing PCS lodging earnings varies by installation. As a percent of total reported MWR program sales and profits in fiscal year 2000 (see table 2), PCS lodging was 2.1 percent of sales; but 10.4 percent of profits. These PCS profits ranged from a low of 2.1 percent of the total MWR profits at Parris Island, S. C., to as much as 37.4 percent at Camp Butler, Japan. All of the installations in table 2 earned a profit before those profits were used to help support local MWR programs. In addition, all but two of the MWR funds would have had profits remaining (after paying all MWR support costs) even if lodging earnings had not been available to them. The MWR fund at Parris Island, S.C., for example, had a net loss of about $940,000 in fiscal year 2000 after paying all MWR support costs. Without the $67,000 in profits from the PCS lodge, the net loss would have been even greater. The MWR fund at Camp Lejeune, N.C., would also have lost money if lodging earnings were not included. In fiscal year 2000, its net profit was about $68,000 after paying all MWR support costs. Without the $492,000 in PCS lodging profits, the fund would have lost about $424,000 for the year. Camp Lejeune officials said that this loss would have had a significant impact on the quality of life of that Marine community. According to Marine Corps officials, the impact of separating PCS lodging funds from the MWR program would be greater than suggested by simply focusing on PCS lodge profits. The officials indicated that removal of the PCS lodging funds would eliminate much needed funding flexibility and the ability to provide advance funding for future activities. Therefore, if the proposed policy is adopted, they said that these installations might have to increase fees or eliminate certain programs. The Marine Corps has several options to compensate the MWR fund for the lost PCS lodging revenue. Currently the Marine Corps is not considering any of these options, which suggests that it is likely to request a waiver from the policy if it is adopted. Each of the options for maintaining a healthy MWR operation at each Marine Corps installation would need to be studied to determine which option or which combination would be the most effective. These options include, but would not be limited to, reducing or eliminating some MWR services or increasing the services’ fees; seeking additional appropriations or reprioritizing existing appropriations; using the potential reimbursement for the net book value of the lodging assets. Marine Corps officials often cited reducing or eliminating MWR services as a possible but undesirable outcome of the policy change, but they did not specify which services would be reduced or eliminated, saying that this would be an individual installation decision. They also discussed the potential need to raise the fees charged for other MWR services used by Marines and their families. These MWR services, especially MWR Category B and C programs, charge varying fees to help support the MWR program. Raising the fees and reducing or eliminating some of these services is an option for the MWR program to offset the loss of lodging revenues. A second option available to the Marine Corps would be to seek additional appropriations or to reprioritize them. Depending on how vital the MWR program is to the military mission, DOD regulations permit varying levels of appropriated support. However, as shown in table 3, the Marine Corps provided less appropriated support in fiscal year 2000 than did the other services for Categories A and B MWR programs. According to DOD policy, Category A MWR programs (e.g., free professional entertainment and physical fitness programs) are considered most essential in meeting each of the military services’ objectives and have virtually no capacity for generating nonappropriated revenues. DOD guidance specifies that they are to be supported almost entirely with appropriated funds. However, according to DOD data, in fiscal year 2000 Marine Corps appropriations paid 76 percent of Category A expenses compared to an average of about 92 percent by the other military services. (See table 3.) A portion of its lodging earnings helped offset the shortfall. Category B MWR programs (e.g., childcare programs and youth activities) are similar to Category A programs in importance to each service but have some revenue-generating capacity. In fiscal year 2000, Marine Corps appropriations paid 52 percent of Category B MWR expenses, compared to approximately 66 percent by the other services. Again, the Marine Corps used a portion of its lodging earnings to help offset the shortfall. Category C MWR programs (e.g., golf courses and bowling alleys) have enough revenue-generating capacity to cover most operating expenses and generally receive limited appropriated support. Because the Marine Corps has discretion to determine how much of its operations and maintenance appropriations will be used to support MWR activities, it could look for opportunities to allocate a greater portion of these appropriations to support MWR activities at levels closer to those provided by the other services. In fact, Marine Corps officials said they were taking steps to increase the percentage of appropriated support for MWR programs. The Corps also has the option to seek additional appropriations from the Congress to make up for the MWR program’s loss of lodging revenues. A third option available to the Marine Corps is to follow a practice recently used by the Army—reimbursing the MWR fund for the value of lodge assets previously held in the MWR program. The Marine Corps estimates the current net book value of its lodging facilities is about $18 million but this could increase as current and planned construction projects are completed. Because most of these assets were built or obtained with MWR funds, the MWR program may be entitled to a reimbursement if the lodging assets are transferred to a separate lodging fund. The Army used this approach when it changed its lodging program to meet the requirements of the proposed policy. In that case, the Army established a multiyear payment schedule to reimburse the MWR program from annual lodging receipts. Such a program in the Marine Corps could provide a source of annual funds to help compensate for lost lodging revenue, at least in the shortterm. The Marine Corps also stated that without continued MWR support, the operations of some of its PCS lodges would be negatively affected. There are options, however, that could reduce this impact. Each of these would need to be studied to determine which or which combination would offer the best alternative. The options include, but would not be limited to sharing pooled PCS lodge revenues across all installations and combining PCS and TDY lodging operations and sharing resources. Pooling and sharing of lodging profits across the Marine Corps installations (e.g., creating a centrally managed lodging fund) could help ensure that money is available to meet all installations’ PCS lodging needs, including construction or remodeling needs and additional support costs. Shortfalls at one location could be met with profits from others. The Marine Corps already pools and shares some lodging earnings. For example, each MWR business activity (including the lodges) contributes to a central MWR construction fund, which is shared by all installations. Currently, the Marine Corps PCS and TDY lodges (like those of the Navy) are managed and operated by two separate organizations. The Office of the Deputy Commandant, Installations and Logistics manages the Marine Corps’ TDY lodges, and the Marine Corps Community Services manages its PCS lodges. The Marine Corps could combine its TDY and PCS lodging operations similar to those of the Air Force and Army, potentially reducing the management and overhead costs associated with managing two distinct lodge systems. On October 1, 2000, the Army took steps to ensure it would be in compliance with the proposed lodging policy should it be adopted. This included creation of a single lodging fund for both PCS and TDY revenues separate from its MWR fund. It also authorized its installations to impose a surcharge on some users of its lodges that is used to help support local morale, welfare, and recreation activities. We believe this practice violates DOD and Army regulations. Prior to October 1, 2000, the Army operated separate TDY and PCS lodging programs. Revenues from the TDY program were deposited into a separate lodging fund and used exclusively to support TDY lodges. However, revenues from the PCS lodging program were deposited into the Army’s MWR fund. While this fund, in turn, paid the lodges’ operating expenses and funded capital improvements, excess lodging earnings were used to support other Army MWR programs. On October 1, 2000, the Army combined operations of the two lodging programs and began depositing all lodging revenues into a single lodging fund at each installation. Considering potential management efficiencies, Army officials believe that the financial impact on its overall MWR program would be minimal. They estimated that the MWR fund will annually lose lodging earnings of about $5 million, after deducting MWR overhead and recapitalization costs. They consider the impact on any particular installation to be limited because the loss is shared by the 61 installations with PCS lodges. Additionally, the Army’s MWR construction fund will lose about $800,000 annually, representing the PCS lodges’ historical contribution to the fund, which was based on a 2-percent assessment of lodging revenues. However, the MWR fund will also benefit from the change because it will no longer be responsible for maintaining existing or constructing new lodges. From fiscal years 1996 through 2000, for example, the MWR fund reported spending about $38 million on the construction of new PCS lodges. In addition, the Army has estimated that it currently has a $635- million backlog of maintenance and repair in its PCS and TDY lodges.Installation MWR funds will no longer be responsible for the PCS portion of this backlog. The Army central lodge construction fund will also reimburse each installation MWR program for the estimated book value of the PCS lodging assets as of October 1, 2000. This is being done in recognition that the assets were initially constructed or renovated with MWR funds but that the MWR programs would no longer be able to benefit financially from the investments. The total reimbursement will be $49.5 million, paid out over 6 years. To further lessen the impact of the loss of lodging revenue to installation MWR programs, the Army permits installations to impose a surcharge on patrons not traveling on official orders, such as military retirees, and transfer the proceeds to the MWR funds at the local installations. Army installations can choose whether to participate and can set the surcharge amount. Twenty-three of 61 installations in the United States and overseas elected to participate in fiscal year 2001. The surcharge rates ranged from $1 at West Point, N. Y., to $25 at Army locations at Camp Zama and Kure, Japan, and generated more than $1.8 million during fiscal year 2001. Under DOD and Army guidance, this transfer of funds to the MWR program is prohibited. The transfer violates the provisions of DOD and Army regulations, set forth below: DODI 1015.12, Lodging Program Resource Management states that nonappropriated funds that are generated from, or associated with, lodging programs shall be used only for lodging programs unless they are organized as part of the single MWR fund. Army Regulation 215-1, MWR Activities and Nonappropriated Fund Instrumentalities provides that supplemental mission nonappropriated funds, such as the funds from lodging operations, will not be used to subsidize MWR programs and that such funds can be used only for the requirement for which they were established—in this instance, lodging. While the Air Force and Navy manage their PCS lodging programs differently, neither provides any lodging revenue to its MWR programs. Rather, historically the Air Force and the Navy have deposited all revenues into separate lodging funds and reinvested them into the lodging programs; therefore they are already in compliance with what the proposed policy would require. The Air Force manages TDY and PCS lodges as one program, and most management operations are the same for both types of facilities. The managing agent is Air Force Services. While the Navy already maintains separate accounting of its lodging fund from its MWR fund, it has not created a consolidated lodging fund for both PCS and TDY lodges as seems to be suggested by the department’s May 2, 2001, report to the Congress. The Navy’s PCS and TDY lodges are managed by two separate organizations, which have separate lodging funds with distinct management philosophies and goals. Navy Exchange Service Command manages the Navy’s PCS lodging and the Naval Facilities Engineering Command manages its TDY lodging. DOD officials provided two primary reasons for changing the PCS lodging policy. First, they perceived a need to resolve a conflict with the Joint Federal Travel Regulation. In DOD’s view, resolution of the conflict required separation of lodging revenues from those used for MWR purposes. Second, the officials told us the policy change was a first step to achieve a number of other management objectives. Our analysis indicates that the policy change may serve an important management purpose, ensuring that lodging funds are retained and used exclusively for lodging programs. However, the change is not compelled by requirements of the Joint Federal Travel Regulation. And while consistency and achieving other management objectives appear to be reasonable, much more will be required to enable DOD to accomplish the other management objectives. In its May 2001 report to Congress, DOD based the proposed policy change on a determination that its current PCS policy is in conflict with requirements of the Joint Federal Travel Regulation. DOD reported that its current policy defines PCS lodging as an “unofficial lodging program” while the Joint Federal Travel Regulation defines PCS lodges as “official travel government quarters.” DOD viewed the proposed policy as resolving this conflict by removing PCS lodging revenues from MWR programs. Although we believe the policy change is within the discretion of the department, we do not find a conflict between the department’s current policy and the Joint Federal Travel Regulation. In our view, the regulation deals with allowances for travel and transportation; it does not apply to lodging policy. DOD officials also outlined a number of other management objectives they expected to accomplish, aimed at improving management of the lodging programs. These included (1) making the programs more consistent across the military services, (2) reducing lodging rates where appropriate, (3) improving the overall quality of lodging facilities, and (4) eliminating the construction of new PCS lodges that may exceed the needs of official DOD travelers. The proposed policy, however, does not specifically address these objectives. Therefore, the policy change, by itself, will not allow DOD to accomplish them. Supplemental DOD guidance for operating both TDY and PCS lodges will be required. Department officials said that the lodging policy is only the first step in their plans to improve the lodging program and that they will eventually need to recommend further change to the department’s guidance to address these other issues. According to officials in the Office of the Secretary of Defense (OSD), the military services’ PCS lodging programs have evolved over time and have widely different operating philosophies and approaches. In addition, when DOD revised its lodging policies and implementing guidance in 1995 and 1996, they were written so that the military services could continue to operate their unique PCS lodging programs; they were not written to ensure consistent lodging programs across the services. The proposed new policy change does not address this issue. Contrasting PCS and TDY lodging programs, OSD officials pointed out that TDY lodging guidance ensures greater consistency across the services. It requires that the services manage their TDY lodges similar to Category A MWR activities. Such lodges are considered to be mission-sustaining; can receive appropriated funds for major renovations and new lodge construction; and can receive other appropriated support typically provided by the local installation (e.g., for minor repairs and electricity). The goal of this type of lodging program, according to DOD’s guidance, is to provide quality lodging facilities at the lowest possible price to official DOD patrons traveling on orders. This, in turn, reduces the travel costs of operational units, allowing use of appropriated funds for other purposes. However, current PCS lodging guidance permits management of lodges as Category A mission-sustaining lodges or as Category C revenue-generating lodges. First, for Category A mission-sustaining PCS lodges, the services follow DOD’s lodging guidance which is similar to guidance followed by TDY lodges. A major difference, however, is that the services must use nonappropriated funds (e.g., from lodging revenues), not appropriated funds, to renovate or build new PCS lodges. The Air Force and Army have combined their TDY and PCS lodging programs and operate them as Category A mission-sustaining activities. While they maintain some distinctions between the two types of lodges (e.g., PCS lodges are designed more for families and generally provide some type of kitchen facilities), lodging rates are kept as low as possible. Further, generally one organization on each installation manages and oversees lodging operations. Revenues in these cases are deposited into a single lodging fund and are used only to support the lodging programs. Second, the services MWR program or exchange service can manage PCS lodges as Category C activities. In these cases, DOD’s lodging criteria are completely different. Most notably, they do not designate PCS lodges as mission-sustaining. Rather, they are classified as revenue-generating activities that, with some minor exceptions, should be financially self- supporting. Consequently, they are expected to receive only limited appropriated support. There is also no requirement that lodging rates be kept to the lowest possible price. The Navy and Marine Corps have separate TDY and PCS lodging programs. They manage their TDY programs as the Air Force and Army manage theirs but manage their PCS programs as revenue-generating activities. Each military installation usually has two lodging organizations, each with its own rate structures and funding priorities. The Navy’s PCS lodging revenues go into a separate lodging fund, while Marine Corps revenues go into a single MWR fund. DOD officials said that besides creating an inequitable situation among the services, the variety of operations makes it practically impossible to collect consistent data and analyze the effectiveness of the lodging programs. The proposed lodging policy, by itself, will not result in more consistent lodging policies and operations among the services. Although, the proposed policy would prevent the services from operating PCS lodges as Category C MWR activities and require them to deposit lodging revenues into “the Military Service’s Lodging Fund,” it would not prevent the services’ MWR programs from continuing to manage separate PCS lodging programs. DOD’s May 2, 2001, report, for example, states that the Navy’s PCS program will not be affected by the change because the Navy already deposits PCS lodging revenue into a separate lodging fund. Moreover, if DOD implements the proposed policy, OSD officials said that the Navy and the Marine Corps could choose to continue to operate separate PCS and TDY lodging programs as long as lodging revenues were not used to support MWR programs. Thus, the policy would not necessarily resolve DOD’s concern about the inconsistent management approaches being used by the military services. OSD officials said, and we confirmed, that there is a relatively large difference in PCS room rates charged by the military services. As shown in table 4 below, the average room rates for fiscal year 2000 ranged from $27 to $55 (actual room rates ranged between $6 and $105 overseas and between $15 and $70 domestically). In these officials’ views, this variation in rates creates an inequitable situation between the services that should be resolved. All of the services offer lodging at rates below commercial rates. However, higher lodging room rates in some services increase the appropriations needed to support PCS travelers. PCS travelers and their families and a large number of TDY travelers stay at PCS lodges. Because these travelers are reimbursed for the actual cost of their rooms, higher rates have a direct impact on the operation and maintenance accounts of their organizational units. As shown in table 4, the services have different criteria for establishing PCS room rates. The Air Force uses the same formula as it does for TDY rates. This formula is designed to recover current operating costs and provide sufficient funds to periodically refurbish lodging interiors (e.g., furniture and paint). It also adds a $6 per-night surcharge (included in the room rates shown above), which is collected centrally and used to pay for the expense of renovating existing lodges and building new ones. Theoretically, this process establishes the lowest possible price needed to meet lodging standards. As shown in the footnotes to table 4, the Army has, since October 1, 2001, adopted a similar approach to that of the Air Force in establishing nightly room rates. It now uses, for example, the same type of formula for establishing PCS room rates and charges a $6 per night surcharge to fund the construction and renovation of its lodges. The Navy and Marine Corps have greater flexibility to establish lodging rates. Each performs a local market survey and/or attempts to establish rates that are lower than the federal per-diem rate but will allow them to earn at least a 20-or 25-percent profit. The proposed policy change does not specifically address lodging rates. There could be some impact on the rates, however, depending on how the services choose to implement the new policy. For example, when the Army implemented the proposed policy, it combined its TDY and PCS lodging programs and began to eliminate distinctions between the two; it set a single rate of $32, which includes the $6 per night surcharge, for both types of lodges. It is not clear at this time how the proposed policy might affect rates charged by the Navy and Marine Corps. As discussed in the previous section, the proposed policy does not specifically require the Navy to combine its TDY and PCS lodging programs, and Navy officials indicated they do not plan to do so. OSD officials perceived a wide difference in the quality of PCS lodges across the services. They attributed this difference to a number of factors, all related to funding. How the proposed policy will affect some of these issues is unclear. First, the inconsistent operating and funding arrangements allowed by DOD’s current lodging guidance allows some services to deposit lodging revenues into a lodging or billeting fund while the Marine Corps deposits revenues into an MWR fund. This creates an inconsistency in how lodging funds can be used. The new policy will eliminate this inconsistency. Second, differences exist in how funding is obtained for lodging modernization and new construction. Lodging revenues in the Army and Air Force (which operate their lodges as Category A mission-sustaining activities) must be sufficient to fund current operating expenses, periodic refurbishment of the lodging interiors, major renovations to the building exteriors, and the construction of any new or replacement lodges. However, the formula used by these two services to set lodging rates does not include factors for renovation or new construction. Therefore, the Army and Air Force lodging programs have added a nightly surcharge to their room rates to pay for these types of capital improvements. The Navy and Marine Corps (which operate their lodges as Category C revenue- generating activities) have greater flexibility to set lodging rates to generate additional revenue for capital improvements or other purposes. Third, the degree of appropriated support provided at the local installation level (e.g., minor repairs and grounds maintenance) varies greatly. Much depends on other funding priorities at the installation and the installation commander’s interest and support. During our work, we stayed at and/or visited 16 of DOD’s 191 installations with PCS lodges, many of which had more than one PCS lodge building. We observed the general quality of the facilities and discussed management and funding issues with local managers. While this small sample does not allow us to project findings to all PCS lodges, our overall impression is that the lodges were generally in good condition. While we noted differences in the quality and age of the buildings and general appearance of the surrounding grounds, most of the interior furnishings were reasonably up to date, and the rooms were clean. Naturally, some of the lodges appeared better than others, but for our small sample, this did not seem to be related to a particular service or method of operation. Rather, it was more a product of the lodges’ age (some were over 50 years old while others had recently been constructed); how recently the interiors had been refurbished (each of the services seemed to have a cyclical refurbishment plan to keep the interiors fresh); whether the exteriors had been adequately maintained or recently renovated; and the degree of support and interest by the local installation commander and his management team. To illustrate this last point, the PCS lodging facilities at Fort Bragg, N. C., appeared to be in very good condition. Local lodging managers said they were lucky because a past installation commander had considered the lodges to be an important quality-of-life issue and made them a priority for funding. Other locations we visited had not benefited from this degree of support. The proposed policy will ensure that lodging revenues are used exclusively for lodging purposes, but the extent to which it will change existing conditions and approaches to upkeep and renovation is unclear. All the services already have programs underway to either renovate or build new or replacement lodges. Because DOD’s current guidance does not permit the services to use appropriations to fund PCS lodge construction, they have used different methods to generate needed funds. For example, as shown in table 4 above, the Air Force and Army currently charge $6 per room, per night, which is deposited into centrally managed construction funds and redistributed on a priority basis. Similarly, each Marine Corps lodge deposits 2.5-percent of its annual revenues into a central MWR construction fund, which is redistributed on a priority basis to all MWR programs. The Navy’s PCS lodging program, which is managed centrally by the Navy Exchange Service Command, earns sufficient profits to renovate existing lodges and build new ones. As discussed previously, similar differences also exist with regard to appropriated fund support at the local installation level. Army and Air Force lodges (because they operate as Category A mission-sustaining activities) are authorized to receive appropriated funding for routine maintenance and other types of support. Navy and Marine Corps lodges (because they operate as Category C revenue-generating activities) are also authorized some indirect appropriated support but generally are expected to be self-supporting at most installations. These funding differences are unlikely to be resolved by the proposed policy change. As discussed in more detail later, OSD officials said that under current guidance, they are not able to limit the construction of new PCS lodges, particularly in the Navy and Marine Corps, even when it is clear that the new lodges are not needed to support PCS travelers. Because the Navy and Marine Corps operate their PCS lodges as Category C revenue- generating activities, current guidance allows them to construct lodges to meet the needs of all authorized MWR patrons, not just those of patrons traveling on orders. As a result, they are building new lodges, some in recreational areas or in other areas that have a high demand by MWR patrons. While the proposed policy will prevent the Marine Corps from using PCS lodging revenues to support MWR programs, it does not change the guidance relating to the construction of PCS lodges. Thus, the Navy, and possibly the Marine Corps, may continue to build PCS lodging in excess of demand by patrons traveling on government orders. For the most part, the proposed policy does not change the underlying DOD instructions and guidance that give the military services wide discretion in managing their lodging programs. As a result, the policy change, by itself, will not result in the type of managerial improvements OSD officials envision for the program. OSD officials said they recognized that the proposed policy was only the first step in revising the department’s lodging operations and that they would eventually recommend changing the DOD instructions to address the other management issues. Until this is done, however, the lodging programs will continue to be managed in a widely divergent manner. The services’ plans for building new PCS lodges are consistent with department guidance. However, two sets of OSD policy guidance are available to the services in managing their lodging programs—MWR guidance followed by the Navy and Marine Corps, which allows them to add new lodging rooms beyond those required to meet the needs of PCS travelers, and lodging guidance followed by the Air Force and Army, which is oriented to meeting the more limited needs of official military and civilian travelers. Each of the services is constructing or has plans to construct sizeable quantities of new or replacement PCS lodges. DOD has two sets of PCS lodging guidance depending on how the military services choose to manage their programs: MWR guidance and lodging guidance. These different sets of guidance have different program emphasis and, more importantly, allow the services to use a different authorized patron base to determine how many lodge rooms are needed to accommodate travelers. MWR guidance allows construction to support all MWR patrons. Lodging guidance allows construction to support only patrons on travel orders. DOD’s MWR guidance stipulates that PCS lodges are provided specifically for PCS personnel and their families but identifies a number of other authorized users, including TDY travelers, members of the armed forces and their families not on official travel, retired members of the armed forces and their families, and others at the discretion of the base commander (e.g., DOD civilians and their families, other federal employees, guests, and even members of the public under some limited circumstances). While PCS travelers are given preference, other authorized users can make confirmed reservations in advance of their stay. In addition, the guidance allows the services to consider all these authorized users when determining whether there is a need to expand existing lodges or build new ones. The Navy Exchange Service Command, which manages the PCS lodging program for the Navy, operates the PCS lodging program in accordance with this MWR guidance. Therefore, to determine its PCS lodging requirements, the Exchange Service tracks total occupancy rates and other data that indicate whether there is an unmet demand from any of its authorized patrons (e.g., number of people turned away). It then assesses the potential return on investment and prepares long range plans to build new lodges or expand existing ones at the installations with the most need. Navy officials pointed out, however, that the installation must approve any expansion or construction plans before funds are committed. The Marine Corps Community Services, which manages the Corps’ PCS lodging program, operates the PCS lodging program as a Category C MWR activity to earn a profit. Unlike the other services, these profits are used to help support Marine Corps MWR programs at the local installation level. Capital to renovate or build new PCS lodges comes predominately from a MWR construction fund managed centrally at the Marine Corps Community Services’ headquarters at Quantico, Va. This fund receives 2.5 percent of the revenues from all Marine Corps MWR business activities (including the PCS lodges) managed by the Marine Corps Community Services and redistributes them to the activities based on relative priorities and potential return on investment. From fiscal years 1996 through 2000, the Marine Corps PCS lodging programs contributed about $1.2 million to the fund but received MWR program commitments of about $21 million to renovate or build new lodges. According to a Marine Corps lodging official, to determine PCS lodging requirements, the Corps relies on four factors, 1) condition of current facilities, 2) percent of occupancy and the number of reservation requests that could not be filled, 3) return on investment of the planned lodging, and 4) availability of housing in the local area. DOD’s lodging guidance says that PCS lodges are provided specifically for PCS travelers. It also identifies a number of other authorized users, such as TDY travelers and relatives and guests of military personnel stationed at the installation. The primary distinction between MWR and lodging guidance, therefore, is more a matter of emphasis. Under the lodging guidance, other authorized users stay at PCS lodges on a “space- available basis,” which generally means they cannot obtain a confirmed reservation until 24 hours before the night of the stay, while MWR guidance allows all authorized users to obtain reservations in advance. The goal as stated in the lodging guidance is “to provide quality lodging facilities and service to authorized personnel and maintain maximum occupancy to reduce official travel costs.” Air Force Services, which manages the TDY and PCS lodging programs for the Air Force, operates both programs as Category A mission-sustaining activities. Because such programs are not designed to generate profits, the Air Force added a surcharge—currently $6 in the United States and $8 overseas—to its nightly room rates to help fund construction of new and replacement lodges. This surcharge generated about $100 million from fiscal years 1996 through 2000. Over the last several years, the Air Force has based its PCS construction program on a 1995 contractor report that described the condition of the Air Force’s PCS lodges and recommended a comprehensive program to bring them up to standard. This program involved the construction of lodges at a cost of about $141 million with an additional $224 million in additional requirements not yet funded. Air Force officials said that their decision to build new PCS lodging capacity is based on estimates of upcoming military personnel moves, not on the lodging demands of unofficial travelers. The U.S. Army Community and Family Support Center manages the Army’s PCS and TDY lodging operations. In February 2000 it approved a “wellness strategy” aimed at addressing an estimated $635 million backlog of maintenance and repair requirements for its PCS and TDY lodges. Currently, the Army funds this strategy and any resulting lodge construction and renovation with a $6 per-room, per-night surcharge. Because the Army estimates it will take 32 years to complete the program at this rate, it expects to increase the surcharge incrementally by $1 per year (starting in fiscal year 2003) until it reaches $12. According to Army lodging officials, part of their wellness strategy includes reviewing the occupancy rates at each installation and resizing the number of lodge rooms as necessary. Its internal guidance stipulates that “a lodging operation should be sized to accommodate 90 percent of its official lodging demand on an annual basis.” In this case, official lodging demand is defined as PCS personnel and their families and TDY personnel, both military and civilian. All of the services have recently built PCS lodges as part of their plans to replace or modernize their lodges. However, as shown in table 5, three of the services are building or have identified building plans that lead to a net increase in their inventory of PCS lodging rooms in the coming years. As shown in table 5, the Navy Exchange Service estimates that it will spend about $121.4 million from fiscal years 2001 through 2005 for a net increase of 940 PCS lodging rooms at 15 Navy installations. These numbers do not include additional Navy plans to replace 769 rooms at 14 installations at an estimated cost of about $84 million, over the same period. The Marine Corps and the Air Force also have plans for new lodge construction. In addition, the Air Force has identified the need for $224 million to construct 1,039 new rooms at 36 bases but is unsure which ones, if any, will be funded. While the Army does not have plans for a net increase in PCS rooms, during fiscal year 2002, as part of its wellness strategy, the Army plans to spend $54 million to renovate or build replacement lodging rooms for those that are not considered worth renovating. Available data on PCS lodge occupancy rates indicate that overall occupancy varies only slightly between the services. For example, during fiscal year 2000 the Air Force at 88 percent had the highest occupancy rate and the Army at 80 percent had the lowest. However, the mix of patrons who are using PCS lodges varies greatly. (See table 6.) The data in table six coupled with the service lodge construction plans (see table 5) indicate that the Navy and Marine Corps plan significantly more new construction than would be necessary based on PCS traveler use. For example, the Navy recently has had plans to add 110 PCS rooms at the North Island Naval Air Station in California, which would have brought its total inventory there to 300 rooms. This contrasts with the fact that, in fiscal year 2000, however, only 38 percent of the occupants were official travelers (11 percent PCS and 27 percent TDY). The other 62 percent were other authorized travelers. In justifying this expansion, Navy officials cited an expected increase in Navy personnel in the area and a large number of reservation requests. More recently, the terrorist events of September 11, 2001, are causing the Navy to rethink the size of this project based on force protection requirements and environmental issues—issues unrelated to PCS occupancy rates. Officials in the Office of the Assistant Secretary of Defense, Force Management Policy, are responsible for overseeing DOD’s lodging programs and establishing appropriate policies. In this capacity, they have review and approval authority for all major PCS lodging-construction projects. According to these officials, however, they cannot limit construction projects as long as the requesting authority has complied with applicable DOD guidance and instructions. They are aware, for example, that the Navy and Marine Corps have expanded existing lodges and built new ones that exceed the needs of PCS and other official travelers. Because DOD’s current guidance allows this, OSD officials state that they have little recourse but to approve the projects as long as sufficient financial resources are available. They pointed out, however, that this excess capacity has a cost that is borne by DOD. The higher room rates charged by the Navy and Marine Corps PCS lodging programs (see table 4) increase DOD travel expenses. As we pointed out earlier, this is one of several key reasons DOD wanted to change the PCS lodging policy. Although we do not believe that travel regulations require DOD to revise its PCS lodging policy, the department does have the discretion to make the proposed change to bring consistency to the program and to reach desired management objectives. Although the proposed policy change would not impact the other services’ overall MWR programs, it would impact the Marine Corps’ MWR program. However, the Marine Corps has several options to help it compensate for potential lost MWR revenue and to preserve a financially healthy lodging operation. For this reason, if the proposed policy is adopted and the Marine Corps requests a waiver, we would support a short-term waiver to permit the Marine Corps time to evaluate implementation options. However, we do not believe that a permanent waiver is necessary, considering the reported amount of lodging earnings involved. While the Navy already separates accounting of its lodging fund from its MWR fund, it does not currently plan to create a consolidated lodging fund for both PCS and TDY lodges as seems to be suggested by OSD’s May 2, 2001, report to the Congress. Clarification of the intent of the policy guidance in this area is needed. In addition, the Army’s practice of charging unofficial travelers a nightly surcharge that it provides to the local installation’s MWR fund violates DOD and Army regulations. DOD’s desired lodging-management objectives—such as consistent lodging policy and operations, reduced room rates, improved lodging facilities, and limitations on new PCS construction—will not happen based simply on the proposed lodging policy change. Such improvements would likely require a revision of internal policies and instructions for both the TDY and PCS lodging programs. Also, the proposed policy leaves in doubt whether DOD expects the services to merge all operations of PCS and TDY lodging or if these operations may, in the case of the Navy and Marine Corps, continue to operate separately. DOD’s current lodging guidance permits a wide disparity in operating and managing PCS lodging programs. This authorizes the Navy and Marine Corps to charge higher rates to help fund the construction of lodging accommodations in excess of the need of PCS travelers. These higher room rates increase the travel expenses for the department and for those of the services’ operation and maintenance accounts. DOD officials acknowledge that the proposed policy change is but the first step in achieving DOD’s desired goals. We recommend that the secretary of defense in conjunction with the assistant secretary of defense for force management policy take the following actions if the proposed policy is implemented Provide the Marine Corps with a short-term waiver, if requested, to permit it time to evaluate policy implementation options and Clarify the proposed policy with regard to whether DOD expects the services to combine PCS and TDY lodging programs and funds or will allow these separate operations to continue. Regardless of whether the proposed policy is implemented, the assistant secretary of defense for force management policy should: Provide the military services with a policy framework including improved lodging guidance to help achieve DOD’s desired lodging-program management objectives, including consistent lodging policy and operations, reduced room rates, improved lodging facilities, and limitations on new construction not focused on official PCS and TDY travelers; and Require the Army to adhere to DOD’s and its own regulations by discontinuing the transfer of lodging revenues (unofficial-traveler surcharge) to installation MWR funds and returning the proceeds collected thus far to the Army’s lodging fund. In commenting on a draft of this report, the assistant secretary of defense for force management policy concurred with the first three recommendations but partially concurred with the fourth. The assistant secretary stated that if the policy is implemented the department will (1) provide a short-term waiver so that Marine Corps leadership can evaluate policy implementation options and (2) clarify the proposed policy regarding whether the services will be directed to combine PCS and TDY lodging programs and funds or if the services can continue separate operations. Regardless of whether the proposed policy is implemented, the assistant secretary stated that the department will provide clear policy guidance, expected to be published by September 30, 2003, to achieve its lodging program management objectives. While we commend departmental recognition of the need for additional policy guidance to achieve lodging-program management objectives, we would urge a quicker time frame than the year and a half the department has established for issuing the guidance. The assistant secretary also stated the department will require the Army to discontinue the transfer of lodging revenues (unofficial-traveler surcharge) to installation MWR funds. The department does not agree, however, that the proceeds already collected should be returned to the Army’s lodging fund. DOD stated that return of the proceeds would create an undue hardship on the MWR program because the funds have already been committed. We continue to believe our recommendation is sound. The revenues in question were transferred from the Army’s lodging funds to its MWR funds in violation of clear prohibitions contained in DOD Instruction 1015.12 and Army Regulation 215-1. The DOD instruction further provides that nonappropriated funds are government funds entitled to the same protection as appropriated funds. The instruction recognizes an individual fiduciary responsibility for properly using nonappropriated funds. The Army regulation contains nearly identical provisions and further provides that DOD directives and implementing Army regulations have the force and effect of law. Under these circumstances, we find no reason to modify our recommendation. The department’s written comments are presented in their entirety in appendix II. We are sending copies of this report to the secretary of defense; the under secretary of defense (personnel and readiness); the secretaries of the Air Force, the Army, and the Navy; the director, Office of Management and Budget; and interested congressional committees and members. We will also make copies available to others upon request. If you or your staff have questions concerning this letter, please contact us on (202) 512-8412. Staff acknowledgements are listed in appendix III. To determine the potential impact of the policy change on service MWR programs, we interviewed and received briefings on the policy change and its impact from key officials in the OSD who are responsible for developing MWR and lodging policy and from appropriate military service headquarters personnel who manage the services’ MWR and lodging operations. We also obtained DOD and service headquarters overviews of their PCS and TDY lodging operations in addition to their policies and regulations that govern MWR and lodge funding and operations, as well as nonappropriated funds and nonappropriated fund instrumentality management and control. We also obtained and reviewed financial reports and other lodging and MWR revenue and expense data. In addition, we obtained and reviewed the Marine Corps Community Services’ Annual Report for 1999, which included an unqualified opinion on its financial statements by an independent public accountant. We analyzed this information and identified additional impacts on both the services’ MWR programs as well as their lodging programs. We used the impacts on the Army’s programs to compare with the potential impacts on the Marine Corps’ programs and to help us propose options for maintaining the health of the Marine Corps’ MWR and lodging programs. To determine to what extent DOD will accomplish its management objectives with the policy change, we first interviewed OSD officials to determine what they hoped to accomplish with the policy change and what they saw as the future of DOD’s and the services’ lodging programs. OSD officials were aware that the proposed policy change would have a limited effect and discussed this issue with us. We obtained and reviewed departmental and service MWR and lodging guidance to establish how each service was allowed to operate their PCS and TDY lodging programs. We then compared this information with the way in which the services were operating their programs to determine whether their operations were within departmental guidelines. We identified actions likely required to implement DOD’s objectives for improving management of the lodging program and then compared this to the impact of the proposed policy to determine the extent to which the new policy would achieve DOD’s objectives. To determine whether the services’ plans for building new PCS lodges was consistent with department guidance, we assessed authorities provided for new construction under existing department guidance with the construction plans of each service. To compare construction plans with the needs of PCS travelers, we obtained the number and location of their lodging facilities; number of rooms, room rates, and official and unofficial occupancy rates at each facility; reported past and future construction schedules and costs; and reported revenue and expenses for each program. We analyzed this information within each service and between the services. We then compared each service’s official and unofficial occupancy rates with their past and future plans for construction to give us an indication of which service had construction plans that did not match with their official traveler occupancy rate. We reviewed the proposed policy justification and the Army’s use of the unofficial traveler’s surcharge to determine whether they were consistent with law and regulation. Our work was performed at the Office of the Assistant Secretary of Defense Force Management Policy in Washington, D.C.; Navy Exchange Service Command headquarters in Virginia Beach, Va.; the Food and Hospitality Branch, Marine Corps Community Services, United States Marine Corps at Quantico, Va.; the Army Community and Family Support Center in Alexandria, Va.; and the Air Force Combat Support and Community Services Office in Crystal City, Va. We also visited the following 16 military installations to determine how the lodges were being managed and supported and to observe their physical condition: Andrews Air Force Base, Md.; Wright-Patterson Air Force Base, Ohio; Scott Air Force Base, Ill.; Fort Meade, Md.; Fort McPherson, Ga.; Fort Bragg, N. C.; Fort Belvoir, Va.; Camp Lejeune, N. C.; Quantico, Va.; Camp Pendleton, Calif.; Miramar Marine Corps Air Station, Calif.; Norfolk Naval Station, Va.; Little Creek Naval Amphibious Base, Va.; Oceana Naval Air Station, Dam Neck Annex, Va.; San Diego Naval Station, Calif.; and North Island (Coronado) Naval Air Station, Calif. We did not independently verify the data the DOD provided. Moreover, while our most recent financial auditdisclosed a continuing inability to capture and report the full cost of DOD’s programs, the data provided by the department is the only data available for our analysis. We conducted our review from March 2001 through January 2002 in accordance with generally accepted government auditing standards. Robert Ackley, Roger Corrado, James Hatcher, M. Jane Hunt, Richard Meeks, and Paul Newton made key contributions to this report. | The military services primarily operate two types of hotels, or lodges, to support official travelers. The first, called permanent-change-of-station (PCS) lodges, support military personnel and their families moving to new duty stations. These are intended to provide military travelers and their families with a clean, affordable place to stay while they prepare to move and while they wait for permanent quarters at their new station. The second type, called temporary duty (TDY) lodges, support military and civilians temporarily traveling on official business. PCS lodges are the subject of a proposed policy change by the Department of Defense (DOD). DOD's current policy permits PCS lodges to be managed as part of morale, welfare, and recreation (MWR) programs. The proposed policy would change this practice by requiring separation of lodge revenues from those used for MWR purposes. Except for the Marine Corps, the proposed policy change will not impact the services' MWR programs. Only the Marine Corps currently uses PCS lodge earnings to support its MWR programs. From fiscal years 1996 through 2000, the net profits reported by the Marine Corps' lodges steadily increased from $1.8 million to $5.1 million. Marine Corps officials do not believe the policy change is required and said that, if implemented, the Corps would have to make changes, such as reducing quality-of-life programs at some installations or seeking additional appropriations to compensate for the loss of this revenue. The proposed policy is predicated on resolving a perceived regulatory conflict and achieving other management objectives. DOD officials believe separation of PCS lodging funds from MWR funds is required to resolve a conflict with the Joint Federal Travel Regulation. However, the regulation does not apply to lodging management, and the policy change, by itself, is likely to have little direct effect on DOD's broader management objectives. The services' plans for building new PCS lodges are consistent with department guidance. The proposed change will not, by itself, change that guidance. |
Ten federal agencies participate in the SBIR program. Five of them—DOD, the National Aeronautics and Space Administration (NASA), the Department of Health and Human Services and, particularly, its National Institutes of Health (NIH), Department of Energy (DOE), and the National Science Foundation (NSF)—provided over 95 percent of SBIR funds in fiscal year 1996. (See table 1.) DOD provides over 50 percent of SBIR funding. Each agency manages its own program, while SBA plays a central administrative role, such as issuing policy directives and annual reports for the program. The Small Business Innovation Development Act of 1982 required that agencies with extramural R&D budgets of $100 million or more set aside not less than 0.2 percent of that amount for the SBIR program and provided for annual increases up to a ceiling of not less than 1.25 percent of the agencies’ budgets. The act provided for a three-phase program. Phase I is intended to determine the scientific and technical merit and feasibility of a proposed research idea. Work in phase II further develops the idea, taking into consideration such things as the idea’s commercialization potential. Phase III generally involves the use of nonfederal funds for the commercial application of a technology or non-SBIR federal funds for continued R&D under government contracts. The Small Business Research and Development Enhancement Act of 1992 reauthorized the SBIR program through fiscal year 2000. The act emphasized the program’s goal of increasing the private sector’s commercialization of technologies and provided for further incremental increases in SBIR funding up to not less than 2.5 percent of agencies’ extramural R&D budgets by fiscal year 1997. Moreover, the act directed SBA to modify its policy directive to reflect an increase in funding for eligible small businesses, that is, businesses with 500 or fewer employees. The funding was increased from $50,000 to $100,000 for phase I and from $500,000 to $750,000 for phase II, with adjustments once every 5 years for inflation and changes in the program. The agencies’ SBIR officials reported that they have adhered to the act’s requirements that they not use SBIR funds to pay for the administrative costs of the program, such as salaries and expenses for support services used in processing awards. However, they added that the funding restriction has limited their ability to provide some needed administrative support. For example, DOD reported that its laboratories and field organizations do not have the necessary funds to provide personnel to act as mentors to their SBIR contractors or engage in activities that could possibly increase the program’s success in phase III. Similarly, NIH, NASA, and NSF have also reported problems in providing outreach for current and potential SBIR participants because of this funding restriction. According to NSF’s SBIR official, this funding restriction has resulted in NSF’s inability to provide SBIR participants with much-needed training in business skills. DOE has reported experiencing administrative problems that are attributed to cuts in the Department’s administrative budget. DOE’s SBIR officials reported that further cuts, without the lifting of the restrictions on the use of SBIR funds, would diminish their ability to complete award selections in a more timely fashion, respond to the needs of the program’s constituents, and ensure that high-quality research is being performed. Although program officials believe that their agencies are adhering to statutory funding levels, some expressed concern because they feel that agencies are using different interpretations of the “extramural budget” definition. This may lead to incorrect calculations of their extramural research budgets. For example, according to DOD’s SBIR program manager, all eight of DOD’s participating military departments and defense agencies that make up DOD’s SBIR program have differing views on what each considers an extramural activity and on the appropriate method for tracking extramural R&D obligations. As a result, the program and budget staff have not always agreed on the dollar amount designated as the extramural budget. Of the five agencies we reviewed, only two—NSF and NASA—have recently audited their extramural R&D budgets. DOD, NIH, and DOE have not audited their extramural R&D budgets nor do they plan to conduct any audits in the near future. Both NSF and NASA audited their extramural R&D budgets in fiscal year 1997. NSF’s audit, which was performed by its Office of Inspector General (OIG), concluded that NSF was overestimating the size of its extramural R&D budget by including unallowable costs, such as ones for education, training, and overhead. NSF estimated that these unallowable costs totaled over $100 million. The OIG audit report concluded that the SBIR portion of NSF’s extramural budget should be reduced by approximately $2.5 million. The OIG audit report further concluded that by excluding these “unallowables,” NSF will reduce the funds available for the SBIR program by approximately $13 million over a 5-year period. These funds could then be used for other purposes that further NSF’s objectives. Likewise, NASA has completed a survey of fiscal year 1995 budget data and is currently reviewing fiscal year 1996 data at its various field centers. NASA officials say this is an effort to (1) determine the amount spent on R&D and (2) categorize the R&D as for either intramural or extramural activities. According to NASA’s SBIR official, the results of these surveys will be used to establish appropriate future funding levels for the SBIR program. The SBIR officials we interviewed felt that neither the application review process nor the current funding cycles are having an adverse effect on award recipients’ financial status or their ability to commercialize their projects. Specifically, DOD, DOE, NSF, and NASA stated that their respective review processes and funding cycles have little to no adverse effect on the recipients’ financial status or the small companies’ ability to commercialize their technologies. Furthermore, NIH believes that having three funding cycles in each year has had a beneficial effect on applicants. While the effects of the review processes and funding cycles on the recipients’ financial status and ability to commercialize projects were not specifically mentioned as problems, SBIR officials did state that some recipients had said that any interruption in funding awards, for whatever reason, affects them negatively. One SBIR program manager who did think that these were problems, stated that at DOD, most award recipients often have no way of paying their research teams during such a funding gap. As a result, ongoing research may be delayed, and the “time-to-market”—that is the length of time from the point when research is completed to the point when the results of the research are commercialized—may be severely impaired, thus limiting a company’s commercial potential. The DOD official said that time-to-market is of paramount importance in most high-tech industries—so much so, that a new product that reaches the market a year late may be partly or mostly obsolete. Most of the participating SBIR agencies have established special programs and/or processes in an effort to mitigate any adverse effect(s) caused by funding gaps. One such effort is the Fast Track Program, employed at DOD, whereby phase I award recipients who are able to attract third-party funding are given the highest priority in the processing of phase II awards. At DOE and NIH, phase I award recipients are allowed to submit phase II applications prior to the completion of phase I. NASA has also taken steps to lessen any adverse impact on small businesses while applications are being processed. For example, NASA has established an electronic SBIR management system to reduce the total processing time for awards and is currently exploring the possibility of instituting a fast-track program similar to DOD’s. Unlike the other participating federal agencies, NSF has not established any programs or procedures to mitigate the possible impacts of funding gaps on its SBIR participants. The reason for this, according to NSF, is that the agency’s experience has been that phase I awardees, when given the choice, request more time to submit phase II applications, thus effectively increasing the funding gap by their own choosing. The third phase of SBIR projects is expected to result in commercialization or a continuation of the project’s R&D. During this phase, additional federal funds or private-sector funds may be included, but additional SBIR funds may not be included. In 1991, we surveyed 2,090 phase II awards that had been made from 1984 through 1987. Our survey received responses on 1,457 awards—a response rate of 77 percent—and included questions that covered phase III activity. In 1996, DOD conducted its own survey, which closely followed our format, and also gathered information on phase III activity. DOD provides almost half of the total federal funding for SBIR, which amounted to over $500 million in fiscal year 1997. DOD’s survey included all 2,828 of DOD’s SBIR projects that received a phase II award from 1984 through 1992. DOD received 1,364 responses to this survey, for a response rate of 48 percent. SBA currently has a survey under way that also follows our format and will similarly cover phase III activity. This survey will include all projects that received a phase II award through 1993 and will cover all of the 10 SBIR agencies except DOD. Because of the SBA survey, we did not conduct our own; however, we did additional analyses of our 1991 survey information. We also performed our own analysis of DOD’s survey data, which we obtained from the contractor. While analyzing the response data from our 1991 survey, we found that approximately half of the phase II awards were followed by phase III activity (e.g., sales or additional funding), while the other half had no phase III activity. (See table 2.) Overall, 515 respondents, or 35 percent, indicated that their projects had resulted in the sales of products or processes, while 691, or 47 percent, had received additional developmental funding. Out of total sales of $471 million that award recipients attributed to SBIR projects, most of that amount came from nonfederal customers—35 percent went to the federal government, while 64 percent was nonfederal. In the case of additional developmental funding, the ratios were somewhat consistent, since most of the funding, once again, came from nonfederal sources (76.5 percent) and the rest came from the federal government (23.6 percent). Our analysis of DOD’s 1996 survey responses showed that phase III activity was occurring at rates similar to those in our survey. Our analysis of these responses showed that 653 projects, or 48 percent, reported that they were active in phase III at the time of DOD’s survey, while the other half did not report any phase III activity. The respondents indicated that 442 awards, or 32 percent, had resulted in actual sales, while 588 reported that the awards had resulted in additional developmental funding. DOD’s sales data broke down differently from the data in our survey results. The sales reported to DOD split almost evenly into federal (52.8 percent) and nonfederal (47.2 percent) customers. The sources of additional developmental funding were also about an even split between federal (48.8 percent) and nonfederal (51.2 percent) customers. Agencies are currently using various techniques to foster commercialization, although there is little or no empirical evidence suggesting how successful the particular techniques have been. For example, in an attempt to get those companies with the greatest potential for commercial success to the marketplace sooner, DOD has instituted a Fast Track Program, whereby companies that are able to attract outside commitments/capital for their research during phase I are given higher priority in receiving a phase II award. According to DOD’s SBIR program manager, getting a product with commercial potential quickly to the marketplace is critical if the company is to be successful. The Fast Track Program not only helps speed these companies along this path but also helps them attract outside capital early and on better terms by allowing the companies to leverage SBIR funds. In 1996, for example, DOD’s Fast Track participants were able to attract $25 million in outside investment. Companies that qualify for an award under the Fast Track Program can be granted a phase II contract without any interruption in funding. Additionally, DOD, in conjunction with NSF and SBA, sponsors three national SBIR conferences annually. These conferences introduce small businesses to SBIR and assist SBIR participants in the preparation of SBIR proposals, business planning, strategic partnering, market research, the protection of intellectual property, and other skills needed for the successful development and commercialization of SBIR technologies. DOE has employed a different technique aimed at increasing the commercial potential of SBIR participants. DOE’s Commercialization Assistance Program provides phase II award recipients with individualized assistance in preparing business plans and developing presentation materials to potential partners or investors. This program culminates in a Commercialization Opportunity Forum, which helps link SBIR phase II award recipients with potential partners and investors. Although NSF’s efforts to foster commercialization are limited in scope, the agency provides (1) its phase I award recipients with in-depth training on how to market to government agencies and (2) its phase I and II award recipients with instructional guides on how to commercialize their research. Similarly, NASA assists its SBIR participants through numerous workshops and forums that provide companies with information on how to expand their business. NASA also provides opportunities for SBIR companies to showcase their technologies to larger governmental and commercial audiences. For example, SBIR companies are encouraged to participate in NASA’s American Institute of Aeronautics and Astronautics conferences, Tech 200X annual shows, Space Technology and Applications International Forum, and Oshkosh Fly In. Moreover, NASA has established an SBIR homepage on the Internet to help promote its SBIR technologies and SBIR firms and has utilized several of its publications as a way for SBIR companies to make their technologies known to broader audiences. Unlike the other SBIR agency participants, NIH does not promote any particular techniques to foster commercialization. However, NIH cites its participation in workshops and forums, including the national conferences, which have a significant focus on commercialization. Using SBA’s data, we determined the number of phase I award recipients who had received 15 or more phase II awards in the preceding 5 years. (See table 3.) Throughout all of the 5-year cycles we reviewed, seven companies received multiple awards in each and every cycle. In addition, the recipient of the most SBIR awards in each cycle was the same throughout all of the cycles. We compared the commercialization rates, as well as the rates at which projects received additional developmental funding, for the multiple-award recipients with those of the non-multiple-award recipients. This comparison of the phase III activity is summarized in table 4. This analysis shows that the multiple-award recipients and the non-multiple-award recipients are commercializing at comparable rates, on the basis of the data from GAO’s and DOD’s surveys. According to both surveys, however, multiple-award recipients receive additional developmental funding at rates higher than those of the non-multiple-award recipients. Table 5 shows another comparison between multiple-award recipients and non-multiple-award recipients. This table shows that the average levels of sales and additional developmental funding for the multiple-award recipients are lower than those for non-multiple-award recipients. Our survey data show that multiple-award recipients’ sales are, on the average, $12,000 lower than those for non-multiple-award recipients, while the levels of additional developmental funding are almost $90,000 lower for the multiple-award recipients. An analysis of DOD’s data shows differences that are even more pronounced. DOD’s survey data show that average sales are over $250,000 lower for the multiple-award recipients and the average levels of additional developmental funding for the multiple-award recipients are over $175,000 lower than those for the non-multiple-award recipients. A comparison between the sales recipients and the sources of additional developmental funding shows differences between our survey data and DOD’s survey data with respect to multiple- and non-multiple-award recipients. (See table 6.) Our survey data show that both the multiple-award recipients and non-multiple-award recipients make approximately 35 percent of the sales to federal customers, while the remaining 65 percent goes to nonfederal customers. On the other hand, DOD’s survey data show that most of the non-multiple-award recipients’ sales go to federal customers (54 percent), while most of the multiple-award recipients’ sales go to nonfederal customers (57 percent). Regarding the sources of additional developmental funding, our data show that a large majority of both multiple-award recipients (67 percent) and non-multiple-award recipients (77 percent) receive this funding from nonfederal sources. DOD’s survey data show an almost even split, namely, that 51 percent of this funding comes from federal sources for multiple-award recipients and 49 percent for non-multiple-award recipients. When an agency funds research for a given solicitation topic where only one proposal was received, it may appear that competition was lacking. The majority of the SBIR officials we interviewed indicated that receiving a single proposal for a given solicitation topic is extremely rare. DOD reported that from 1992 through 1996, there were only three instances when a single proposal was submitted for a given solicitation topic out of 30,000 proposals that were received for various solicitations. DOD’s SBIR official also stated, however, that none of the cases resulted in an award. Both DOE’s and NASA’s SBIR officials reported that they did not receive any single proposals for this time period. Moreover, NASA’s SBIR officials stated that their policy is to revise a solicitation topic/subtopic if it receives fewer than 10 proposals or to drop the topic/subtopic from the solicitation. SBIR officials from both NIH and NSF reported that their respective solicitations are different from those of the other agencies because the solicitation topics are very broad. As a result, they receive a wide range of proposals for a given solicitation topic. The officials stated that despite the diversity of the proposals received, they still compete against one another for funding. One of the purposes of the 1992 act was to improve the federal government’s dissemination of information concerning the SBIR program, particularly with regard to participation in the program by women-owned small businesses and by socially and economically disadvantaged small business. All of the agencies we reviewed reported participating in activities targeted at women-owned or socially and economically disadvantaged small businesses. For example, DOD’s program managers participate each year in a number of regional small business conferences and workshops that are specifically designed to foster increased participation in the SBIR program by women-owned and socially and economically disadvantaged small businesses. All of the SBIR managers participate in national SBIR conferences that feature sessions on R&D and procurement opportunities in the federal government that are available to socially and economically disadvantaged companies. NSF encourages its program managers to take women-owned and socially and economically disadvantaged small businesses into consideration in order to promote balance in its program. According to NSF’s Director of Industrial Innovation Programs, SBIR managers are directed to look not only at a company’s commercialization track record but also at the company’s status as a new participant, woman-owned business, or a socially and economically disadvantaged business when deciding whether to make an award. Furthermore, NASA has included all minority colleges and universities on its mailing list in an attempt to reach out to these special groups. Most of the SBIR agency officials whom we interviewed stated that they use the two listings of critical technologies as identified by DOD and the National Critical Technologies Panel in developing their respective research topics. The other agencies believe that the research being conducted falls within one of the two lists. At DOE, for example, research topics are developed by the DOE technical programs that contribute to SBIR. In DOE’s annual call for topics, SBIR offices are instructed to give special consideration to topics that further one or more of the national critical technologies. DOE’s analysis of the topics that appeared in its fiscal year 1995 solicitation revealed that 75 percent of the subtopics involved one or more of the national critical technology areas. Likewise, NASA’s research topics, developed by its SBIR offices, reflect the agency’s priorities that are originally developed in accordance with the nationally identified critical technologies. At DOD, SBIR topics that do not support one of the critical technologies identified by DOD will not be included in DOD’s solicitation. Both NIH and NSF believe that their solicitation topics naturally fall within one of the lists. According to NIH’s SBIR official, although research topics are not developed with these critical technologies in mind, their mission usually fits within these topics. For example, research involving biomedical and behavioral issues are very broad and can be applied to similar technologies defined by the National Critical Technologies Panel. NSF’s SBIR official echoes the sentiments of NIH. According to this official, although NSF has not attempted to match topics with the listing of critical technologies, it believes that the topics, by their very nature, fall within the two lists. According to our 1991 survey and DOD’s 1996 survey, SBIR projects result in little business-related activity with foreign firms. For example, our 1991 survey found that 4.6 percent of the respondents reported licensing agreements with foreign firms and that 6 percent reported marketing agreements with foreign firms. It should also be remembered that both of these agreements refer to activities where the U.S. firm is receiving benefits from the SBIR technology and still maintaining rights to the technology. Sales of the technology or rights to the technology occurred at a much lower rate—1.5 percent—according to our survey. The DOD survey showed similar results. These data showed that less than 2 percent of the respondents had finalized licensing agreements with foreign firms and that approximately 2.5 percent had finalized marketing agreements with foreign firms. Sales of the technology or the rights to the technology developed with SBIR funds occurred only 0.4 percent of the time. Although the act called for us to make recommendations on foreign interest, we are making no recommendations on tracking the extent to which foreign firms are benefiting from SBIR at this time because of the limited activity to date. A recent SBA study stated that one-third of the states received 85 percent of all SBIR awards and SBIR funds. In fiscal year 1996, the states of California and Massachusetts had the highest concentrations of awards—904 awards, for a total of $207 million, and 628 awards, for a total of $148 million, respectively. However, each state has received at least two awards, and in 1996, the total SBIR amounts received by states ranged from $120,000 to $207 million. The SBA study points out that 17 states receive the bulk of U.S. R&D expenditures, venture capital investments, and academic research funds. Hence, the study observes that the number of small high-tech firms in a state, its R&D resources, and venture capital are important factors in the distribution and success of SBIR awards. The geographic distribution of awards by state is presented in figure 1. SBIR program officials have said that they are uncertain whether the agencies are correctly adhering to the requirements for establishing their extramural research budgets. Agencies have had different interpretations, resulting in items incorrectly being excluded or included in their budgets. Current law essentially defines “extramural budget” as an agency’s budget obligations that do not support activities conducted by agency employees. Therefore, there is little assurance that the SBIR program is being funded at the levels required by statute. To ensure that SBIR funding levels are correct, we recommend that the Administrator of SBA provide additional guidance to the participating agencies on how to calculate their “extramural budgets.” We provided DOD, DOE, NASA, NIH, NSF, and SBA with draft copies of this report for their review and comment. We discussed the draft with SBA’s Assistant Administrator for Technology, who stated that the report was balanced and that the agency agreed with our recommendation that SBA provide participating agencies with more guidance in determining extramural activities. DOD, DOE, NIH, and NSF program officials provided us with technical corrections and clarifications that we incorporated where appropriate. NASA did not provide comments in time for us to include them in our report. The information provided in this report was gathered in two ways. First, we interviewed the senior SBIR program officials at the five agencies with the largest SBIR budgets. These five agencies account for over 95 percent of all SBIR funds. They were DOD, NASA, the Department of Health and Human Services (primarily, NIH), DOE, and NSF. Second, we analyzed several databases containing information on award recipients. These databases came from the SBA, GAO, and DOD. SBA’s database contained information on all SBIR phase I and phase II awards that had been granted from 1982 through 1996. We reviewed this database and revised it in several places where there appeared to be anomalous entries. We provided SBA with the revised database for review, and SBA agreed with our changes. We also analyzed the database that resulted from our 1991 survey and the database resulting from a 1996 DOD survey. These surveys were used to provide information on phase III activity and, in conjunction with SBA’s database, information on multiple-award recipients’ phase III activity. We performed our review from May 1997 through April 1998 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Secretaries of Defense, Energy, and Health and Human Services; the Administrators of NASA and SBA; the Directors of NSF and NIH; the Director, Office of Management and Budget; and other interested parties. Please call me at (202) 512-3841 if you or your staff have any questions about this report. Major contributors to this report are listed in appendix II. Public law 102-564, dated October 28, 1992, mandated that the Comptroller General of the United States provide the Congress with a report on the Small Business Innovation Research program that containing the following: (1) a review of the progress made by federal agencies in meeting the requirements of section 9(f) of the Small Business Act (as amended by this Act), including increases in expenditures required by that subsection; (2) an analysis of participation by small business concerns in the third phase of SBIR programs, including a systematic evaluation of the techniques adopted by federal agencies to foster commercialization; (3) an analysis of the extent to which awards under SBIR programs are made pursuant to section 9(l) of the Small Business Act (as amended by section 103(h)) in cases in which a program solicitation receives only one proposal; (4) an analysis of the extent to which awards in the first phase of the SBIR program are made to small business concerns that have received more than 15 second phase awards under the SBIR program in the preceding 5 fiscal years, considering (A) the extent to which such concerns were able to secure federal or private sector follow-on funding; (B) the extent to which the research developed under such awards was commercialized; (C) the amount of commercialization of research developed under such awards, as compared to the amount of commercialization of SBIR research for the entire SBIR program; (5) the results of periodic random audits of the extramural budget of each such federal agency; (6) a review of the extent to which the purposes of this title and the Small Business Innovation Development Act of 1982 have been met with regard to fostering and encouraging the participation of women-owned small business concerns and socially and economically disadvantaged small business concerns (as defined in the Small Business Act) in technological innovation, in general, and the SBIR program, in particular; (7) an analysis of the effectiveness of the SBIR program in promoting the development of the critical technologies identified by the Secretary of Defense and the National Critical Technologies Panel (or its successor), as described in subparagraph 9(j)(2)(E) of the Small Business Act; (8) an analysis of the impact of agency application review periods and funding cycles on SBIR program awardees’ financial status and ability to commercialize; and (9) recommendations to the Congress for tracking the extent to which foreign firms, or United States firms with substantial foreign ownership interests, benefit from technology or products developed as a direct result of SBIR research or research and development. Robin M. Nazzaro, Assistant Director Andrew J. Vogelsang, Evaluator-in-Charge Katherine L. Hale, Senior Evaluator John C. Johnson, Senior Evaluator Alice Feldesman, Supervisory Social Science Analyst Curtis Groves, Social Science Analyst The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a legislative requirement, GAO provided a final report on aspects of the Small Business Innovation Research (SBIR) program, focusing on: (1) agencies' adherence to statutory funding requirements; (2) agencies' audits of extramural (external) research and development (R&D) budgets; (3) the effect of the application review process and funding cycles on award recipients; (4) the extent of companies' project activity after receiving SBIR funding and agencies' techniques to foster commercialization; (5) the number of multiple-award recipients and the extent of their project-related activity after receiving SBIR funding; (6) the occurrence of funding for single-proposal awards; (7) participation by women-owned businesses and socially and economically disadvantaged businesses; (8) SBIR's promotion of the critical technologies; (9) the extent to which foreign firms benefit from the results of SBIR; and (10) the geographical distribution of SBIR awards. GAO noted that: (1) the agencies' SBIR officials reported that they have adhered to the requirements that preclude them from using SBIR finds to pay for the administrative costs of the program; (2) the program officials also believe that they are adhering to statutory funding levels for the program; (3) however, some said that they are uncertain whether the agencies are correctly adhering to the requirements for establishing their extramural research budgets; (4) only two of the five agencies that GAO reviewed have conducted audits of their extramural research budgets; (5) in 1997, the Office of Inspector General at the National Science Foundation audited the agency's extramural budget and found that it contained over $100 million of unallowable costs; (6) while most of the SBIR officials GAO interviewed said that neither the application review process nor current funding cycles have had an adverse effect on award recipients' financial status or ability to commercialize their ideas, some recipients have said that any interruption in funding awards, for whatever reason, affects them negatively; (7) the companies responding to GAO's and the Department of Defense's (DOD) surveys reported that approximately 50 percent of their projects had sales of products or services related to the research or received additional developmental funding after receiving SBIR funding; (8) the number of companies receiving multiple awards, defined here as those phase I award recipients that also received 15 or more phase II awards in the preceding 5 years, grew from 10 companies in 1989 to 17 in 1996; (9) GAO found that the funding of single-proposal awards was rare; (10) all of the agencies GAO examined reported that they engaged in activities to foster the participation of women-owned businesses or socially and economically disadvantaged small businesses; (11) all of the agencies' SBIR officials GAO interviewed felt that the listings of critical technologies are used in developing their respective research topics or that the research being conducted falls within one of the two lists; (12) GAO found little evidence of foreign firms, or U.S. firms with substantial foreign ownership interests, benefiting from technology or products developed as a direct result of SBIR-funded research; (13) SBIR awards are concentrated in the states of California and Massachusetts; (14) however, every state received at least two awards; and (15) previous studies have linked the concentration of awards to local characteristics, such as the prevalence of small high-tech firms. |
As of September 30, 2010—the end of the 2 fiscal years during which Recovery Act awards were made—NIH made more than 21,500 grant awards using Recovery Act funds. In August 2010, we reported that NIH used standard review processes—peer review or administrative review— and standard criteria to award extramural scientific research grants with Recovery Act funding. These NIH Recovery Act grant awards were made to three grant categories. The grants varied in award size, geographic distribution, award duration, and research methods, consistent with scientific research grants funded with annual appropriations. The act required that these funds be obligated by NIH within a 2-year window—specifically, in fiscal years 2009 and 2010, though the activities funded by the grant may occur after fiscal year 2010. OMB guidance requires recipients of Recovery Act funding—including NIH Recovery Act grantees—to report on the number of jobs supported by the Recovery Act on a quarterly basis to the nationwide data collection system. OMB developed recipient reporting guidance and deployed a nationwide data collection system at www.federalreporting.gov. According to OMB guidance, a grantee’s estimate of the number of jobs supported by the Recovery Act each quarter must be expressed in terms of FTEs, which are calculated as the total number of hours worked and funded by the Recovery Act within a reporting quarter divided by the quarterly hours in a full-time schedule, as defined by the recipient. According to the OMB guidance, federal agencies that award Recovery Act funds should establish internal controls to ensure data quality, completeness, accuracy, and timely reports to the www.federalreporting.gov Web site. In reviewing a selection of the reports submitted to www.federalreporting.gov by grantees of agencies across the Department of Health and Human Services (HHS), the HHS Office of Inspector General found that HHS had processes in place for reporting the use of Recovery Act funds. NIH officials also reported that HHS assesses the quality of reports filed by NIH Recovery Act grantees. For example, using data assessments performed by NIH, HHS assesses the quality of the data reported by Recovery Act grantees. NIH and NIH Recovery Act grantees collect information about the FTEs supported by NIH Recovery Act funding as well as information on the other impacts of this funding from a variety of sources. Specifically, NIH collects information about FTEs supported by the Recovery Act from the www.federalreporting.gov Web site. NIH grantees, including NIH Recovery Act grantees, also submit annual progress reports to NIH that include information such as the goals and progress of their research. NIH is also participating in the development of a multiagency collaboration (called Star Metrics) to track the employment, scientific, and economic impacts of its funded research projects—including Recovery Act grants. In addition, NIH gathers information from principal investigators working on priority research areas and prepares publicly available reports (known as Investment Reports) about the potential scientific impacts of NIH- funded research. NIH Institutes and Centers (IC) select the topics featured in these reports based on (1) the importance of the topic area within the body of research funded by the IC, (2) the level of funding provided by the IC to the topic area, and (3) the level of public interest in the topic area. NIH grantees also collect information about the jobs as well as other impacts of NIH grants, including those funded by the Recovery Act, using payroll records, and effort reporting systems—such as time cards, other internal accounting records, and publications. Data reported by all NIH Recovery Act grantee institutions to the nationwide data collection system and available to NIH indicate that the number of FTEs supported by NIH Recovery Act funds generally increased from December 2009 through September 2010, then generally remained steady from December 2010 through June 2011—the most recent quarters for which data are available. As shown in figure 1, the number of FTEs supported by NIH Recovery Act funding ranged from about 12,000 in the reporting quarter ending December 2009 to about 21,000 in the quarter ending in June 2011. According to NIH officials, Recovery Act funds could eventually support a total of approximately 54,000 FTEs. This figure represents NIH’s estimated total of FTEs that could be supported throughout the Recovery Act. According to NIH officials, this estimate is projected based on the quarterly expenditure of funds reported by grantee institutions and the projected number of FTEs that NIH expects that these funds could support over the life of the Recovery Act. NIH expects that the Star Metrics program will provide additional information about the number and types of jobs funded by the Recovery Act. NIH officials reported that the Star Metrics program is an ongoing initiative and that the program is expected to release preliminary results regarding jobs in 2012. Like other NIH Recovery Act grantee institutions, data reported by our five grantee institutions also showed a general increase in FTEs. Specifically, the five institutions combined reported almost 1,000 FTEs in the quarter ending in December 2009, increasing to almost 2,000 supported FTEs in the most recent quarter for which data are available that ended in June 2011. (See fig. 2). Through responses to our data collection instrument 50 selected principal investigators at five grantee institutions provided additional information explaining how the Recovery Act funding supported FTEs. Nearly 30 percent of the 50 selected principal investigators reported that the NIH funding they received supported new positions, and about half of the principal investigators reported that the funding they received allowed them to avoid reductions in the number of employees at their institution or avoid a reduction in the number of hours worked by current employees. For example, according to the selected principal investigators, 29 percent of the jobs supported by NIH Recovery Act funding at the five grantee institutions were new employees hired by the institution using Recovery Act funding, and 54 percent were current employees. One principal investigator reported using NIH Recovery Act funding to hire more than 10 employees, many of whom had recently been laid off or had been out of work for several months. According to selected principal investigators, a majority (54 percent) of the job positions supported by NIH Recovery Act funds were parttime and the mean number of hours worked per week for all supported positions was about 20, including for example, a mean of 9 hours per week for professors and 35 hours per week for students pursuing postgraduate degrees. (See app. II for more descriptive information about the FTEs supported by NIH Recovery Act funding.) NIH officials currently receive some information reported by NIH grantees about other impacts of NIH’s Recovery Act funding, and NIH is participating in a program that NIH officials expect could help track these other impacts. In response to our data collection instrument, two-thirds of our 50 selected principal investigators—who direct research at the grantee institutions—reported that the Recovery Act funding received in fiscal years 2009 and 2010 was used to purchase research supplies and equipment and lab testing services. In addition, the majority of our 50 selected principal investigators and NIH also reported preliminary results from research projects funded by the Recovery Act. NIH officials we interviewed said that principal investigators—who direct research at the grantee institutions—including those which received Recovery Act funding—currently report some information to NIH about the other impacts of NIH-funded research. This information generally includes purchases made by the principal investigators, as well as preliminary research results submitted to NIH in their annual progress reports. NIH is participating in the Star Metrics program—a multiagency collaboration currently involving about 77 grantee institutions—to track, among other things, the scientific and nonscientific impacts of its funded research grants, including social and workforce outcomes and economic growth. NIH officials expect that the Star Metrics program could provide more information about these other impacts. Officials told us that Star Metrics is currently developing an approach to capture this information, and that they expect to pilot the approach in 2012. However, at this time there is no expected completion date for reporting this information. In their responses to our data collection instrument, many of our 50 selected principal investigators reported that they used the Recovery Act funding they received from fiscal years 2009 through 2010 to purchase supplies, equipment, and testing services used in research. Some of the principal investigators also reported that in the course of conducting some of their Recovery Act-funded research, they were able to provide scientific training to health care professionals. The selected principal investigators provided anecdotal information about the other impacts of the selected grants. Recipients of Recovery Act funding, such as grantee institutions, do not systematically track these other impacts; however, they are not required by the Recovery Act to do so. In previous work on the Recovery Act, GAO identified difficulties in assessing other impacts, particularly in instances when data on the other impacts are not readily available. (See app. III for more details of the other impacts of NIH Recovery Act funding as reported by selected principal investigators.) Purchasing Supplies and Equipment. In their responses to our data collection instrument, two-thirds of our 50 selected principal investigators reported that they used the Recovery Act funding they received from NIH to purchase or lease laboratory equipment and supplies needed to conduct research. These transactions, which we corroborated by conducting a selected review of NIH Annual Progress Reports and Recovery Act recipient reports, could translate into additional sales and revenues for the vendors. According to the principal investigators, their transactions included biomedical equipment and supplies, office supplies, computer equipment, and software licenses. For example, one principal investigator reported purchasing highly specialized imaging equipment for $27,000, as well as other medical, laboratory, and office supplies. Purchasing Specialized Services. Over a quarter of our 50 selected principal investigators reported that they used NIH’s Recovery Act funding to purchase certain laboratory testing services—such as genetic sequencing—from other research facilities that were better equipped to perform the testing and analyses. For example, one principal investigator reported contracting with a small local research company to perform specialized DNA analysis needed to determine the causes of immune deficiency disorders. In addition, a couple of principal investigators reported that they used NIH’s Recovery Act funding to contract for consultations services, such as statistical analyses and the design of models needed for their research. Some principal investigators also purchased ancillary services that they said were needed to support clinical trials, such as services providing patient transportation, recruitment, and care. Scientific Training for Health Care Professionals. Nine of our 50 selected principal investigators also reported in our data collection instrument that in the course of conducting their Recovery Act-funded research they were able to provide scientific training to health care professionals. Some of these principal investigators cited the importance of exposing current and future physicians to research-based approaches for diagnosing and treating patients. For example, one principal investigator reported that while researching how to select treatments for cancer patients, new oncology researchers—fellows and junior faculty—were trained about the effects of human genetics on care delivery for cancer patients. According to this principal investigator, understanding the effects of genetics on cancer allows physicians to personalize the treatment options they offer to patients. The principal investigator also noted that the next generation of physicians needs to be knowledgeable about genomic approaches to cancer care, while developing the foundation for their research careers. According to another principal investigator, as part of research to determine why certain genes contribute to Alzheimer’s disease, health care professionals were trained to analyze complex genetic datasets and to develop software packages needed to efficiently perform the analysis. In responses to our data collection instrument, a majority of our 50 selected principal investigators who direct research at the grantee institutions reported on the preliminary results from their research projects supported with Recovery Act funds. According to the majority of our selected principal investigators these preliminary results could contribute to future scientific developments in preventive medicine, the early detection of diseases, and medical therapies. Additionally, one principal investigator reported that some of the results of their research could lead to the development of research capabilities to be used by other researchers. A few principal investigators, however, stated that it was premature to report any preliminary results from their NIH Recovery Act- funded research, because they were still conducting clinical trials and analyzing data. In general, scientific research—including NIH-funded projects—can be lengthy and complex, and take years to obtain results. Grantee institutions and principal investigators in our review and NIH officials we interviewed reported that they track the scientific impact of NIH research—including preliminary results from research funded through the Recovery Act—primarily through peer-reviewed publications. NIH officials also reported that they track certain priority research areas and communicate potential scientific impacts through its Investment Reports. According to NIH, when a sufficiently large body of research results have accumulated the agency plans to prepare reports (similar to its Investment Reports) that highlight the impact of its Recovery Act- funded research. Other metrics used to track scientific impacts—including for Recovery Act-funded research—as reported by principal investigators in our review include the filing and approval of patent applications, the ability to secure future grant funding, presentations at professional meetings, utilization of products produced from their research, and changes to health care policies and clinical practices implemented as a result of their research. As noted earlier, the majority of our selected principal investigators provided preliminary results from their research projects supported with Recovery Act funds. The following are examples of these preliminary results: Prevention of Diseases. One principal investigator reported that their Recovery Act-supported research on coronary heart disease indicated that high levels of calcified and noncalcified plaque, which can clog arteries and contribute to heart disease, is present in young healthy people who have a family history of premature coronary disease. According to this principal investigator, the results of this research could be used to identify persons who would benefit from heart imaging tests and preventative therapy for coronary heart disease. Early Detection of Diseases. One principal investigator reported that their Recovery Act-supported research resulted in the identification of several hundred proteins that are associated with chronic pancreatitis. According to this principal investigator, this research could contribute towards creating new blood tests for detecting chronic pancreatitis. Another principal investigator reported identifying the symptoms that are the most important and efficient for making a diagnosis of autism in young children. Improvements in Medical Therapies. One principal investigator reported that data collected for their Recovery Act grant has yielded results in developing personalized therapeutic approaches for patients with idiopathic pulmonary fibrosis, a fatal disorder. This principal investigator noted that these results could help to simplify decision making regarding therapeutic interventions, such as for patients undergoing an organ transplant. Another principal investigator cited progress toward overcoming the resistance of colon cancer to existing treatment therapies, and another assessed two alternative therapies for coronary heart disease. A principal investigator also reported that their Recovery Act-supported research contributed to the development of a kidney dialysis monitoring device that could be less invasive and more cost-effective than the current surgically implanted monitoring systems. Improved Research Capabilities. One principal investigator reported that their Recovery Act-supported research contributed to the development of a new approach that is being utilized by other researchers studying the connections between different genes and traits, such as those that may lead to heart disease. A draft of this report was provided to HHS for review and comment. HHS provided technical comments that were incorporated as appropriate. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to other interested congressional committees, the Secretary of Health and Human Services, and the Director of the National Institutes of Health. This report will also be available on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact Linda T. Kohn at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. To obtain the information National Institutes of Health (NIH) and selected NIH Recovery Act grantees have on the jobs supported with NIH Recovery Act funding, we interviewed NIH officials about the information they have on the full-time-equivalents (FTE) supported by the Recovery Act, and reviewed (1) NIH data containing information reported by grantee institutions to a nationwide data collection system at www.federalreporting.gov on the FTEs supported by NIH Recovery Act funding, (2) annual progress reports for fiscal year 2010 that NIH Recovery Act grantees are required to submit to NIH, and (3) other jobs information that NIH gathers from other sources. To assess the reliability of the data provided by NIH, we obtained information from agency officials knowledgeable about (1) NIH grant award data, (2) NIH Recovery Act grantee recipient reports, and (3) the jobs information that NIH gathers from other sources. We also performed data quality checks to assess the reliability of the Recovery Act grants data file received from NIH. These data quality checks involved an assessment to identify incorrect and erroneous entries or outliers. Based on the information we obtained and analyses we conducted, we determined that the data were sufficiently reliable for the purposes of this report. In addition, we selected five grantee institutions, which were universities that employ principal investigators who received NIH Recovery Act funding. The five selected grantee institutions met the following criteria: (1) received the largest portion of Recovery Act funds from NIH, (2) received the largest number of grants, and (3) reported the highest number of FTEs supported by NIH Recovery Act funds. The selected institutions were Johns Hopkins University, University of Michigan, University of Washington, University of Pennsylvania, and Duke University. The selected grantee institutions are not representative of all institutions that received Recovery Act funding. (See table 1 for more information about the five selected grantee institutions.) To gather more specific information about individual grants, we created a Web-based data collection instrument (DCI) and disseminated it to 50 selected principal investigators—10 principal investigators at each of the same five grantee institutions. The Web-based DCI contained questions about the types and number of jobs supported by the Recovery Act funding received from NIH. The selected principal investigators received grant awards that met the following criteria: (1) the grant was a new grant award and not a supplement to an existing grant, (2) the grant award was for $500,000 or greater (see table 2 for more details), and (3) the grant award was made on or before December 1, 2009. We reviewed the abstracts for all the grants that met the above criteria and made a judgmental selection of the final 50 grants—making sure to include a variety of grant types such as Challenge grants and Grand Opportunity (GO) grants that were developed for the Recovery Act. The 50 selected grant awards ranged in size from $500,000 to about $11,000,000. The principal investigators for these selected grants are not representative of all principal investigators who received NIH Recovery Act funding. To gather information about the grants from an institutional perspective, we also created a second Web-based DCI and disseminated it to an official involved in coordinating Recovery Act reporting at each of the five selected grantee institutions. We performed follow-up information gathering from selected principal investigators and administrators at grantee institutions that completed the DCI to supplement the information provided in the DCI. We also obtained and reviewed information reported by grantee institutions to the nationwide data collection system at www.federalreporting.gov about the number of jobs supported by the Recovery Act. The information on the number of FTEs supported by NIH Recovery Act funding reported to the nationwide data collection system by recipients of Recovery Act funding has certain limitations. First, the Office of Management and Budget (OMB) guidance requires FTE numbers to be reported quarterly and FTEs should not be added across quarters to obtain a cumulative number of FTEs. In addition, the calculation of FTEs may reflect full-time and/or multiple part-time jobs, therefore FTEs cannot be used to determine the total number of individual jobs. Moreover, because of a change in OMB’s reporting guidelines, FTE data for the first reporting quarter may not be comparable to the data reported for subsequent reporting quarters. The number of FTEs represents only the jobs directly supported by the Recovery Act but does not capture the jobs indirectly supported by the act or other impacts of the spending. To identify the information NIH and selected grantee institutions and principal investigators have on the other impacts of the NIH Recovery Act funding they received, we utilized the Web-based DCI disseminated to the same 50 principal investigators—10 principal investigators at each of the five selected grantee institutions—noted earlier, and interviewed NIH officials. We asked the grantee institution and principal investigators to identify other impacts such as scientific impacts, impacts in the local community, and impacts on the grantee institution and principal investigators. We also asked NIH and principal investigators to identify the metrics they use to measure and track these other impacts. We contacted the State Recovery Act representative in two of the states in which our selected universities are located (North Carolina and Pennsylvania) to identify information on the other impacts of NIH Recovery Act funding in their jurisdictions. Finally, we reviewed relevant NIH Recovery Act grant guidance as well as OMB’s Recovery Act guidance to identify Recovery Act grantee requirements for reporting information on FTEs and on the impacts of the Recovery Act grants to NIH and the nationwide data collection system at www.federalreporting.gov. We disseminated a Web-based data collection instrument (DCI) to a total of 50 selected principal investigators (10 principal investigators at each of five selected grantee institutions). The data collection instrument included questions about the jobs supported by NIH Recovery Act funding. Detailed results from selected questions in our data collection instrument related to the jobs supported by Recovery Act funding cited in this report are listed below in tables 3-6. For example, information about (1) the number of supported positions that existed before the Recovery Act and (2) the average number of hours worked by each supported job category. Not all totals add to 100 percent because respondents were given multiple answers and asked to check all that apply. We disseminated a Web-based data collection instrument to a total of 50 selected principal investigators (10 principal investigators at each of five selected grantee institutions). The data collection instrument included questions about the other impacts of NIH Recovery Act funding. Detailed results from selected questions in our data collection instrument related to the other impacts of Recovery Act funding cited in this report are listed in tables 7-10. For example, information about (1) the types of nonscientific impacts reported by selected principal investigators, and (2) the metrics used to track and measure scientific impacts. In addition to the contact named above, Will Simerl, Assistant Director; N. Rotimi Adebonojo; Leonard Brown; Carolyn Garvey; Krister Friday; Daniel S. Ries; and Monica Perez-Nelson made key contributions to this report. | The American Recovery and Reinvestment Act of 2009 (Recovery Act) included $8.2 billion in funding for the National Institutes of Health (NIH) to be used to support additional scientific research-including extramural grants at universities and other research institutions. In 2009, the Acting Director of NIH testified that each extramural grant awarded with Recovery Act funding had the potential of supporting employment--full- or part-time scientific jobs--in addition to other impacts, such as contributing to advances in improving public health. GAO was asked to examine the use of Recovery Act funds by NIH grantees. Specifically, GAO addresses the information available from NIH and its grantees about the extent to which NIH Recovery Act funding (1) supported jobs, and (2) had other impacts. To obtain information on job impacts, GAO reviewed a database containing information NIH Recovery Act grantees reported to the national data collection system and interviewed NIH officials. To obtain more specific jobs information about individual grants, GAO administered a Web-based data collection instrument to 50 selected principal investigators who direct research at grantee institutions--10 principal investigators at each of five selected grantee institutions. The selected principal investigators had generally received awards of $500,000 or more. To obtain information on other Recovery Act impacts, GAO used information from the data collection instrument and interviewed NIH officials. Data reported by all of NIH's Recovery Act grantee institutions to the national data collection system at www.federalreporting.gov and available to NIH indicate that the number of full-time equivalent (FTEs) jobs supported by NIH Recovery Act funds increased from December 2009 through September 2010, and then remained steady from December 2010 through June 2011--the most recent quarter for which data are available. The number of FTEs supported by NIH Recovery Act funds increased from about 12,000 in the reporting quarter ending December 2009 to about 21,000 in the quarter ending in June 2011. The 50 selected principal investigators who direct research at the grantee institutions in GAO's review provided additional information explaining how the Recovery Act funding supported FTEs. Nearly one-third of the selected principal investigators reported that the NIH Recovery Act funding they received supported new positions, and about half of the principal investigators reported that the funding they received allowed them to avoid reductions in jobs or avoid a reduction in the number of hours worked by current employees. The selected principal investigators also reported that the Recovery Act funding they received primarily supported scientists and other faculty. NIH officials we interviewed reported that they receive some information from principal investigators about the other impacts of NIH-funded research, such as preliminary research results included in annual progress reports. NIH is also participating in the Star Metrics program--a multiagency venture to monitor the scientific, social, and economic impacts of federally funded science--which NIH officials expect could provide more information about these impacts. While Star Metrics is currently developing an approach to capture information about the other impacts of NIH grant funding, there is no expected completion date for reporting this information. In response to GAO's data collection instrument, selected principal investigators who direct research at the grantee institutions in GAO's review reported that the use of Recovery Act funds resulted in purchases of research supplies, equipment, laboratory testing services, and scientific training of health care professionals. The majority of the 50 selected principal investigators in GAO's review also reported preliminary results from their Recovery Act-funded research that could contribute to future scientific developments in prevention and early detection of disease, improvements in medical therapies, and improved research capabilities. The principal investigators in GAO's review and NIH officials GAO interviewed reported that they track the scientific impact of NIH research--including the impact of research funded through the Recovery Act--primarily through peer-reviewed publications, but also through other metrics such as the filing and approval of patent applications. According to NIH officials, when a sufficiently large body of research results has accumulated, NIH plans to prepare reports--similar to its existing publicly available Investment Reports--that will highlight the impact of its Recovery Act-funded research. The Department of Health and Human Services provided technical comments on a draft of this report, which GAO incorporated as appropriate. |
OPIC was established by the Foreign Assistance Act of 1969 (P.L. 91-175, Dec. 30, 1969) to pursue the U.S. foreign policy of mobilizing and facilitating the participation of U.S. private capital and skills in the economic and social advancement of developing countries. In carrying out this responsibility, OPIC took over the investment guarantee and promotion functions of the U.S. Agency for International Development. In the early 1970s, the U.S. approach to foreign assistance began to shift from one of providing government aid for infrastructure building and large capital projects to providing assistance to meet basic human needs. OPIC’s role was to support market-oriented private investment in various sectors. More recently, the World Bank has estimated that $200 billion would be needed annually over the next 10 years to meet the infrastructure needs of developing countries. Obtaining this level of private investment will be a major challenge given the economic and political characteristics of emerging markets and the unique risks inherent in each project. Project financing is emerging as an important component in infrastructure development. OPIC’s programs are designed to promote overseas investment and assume some of the associated risks for investors. Specifically, OPIC offers direct loans and loan guarantees to U.S.-sponsored joint ventures abroad, supports private investment funds that provide equity for projects abroad, and provides political risk insurance to U.S. investors. The political risk insurance covers investors for up to 20 years against losses due to currency inconvertibility, political violence, and expropriation. OPIC collects premiums and fees from the private sector for insurance and financing services. OPIC finance and insurance activities are backed by the full faith and credit of the U. S. government and are limited to a total exposure of $23 billion in fiscal year 1997. OPIC services are available in some 140 developing countries, although OPIC does not operate in some countries, largely for U.S. foreign policy reasons. Projects eligible for OPIC assistance include new investments, privatizations, and expansions or modernization of existing plants. The sectors OPIC supports include power, financial services, telecommunications, and oil and gas. To obtain OPIC support, investors must meet specific criteria, including U.S. ownership requirements. Over the years, Congress has placed various requirements on OPIC’s authority to support U.S. investment. For example, in carrying out its activities, OPIC is to administer its entire portfolio (financing, insurance, and reinsurance operations) on a self-sustaining basis and in a manner that ensures that the projects it supports are economically and financially sound; refuse support for any investment in countries that are not taking steps to adopt and implement internationally recognized worker rights; and decline participation in investments that are likely to significantly reduce U.S. domestic employment levels or pose an unreasonable or major environmental, health, or safety hazard. A changing global environment has reduced the perception of risk for the investors we spoke with in emerging markets. Economic growth and liberalization have created investment opportunities in sectors that were previously dominated by government-owned companies or were simply off limits to foreign investors. Many countries, for example, have privatized their power and telecommunication sectors and enacted laws that permit foreign ownership, resulting in dramatic increases in foreign investment. More recently, private providers of project finance and political risk insurance are increasingly available to assist investors. However, according to many of the firms we surveyed, markets still exist where they are unable to obtain private finance or insurance services. As a consequence, they seek public support. Public support includes direct loans, loan guarantees, and political risk insurance from OPIC and the U.S. Eximbank; foreign agencies that provide such services (often called export credit agencies); or multilateral financial institutions, such as the World Bank. The privatization of public enterprises, legal and regulatory reforms, and a more stabilized political and economic environment in developing counties, among other changes, have led to an increase in total private capital flows. As shown in figure 1, private capital flows to finance infrastructure projects and other private investments overseas have increased from $26 billion in 1986 to $246 billion in 1996. During the 1990s, private sector finance has increased dramatically, especially to Asian and Latin American developing countries, despite setbacks associated with the Mexican peso crisis. Private flows going to infrastructure reflect these overall increases, particularly in commercial lending devoted to project finance. According to a 1996 International Finance Corporation report, these private infrastructure investments would not have seemed possible 10 years ago. Today, more and more countries are introducing competition and private participation in infrastructure ownership and management. The 34 power and telecommunications companies that we surveyed indicated that their investment decisions have been significantly influenced by the recent developments in emerging markets. In general, 30 of the companies stated that changes in the legal and regulatory environment in emerging markets have led them to seek investments in countries where they had not invested in the past. At the same time, the U.S. power market matured, and U.S. power companies began seeking investment opportunities in emerging markets. The rise in overseas private investment has been accompanied by increases in investment support by public providers of finance and insurance as well as increases in private insurance coverage in some markets. Three countries—Japan, the United States, and Germany—are the largest public providers of political risk insurance. (See app. II, which identifies features of the services provided by the major public providers of political risk insurance.) Lloyd’s of London, the American Insurance Group, and Exporters Insurance Corporation—three major private insurers—have recently increased their insurance coverage. Globally, public providers have increased investor coverage. According to the Berne Union, new investments insured by its members rose annually between 1991 and 1996, going from $7.1 billion to $15.2 billion. As of the end of 1996, the cumulative amount of investment covered by Berne Union members was $43.4 billion. According to data collected directly from the major public providers of political risk insurance, Japan led all public providers with $13.9 billion in cumulative exposure. OPIC was second with $13.4 billion in exposure, and the German public provider was third with $7.8 billion in exposure. These public insurers have traditionally dominated the public risk insurance market. Although the major public providers generally offer investment services in the same countries, each of the major providers’ business tends to concentrate in different markets. OPIC, for example, concentrates in Latin America, the Japanese in Asia, and the Germans in Asia/Pacific and Central and Eastern Europe. (See app. III for available information on the regional concentration of major public insurance providers.) Investors are also assisted by other Berne Union members, including the Multilateral Investment Guarantee Agency, a multilateral institution affiliated with the World Bank Group, with about $3.9 billion in exposure reported in 1997. The level of coverage of privately provided political risk insurance has increased considerably over the past 2 years, according to the private insurers we spoke with. Although the volume of coverage provided by private insurers is difficult to determine, a political risk insurance expert estimated that several billion dollars of private political insurance coverage was provided in 1996. According to the American Insurance Group, one of the largest private providers of political risk insurance, it increased the length of its coverage from a maximum of 3 years to a cap of 7 years in 1996. Additionally, ACE, Inc., a private insurance provider, recently entered into a reinsurance contract with the Multilateral Investment Guarantee Agency, providing up to 15 years of risk coverage on the same terms as that agency. However, according to officials of a large commercial bank and a private political risk insurer, in some risky markets private insurers are only willing to provide insurance when a public sector entity is involved in the project. A private insurer we spoke to said his company had not provided coverage in Russia and most of the other newly independent states of the former Soviet Union. Public and private sources also provide financing in developing countries. Public providers include OPIC; the International Finance Corporation, a multilateral institution affiliated with the World Bank Group; the U.S. Eximbank; and other bilateral credit agencies, such as the Japanese Export-Import bank. Private sector financing to developing countries is available through commercial banks and other private financial institutions. According to the World Bank, this source of financing has increased significantly during the 1990s, with about one-half of these resources directed toward project financing for infrastructure development. Investors’, private lenders’, and insurers’ perception of risk frames how projects are structured and financed. The risks assumed and the type of support sought by investors can differ by project and by sector. For example, based on the projects identified in our survey, more telecommunications projects were completed without public support and with investor self-insurance than were power projects. Power plants are costly and can take 10 years or longer to recoup the investment costs, according to an energy firm official we interviewed, making plant assets and income subject to long-term political risks. Telecommunications projects, on the other hand, may generate enough income to cover investment costs in just a few years. Investors we surveyed told us that over the past decade, several Latin American, East Asian, and East European countries have taken steps to create environments attractive to investors. Specifically, 22 of the 34 firms we spoke to were comfortable with assuming investment risks after they had been successful in a country for a period of time. For example, one telecommunications company that is developing cellular telephone operations in Hungary told us that the availability of OPIC political risk insurance was a critical factor in its initial decision to invest $200 million when privatization allowed the company to enter the market. After 2 years, however, the company reassessed the political and economic risks of this investment and decided to drop its OPIC insurance in favor of self-insurance. A company with 10 projects in Poland told us that it developed 9 cable projects with private investment after completing 1 successful project in Poland that was financed by OPIC 5 years ago when private financing was not available. In another example, a power company that has used OPIC in other high-risk markets has made acquisitions of privatized public utilities in Argentina and Chile without official support by obtaining financing from European financial markets and locally syndicated money. Officials of the International Finance Corporation confirmed that investors are increasingly likely to cancel International Finance Corporation loans as lower-priced private financing becomes more available in lower-risk markets. Despite these trends, some markets are still considered high risk by investors, lenders, and private insurance companies. Thus, obtaining commercial finance and insurance in these markets remains difficult, according to private firms we surveyed. Several of the power and telecommunications companies we surveyed concurred with the assessment that in several regions of the world, including Africa, Russia, the other newly independent states of the former Soviet Union, and Central America, the perception of risk remains high. Some companies told us that they are generally unable to raise the necessary financing for transactions in high-risk countries without public support. For example, four firms that we spoke to that invested in Russia or Ukraine said that private finance was unavailable for their projects. One telecommunications company with investments in Russia and Ukraine stated that without OPIC political risk insurance, it would have avoided these high-risk markets. A power company with a $150-million equity investment in El Salvador covered by OPIC political risk insurance told us that the availability of OPIC services was a key factor in the company’s decision to invest in the country. According to an official from this company, although it considers Guatemala to have great potential for the industry, private financial institutions and insurance companies still consider Guatemala to be high risk, and the company will not go forward with projects in Guatemala without OPIC or other public support. Additionally, private lenders and insurance companies we spoke with told us that they offer limited, if any, services in higher-risk markets such as the newly independent states of the former Soviet Union. Officials at the major international banks we visited noted that they are reluctant to lend in high-risk markets without some form of political risk insurance and that the private insurance companies often cannot provide the kind of insurance lenders need in these markets. In countries where OPIC services are not available due to U.S. foreign policy or operational reasons, such as Mexico, China, Pakistan, and Vietnam, we found that most of the U.S. investors we interviewed often seek other forms of public support to facilitate investment. As is the case in other emerging markets, investors’ decisions to invest in a project were predicated on their perceived risk. Our survey of U.S. investors showed that when U.S. firms believed they needed public investment support in a non-OPIC country, they sought investment support from the U.S. Eximbank or other foreign export credit agencies or multilateral financial institutions. Although such support facilitates the original investment, subsequent equipment and service procurements are often tied to the countries providing the support. Thus, if foreign export credit agencies provide the support, U.S. suppliers could be excluded. In some non-OPIC markets, such as Mexico, U.S. investors may not always seek public support. According to a telecommunications company official, several risk mitigation factors enabled the company to make a $1-billion investment in Mexico without political risk insurance or other official participation in the project. Mexico’s historical and geographical relationship to the United States, trends in Mexico’s economic performance, the potential for free trade, and the contractual commitment of high-level government officials and the Mexican Central Bank, along with the company’s confidence in its Mexican partner, all helped lower the company’s perception of risk. In contrast, a $644-million power project in Mexico is being undertaken by U.S. investors facilitated by a $477-million U.S. Eximbank loan, $28 million in U.S. Eximbank political risk insurance during construction, and a $75-million Inter-American Development Bank loan. In China, companies have entered into joint ventures with local companies that are affiliated with provincial governments, which lowers investor perception of risk. Depending on the size of the project, these companies were more likely to obtain a portion of their financing from multilateral institutions or foreign official sources. For example, one power company with several recent joint ventures in China financed smaller-sized projects (under $30 million) without public support. However, the same company is finalizing a $1.6-billion project and is obtaining support from the U.S. Eximbank and Hermes, Germany’s export credit agency. The opportunities presented by China’s large market potential may increase investors’ willingness to do business there despite the perceived risk. In other markets where OPIC is not available, the U.S. firms we surveyed have used the services of multilateral agencies or export credit agencies.One telecommunications company mitigated its risk in Pakistan by obtaining guarantees and political risk insurance from the International Finance Corporation and the Multilateral Investment Guarantee Agency. Because OPIC was not available in Vietnam, a U.S. power firm used the Asian Development Bank and Coface (the French export credit agency) to finance a $160-million power plant. U.S. investors’ use of investment support from sources other than OPIC may affect the source of procurements. Multilateral institutions generally do not tie their support to buying equipment from a particular country. However, some U.S. firms told us that they were unable to use U.S. suppliers when they obtained support from foreign export credit agencies. In testimony before Congress, an official of a large U.S. company testified that her company utilized or planned to use German, Japanese, or French equipment for projects in China, Pakistan, and Vietnam because the company obtained investment support from German, Japanese, and French export credit agencies. Historically, OPIC has been self-sustaining, generating substantial revenues from its finance and insurance programs and its investments that together have been sufficient to cover actual losses. As of September, 1996, OPIC had accumulated $2.7 billion in reserves. According to a February 1996 J.P. Morgan Securities, Inc., report, OPIC’s reserves are more than adequate to cover any losses that OPIC might experience, excluding an unprecedented disaster. OPIC’s risk management strategies, which include maintaining reserves, setting exposure limits, performing pre-approval reviews, and applying underwriting guidelines, help limit U.S. taxpayers’ exposure to undue risk and prevent project losses. In 1994, OPIC raised the maximum amount of insurance and finance coverage it offers on a given project, a step that increases the government’s exposure to loss but may not negatively affect the quality of OPIC’s portfolio. Notwithstanding OPIC’s track record, the private sector’s willingness to have greater involvement in some developing countries has created opportunities for OPIC to take steps to further reduce the risk associated with its portfolio through greater risk-sharing. Some possible options to explore include obtaining reinsurance from other providers, utilizing coinsurance, and insuring less than 90 percent of the value of each investment. Adoption of any of these options, however, should be carried out with due consideration of U.S. foreign policy objectives. Historically, OPIC has generated sufficient revenues from its insurance and finance programs to cover its operating costs and the losses associated with its portfolio. Since its inception through 1996, OPIC had about $500 million in insurance claims and recovered all but $11 million of this amount from the disposal of assets and recoveries from foreign governments. During the same period, OPIC has received over $922 million in premiums from its insurance activities. OPIC’s insurance revenues have exceeded its gross claims payments in all but 3 fiscal years, excluding recoveries that OPIC obtained after the claims were paid and liabilities were incurred but not reported. Also excluded is interest from Treasury securities. According to J.P. Morgan Securities, Inc., OPIC’s finance program has operated at a small loss or close to breaking even. Although OPIC’s cash revenues from its finance program have exceeded all cash losses from loans or loan guarantees since 1984, when operating costs and loan loss provisions are included, OPIC’s finance program shows a net operating loss for each year since 1993. If income from Treasury securities were allocated for each of these years, the finance program would show a net income. Under OPIC’s finance program, its direct loans, which by statute are only available to small businesses, have experienced higher rates of delinquencies and loan losses than its loan guarantees. Between 1984 and 1996, OPIC’s average direct loan loss rate was 4.4 percent; the loss rate was at its highest, at 11.7 percent, in fiscal year 1984. In the same time period, OPIC’s loan guarantee portfolio had an average loan loss rate of 0.56 percent for a combined rate (direct loans and loan guarantees) of 0.93 percent on average outstandings. OPIC’s finance program has been subject to the Federal Credit Reform Act of 1990, which became effective in fiscal year 1992. The act requires that government agencies, including OPIC, estimate and budget for the total long-term costs of their credit programs on a present value basis. Based on the required estimation of subsidy costs under credit reform, OPIC’s finance program will cost the government $72 million in fiscal year 1997 and total about $135 million between fiscal years 1992 and 1996. Historically, OPIC’s combined finance and insurance programs have been profitable and self-sustaining, including costs due to credit reform and administration. The J.P. Morgan Securities, Inc., report stated that OPIC’s finance program has operated at a small loss or close to breaking even and that much of OPIC’s profitability has come from interest earned on Treasury securities. This interest has accounted for over 60 percent of OPIC’s total revenue over the past 6 years. In fiscal year 1996, OPIC’s net income was $209 million, of which $166 million was interest on Treasury securities. From a governmentwide perspective, interest on Treasury securities held by OPIC represents transfers between two government agencies (that is, OPIC’s income from Treasury securities is a Treasury expense) that cancel each other out. From that perspective, OPIC’s net income from transactions with the private sector, that is, fees and premiums, amounted to about $43 million in fiscal year 1996. OPIC’s risk management strategy focuses on limiting OPIC’s maximum exposure to loss in any one country or sector. No single country accounts for more than 15 percent of OPIC’s portfolio, effectively protecting OPIC against the adverse consequences of catastrophic events in any one country. The purpose of risk diversification is to spread the risk of one transaction across a number of different transactions, thereby isolating OPIC against the risk of one “catastrophic event.” As shown in figure 2, OPIC’s portfolio is diversified across different regions of the world. Although OPIC seeks to diversify its portfolio, figure 2 shows that the countries of the Americas account for more than 40 percent of OPIC’s portfolio. This trend is explained by the fact that U.S. firms choose to use OPIC support in these markets. In general, OPIC’s portfolio is consistent with U.S. foreign direct investment in emerging markets. Figure 3 displays OPIC’s portfolio diversification by investment sector. OPIC’s risk management strategy also includes pre-approval review and underwriting guidelines that take into account some of the same factors other private and multilateral insurers use in evaluating projects. For example, a risk analysis is performed as part of OPIC’s insurance approval process, and a credit analysis is included in the finance approval process. OPIC officials said they consider the same factors that any commercial bank or insurance company would concerning the economics of a project under consideration for financing or insurance. Additionally, as of September 30, 1996, OPIC had accumulated over $2.7 billion in reserves as part of its risk management strategy. These reserves were raised from fees or premiums paid by users of OPIC’s services and from the investment of these funds in Treasury securities. OPIC’s reserves as a percentage of the total current exposure to claims have declined somewhat in recent years due to the rapid increase in the size of OPIC’s portfolio since 1994. The reserves as a percent of OPIC’s total outstanding exposure have declined from 41 percent in 1992 to 34 percent in fiscal year 1995. Despite this decline, J.P. Morgan Securities, Inc.’s, 1996 report on OPIC privatization concluded that these reserves are extremely large relative to exposure by private sector standards and compared to OPIC’s historical losses. Further, analysts at J.P. Morgan Securities, Inc., see the reserves as adequate to cover OPIC’s losses in all cases but an unprecedented disaster. In 1994, OPIC increased per project financing limits from $50 million to $200 million and insurance coverage from $100 million to $200 million per project. Although larger transactions increase the government’s contingent liabilities, large loans are not necessarily more risky than small loans. For example, 13 of the 14 loans currently in technical default or in a non-performing status at the end of fiscal year 1996 were loans made to small businesses and ranged in value from $328,000 to $12.5 million. In addition, OPIC data show that its direct loans have historically experienced more problems than its loan guarantees, which are mostly for high-value loans to large companies. However, for insurance transactions, higher project limits may or may not raise the overall level of risk for the portfolio. On the one hand, OPIC could be subject to larger claims if a foreign government, for example, were to expropriate an insured project. On the other hand, if OPIC’s past experience with claims were to continue, the government’s potential liability may be small. Since 1971, OPIC has recovered over 98 percent of the claims it has paid. We caution that OPIC’s past experience may not reflect future performance because OPIC has new exposure to losses in the newly independent states of the former Soviet Union, where it has had no previous experience. Furthermore, some countries in the region are considered to be very risky by the private insurers and bankers we spoke with. The private sector’s willingness to have greater involvement in some emerging markets has created opportunities for OPIC to further reduce risks in its insurance program. OPIC could share the risk of losses with the private sector, which has shown an interest in emerging markets. For example, OPIC could lower the risks associated with its portfolio through reinsurance, coinsurance, and by decreasing project coverage or terms. However, OPIC’s efforts to support U.S. foreign policy objectives, which promote investment in risky markets, present challenges for OPIC when considering ways to reduce the risks associated with its insurance portfolio. Under the reinsurance scenario, OPIC could consider insuring part of its high- and medium-risk portfolio with private sector insurance companies at premium rates that are mutually acceptable. For example, OPIC could enter into a contract with a large private insurer that would pay a specified percentage of any claims to OPIC. Care must be taken to ensure that the private insurer is not providing support exclusively for the lower-risk transactions and that OPIC retains enough of the reinsured premiums to cover its administrative costs. According to OPIC officials, OPIC had used portfolio re-insurance by the private sector as a mechanism for managing risk and stimulating U.S. private sector interest in providing risk insurance until the mid-1980s. The Grace Commission concluded that given OPIC’s low claims experience, there was no justification for the U.S. government to pay reinsurance premiums that exceeded claims payments collected from the reinsurers. After the Grace Commission’s study of OPIC’s reinsurance practices, the Office of Management and Budget directed OPIC to stop this practice because it was not cost-effective. OPIC officials told us that OPIC is currently in discussions with the Office of Management and Budget about the feasibility of once again pursuing portfolio reinsurance. As noted earlier, private political risk insurance companies are showing greater interest in emerging markets. This trend presents OPIC with opportunities to negotiate fee or premium arrangements that it would not have been able to negotiate in the past. Another risk mitigation strategy that OPIC may use is providing more coinsurance. It could coinsure a project with other private or public insurers in order to share the associated risks and premiums. In this case, the coinsurer would provide insurance that might or might not be identical to the type provided by OPIC that would permit both parties to provide a higher level and scope of coverage. For example, OPIC could provide $100 million of coverage on a $200-million project, while a private entity or a number of entities could provide the other $100 million of coverage. An insurance industry official has publicly stated that OPIC could leverage its resources by inviting the private sector to provide 50 percent of the insurance required on a project. However, OPIC officials said that the private sector’s reluctance to take long-term risk in risky markets limits its opportunity to pursue coinsurance. OPIC has documented only 12 of 1,392 contracts that it has coinsured with the private sector since 1988. A third risk mitigation strategy may be to reduce the coverage and terms of OPIC’s insurance program. OPIC currently offers standard 20-year insurance with 90 percent coverage of the value of the insured assets.One potential option would be that OPIC could insure less than 90 percent of the value of each investment. OPIC’s rationale for insuring 90 percent, rather than 100 percent, of the value of the assets is to ensure that the investor or project sponsor has an incentive to manage its assets prudently. Another option would be for OPIC to offer less than 20-year coverage. For example, rather than providing its current 20-year standard policy, OPIC could offer a standard 15-year term, as is the practice with other public insurers, and provide 20-year cover only in certain cases. Lastly, OPIC could require that the insured hold OPIC coverage for a minimum of 3 years. These measures would lower the value of assets covered, the length of coverage, and potentially the cost of coverage. Regarding the risk-sharing option, OPIC officials said that reducing the coverage level below 90 percent would have an adverse impact on small businesses and might lead U.S. investors to seek insurance support from foreign or multilateral sources that provide 90-percent coverage. They also noted that it might not be practical to make a project sponsor hold the coverage longer than he or she thinks is necessary or prevent him or her from seeking alternative sources of insurance. However, since a reduction in coverage is likely to come with a reduction in price, U.S. investors might continue to seek OPIC coverage. OPIC officials acknowledged that reinsurance, coinsurance, and greater risk sharing may be sound risk management options, but are not without trade-offs. For example, reinsurance may reduce OPIC’s income from premiums because OPIC would have to pay premiums to the reinsurer. Furthermore, OPIC takes on the credit risks of the reinsurer. The officials also stated that OPIC would need to maintain flexibility as to how and when to utilize these risk mitigation alternatives. The U.S. foreign policy objective of promoting private investment in developing countries encourages OPIC to take risks that the private sector may not take without public support. OPIC, the State Department, and other U.S. government officials consider OPIC to be a major tool for pursuing U.S. foreign policy goals. One major U.S. foreign policy goal is to assist Russia in its transition toward a free market economy. According to OPIC officials, by entering into OPIC’s bilateral agreement in 1992, Russia began to establish the conditions necessary for attracting private investment. Further, OPIC operates to promote development strategies that are consistent with internationally recognized worker rights. For example, OPIC ceased operations in the Republic of Korea in 1991, due to concerns over worker rights, including the arrest and imprisonment of labor union leaders. OPIC’s involvement in Russia was initially quite cautious, as it offered only coverage for expropriation and political violence. OPIC officials noted that as conditions improved in Russia, OPIC began offering coverage for currency inconvertibility risk. Since 1992, OPIC has accumulated a finance and insurance portfolio in Russia of $880 million and $1.6 billion, respectively. OPIC justifies its involvement in the high-risk markets of the former Soviet Union—currently 18 percent of its portfolio—by noting its central role in furthering the U.S. foreign policy objective of facilitating private investment in these markets. The private sector has tended to perceive the markets that OPIC operates in as risky, and private investors have often sought support from official sources when investing in these markets. According to OPIC officials, OPIC’s goal is to support deals that would not be made without its support, and OPIC as an agency of the U.S. government has access to risk mitigation tools, including advocacy and intervention to avert claims, that are not available to the private sector. This implies that OPIC would seek transactions that the private sector believes would be too risky without public support. If OPIC is to continue pursuing its mission, its portfolio will always be considered more risky than the portfolios of private sector insurers. OPIC’s authorizing legislation makes no provision for a phaseout process in the event the agency is closed. Any legislation shutting down OPIC should make clear whether OPIC’s portfolio should be moved to another agency or managed by a temporary organization until the portfolio expires. It could take as long as 20 years for OPIC’s portfolio to expire because many of OPIC’s insurance contracts run for 20 years, and OPIC had more than $5 billion in such contracts with 19-20 years remaining as of the end of fiscal year 1996. According to OPIC’s projections, about one-third of the portfolio would remain after 10 years. If the portfolio risk diminishes, Congress’ option to dispose of these assets is more viable. If Congress decides not to reauthorize OPIC, any shutdown legislation would need to address whether OPIC would continue to manage the portfolio during a phaseout period or whether the portfolio should be moved to another agency. If the portfolio is moved to another agency, Congress would need to decide if any OPIC employees would be moved with it to ensure an adequate and knowledgeable work force. According to Office of Management and Budget officials responsible for overseeing OPIC and related agencies, OPIC staff may be best suited to managing the portfolio because they are familiar with the portfolio. According to OPIC and private sector financial officials, OPIC’s portfolio could suffer losses if it is not properly managed, thereby increasing the cost of closing the agency. For example, a successor entity would need to monitor the construction of power and other projects, as well as political developments in host countries and the portfolio’s financial performance, to help prevent claims and/or defaults. Additionally, such an entity would need to perform OPIC’s administrative and legislatively mandated functions, including fee collection, repayment, environmental oversight, compliance with worker rights, and other monitoring to ensure that clients comply with their contractual agreements. According to OPIC officials, if finance projects encountered payment difficulties, an entity would also be needed to restructure the project and make collections where necessary. If a decision were made to move OPIC’s portfolio to another agency, the U.S. Eximbank would be the closest fit, according to Office of Management and Budget officials who are also responsible for overseeing the U.S. Eximbank. U.S. Eximbank officials also stated that their agency has many of the appropriate skills to do the job. The Eximbank officials cautioned, however, that their employees would not be familiar with the various monitoring requirements that OPIC carries out. They noted that OPIC is a foreign policy agency that provides development assistance while the U.S. Eximbank is an export promotion agency whose emphasis is on expanding U.S. exports. The U.S. Eximbank’s lack of familiarity with OPIC’s monitoring requirements would be less of an issue if OPIC staff were transferred to the U.S. Eximbank. Officials from three other agencies with responsibilities for overseeing loans or insurance obligations, or for encouraging and tracking U.S. investment in key overseas markets, all said that their agencies lack the business skills and resources necessary to manage OPIC’s portfolio. These agencies include the Departments of Commerce, State, and the Treasury. Office of Management and Budget officials concurred that their agency also lacks these skills and resources. In addition, officials from the Agency for International Development, the agency from which OPIC was created, said that their agency would not be well suited to managing OPIC’s portfolio because the agency (1) does not provide political risk insurance, (2) provides mostly grants, and (3) lends primarily to public entities (OPIC lends to the private sector). Regardless of whether OPIC’s portfolio is turned over to another agency, certain Office of Personnel Management rules would affect OPIC employee entitlements as he or she is separated from government service. These entitlements may include (1) retirement or severance pay, (2) unemployment compensation, (3) the dollar equivalent of unused annual leave, and (4) settlement from any pending equal employment opportunity or other labor-related litigation. According to officials of the Office of Personnel Management, if OPIC’s portfolio is moved to another agency, Congress would have to decide if any OPIC employees are to be moved with the portfolio. These officials said that reassignment of OPIC employees to another agency, under current Office of Personnel Management rules, would be temporary, lasting only until OPIC’s portfolio expires or the government disposes of the portfolio. If OPIC’s portfolio is moved to another agency, other issues might be considered for easing the transition. For example, a timetable could be established for transferring OPIC functions to the designated agency. In the absence of specific congressional direction, General Services Administration regulations would apply governing the disposal of OPIC’s property including the transfer of office furniture and equipment. In addition, OPIC said it has a commercial real estate lease that runs to June 30, 2007. A phaseout of OPIC would require ceasing new business as of a certain date. Also, a phaseout could take as long as 20 years. OPIC’s investment funds run for 10 years; its loans and guarantees, a maximum of 15 years; and its insurance policies, a maximum of 20 years. According to OPIC estimates, which assume a 10-percent annual drop in the declining remainder of the insurance portfolio due to both cancellations and policies ending at term, the agency’s potential exposure of $23 billion for all services would fall by 64 percent, to $8.2 billion, after 10 years. During the same period, OPIC estimates that its current staff of 200 would decrease by more than 70 percent to about 60 people as the portfolio diminishes. We compared OPIC’s assumptions concerning insurance cancellations and contracts ending at term to historical data and found these assumptions to be generally consistent with these data. According to OPIC, just under 10 percent of the original exposure would remain in the 20th year, with less than 8 percent of the staff needed to monitor it. The decline in OPIC’s portfolio is shown graphically in figure 4. The insurance portion of the portfolio is by far the largest, currently at just under $16 billion. This portion is about 3 times the value of the finance portion and almost 8 times that of the investment fund portion. In the 20th year, just the insurance portion would be left, having dropped by 86 percent to just over $2 billion (see fig. 4). Although the government may wish to divest OPIC’s portfolio before its expiration by selling it to the private sector, such a decision would need to account for the relative riskiness of OPIC’s portfolio and any discounts such a disposal would necessitate. According to a recent study, a privatization of OPIC’s current assets could only be accomplished at a discount. As OPIC’s portfolio matures during a phaseout, external factors may affect the riskiness of the portfolio, either negatively or positively, and thus any potential privatization discount. If existing economic and political trends continue in the markets where OPIC currently operates, OPIC’s portfolio may become less risky. With each year that passes, the length of the government’s obligation decreases and the insured as well as the government becomes more familiar with the risks and issues inherent in a given transaction. As stated earlier, OPIC’s clients tend to cancel their insurance coverage after a few years as they feel more comfortable with the political risks. On the other hand, OPIC’s portfolio may experience greater risk. In general, long-term transactions are riskier than similarly situated short-term loans, guarantees, or insurance transactions. Also, according to OPIC officials, cancellations are more likely to occur in the lower-risk segment of OPIC’s portfolio, thus making the portfolio riskier in the future than it is today. Either situation—less risk in the portfolio or greater risk—may occur. Regardless of the risk characteristics of the portfolio over time, OPIC’s portfolio will decrease. As the portfolio decreases, the amount of the discount will decrease for a given risk in the portfolio. If the quality of the portfolio improves as a result of improvements in OPIC markets, then the rate of discount will likely be much lower or even disappear. If, on the other hand, the portfolio becomes more risky over time, the rate of discount is likely to increase. Since the condition of this portfolio a decade or more from now is unclear, the government has the option of revisiting its choice to sell the portfolio if the risk is reduced. OPIC provided written comments on a draft of this report. OPIC generally agreed with the information and analyses in the report. In commenting on the draft, OPIC provided additional information to further clarify its view of (1) the role of the private sector, (2) risk mitigation opportunities, and (3) phaseout issues. OPIC also orally provided technical corrections and updated information that were incorporated throughout the report where appropriate. OPIC’s comments are reprinted in appendix VI, along with our evaluation of them. To identify trends in private sector investment in developing markets and the public sector’s role in these markets, we focused on various characteristics. Specifically, we obtained and analyzed World Bank data on the extent and types of private capital flows going to finance infrastructure and the trend of these flows over time. To identify the recent developments in the volume and types of investment support provided by the public and private sectors for investments overseas, we obtained and compared information from (1) five large private providers of political risk insurance; and (2) the largest public providers of investment support representing France, Germany, Japan, Canada, Italy, the United Kingdom, and the United States. (see app. II) and the Multilateral Investment Guarantee Agency. We also discussed with the Berne Union information on the nature of political risk insurance and the role and capability of the public and private sectors. We obtained total insurance exposure data directly from the Group of Seven (G-7)insurance providers. Regarding financing, we obtained information from major financial institutions that provide financing to U.S. investors, including the Chase Manhattan Bank and Citibank, and the International Finance Corporation. We also discussed the international finance environment with Standard & Poor’s Ratings Services and Moody’s Investors Service, two large financial rating agencies. An important component of our analysis of private sector investment was the identification of the kinds of investment services U.S. investors have utilized in various developing countries or economies in transition as well as countries in which OPIC is not open for business (for example, China and Mexico). To obtain this information, we surveyed a judgmental sample of 34 U.S. investors that had made major investments within the last 5 years in the power and telecommunications sectors. We selected the power and telecommunications sectors because they (1) are listed as the major sectors of growth in emerging markets and (2) represented two of the four largest sectors supported by OPIC. Since these sectors have considerably different resource requirements and risks, their inclusion allowed us to make several important distinctions regarding the investment environments in which they operate. To survey firms in the power and telecommunications sectors operating overseas, we (1) reviewed relevant literature including the Directory of American Firms Operating in Foreign Countries and U.S. Security and Exchange Commission data, (2) contacted appropriate Department of Commerce officials, (3) reviewed OPIC’s annual reports that list overseas investors, and (4) asked the firms contacted to identify their major competitors. We attempted to contact the 54 firms identified and successfully interviewed 34. We asked each firm to identify the projects it was involved in over the past 5 years, how these projects were structured, their views on the nature of the risks involved, and how it mitigated the risks. To determine OPIC’s risk management strategy and the steps that OPIC may take, if it is reauthorized, to further reduce portfolio risks while pursuing its objectives, we obtained and reviewed documents on OPIC’s risk assessment policies and financial reports that detailed the condition of OPIC’s portfolio. We also gathered and reviewed information on the risk assessment policies of two World Bank institutions (the Multilateral Investment Guarantee Agency and the International Finance Corporation), organizations that have programs comparable to OPIC’s insurance and finance programs. To support our analysis of these policies, we interviewed OPIC, Treasury, and State Department officials. Furthermore, we interviewed officers of private banks, investment institutions, and political risk insurance companies about steps that OPIC could pursue in reducing the risks associated with its portfolio. To determine the issues that would need to be addressed and the time it would take to phase out OPIC if it is not reauthorized, we reviewed laws and regulations and discussed applicable policies and practices with officials from the Office of Personnel Management, the General Services Administration, and the Office of Management and Budget. In addition, we reviewed our past work on the closure of the Resolution Trust Corporation and interviewed the Federal Deposit Insurance Corporation official responsible for managing the phaseout of the Resolution Trust Corporation. To determine how long it would take for OPIC’s obligations to expire, we obtained documents from OPIC on (1) its current financing and insurance obligations, (2) its insurance policy cancellation rates, and (3) its projections on the duration of its existing portfolio and the resources it would require to manage the portfolio. To assess the reasonableness of these projections, we reestimated OPIC’s analysis using a higher projected phaseout rate. With regard to which agency might be best suited to manage OPIC’s existing portfolio until the obligations expire, we interviewed officials from the Agency for International Development, the Commerce Department, the U.S. Eximbank, the National Economic Council, the Office of Management and Budget, OPIC, the State Department, and the Treasury Department. We also obtained Office of Personnel Management documents showing job classifications at OPIC and two other agencies—the Agency for International Development and the U.S. Eximbank. We conducted our review from January 1997 to July 1997 in accordance with generally accepted government auditing standards. We are sending copies of this report to appropriate congressional committees and the President and Chief Executive Officer of the Overseas Private Investment Corporation. We will also make copies available to other interested parties upon request. This review was done under the direction of JayEtta Z. Hecker, Associate Director. If you or your staff have any questions concerning this report, please contact Ms. Hecker at (202) 512-8984. Major contributors to this report are listed in appendix VII. AES Corporation Coastal Power Energy CalEnergy Company, Inc. CMS Energy Corporation Constellation Power, Inc. Dominion Resources, Inc. Duke Energy International, Inc. Enron International GE Capital Corporation GPU International, Inc. Houston Industries Energy, Inc. Edison Mission Energy Ogden Energy Group, Inc. TECO Power Services Corporation El Paso Energy International The Wing Group Ltd. Co. Adelphia Communications International African Communications Group, Inc. Ameritech Corporation Andrew Corporation BellSouth Corporation Comcast Corporation Chase Enterprises D & E Communications, Inc. GTE Service Corporation Hungarian Telephone & Cable Corporation Lucent Technologies, Inc. MCT of Russia, L.P. Millicom International Cellular, S.A. Motorola, Inc. Radiomovil Digital Americas, Inc. Telecel International, Inc. SBC Communications Inc. US WEST International Holdings, Inc. Legal entities registered in France. No restrictions. No limit. 15 years. Expropriation, war, inconvertibility, breach of government commitments. Domestic German entities. No restrictions. No limit. 15 years.Expropriation, war, inconvertibility, breach of government contracts. Persons and entities existing in Japan. No restrictions. $500 million per project. 15 years.Expropriation, war, inconvertibility, bankruptcy after 2 years of operation. Persons or business beneficial to Canada. No restrictions. No limit. 15 years. Expropriation, war, inconvertibility. Persons or entities domiciled in Italy. Developing countries only. No limit. 15 years. Expropriation, war, inconvertibility, natural catastrophe. Persons and entities carrying on business in United Kingdom. No restrictions. No limit. 15 years extendable to 20. Expropriation, war, inconvertibility, breach of contract by host government. U.S. citizens and entities and foreign entities 95% owned by U.S. interests. Developing countries only. $200 million per project. 20 years. Expropriation, war, inconvertibility, breach of contract by host government. OPIC data as of September 30, 1996. The following are GAO’s comments on OPIC’s letter dated August 6, 1997. 1. The points that OPIC highlights are there own interpretation of our analyses. Several points discussed by OPIC, such as the health of their reserves, filling a commercial void and the impact of its activities on U.S. employment, are not our specific conclusions. Rather, the report provides factual information and our analysis of the trends in private sector investment, the public sector’s role in emerging markets, OPIC’s portfolio and risk management strategy, and issues to be addressed if OPIC were not reauthorized. 2. Information in the report on OPIC’s risk management strategy is not restricted to a discussion of how OPIC limits exposure in any one country or sector. The report also includes a discussion of OPIC’s pre-approval review process and underwriting guidelines. Appendixes IV and V contain information on the application, approval, and monitoring processes for the insurance and finance programs. 3. Although the report notes that the larger finance projects tend to be less risky than smaller projects, we do not agree that the same is necessarily true for OPIC’s insurance projects. Financing involves commercial risks that well-capitalized and experienced private participants have greater influence in mitigating. However, political risk insurance only covers actions taken by governments—actions that are less within the control of the private sector. 4. The report discusses only the recent growth in privately provided political risk insurance. The extent to which the private market capacity for political risk insurance would be affected by changes in demand for property/casualty coverage is not certain. 5. We recognize that OPIC has in some cases pursued the risk mitigation options discussed in the report. However, we believe that the private sector’s current high level of interest in investing in emerging markets has created opportunities for OPIC to further reduce portfolio risk through greater use of the options presented. 6. The report provides OPIC data that show 18 (now 12) cases since 1988 in which OPIC coinsured with the private sector. Although there may be other cases in which the private sector provided insurance to investors also insured by OPIC, this information is more anecdotal and these instances would not represent cases in which OPIC formally sought to coinsure with the private sector. 7. We revised the report to reflect that any loss that was covered by a drawdown in reserves (that are comprised of Treasury securities) would become a budgetary outlay. However, we do not agree that such an outlay should then be compared to the offsetting collections that OPIC receives. If it were necessary for OPIC to redeem Treasury securities, then it would need more cash to cover losses than it would be taking in. 8. The report states that under the Federal Credit Reform Act of 1990, agencies are to estimate and budget for long-term costs of their credit programs on a present value basis. Subsidy costs arise when the estimated program disbursements by the government exceed the estimated payments to the government on a present value basis. The subsidy cost data in our report are based on OPIC’s reported estimates. In order to show lower subsidy costs, the costs must be reestimated, with key factors such as the credit risk of the borrowing country showing improvement. OPIC identified $72 million in subsidy costs for fiscal year 1997 programs. With regard to OPIC’s statement about its interest earnings, only those earnings properly allocable to its credit program are relevant to the discussion of its credit subsidy estimates. Under credit reform requirements, interest earned on credit-related reserves is required to be included in estimating the subsidy cost. 9. We modified the report to include this information. 10. We modified the report to include this information. Tom Zingale The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed: (1) trends in private sector investment in developing markets and the role of the public sector in these markets; (2) the Overseas Private Investment Corporation's (OPIC) risk management strategy and the steps that OPIC may take, if it is reauthorized, to further reduce portfolio risks while pursuing U.S. foreign policy objectives; and (3) the issues to be addressed and the time it would take to phase out OPIC if it is not reauthorized. GAO noted that: (1) improvements in economic and political conditions in many developing countries have led to a reduction in investors' perception of risk and a dramatic increase in private investment in these markets since the late 1980s; (2) however, according to most of the 34 firms GAO surveyed, risky markets still exist where the private sector stated they are reluctant to invest or operate without public guarantees or insurance; (3) in high-risk markets, U.S. investors GAO spoke with have sought public finance or insurance from OPIC, the Export-Import Bank, or other public institutions; (4) in risky markets where OPIC services are not available, U.S. investors tended to use other public support; (5) if foreign export credit agencies provide the support, U.S. suppliers could be excluded; (6) OPIC has historically been self-sustaining by generating revenues from its insurance and finance programs to cover actual losses; (7) OPIC's risk mitigation strategy includes maintaining reserves, limiting its exposure in any one country, requiring pre-approval reviews, and establishing underwriting guidelines; (8) nonetheless, the private sector's willingness to have greater involvement in some emerging markets has created opportunities for OPIC to further reduce portfolio risks, while continuing to pursue U.S. foreign policy objectives; (9) possible ways for OPIC to minimize the risks associated with its insurance portfolio include obtaining to a greater extent reinsurance from or coinsuring with other insurance providers, insuring less than 90 percent of the value of each investment, and offering insurance at less than a 20-year term; (10) while OPIC officials agree that these are good risk mitigation techniques, they cautioned that these strategies should be employed on a case-by-case basis so as to enable OPIC to continue to meet U.S. foreign policy objectives and the needs of its customers; (11) if Congress decides not to reauthorize OPIC, an orderly phaseout of the agency would require specific legislative action; (12) an important issue that would need to be addressed is who would manage the existing portfolio; (13) also, given that OPIC issues insurance policies with 20-year coverage, it could take up to 20 years for OPIC's existing obligations to expire; (14) the government has the option to sell OPIC's portfolio to the private sector before its expiration; (15) however, a recent study suggests that disposal of OPIC's assets could only be accomplished at a discounted price; and (16) if the risk of the remaining portfolio decreases over time, opportunities for asset disposal may arise. |
Alaska’s location makes the United States an Arctic nation. Alaska has extensive maritime access, with over 6,000 miles of coastline, bordered by the Beaufort, Chukchi, and Bering Seas; the Arctic Ocean; the Gulf of Alaska; and the Bering Strait, whose jurisdiction is divided between the United States and Russia. See figure 1. The Bering Strait provides the only access to the Arctic Ocean from the Pacific Ocean, which lies south of the Aleutian Islands. Federal waters typically extend from 3 to 200 nautical miles offshore, and state waters for coastal states such as Alaska generally extend from the state coastline up to 3 nautical miles offshore. Within the complex array of federal and state maritime boundaries, all navigable waters of the United States are subject to some type of federal jurisdiction. There is evidence that the Arctic sea ice cover has diminished, which has increased interest in shipping into and through the U.S. Arctic during the summer months. As seasonal sea ice diminishes, the time and extent to which vessel traffic can use Arctic waters increases. There are two types of shipping that occur in the U.S. Arctic: “destinational” and “trans-Arctic.” Currently, most shipping in the U.S. Arctic is destinational. Destinational shipping refers to shipping into or out of the Arctic, mainly in support of commercial activity. It includes, for example, shipping that supports seasonal oil-drilling operations in U.S. Arctic waters and tugs and barges that provide diesel oil and other commodities to remote Alaskan villages. Destinational shipping to the U.S. Arctic coast through the Bering Strait usually begins in July and ends by mid-October. Trans-Arctic shipping refers to use of the Arctic as a route between two destinations outside of the Arctic. There are two primary trans-Arctic sea routes. The Northwest Passage follows the northern coasts of Alaska and Canada, connecting the east coasts of Canada and Asia. The Northern Sea Route follows the northern border of Russia, connecting Asia and Europe. Increased trans-Arctic use of the Northern Sea Route could affect the U.S. Arctic because the eastern entry/exit point passes through the Bering Strait. According to USCG data, vessel transits through the Bering Strait, for both northbound and southbound destinational and trans-Arctic traffic, ranged from 217 to 484 transits annually from 2008 to 2013. See figure 2. Alaska is the largest U.S. state, but with a small population, the lowest population density in the country, and large travel distances. See figure 3. In addition, Alaska’s geography is diverse with mountainous terrains, and areas of the state that are completely iced-in most of the year. Consequently, Alaska’s transportation systems are unique compared to those of the contiguous states. Highway and rail infrastructure is primarily located in the south central region of the state, and many cities do not have highway connections to the rest of the state. There is one rail line running 500 miles from the south central region of the state to the interior (from Seward and Whittier to Fairbanks, Alaska). Many Alaskan cities and villages are accessible only by air or water. Consequently, there are a number of general aviation airports and small ports and harbors, and the dominant modes of transportation are air service and barge service along coastal and inland waterways. See figure 4. There are a wide variety of federal, state, local, and other stakeholders that play a role in planning, developing, and managing U.S. Arctic maritime infrastructure. Table 1 shows some key federal agencies with Arctic maritime-infrastructure responsibilities. There are also a variety of non-federal stakeholders with responsibilities in planning, developing, and managing Arctic maritime infrastructure including international entities, the state of Alaska, local governments, Alaska Native organizations, and non-profits that work with federal agencies to plan and develop maritime infrastructure. For additional information on Arctic stakeholders and maritime infrastructure components, see appendix III. Federal agencies’ involvement in planning and developing Arctic maritime infrastructure is guided by several national policies. The Administration issued the Arctic Region Policy in 2009, which addresses issues related to national security, international governance, international scientific cooperation, economic issues, environmental protection, and maritime transportation in the Arctic region. It specified that priorities for maritime transportation include safe navigation, protection of maritime commerce, and protection of the environment. It recognized the need for infrastructure to support shipping activity, and search and rescue capabilities, among others. The White House National Ocean Council issued the National Ocean Policy Implementation Plan in April 2013. While this plan is broader than the Arctic region, it specifically identifies the need for improvements to communications, environmental response to marine pollution and oil spills, the ability to observe and forecast sea- ice, and the accuracy of charts and maps of the region. In May 2013, the White House issued a National Strategy for the Arctic Region. This document was created to articulate the strategic priorities for the Arctic region and to position the United States to meet the challenges and opportunities that lie ahead, such as evolving the Arctic infrastructure and charting and mapping the Arctic region’s oceans and waterways. It prioritizes and integrates the work of federal agencies with activities that are already under way in the state of Alaska and at the international level. An implementation plan for this document was released in January 2014 that sets forth the methodology, process, and approach for executing the strategy, including a framework to guide federal activities in the construction, maintenance, and improvement of ports and other Arctic infrastructure. A Presidential Directive in the U.S. Ocean Action Plan, issued in 2004, created the Committee on the Marine Transportation System (CMTS), chaired by DOT. The CMTS is supported by a sub-cabinet policy advisory body, the Coordinating Board, a dedicated staff body, the Executive Secretariat, and Integrated Action Teams. The Arctic Integrated Action Team (Arctic IAT) is led by the Coast Guard, Maritime Administration (MARAD), and NOAA. In 2012, the Coast Guard and Maritime Transportation Act of 2012 established the CMTS in statute and requires CMTS to serve as a federal interagency coordinating committee to (1) assess the adequacy of the marine transportation system (MTS), (2) promote the integration of the MTS with other modes of transportation and other uses of the marine environment, and (3) coordinate and make recommendations with regard to federal policies that affect the MTS. In 2010, Congress directed the CMTS to coordinate the establishment of domestic transportation polices in the Arctic to ensure safe and secure maritime shipping and the implementation of the Arctic Council’s Arctic Marine Shipping Assessment Report. In response in 2013, CMTS published the U.S. Arctic Marine Transportation System: Overview and Priorities for Action (Arctic Report), developed by the Arctic IAT and subject to extensive interagency review, which reviewed maritime traffic in the U.S. Arctic, current conditions of U.S. Arctic maritime infrastructure, and current Arctic MTS policies, among other things. Diminishing sea ice has contributed to promising prospects for oil and gas in the U.S. Arctic and created growth potential for commercial shipping on trans-Arctic routes that are geographically shorter than current shipping routes through the Panama or Suez Canals. However, industry representatives we spoke with from five key industries— commercial shipping, cruises, commercial fishing, oil, and mining—stated that their level of commercial activity in the U.S. Arctic is expected to remain limited over the next 10 years due to a variety of contributing factors. Factors included general challenges related to operating in the Arctic such as geography, extreme weather, and hard-to-predict sea ice movement,and other industry-specific factors. Table 2 provides some examples of contributing factors cited by industry representatives. For decades destinational shippers have provided transport services such as fuel and supplies for coastal villages north of the Bering Strait, hauled construction materials and equipment to support local development, and exported zinc-lead ore from the Red Dog Mine during the summer months. To date, the diminished sea ice has not greatly increased the volume of destinational shipping activity, with the exception of an increase in vessels and barge traffic in 2012 to support an oil company’s exploration during that summer’s drilling season. One shipping company representative told us that in 2013, media sources had credited a Chinese container shipping company with the first container ship transit of the Northern Sea Route that year, but the ship was actually a smaller multi-purpose ship, not a container ship vessel that would be used for container cargo transportation. however, other companies are interested in the route’s potential. Tanker companies have not used the Northwest Passage for trans- Arctic shipping. Shipping industry representatives we spoke with highlighted a number of contributing factors that can affect plans for trans-Arctic shipping, including higher costs, specialized vessel requirements, and the lack of reliability in terms of weather and ice—particularly the sea ice presence in the Northwest Passage. First, using Arctic routes would incur additional costs that may not outweigh the benefits. For example, the shipping industry uses a network of ports, but there is not a U.S. port in the network north of the Bering Strait. A representative from a major container shipping company stated that even if a port were built, since the passages are not open year-round, it would require companies to modify their schedules for those months the Arctic is open, which could be expensive and disruptive. Second, transiting Arctic routes would require ice-strengthened vessels, which have less shipping capacity due to increased weight. In particular, the shallower waters along the Northwest Passage can only accommodate a smaller vessel, which may not present the necessary economies of scale to warrant shipping companies modifying their schedules to use an Arctic route. Finally, shipping representatives told us that the consistent presence of sea ice, bad visibility, high winds, and uncharted waters all raise the risk of transiting the Arctic. A container ship company representative stated that the container-shipping industry is reliant on strict schedules, and the unpredictability of sea ice and weather makes the trans-Arctic passages less reliable. A tanker-shipping industry representative added that ship captains are not willing to take vessels loaded with oil through uncharted waters, such as those in much of the Arctic. Similarly, a recent study published by MARAD stated that the availability of an Arctic route seems unlikely over the next 10 to 20 years due to uncertainties surrounding the rate at which sea ice will diminish; the lack of U.S. trade lanes that would provide sufficiently shorter sailing distances to make an Arctic route relevant; and the investments needed for escort vessels, staging ports, and channel preparations. A handful of cruises each year sail in the U.S. Arctic, and the number is expected to remain relatively stable through the next 10 years. Cruise ships that sail above the Bering Strait in the U.S. Arctic are a niche segment of the adventure cruise market. According to representatives from an Alaska cruise association, only one of its members currently uses the Northwest Passage once or twice per year with small cruise ships that carry fewer than 200 passengers. By comparison, mainstream cruise vessels, which operate in southeast Alaska, can carry more than 1,000 passengers each. Cruise industry representatives we spoke with expect cruise tourism in the Northwest Passage to remain limited to adventure cruises for the next 10 to 15 years. The representatives did not believe that mainstream cruise companies would offer U.S. Arctic tours in the foreseeable future or that additional charting or mapping, icebreakers, or search and rescue capabilities in the Arctic would increase cruise traffic in the Northwest Passage. According to representatives from a cruise association, the primary reason for the limited number of Arctic cruises is a lack of demand from the mainstream cruise consumer base. They noted that approximately 10 days are required to sail the long distances in the U.S. Arctic, often with no variation in scenery and no points of interest for which to disembark. Commercial fishing is currently prohibited in U.S. waters north of the Bering Strait under a federal Arctic Fishery Management Plan for the region implemented in a National Marine Fisheries Service final rule. The 2009 final rule implementing the North Pacific Fishery Management Council’s Arctic Fishery Management Plan places a ban on all commercial fishing in specified U.S. waters north of the Bering Strait in the U.S. exclusive economic zone, which includes the Beaufort and Chukchi Seas, “until sufficient information is available to enable a sustainable commercial fishery to proceed.” Two commercial-fishing industry representatives we spoke with said that it is not certain when, if ever, federal or state waters will open to commercial fishing. There is little industry interest in establishing commercial fisheries north of the Bering Strait until researchers are able to determine the impact of commercial fishing. So far, the industry representatives have not seen a big move of fish stock north due to diminished sea ice, which, in their view, would be a reason to open those waters. According to industry representatives, no increases in commercial fishing are expected in the next 10 years. Recently, oil companies have invested in initial exploration for offshore oil resources in the U.S. Arctic. Three major oil companies that hold offshore leases in the Beaufort and Chukchi Seas are in the exploration phase of their sites and may still be decades away from production, according to industry representatives. One company began drilling two exploratory wells in 2012, with 25 vessels supporting these drilling operations, which increased the destinational maritime traffic that season. However several well-publicized incidents halted operations. None of the three companies chose to conduct exploratory offshore drilling for the 2013 drilling season, but instead conducted site-surveying activities such as “bathymetric” mapping. In the next 10 years, oil exploration activity is expected to be limited and the impact on the levels of maritime traffic appears uncertain. Representatives from two companies said that they had not decided when they will resume exploration and that they are awaiting DOI’s proposed rule for Alaska Outer Continental Shelf drilling before determining their plans for the 2014 drilling season. A third company recently decided to stop its exploration program for Alaska in 2014 citing unresolved legal issues stemming from a January 2014 decision of the U.S. Court of Appeals for the Ninth Circuit, affecting proposed DOI oil and gas leases in the Chukchi Sea off the northwest coast of Alaska, that, among other things, remanded the case to the U.S. District Court for the District of Alaska for further proceedings. Several factors create uncertainty about how future oil exploration activities may affect maritime traffic. First, it is unknown when and whether U.S. Arctic offshore oil production will begin. One industry representative we spoke with estimated 10 years or more until oil production can begin. The production stage could increase seasonal, destinational traffic due to the increase in support vessels. Second, even if companies eventually begin producing oil in the U.S. Arctic, an industry association and company representatives stated that the oil would likely be transported through a sub-sea pipeline to land where it would then connect to the Trans-Alaska Pipeline System, rather than being transported by tanker. According to an oil-industry association representative, transporting the oil by tanker is not the preferred option because it presents a greater risk for spills because of floating ice, shallow waters, and potential collisions with other vessels. Finally, uncertainty regarding oil prices and variable industry trends also can affect the oil industry activity in the U.S. Arctic. For oil companies, the U.S. Arctic presents one potential oil production opportunity that must be weighed against other potential sites. According to an oil industry association representative, oil companies focus on those areas and production sites that provide the best business opportunities. Currently the costs of developing the offshore oil fields in the Arctic are not as competitive as other investment opportunities emerging in shale oil fields across the United States. The Red Dog Mine, which opened in 1989 and is located near Kotzebue, is currently the only mine operating in the U.S. Arctic. The Red Dog Mine is serviced by a port facility and a road known as the DeLong Mountain Transportation System. The port is accessible for shipping a few months each year, so the mine stores its zinc ore at the DeLong facility and typically ships it to customers through the Bering Strait from July to October each year. Currently there is one new mine being planned in the U.S. Arctic, and one under consideration. Plans exist to develop a copper mine in the Ambler Mining District, which is located 180 miles southeast of the Red Dog Mine, but production would not begin for at least 6 years, and the method for transporting the copper ore has not been determined. In addition, an Alaska Native regional corporation is considering development of a coalmine on the North Slope and is currently assessing a location for a potential deepwater port to transport the coal. The effect of the planned mines on the levels of maritime traffic appears uncertain in the next 10 years. Mineral deposits are in remote locations and would require the development of significant infrastructure, such as roads capable of carrying freight, rail, or a deepwater port to transport the ore. Mining companies, such as those in the Ambler Mining District, have considered using the DeLong Terminal to ship ore, but have not done so due to its shallow depth. While the port may have sufficient depth to ship Red Dog Mine’s zinc ore, a deepwater port would be needed for heavier copper ore. According to the representative, mining companies would be interested in using ports to export extracted minerals, but do not plan to develop port infrastructure on their own. Federal and state government entities have taken some actions to support the existing Arctic maritime infrastructure and plan for future maritime infrastructure investments. Table 3 below describes the current status of existing maritime infrastructure to support the Arctic MTS. Some government actions help to address the factors that some industry representatives identified as limiting their current and expected activity in U.S. Arctic. For example, the USACE, in collaboration with the State of Alaska, has taken steps to study the development of an Arctic deepwater port, a factor identified by mining representatives as contributing to the industry’s limited activity. Given the level of interest in developing the Arctic, we reviewed efforts by the various government entities to plan and develop maritime infrastructure such as ports; aids to navigation; polar icebreaking; mapping, charting, and weather information; and port connectors, such as rail and roads. Currently there are studies under way to develop an Arctic deepwater port in northern Alaska. The USACE and the Alaska Department of Transportation and Public Facilities have reported on this issue and are currently conducting an additional study to identify potential port sites in the U.S. Arctic region. In addition to conducting studies, the USACE also conducts dredging, for example at the Port of Nome, with a 22-foot deep outer harbor and a 10-foot deep small boat harbor, which supports vessels that service commercial and community needs. The state of Alaska has also taken some actions in support of planning and developing port infrastructure in the U.S. Arctic. The Alaska Industrial Development and Export Authority (AIDEA), a corporate agency related to the state government, provides project financing for Alaska businesses. For example, it financed the construction of the approximately $260 million DeLong Mountain Transportation System for the Red Dog Mine near Kotzebue. AIDEA, in conjunction with an Alaska Native Corporation, has also funded the second phase of a study to determine the feasibility of developing Cape Thompson, located on the North Slope, as a port for shipping extracted minerals and gas. Officials we spoke with from state and local government suggested that a U.S. Arctic deepwater port is needed to support a potential increase in maritime activities in the Arctic. According to these government officials, an Arctic deepwater port could potentially serve as a trans-shipment hub for companies using Arctic routes or could host a permanent USCG presence in the Arctic, allowing the USCG to better meet its missions for search and rescue, oil spill response, and maritime law enforcement. While there was some agreement about the usefulness of a deepwater port to support USCG efforts, industry representatives we spoke with had varying views about such a port’s potential for commercial purposes. Shipping-industry representatives, for example, indicated that they would not use a U.S. Arctic deepwater port for trans-Arctic shipping because of high fuel costs or the fact that such a port would not be connected with existing port networks or any port connectors. The USCG is conducting a Waterway Analysis and Management System assessment along the western and northern coasts of Alaska in order to understand the extent and type of aids to navigation needed; however, officials we spoke with indicated that there were no current plans to expand deployment of aids to navigation in the Arctic region. According to federal government sources, there are a number of challenges to such deployment in the Arctic. First, hydrographic surveying and mapping must be completed before the USCG can install aids to navigation in an area, and as noted in table 3, a large amount of the U.S. Arctic remains uncharted or mapped.challenging to operate north of the Bering Strait due to the freeze-thaw cycle and likelihood of sustaining damage from floating sea ice. The USCG is currently in the preliminary phase of a new polar-icebreaker acquisition project including development of a formal mission need statement, a concept of operations, and an operational requirements document. million in fiscal year 2013 and $2 million in fiscal year 2014. These sums are a fraction of USCG’s cost estimates, which range from $850 million to $1 billion for one new icebreaker that USCG plans to put into service in the early 2020s. USCG budget requests for this pre-acquisition work were $8 Although multiple studies have pointed to a gap in the nation’s icebreaking capabilities, due to limited resources, the USCG balances icebreaking needs against a variety of considerations. The USCG operates the nation’s two functioning icebreakers, which are used in the Arctic for emergency response, research assistance, and patrols. In early 2012, the U.S. Coast Guard Cutter (USCGC) Healy escorted a Russian fuel tanker to Nome to provide the city with an unprecedented winter fuel delivery. The Russian tanker was the city’s only option after its final fall fuel shipment was cancelled due to a large storm in the Bering Sea. The USCG’s other icebreaker, the USCGC Polar Star was recently reactivated and conducted icebreaking sea trials in the U.S. Arctic during summer 2013 to make sure it was functioning properly after 3 years of extensive repairs. Due to the limited number of icebreakers, the USCG determines where it sends its icebreakers based on risk assessments. Ice operations are a USCG statutory mission area. In response to increasing demand, NOAA has taken several steps to improve mapping, charting, and weather information for the U.S. Arctic. In February 2013, NOAA released its plan to create new nautical charts in parts of the U.S. Arctic. In addition, NOAA is working in partnership with the Alaska Ocean Observing System to develop an Alaska Sea Ice Atlas, which would be a weekly web-based product providing site-specific and season-specific information on sea ice in Alaskan waters, including anticipated season lengths and navigation opening dates. According to NOAA, a prototype will be available in 2014. In addition to NOAA’s charting efforts, the state of Alaska is undertaking a charting and mapping initiative. The state’s Department of Natural Resources is overseeing a Statewide Digital Mapping Initiative, which is developing a digital base map of the state, including the U.S. Arctic. The state dedicated $3 million for the mapping initiative in the fiscal year 2014 enacted budget. According to NOAA officials, mapping and charting information for the U.S. Arctic has generally not been an issue until recently, since historically the Arctic has been ice-locked and closed to substantial maritime activity. Although a majority of industry representatives we spoke with did not identify a need for updated nautical charts, officials from NOAA stated that with increased accessibility to the Arctic, the agency has observed an increasing demand for updated charts among multiple users, including other federal agencies. Furthermore, officials noted similar increased demand for weather and sea ice information. Weather forecasts in the Arctic are not as accurate as those for the rest of the United States, due to fewer observations and forecasting models. To meet this demand, additional observations and forecasting models are necessary to improve weather and sea ice forecasts in the challenging Arctic environment. Plans for developing and investing in U.S. Arctic port connectors are fairly limited. At the federal level, there are no specific plans to develop connecting roads or railways to existing ports or harbors, although the Federal Highway Administration (FHWA) provides formula grants to states, including Alaska, for state-highway investment. However, the state of Alaska has created the Roads to Resources initiative to support the state’s priority to develop its natural resources by providing needed infrastructure to transport minerals. For fiscal year 2014, $8.5 million was appropriated and the Governor has proposed an additional $8.5 million in the fiscal year 2015 budget toward an all-year access road to the Ambler Mining District, according to Alaska officials. Geographic and construction challenges can affect the development of infrastructure in the Arctic, challenges that often result in more complex and costly design and construction. According to engineers we spoke with, although the engineering capabilities and technology exist, engineers in Alaska have to account for unique geographic challenges, which include the following. Permafrost: In northern Alaska, engineers have to address melting permafrost—the thawing of the soils underneath structures and roads. The melting of permafrost can be mitigated by using special designs, but at a high cost. For example, in Nome, as shown in figure 5, a hospital was built on a special foundation above the ground so that the building’s warmth would not melt the permafrost underneath. Coastal erosion: Coastal erosion is a result of stronger waves that are occurring at an accelerated rate with the diminishing sea ice. Erosion also increases at the shoreline as a result of permafrost melt and could contribute to higher waves around ports and affect pilings or other port infrastructure. These challenges can be mitigated by efforts such as strengthening the shoreline. See figure 5. As with roads and buildings, there are ways to mitigate the Arctic conditions, but they are costly. There are also substantial construction challenges that could affect Arctic maritime infrastructure development, including the following. Construction materials and equipment: According to USACE officials, construction materials and equipment are typically not readily available when and where they are needed and often must be shipped great distances. In most cases, materials and equipment must be transported by sea during a brief summer window with construction occurring in the same window or slightly beyond. For example, according to one engineer, gravel used for road construction and building foundations is often not available in the area of the construction. According to a state official, in many places there are no or limited supplies of local gravel, and the cost of transporting the gravel to the site could be greater than the cost of gravel itself. Skilled construction labor force: Villages may be able to provide some local labor, but skilled construction labor is usually in short supply in smaller villages and has to be brought in from other locations. According to USACE officials, one unique construction labor issue is that the local labor force in Alaska may have to hunt or perform other subsistence activities during the warmer summer season to survive the winter. Bringing in outside workers drives up the cost of a project because, in the absence of existing housing facilities, temporary camps are needed. Short construction season: Alaska has an approximately 4-month construction season, along with extreme temperature ranges. While some types of construction can be done in the winter, such as excavating in permafrost and bogs, other types of construction cannot, such as erecting steel structures. Largely due to the above factors, maritime infrastructure development in the Arctic is generally considered to be more expensive than similar construction in the continental United States. During our interviews with Arctic stakeholders with expertise in engineering and construction, we heard estimates of higher costs for Arctic maritime infrastructure components that ranged from 15 percent to 500 percent higher than for infrastructure constructed in the contiguous states. However, according to USACE officials, data do not exist to show specifically how much more expensive Arctic construction would be for different types of infrastructure projects. For an accurate civil construction cost estimate in Alaska, for example, the USACE would typically develop a customized estimate based on the infrastructure needed. This type of estimate depends on the specifics of the project’s scope, including project design, location, availability of qualified labor, time of construction, and other factors. In July 2013, the federal interagency CMTS published the U.S. Arctic Marine Transportation System: Overview and Priorities for Action (Arctic Report), which identified and prioritized actions for developing Arctic maritime infrastructure and identified the lead agency for each of those actions, among other things. According to CMTS officials, it is the first systematic, interagency and publicly reviewed, sector-specific plan for federal U.S. Arctic maritime transportation policies, programs, and services. In addition to a summary of the myriad of federal Arctic reports, the Arctic Report includes an Arctic MTS Improvement Plan, which provides actions and time frames for federal agencies to invest in Arctic maritime infrastructure. Specifically the Arctic Report prioritized two broad categories of MTS infrastructure—information infrastructure, such as mapping and charting, and response services, such as search and rescue—to be addressed by agencies in the near term.were selected as near-term priorities because, according to the Arctic Report, they: were identified as requirements by expert reports; can be achieved with existing resources; were deemed to be regionally significant; are interdependent, building on each other to develop the Arctic MTS; would help establish a foundation for sustainable federal Arctic can immediately increase safety for the mariner; and support and safe operations. Within the information infrastructure and response services categories, the Arctic Report recommended over 70 near-term actions to be addressed by 2015 by select member agencies: USCG, Department of Defense (jointly with USCG), and NOAA. According to the CMTS, the remaining three categories of MTS infrastructure development priorities identified in the Arctic Report require longer lead times and more investment to be adequately addressed. Development of the recommended infrastructure priorities was an interagency effort from nine CMTS member agencies, including USCG, NOAA, USACE, and BOEM. Officials from the key federal agencies within the scope of this report indicated that they had suggested actions based on their current program elements. For example, BOEM included currently funded environmental program studies, such as ice engineering studies, as near-term actions in the information infrastructure MTS category. According to CMTS officials, they are currently developing formalized plans to regularly monitor the extent to which agencies are addressing the Arctic Report’s recommended actions. In addition, officials plan to monitor the extent to which recommended actions are being implemented consistent with the National Strategy for the Arctic Region. We have previously found that developing mechanisms to monitor the results of collaborative efforts is a key practice that can help to enhance and sustain collaboration among federal agencies. Furthermore, monitoring is particularly important where, as here, the CMTS is not vested with the authority to require agencies to implement the identified actions or activities. While regular monitoring does not provide resources to address the MTS needs of the Arctic, it can provide an efficient way to keep all stakeholders apprised of potential changes and help them to be more responsive to any adjustments to priorities or recommended actions in the Arctic Report. Implementation of the recommended actions identified in the Arctic Report is at the discretion of each federal agency and according to CMTS officials, no additional funding or resources were provided to address the priorities. Recommended actions will depend on, among other things, individual agency resources and available appropriations. For example, USACE officials reported that although the actions included in the Arctic Report are largely consistent with those identified in their planning processes, the agency would only budget for those that reflect existing USACE priorities and projects under consideration, such as the Arctic deep-draft port study. The Arctic Report also identifies several priorities without including a specific time frame for agency action; these priorities are noted as “recommended but not resourced,” meaning agencies may not have planned or budgeted for them. Therefore, CMTS and its member agencies will only know the status of all recommended actions if they are actively monitored and reported on. CMTS officials also noted that the Arctic Report is a “living document” that should be updated as needed to reflect agencies’ progress addressing recommended actions and to incorporate information from other Arctic planning documents currently in development. There are a number of ongoing planning efforts and critical planning documents in development that could affect identified Arctic priorities and the planning and development of U.S. Arctic maritime infrastructure. For example, an Alaska legislative commission is currently developing a document that will outline the State of Alaska’s overarching Arctic priorities. That document could lead to changes to the Arctic Report priorities or recommended actions, and consequently, federal agencies’ efforts to address those actions. Since CMTS is in the early stages of developing a process for agency monitoring, officials may want to consider identifying the type of information to be monitored and the timing and frequency of the monitoring. For example, tracking such details as to why an agency may not be addressing a recommended action or why an agency may be experiencing delays or any changes in an agencies’ commitment to addressing a recommended action. The reason for a delay or not addressing a recommended action could be particularly important given that some recommended actions being addressed by agencies may affect other agencies’ recommended actions. Furthermore, since there are over 70 recommended agency actions scheduled to be addressed in the next 2 years, the CMTS may want to consider more frequent monitoring of agencies’ progress in order to keep the Arctic Report effectively updated in the near term. According to CMTS officials, they will monitor and report on progress made to improve the Arctic MTS infrastructure. Economic opportunities in the U.S. Arctic are considered to be key drivers for the development of Arctic maritime transportation infrastructure. Although we found commercial industries currently have limited activity in the U.S. Arctic and similarly limited plans for activity over the next 10 years, federal agencies are taking steps to plan and develop maritime infrastructure that could help to address some of the underlying factors that contribute to limited development. For example, plans are moving forward to study potential sites for a U.S. Arctic deepwater port— infrastructure that some have cited as desirable for both potential commercial activity and to enhance maritime safety. CMTS, the federal interagency coordinating committee tasked with addressing various Arctic maritime infrastructure issues, includes member agencies with differing missions and objectives. The identification, prioritization and vetting of Arctic maritime infrastructure plans and near term actions for federal agencies were important steps to addressing Arctic maritime infrastructure needs. Given the level of uncertainty around the development of the Arctic and the challenges and high costs to developing Arctic maritime infrastructure, it is important that federal agencies with responsibility for infrastructure components incorporate Arctic maritime infrastructure priorities and identified actions into their agency’s overall planning and investment decisions. Furthermore, since implementing recommended actions is at the discretion of the agencies and the Arctic Report is considered a “living document” with potentially changing priorities and actions, monitoring agencies’ progress in addressing recommended actions is an important step in planning, developing, and investing in Arctic maritime infrastructure. Effective monitoring will help ensure that CMTS member agencies continue to address Arctic maritime infrastructure as a coordinated effort with a shared understanding of current priorities and actions needed. We provided a draft of our report to USACE, USCG, NOAA, DOT, and DOI for their review and comment. USCG, NOAA, DOT, and DOI provided written technical comments, which we incorporated into the report as appropriate. USACE did not have any comments on this report. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Secretary of Defense, the Secretary of Homeland Security, the Secretary of Commerce, the Secretary of Transportation, the Secretary of the Interior, appropriate congressional committees, and other interested parties. In addition, the report will be available at no charge on the GAO Website at http://www.gao.gov. If you have any questions about this report, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix IV. The objectives of this report are to (1) identify what is known about the extent of commercial maritime activity in the U.S. Arctic and anticipated activity in the next 10 years; (2) identify actions government entities have taken in support of planning and developing U.S. Arctic maritime infrastructure and unique challenges that may exist; and (3) describe federal interagency efforts that have been taken to identify and prioritize Arctic maritime infrastructure investments. For this report we focused on maritime infrastructure on the waters and land along the western and northern coasts of Alaska, in particular areas north of the Bering Strait because of the diminishing seasonal sea ice in these areas. Federal government agencies use multiple definitions for the Arctic, as there is no singular definition. We used the term Arctic to mean areas above the Arctic Circle and the term U.S. Arctic to discuss those areas that are U.S. waters and land, as defined by the Arctic Research and Policy Act of 1984, which includes “all United States and foreign territory north of the Arctic Circle and all United States territory north and west of the boundary formed by the Porcupine, Kuskokwim, and Yukon Rivers in Alaska; all contiguous seas, including the Arctic Ocean and the Beaufort, Bering, and Chukchi Seas; and the Aleutian chain.” We focused on the commercial-shipping, cruise, commercial-fishing, oil, and mining industries. The maritime infrastructure included in our review is the marine transportation system (ports, navigable waterways, and port connectors, such as roads and railways), aids to navigation (e.g., buoys and beacons), mapping and charting, marine weather and sea ice forecasts, and polar icebreakers. To obtain information on all of our objectives we reviewed program documentation and written reports and interviewed knowledgeable officials from selected federal entities, state of Alaska entities, local governments, industry associations, companies, Alaska Native organizations, Alaska Native corporations, academic and research institutions, engineers, financial and insurance services, and environmental groups as shown in table 4. We selected the stakeholders based on relevant published literature, our previous work, stakeholders’ recognition and affiliation with private industry, and recommendations from the stakeholders interviewed. The results of these interviews are not generalizable, but do provide insights regarding current and planned maritime activities in the U.S. Arctic. To describe what is known about commercial activity in the U.S. Arctic, we interviewed companies and industry trade associations from the commercial-shipping, cruise, commercial-fishing, oil, and mining industries. We selected these industries based on background research from key Arctic infrastructure reports from the Congressional Research Service and the Committee on the Marine Transportation System. Information we collected included specific industry practices, such as the use of Arctic routes and ports, and the extent to which industries plan to utilize Arctic routes and increase their activity over the next 10 years particularly north of the Bering Strait. To describe actions federal, state, and local government entities have taken in support of the U.S. Arctic marine transportation system, we interviewed and collected documentation from 7 federal, 10 state, and 6 local entities to identify infrastructure within the scope of responsibility for each entity. We also identified specific efforts each entity has undertaken related to mapping, ports, port connectors (e.g., roads and rail), weather, polar icebreakers, and aids to navigation. To describe unique challenges that may exist, we conducted a site visit to Alaska and interviewed stakeholders. We conducted site visits to Nome, Barrow, and Anchorage, Alaska, from July 21, 2013, to July 27, 2013. We chose these sites by applying the following criteria: geographic location in the state, number of interviews to be conducted, infrastructure activity, cultural considerations, and recommendations from stakeholders. During the site visits, we spoke with federal, state, local, Alaska Native, and private sector stakeholders; toured the ports of Nome and Anchorage; and viewed barge-landing areas in Barrow. We also documented existing infrastructure, the physical environment, and challenges to developing infrastructure in each location. In addition to the site visits, we spoke with engineers and financial and insurance representatives. The information we gathered from these interviews include relative costs of constructing infrastructure in the Arctic and considerations for cost calculation. To describe federal interagency efforts that have been taken to identify and prioritize Arctic maritime infrastructure investments, we reviewed a key federal government report and prior GAO reports on several topics including our body of work on Arctic issues and interagency collaboration.CMTS, BOEM and BSEE, the USACE, NOAA, and the USCG to understand the status of the near-term actions identified in the CMTS Arctic Report and how, if at all, those actions fit within each agency’s strategic plans. In addition, we interviewed knowledgeable officials from We conducted this performance audit from February 2013 through March 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Scientific research and projections vary, but there is consensus that Arctic sea ice is diminishing and will continue to do so through the 21st century. According to the U.S. National Snow and Ice Data Center, the September ice extent in the Arctic has seen a downward trend with a 13.7 percent decrease per decade since 1979. The center also reported that the 2013 Arctic sea-ice extent decreased to 2.0 million square miles—the sixth lowest in the satellite record. See figure 6. NOAA officials stated that sea ice volume (area times thickness) is now estimated at 25 percent of its 1980 amount. Predictions by researchers of when there will be an ice- diminished Arctic Ocean in the summer range from sometime in the next 10 years to the year 2100, with most estimates in the range of 20 to 40 years. U.S. Army Corps of Engineers (USACE) is the lead federal agency responsible for maintaining and improving navigable waterways in the United States (e.g., to provide dredging of port harbors). Among USACE’s responsibilities, the USACE assists federal, state, local, and native entities with planning, engineering, and construction of projects. USACE is the key federal agency in constructing, operating and maintaining harbors, shipping channels, and inland waterways, as well as locks, dams, and other navigation structures such as jetties. The U.S. Coast Guard (USCG) is a multi-mission, maritime military service within the Department of Homeland Security that has responsibilities including maritime safety, security, environmental protection, and national defense, among other missions. Ice operations and aids to navigation are two of its 11 statutory mission areas. USCG plays a significant role in search and rescue efforts, emergency response, and maritime law enforcement. National Oceanic and Atmospheric Administration provides weather and sea ice forecasts, nautical charts, and oceanographic information for marine transportation, accurate-positioning infrastructure, real-time and forecast models for navigation and oil-spill response, and satellite search and rescue support services for the U.S. Exclusive Economic Zone, which includes areas in the U.S. Arctic. Department of Transportation and its respective federal administrations—Federal Highway Administration and Federal Railroad Administration—provide some support for infrastructure that is used as connectors to ports. The Maritime Administration provides technical assistance to port authorities for project planning, design, and construction. There is also a variety of non-federal stakeholders involved with Arctic maritime infrastructure including international entities, the State of Alaska, local governments, Alaska Native organizations, Alaska Native corporations, and other non-profits. Among them are: International Entities: The United States participates in the Arctic Council, a high level intergovernmental forum established in 1996 to promote cooperation, coordination, and interaction among Arctic states, with the involvement of the Arctic indigenous communities and other Arctic inhabitants on common Arctic issues, particularly issues of sustainable development and environmental protection in the Arctic. State of Alaska Government: Multiple entities within state government have a role in the development of Arctic maritime infrastructure or the landside transportation connectors. Related state roles include search and rescue, infrastructure finance and construction, and regulating the use of Arctic waters within Alaska’s jurisdiction. In addition, the State Legislature formed the Alaska Arctic Policy Commission in 2012 to create an actionable Arctic policy for Alaska. The Commission released a Preliminary Report for public comment in January 2014, with a final report due to the Alaska Legislature in January 2015. Local Government: Local government includes both cities and boroughs. A borough functions somewhat similarly to a county in other states. For example, Alaska’s North Slope Borough encompasses 89,000 square miles of Arctic territory in northern Alaska, and includes the city of Barrow and others. Alaska Native Organizations: Alaska Native communities have inhabited the Arctic region for thousands of years and have cultures that are particularly sensitive to changes in the environment due to subsistence lifestyles revolving around marine ecosystems. There are currently 225 federally recognized tribal governments in Alaska, which may coexist with a city government. Groups such as the Alaska Eskimo Whaling Commission and the Eskimo Walrus Commission have also formed to represent and protect Alaska Natives’ lifestyles and heritage. Alaska Native Corporations: Regional and village Alaska native corporations are private entities that have business interests and own land that could affect the development of maritime infrastructure. Non-profit: The Marine Exchange of Alaska, a not-for-profit entity that works with USCG and the State of Alaska, among others, collects vessel traffic data through the Bering Strait. Relying on Automatic Identification System (AIS) technology, the Marine Exchange tracks and reports on vessel traffic around the state of Alaska. While AIS data relies on self-reported information—such as the description of the type of vessel, type of cargo, or the destination of the vessel—it does provide an indication of the overall steady trend of Arctic maritime activity. In addition to the contact named above, Sharon Silas (Assistant Director); Brian Chung; Swati Deo; Geoff Hamilton; Delwen Jones; Les Locke; Josh Ormond; and Elizabeth Wood made key contributions to this report. Sarah Kaczmarek, Melanie Papasian, Theresa Perkins, and Christopher Stone made key contributions to the video in this report. | Decreasing seasonal sea ice has opened up Arctic waters for longer periods with resulting potential economic opportunities in commercial shipping, cruises, commercial fishing, oil, and mining. In light of the importance of U.S. efforts to effectively manage Arctic issues, GAO was asked to examine U.S. actions related to developing and investing in Arctic maritime infrastructure. This report discusses (1) current commercial maritime activity in the U.S. Arctic and anticipated activity in the next 10 years, (2) actions taken by government entities in support of planning and developing U.S. Arctic maritime infrastructure, and (3) federal interagency efforts to identify and prioritize Arctic maritime-infrastructure investments. GAO interviewed representatives from the commercial-shipping, cruise, commercial-fishing, oil, and mining industries and government entities involved in the U.S. Arctic. Site visits were conducted to Nome, Barrow, and Anchorage, Alaska. These sites were selected based on factors such as geographic location and infrastructure activity. Commercial U.S. Arctic maritime activities are expected to be limited for the next 10 years, according to industry representatives, due to a variety of factors. Interviews with industry representatives highlighted a variety of general challenges related to operating in the Arctic, such as geography, extreme weather, and hard-to-predict ice floes. Industry-specific factors were also cited as contributing to limited commercial activity. For example, shipping companies noted higher costs with Arctic transit; cruise industry groups noted a lack of demand for Arctic cruises from the mainstream cruise-consumer base, and oil companies last drilled offshore exploratory wells in the U.S. Arctic in 2012. Although the activity will likely be limited, federal, state, and local stakeholders have taken some actions to plan for future maritime-infrastructure investments. Some of these actions address factors that, as identified by industry representatives, contribute to the current and expected limited maritime activity in the U.S. Arctic. For example, the U.S. Army Corps of Engineers (USACE), in collaboration with the State of Alaska, has taken steps to study the development of an Arctic deepwater port; the lack of which is a factor identified by mining representatives as contributing to the expected limited mining activity in the U.S. Arctic. The U.S. Coast Guard (USCG) is in the preliminary phase of seeking to acquire a new polar icebreaker, which could be used for emergency response, research assistance, or patrols. The National Oceanic and Atmospheric Administration (NOAA) and the Alaska government are working to improve mapping, charting, and weather information for the U.S. Arctic. The Committee on the Marine Transportation System (CMTS) published the U.S. Arctic Marine Transportation System: Overview and Priorities for Action in July 2013, which prioritized actions for developing Arctic maritime infrastructure and identified the lead agency for each action. This report prioritized two broad categories to be addressed in the near term: information infrastructure, such as mapping and charting, and response services, such as search and rescue. Implementation of the report's actions is at the discretion of each federal agency; however, according to CMTS officials, CMTS is currently developing a process to regularly monitor agencies' progress in addressing the recommended actions. GAO is not making recommendations in this report. USCG, NOAA, the Department of Transportation, and the Department of the Interior sent GAO technical comments on this report, which were incorporated as appropriate. USACE did not have any comments on this report. View a video of GAO's review of U.S. Arctic maritime infrastructure. |
Natural gas is a vital energy source used in a large variety of applications, providing about one-fourth of the energy consumed in the United States. Natural gas is a colorless, odorless fossil fuel found underground that is composed mainly of methane and generated through the slow decomposition of ancient organic matter. Most natural gas consumed in this country is produced in North America, but an increasing portion is shipped from overseas in the form of liquefied natural gas (LNG). Natural gas is used in about 60 million homes and 5 million businesses in a variety of ways, such as for heating, fueling industrial processes in manufacturing operations, fueling electricity generation, and fueling some cars and buses. Most natural gas consumers are residential users, but they use only about 24 percent of the gas consumed in the United States. Other natural gas consumers include industrial consumers, electricity generators, and transportation users. The natural gas industry performs three separate functions to deliver natural gas to consumers: (1) production of the natural gas commodity, (2) transportation of the commodity between states, and (3) local distribution within states. These major functions are illustrated in figure 1. To produce the natural gas commodity, producers drill wells to reach pockets of natural gas, either at sea (such as in the Gulf of Mexico) or on land (such as in the Powder River Basin of the Rocky Mountain states). Once the gas well has been drilled, the drilling rig is removed and the natural gas flows to the surface, where it is combined with gas from other nearby wells and moved locally through a network of progressively larger local pipelines to processing plants. There, the raw gas is processed to remove water vapor, hydrogen sulfide, and other compounds so that it can be transported, bought, and sold nationally. Producers may choose to sell the natural gas commodity to a variety of customers, including marketers, traders, and a variety of consumers. Furthermore, the various players in the market may, in turn, sell gas back and forth several times before it is actually delivered. Eventually, the natural gas is transported via a network of larger interstate pipelines that connect various supply regions, such as the Gulf of Mexico, to areas where natural gas is consumed, such as large cities on the East Coast. Interstate pipelines converge at several pipeline network interconnections, which link gas consumers across the United States to several different production regions. As a result of this interconnected network, prices of natural gas at different trading locations vary somewhat, but they generally move together as the overall supply and demand balance changes. Some interstate pipeline intersections have become important locations for trading natural gas, such as the “Henry Hub” pipeline interconnection in Louisiana. Most consumers, particularly residential and small commercial consumers, receive natural gas from local natural gas utilities. Utilities generally operate as monopolies within service areas defined by states and, as such, are the only entity delivering natural gas to most consumers. In most cases, local gas utilities also purchase the natural gas commodity for their customers. Local gas utilities receive natural gas from interstate pipelines and route it into local delivery pipelines to homes and businesses, where it is consumed. A smaller number of consumers—such as operators of electric power plants or operators of industrial or manufacturing plants—may completely bypass the local gas utility. Because these consumers use large amounts of natural gas, they may purchase gas directly from suppliers and receive natural gas directly from interstate pipelines. The federal government has authority to regulate certain sales of natural gas and its interstate transportation and does so through two agencies. FERC has primary responsibility for natural gas oversight. FERC is led by five commissioners appointed by the President and approved by the Senate. The Commodities Futures Trading Commission (CFTC) also plays a role in federal oversight related to natural gas prices. It is responsible for ensuring that fraud, manipulation, and abusive practices do not occur in federally regulated financial markets, where some natural gas transactions are conducted. States directly regulate the local gas utilities that fall under their jurisdiction. Because only one utility generally provides gas to a specific service area, utilities lack competition and could take advantage of their monopoly by artificially raising natural gas prices for consumers or by taking other actions. To regulate investor-owned utilities, which distribute over 90 percent of the gas delivered by utilities, states created agencies called public utility commissions. States generally do not allow utilities to profit from the natural gas that they resell, although they allow utilities to recover the costs of purchasing the natural gas commodity by passing those costs on to customers. Traditionally, utilities sold natural gas at a single price per unit of gas—such as per thousand cubic feet—approved by a commission. However, as consumer prices have become more variable, states have generally started to allow utilities to use a “gas cost adjustment” system, where utilities independently adjust the rates they charge consumers, as long as utilities are not profiting from the gas sales. Since natural gas commodity prices were deregulated in 1993, FERC’s role ensuring that the price consumers pay for natural gas is fair has been twofold and limited. First, FERC has an indirect role overseeing the market that determines commodity prices, with activities generally limited to monitoring the market to identify and punish market manipulation while supporting the development of competition. Recently, this oversight role has become more important because the commodity portion of the price that consumers pay for natural gas has increased from about 30 percent in 1993 to almost 60 percent in 2005. FERC faces challenges in carrying out its oversight of the commodity markets, including difficulties ensuring that markets are competitive and completely free from manipulation. Second, FERC directly approves rates that determine interstate transportation prices. While FERC retains a direct role in approving the rates for interstate transportation, this role has decreased in importance because the interstate transportation portion of the price that consumers pay has decreased from about 20 percent in 1993 to about 10 percent in 2005. In carrying out its responsibilities to help ensure that natural gas commodity prices in deregulated markets are competitive and free from manipulation, FERC’s Office of Enforcement polices wholesale natural gas commodity markets for manipulation. Relying on a wide range of energy data sources in FERC’s Market Monitoring Center, energy market analysts in the Office of Enforcement monitor prices and volumes of natural gas commodity transactions at many key energy market trading centers nationwide to identify price anomalies or other unusual market activity that might indicate market manipulation. FERC officials explained that because natural gas prices at different locations generally move together, FERC’s monitoring of prices at key energy market trading centers allows them to understand the overall natural gas market. In addition, they monitor other factors that may affect the market, such as storage levels, imports and exports, weather, supply and demand for other fuels, and electricity transmission constraints and outages. The Office of Enforcement also operates an enforcement hotline, through which anyone can anonymously offer information about suspicious market activities, such as bidding anomalies or improper transactions between a company and an affiliate. When Office of Enforcement staff identify unexpected or unexplained deviations in price behavior or other anomalies, they examine the anomaly and undertake informal or formal investigations when needed. In response to unusual circumstances resulting in short-term market changes, the office has increased its monitoring and enforcement efforts. For example, in response to persistent high energy prices and Hurricane Katrina, which substantially disrupted domestic natural gas supplies during the fall and winter of 2005, the office initiated a daily review of market activity and intensified its investigation of unusual trading activity, according to office officials. In addition, the staff conduct a variety of random and targeted audits of individual companies to determine whether companies are following rules and regulations regarding trading activities. For example, in 2004, FERC completed 27 financial audits to determine compliance with its accounting regulations and an additional 12 audits to determine compliance with FERC standards of conduct and other requirements. Among other things, these audits resulted in over 100 recommendations to remedy deficiencies and uncovered $10 million in pipeline costs that were improperly capitalized. To further help ensure that natural gas commodity prices are competitive and free from manipulation, FERC also supports the development of competitive markets. It has done this primarily by promulgating rules that prevent pipeline companies from giving undue preference to their energy affiliates by requiring that pipeline companies completely separate (or “unbundle”) their transportation, storage, and sales services and open access of their pipeline to other entities. Recently, it has supported the development of competitive markets by fine-tuning existing policies rather than making major changes: In 2003, for example, FERC Order Number 2004 updated rules of conduct designed to prevent natural gas pipelines and public utilities from giving undue preference to their affiliates. Also in 2003, FERC developed standards and issued orders designed to improve the information about natural gas markets published in price indices—a key source of market information that market participants use to make informed decisions about buying and selling natural gas. While FERC’s role overseeing natural gas commodity markets has been limited, it has become more important in recent years because the commodity portion of prices that consumers pay for natural gas has increased more than the other components. As shown in figure 2, real natural gas commodity prices accounted for almost 60 percent of the total consumer price in 2005, compared with about 30 percent in 1993. Specifically, real natural gas commodity prices increased from $2.59 in 1993 to $7.51 in 2005—an increase of about 190 percent. Over the same period, real interstate transportation prices and other charges decreased from $1.48 to $1.13 and local distribution charges increased slightly from $3.75 to $4.17. FERC continues to face challenges ensuring that the gas commodity market is competitive and free from manipulation. EPAct 2005 allows FERC to gain access to information about virtually any natural gas transaction. However, senior Office of Enforcement officials told us that while they have increased the number and types of data sources they actively monitor, they do not actively monitor all natural gas trades that occur through established markets. The officials said that, even after increasing the number of staff working in the Office of Enforcement dedicated to market monitoring, they are still not able to examine all of the potentially millions of transactions that occur in numerous physical and financial markets. Since the passage of EPAct 2005, FERC also has authority to police all markets that could affect natural gas for manipulation, including sales that do not involve pipeline companies or their affiliates. However, FERC officials have acknowledged that it is often difficult to determine whether markets are competitive and completely free from manipulation because, for example, it is difficult to determine what prices should be under completely competitive conditions. In addition to its efforts regarding competitive natural gas commodity markets, FERC continues to approve the prices that pipeline companies charge for the interstate transportation of natural gas. The Natural Gas Act of 1938, as amended, mandates that FERC regulate the rates that natural gas pipeline companies under its jurisdiction can charge for interstate transportation of natural gas to ensure that rates are just and reasonable. Specifically, FERC requires that every natural gas company file schedules with FERC showing all rates, contracts, and charges for interstate transportation of natural gas subject to FERC. FERC staff analyze the information provided by these companies to ensure that proposed rates are just and reasonable. However, in practice, FERC officials told us that typically, the proposed rate for each unit of service is calculated by dividing a pipeline’s overall cost of service—that is, the company’s total revenue required to cover the pipeline’s operations plus a just and reasonable return on its investment in facilities—by the projected amount of gas its customers will use. A just and reasonable return is typically determined by evaluating the range of returns generally experienced in the industry, and adjusted to reflect the specific investment risks of the pipeline company as compared with the industry. Ultimately, the return on investment must be sufficient to attract capital and compensate the pipeline’s investors for the risks of their investment, but not higher. FERC’s role in regulating the rates charged for the interstate transportation component of the price that consumers pay for natural gas has become less prominent in recent years because the rates that pipeline companies charge for transportation of natural gas along interstate pipelines have declined relative to the other components of the price consumers pay. As a result, the interstate transportation portion of the consumer price for natural gas accounted for less than 10 percent in 2005, compared with about 20 percent in 1993, as shown in figure 2. FERC has made substantial progress implementing the additional authorities related to natural gas provided to it in EPAct 2005 but has not yet used its new authority to impose fines or penalties authorized by the act. EPAct 2005 identified six actions for FERC related to natural gas or natural gas markets. As of June 2006, FERC has met all deadlines thus far for implementing additional EPAct 2005 requirements, completing or initiating work on five of the six actions identified in EPAct 2005. FERC has not yet imposed any penalties for violations of rules and regulations related to its new penalty authority since the enactment of EPAct 2005, according to Office of Enforcement officials, because investigations of violations that have occurred since the passage of EPAct 2005 are still under way. Office of Enforcement officials told us that some investigations will be completed soon, and FERC will use its authority if the investigations warrant. Table 1 shows the status of the additional authorities related to natural gas provided by EPAct 2005. In addition, the Office of Enforcement has begun to use the authority under EPAct 2005 to expand its monitoring and investigation of those who violate its new antimanipulation rules. Following the enactment of EPAct 2005, FERC issued antimanipulation regulations implementing its new authority to monitor, investigate, and impose fines and penalties on any person under its jurisdiction that manipulated natural gas commodity prices (action No. 3 in table 1). Previously, FERC could only penalize behavior that manipulated natural gas commodity prices for a limited number of transactions, such as those by owners of interstate pipeline companies and other entities transporting natural gas on an interstate pipeline. Under the new regulations that implement EPAct 2005, FERC’s prohibition against market manipulation applies to transactions by producers, financial companies, local utilities, and natural gas traders, most of which were not previously regulated by FERC. According to Office of Enforcement officials, to implement the authority, the Office of Enforcement has dedicated more time and staff efforts analyzing transactions and other market behavior in venues previously outside FERC’s jurisdiction. For example, Office of Enforcement officials told us they are now able to examine whether financial market transactions, which are not generally under FERC jurisdiction, affect the physical natural gas markets over which FERC has authority. However, FERC has not yet imposed any penalties for violations of rules and regulations related to its new penalty authority since the enactment of EPAct 2005, according to Office of Enforcement officials. With regard to antimanipulation rules, according to Office of Enforcement staff, proving market manipulation is harder than it was before EPAct 2005. Instead of proving that the market behavior had a “foreseeable” effect on market prices, conditions, and rules, FERC must now prove that the conduct that resulted in manipulated prices is intentional or reckless, which office staff told us is a more difficult standard. Although the Office of Enforcement has begun investigating possible violations that have occurred since passage of EPAct 2005—and that may be subject to the new penalty authority—the investigations are still under way. As a result, no penalties have been levied under the new authority, but FERC staff told us they will use its authority if warranted. Nevertheless, according to Office of Enforcement officials, their efforts to implement the new authorities granted by EPAct 2005 are already having tangible results outside of FERC’s antimanipulation activities. Specifically, Office of Enforcement officials noted that following the issuance of FERC’s Policy Statement on Enforcement in October 2005, which explained the new market manipulation rules and higher penalties, some industry members have self reported instances of noncompliance with FERC-approved rules in an effort to gain FERC’s consideration for a lesser penalty. States directly oversee the prices utilities charge for local distribution of natural gas but have only a limited role approving natural gas commodity and interstate transportation prices. States review and approve the local delivery prices that utilities charge, and they review and approve the charges utilities pass on to consumers to recover the cost of purchasing and transporting the natural gas commodity. However, states generally allow utilities to pass on commodity prices to local consumers, according to state officials we interviewed. States rely on FERC to oversee commodity and interstate transportation prices, and stakeholders told us they lacked knowledge about FERC’s oversight of natural gas commodity prices. Some stakeholders said they had little confidence that natural gas commodity markets were free from manipulation. FERC officials acknowledged that providing some additional information would increase stakeholders’ understanding of FERC’s oversight of natural gas and help deter market manipulation. States directly oversee utilities’ charges for local distribution of natural gas. In most states, utilities file proposals to set or change natural gas distribution charges with state public utility commissions—state regulators—that specify the rates utilities may charge consumers. These rate proposals outline the utilities’ costs to distribute natural gas. In general, states allow utilities to earn a regulated rate of return, or profit, and the profits allow utilities to realize a return on their investment and enable the utilities to make improvements. Utilities file rate proposals at different intervals. Some follow a regular schedule, such as filing monthly or annually, while others file only when they believe a price change is needed. State regulators review these proposals and may either accept them—enabling the utility to charge those prices to consumers—or deny them, requiring the utility to charge a different rate. Although state regulators directly approve local distribution charges, the regulators cannot substantially lower utilities’ local distribution charges without affecting service quality or long-term financial health, according to state officials. Like any business, utilities must cover their cost of service, which can include charges for the cost of expanding or maintaining the gas pipelines, the cost of storage paid by the utility, or the cost of utility employees to read consumers’ meters or provide other services. Unless utilities cover these costs, they may eventually face financial problems or go out of business. Since deregulation, local distribution charges have risen slightly in real terms, but they have decreased significantly as a share of the total consumer price. Local distribution prices increased from $3.75 in 1993 to $4.17 in 2005 (in constant 2005 dollars), but the share of the price consumers paid for utilities to distribute natural gas decreased, dropping from about 50 percent of the total price in 1993 to about 30 percent in 2005. As a result, state regulators’ ability to affect total natural gas prices paid by consumers has decreased. This occurred primarily because of the increase in natural gas commodity prices, which almost tripled in price over the same period. States exercise limited oversight of the gas commodity and transportation components of consumer prices by reviewing the costs utilities pass on to their consumers. States can deny utilities from recovering the costs of these purchases from consumers if the costs of the gas purchases do not reflect fair market prices; however, regulators in states we reviewed told us this rarely occurs. Officials in only 4 of the 10 states we reviewed said they had denied utilities’ recovery of gas purchases since 2002. Of these 4 states, the state officials recalled that they had done so infrequently— generally in only one or two cases, out of the dozens of rate changes utilities have proposed since 2002. State regulators cited several reasons why states rarely denied utilities from recovering their costs—for example, they told us it is difficult to prove these costs were above a fair market price. Also, some state regulators we talked to expressed a desire to avoid being overly directive regarding utilities’ purchases because the regulators said that utilities have greater expertise in making purchasing decisions. Because state regulators have limited oversight of consumer prices but are concerned about recent high and volatile prices, they generally provide for two types of actions to help stabilize consumer prices—they influence how utilities purchase the commodity, and they sometimes implement “customer choice” programs. First, most states encourage utilities to engage in “hedging,” which reduces the need for utilities to buy from volatile short-term spot markets. Hedging includes such techniques as buying gas at fixed prices in long-term contracts or storing gas purchased when prices are relatively low, to be used during times when prices are high. Utilities in these states often engage in some form of hedging to insulate consumers from “rate shocks,” where prices greatly increase from one month to another. While hedging does not guarantee the lowest price, it tends to smooth prices, giving consumers greater price stability. Second, some states offer “customer choice” programs that allow residential consumers to choose to purchase gas from natural gas suppliers other than the utility provider. Customer choice programs may encourage more stable natural gas prices because nonutility suppliers have an incentive to hedge their gas purchases to minimize the risk of high prices—unlike utilities, which fully recover their gas purchase costs from the consumer. Therefore, nonutility suppliers may be more likely to offer gas service to consumers at a set price for a period of months or years. However, regulators in the states we reviewed told us that customer choice did not necessarily lead to lower prices, because nonutility gas marketers still purchase gas from the same natural gas commodity markets from which utilities purchase. Moreover, high and variable natural gas commodity prices have decreased participation in customer choice programs. According to the Energy Information Administration, participation in customer choice programs declined from 4.1 million households in 2002 to about 3.9 million households in 2005—representing about 6 percent of all gas users in the United States—and mostly concentrated in two states, Georgia and Ohio. States rely on FERC to oversee the market and investigate market manipulation. U.S. Supreme Court decisions and other legal interpretations have established that the federal government has exclusive responsibility for overseeing natural gas commodity prices. As a result, according to the state regulators and other experts we interviewed, the states must rely on FERC to monitor commodity markets and ensure prices are fair. FERC officials acknowledge that it is important to inform stakeholders about their oversight activities. In that regard, in recent performance reports FERC listed actions it has taken to provide information on its oversight, such as providing copies of its market surveillance reports to state public utility commissions. Officials in the Office of Enforcement told us they discuss their market-monitoring and oversight activities during twice-yearly meetings with the National Association of Regulatory Utility Commissioners (NARUC), a national organization of state regulators. In addition, upon request, Office of Enforcement officials have met with state regulators to discuss their market oversight activities. FERC compiles data on the numbers and subject areas of the informal and formal investigations it undertakes, and it reports some of those data for completed investigations. For example, FERC publicly reports the number of hotline calls it receives and some statistics on closed investigations and audits through documents available on its Web site, such as press releases, FERC staff reports, the agency’s annual report to Congress, and its State of the Markets Report, which summarizes information about energy market conditions and identifying emerging trends. However, FERC staff are prohibited from disclosing details about ongoing investigations except by order from the FERC commissioners. In that regard, FERC’s practice has been to release information about the numbers and subject areas of ongoing investigations only rarely because it has been its view that providing overly detailed information could risk undermining FERC’s market-monitoring efforts. FERC officials recognize that publicly disclosing some additional information about its oversight activities, as long as it would not compromise ongoing investigations, could serve to increase stakeholder understanding and, potentially, deter market manipulation. In this regard, FERC has occasionally disclosed information about ongoing oversight efforts at the commissioner’s discretion, as it did in 2002 during the Enron investigation in an effort to increase public understanding of FERC’s oversight activities and raise public confidence in energy markets. FERC officials also told us that they are developing a Web page to better inform the public about its oversight activities in response to questions they received from the public. Despite FERC’s past efforts, some stakeholders still do not have a full understanding of FERC’s oversight activities and lack confidence in the fairness of natural gas commodity prices. Some state regulators we interviewed told us they lacked assurance that natural gas prices are free from manipulation. For example, regulators from one state sent a letter to FERC expressing concern about high gas prices and that FERC’s oversight may not prevent market manipulation. In response, Office of Enforcement officials invited the state regulators to their offices in Washington, D.C., for discussions and to tour FERC’s Market Monitoring Center to observe firsthand how FERC monitors the market. Between October 2005 and February 2006, FERC received similar letters from two other states and one municipal government requesting information about rising natural gas prices and possible market manipulation. Other state regulators we interviewed told us they would benefit from greater coordination with FERC regarding natural gas prices. Moreover, according to one state commissioner on the NARUC gas committee, state commissioners vary in their knowledge of what FERC staff do to monitor natural gas commodity markets—and many members have limited knowledge. In addition, a NARUC gas committee official elaborated that FERC outreach to the states would help both FERC and the states better fulfill their respective regulatory duties. Citing their concern over rising natural gas prices and concerns over monitoring of commodity markets, attorneys general from four Midwestern states commissioned a report to investigate whether natural gas prices were artificially high as a result of market manipulation. Oversight of natural gas markets has evolved substantially from the days when the federal government set prices based on costs for natural gas produced at wells and controlled, together with the states, nearly all of the rest of the costs of delivering it to consumers. However, aside from FERC’s efforts to prevent market manipulation, neither the federal government nor the states have much influence on the natural gas commodity price that now accounts for the largest portion of the price that consumers pay. As a result, the natural gas prices consumers pay will remain highly affected by what happens in the commodity markets. Nevertheless, federal oversight of the commodity markets remains a work in progress. Stakeholders, including state regulators, other government officials, and the public, are highly affected by the commodity markets that FERC is charged with overseeing, but some of these stakeholders remain largely unaware of FERC’s oversight processes and activities. Because of regulatory limitations, FERC staff do not publicly disclose information about informal and formal investigations unless the investigations have been completed and have resulted in a formal penalty, despite the advantages such information could have in increasing stakeholder understanding of FERC’s oversight activities and, potentially, deterring market manipulation. However, under current regulations, FERC commissioners have it within their authority to disclose this information. Furthermore, because the commodity component of the price that consumers ultimately pay for their natural gas has taken on such prominence and because states rely on FERC to oversee the commodity market, it is increasingly important for stakeholders to understand what FERC is doing to police this market. In this regard, FERC recognizes the need to provide more information to stakeholders about its oversight efforts and has multiple ways to do so, such as through its Web site. In providing even more information to stakeholders on its oversight efforts, including information, as appropriate, about ongoing monitoring and investigation activities, FERC could both increase stakeholders’ understanding about FERC’s efforts to ensure the fairness of natural gas prices and better deter market manipulation. Given the potential benefits of providing more information on its oversight activities, we recommend that the Chairman of FERC provide more information to stakeholders, including state regulators, other government officials, and the public, about actions taken by FERC to ensure that natural gas prices are fair. This effort should be undertaken within existing law and regulation, build upon the efforts that FERC already has under way, and use the information FERC already compiles on its monitoring and investigations. We agree that disclosure of information that is specific or detailed could provide would-be market manipulators with information about FERC’s sources and methods of operation. Therefore, we believe it prudent that the Chairman have initial discretion on how best to do this. The information we recommend that the Chairman consider providing to stakeholders, including state regulators and, where possible, the public, includes the following: information on how the Office of Enforcement staff analyze natural gas markets and how the staff go about identifying market anomalies or unusual market behavior; information on the types of unusual market behavior that warrant further investigation by the Office of Enforcement; and, more timely information on the informal and formal investigations under way, such as the numbers and subject areas but not the identities of those under investigation. We provided the Federal Energy Regulatory Commission with a draft copy of this report for review and comment. FERC generally agreed with the report’s findings, conclusions, and recommendation and offered minor technical comments, which we have incorporated, as appropriate. FERC’s written comments are reproduced in appendix II. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, will send copies to the Chairman of FERC and other interested parties. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix III. In addition to the contact named above, Karla Springer (Assistant Director), Lee Carroll, James Cooksey, John Forrester, Jon Ludwigson, Kristen Massey, Alison O’Neill, Frank Rusco, Barbara Timmerman, and John Wanska made key contributions to this report. Others who made important contributions include Casey Brown, Michael Derr, Glenn Fischer, and Kim Raheb. | Following Hurricanes Katrina and Rita, natural gas prices spiked to more than $15 per thousand cubic feet, nearly seven times higher than in the late 1990s. As a result, policymakers have increasingly focused on better understanding how prices are overseen. The prices that consumers pay for natural gas are composed of (1) the commodity price, (2) the cost of interstate transportation, and (3) local distribution charges. Oversight of these components belongs to the federal government, through the Federal Energy Regulatory Commission (FERC), and the states. In 1993, federal price controls over commodity prices were removed, but FERC is still charged with ensuring that prices are fair. Recently, the Energy Policy Act of 2005 (EPAct 2005) broadened FERC's authority. GAO agreed to (1) analyze FERC's role overseeing natural gas prices, (2) summarize FERC's progress in implementing EPAct 2005, and (3) examine states' role in overseeing natural gas prices. In preparing this report, GAO met with officials from 10 states that regulate gas in different ways and analyzed relevant laws and documentation. Since natural gas commodity prices were deregulated in 1993, FERC's role in ensuring that commodity prices are determined competitively and are free from manipulation has been limited to (1) indirectly monitoring commodity markets to identify and punish market manipulation and (2) supporting competition in those markets. FERC faces challenges ensuring prices are fair, however, because staff cannot monitor all of the potentially millions of transactions and because it is difficult to identify market manipulation. FERC's oversight of commodity markets has risen in importance recently because the commodity price amounted to nearly 60 percent of the total consumer price in 2005 compared with about 30 percent in 1993. FERC also directly approves interstate transportation prices. FERC has completed action on four of the six new tasks identified by EPAct 2005 related to natural gas. FERC officials said that EPAct 2005 has achieved tangible results. For example, following FERC's issuance of a policy statement on enforcement in October 2005, some industry members have self-reported instances of noncompliance with FERC-approved rules in an effort to gain consideration for a lesser penalty. States directly oversee prices for local distribution of natural gas and have a limited role approving commodity and interstate transportation prices. States directly approve utilities' charges for local delivery of natural gas, but this represented only about 30 percent of the consumer price in 2005. While states can deny gas utilities from passing on the cost of the gas commodity to consumers, state officials told us this rarely occurs. State officials rely on FERC to ensure that commodity prices are fair, but some said they are unaware of FERC's oversight efforts. FERC officials agree that expanding the information they provide to stakeholders would improve stakeholders' understanding of FERC's efforts and could help deter manipulation. |
The TDRL was established under the Career Compensation Act of 1949 to allow for temporary disability retirement pay and benefits for any servicemember who would be eligible for disability retirement benefits, were it not for the fact that their disability was not of a permanent nature. In 1986, the law was amended to allow the military to place individuals on the TDRL if it is determined that their disabilities could be of a permanent nature but are not stable enough to rate their severity. Under this criterion, a disability is considered not stable if the medical evidence indicates its severity will probably change enough sometime within the next 5 years to warrant an increase or decrease in the disability percentage rating. For example, cancer is a condition that may be determined to be permanent and stable when the disease has progressed to the point where treatments are unlikely to cure it, or determined to be permanent and unstable when the disease is being treated and the prognosis remains uncertain. Consistent with how the military administers its overall disability evaluation system, DOD gives each service responsibility for administering its own TDRL process. DOD provides some guidance for administering the TDRL, but gives the services broad latitude. Therefore, each service has established more detailed guidance for its own day-to-day processes related to the TDRL. The services have their own staff, or TDRL units, that oversee and process TDRL cases. Figure 1 depicts the TDRL decision process in detail. To qualify for permanent disability retirement benefits, or placement on the Permanent Disability Retired List (PDRL), a servicemember must have a service-related medical condition that renders him or her unfit for duty. The condition must be compensable, and the severity of the condition, expressed as a percentage rating, must be 30 percent or higher. Typically, the percentage disability rating dictates the amount of monthly disability retirement payments to which a servicemember is permanently entitled. If, based on the medical evidence, the PEB determines that a servicemember’s disabling condition is unstable—that the condition’s current percentage rating could change within the next 5 years—the PEB will place the servicemember on the TDRL. In effect, placement on the TDRL postpones a final determination of the percentage rating and the associated monthly disability payments to which the retiree may eventually and permanently be entitled. Once placed on the TDRL, temporary retirees must undergo periodic medical reexaminations and evaluations by a PEB at least once every 18 months. Under the law, assignment to the TDRL must end with a final determination at the end of 5 years, or sooner if the results of a medical reexamination indicate that the temporary retiree’s condition is of a permanent nature and stable or the servicemember’s rating drops below 30 percent. Typically, temporary retirees receive medical reexaminations in conjunction with PEB determinations. These examinations are usually conducted at military treatment facilities (MTF). Each service’s TDRL administrative unit is responsible for determining when temporary retirees are due for medical reexaminations, notifying them of upcoming medical reexaminations and arranging for the examinations at MTFs, and following up with temporary retirees who fail to keep appointments. Temporary retirees are required to make sure the appropriate service’s TDRL unit has their current address. Temporary retirees are also required to report for medical reexaminations at appointed times and places. Typically, reexaminations are scheduled by the relevant service’s MTF that is nearest to the TDRL retiree’s place of residence. If a temporary retiree is unable to keep an appointment, he or she is required to make alternate arrangements to complete the medical reexamination. If temporary retirees refuse or fail to report for required reexaminations, the services have the authority to terminate their temporary disability retirement pay. The benefits that servicemembers are entitled to while on the TDRL are similar to those for servicemembers who are placed on the PDRL. In most cases, the amount of TDRL monthly payments are calculated in the same way as PDRL monthly cash payments: retirees with fewer than 20 years of service receive their base pay at retirement, multiplied by the assigned percentage rating for their disabling medical conditions; servicemembers with 20 or more years of service receive the higher of either their base pay at retirement, multiplied by either their assigned percentage rating, or 2.5 times their years of service—whichever is higher. Regardless of years of service, temporary retirees with a disability percentage rating of 50 percent or less are entitled to no less than 50 percent of their base pay at retirement. Both TDRL and PDRL monthly cash payments are subject to a cap of 75 percent of servicemembers’ base pay and are subject to income taxes. In addition to receiving cash payments, temporary retirees are entitled to other military retirement benefits, including health insurance coverage for themselves, their spouses, and eligible dependents, and access to discounted goods and services through military exchange facilities. Finally, temporary retirees are also eligible to apply for VA disability compensation, which is not subject to income taxes. The military benefits of both permanent and temporary retirees are reduced, however, by the amount of VA benefits they receive. While the Career Compensation Act of 1949 does not cite a specific purpose for the TDRL or state a rationale for the eligibility threshold of 30 percent, a 1948 report of the Advisory Commission on Service Pay (the Hook Commission), upon which much of the act was based, suggests that the TDRL may have been established as a means of “minimizing the loss of trained, experienced service members who, given additional time, might recover sufficiently to return to” the military. Meanwhile, a recently issued report by DOD suggests that the purpose of the TDRL has also evolved into a vehicle to safeguard the interests of servicemembers whose conditions may develop into more serious permanent disabilities. The report also notes that other means might be used to accomplish the current purposes of the TDRL and suggests that changes may be warranted, including reducing the maximum tenure on the TDRL and establishing standardized guidance for classifying impairments as “permanent and stable.” TDRL caseloads grew DOD-wide by 43 percent from fiscal years 2003 through 2007. Growth in TDRL caseloads could be related to a combination of increases in the number of cases going through the military’s disability evaluation system, higher TDRL placement rates, and low numbers of cases removed from the TDRL relative to numbers of new cases being added to the list. While DOD-wide TDRL caseload size declined slightly from fiscal years 2001 through 2003, it grew steadily from 9,983 cases in 2003, to 14,285 cases in 2007, an increase of 43 percent. (See fig. 2.) Air Force and Marine Corps caseloads had the highest rate of growth during this time (72 percent each), and the Army’s caseload grew by 54 percent. The Navy’s also grew during this time, but only by 14 percent. A combination of factors contributed to the growth in TDRL caseloads between fiscal years 2003 and 2007. TDRL caseloads grew along with an increase in cases going through the disability evaluation system as a result of Operations Enduring Freedom and Iraqi Freedom. The number of disability evaluation system cases DOD-wide grew from about 16,500 in 2003, to about 20,000 in 2007, an increase of 21 percent. (See app. II, table 7.) Each service also experienced an overall growth in disability evaluation system cases during this period. (See app. II, table 8.) Higher TDRL placement rates—the number of placements on the TDRL in a given year relative to the number of all cases receiving a disability determination that same year—also contributed to the growth in TDRL caseloads. (See table 1.) The increase in TDRL placement rates was most significant for the Air Force and the Marine Corps. Marine Corps and Navy placement rates were also consistently much higher than rates in the other services. Finally, the growth in the TDRL caseload DOD-wide may also be due, in part, to the relatively low numbers of cases removed from the TDRL, compared with the numbers of new cases added to the list each year. (See fig. 3.) In fiscal year 2003, there were 18 more cases placed on the TDRL than were removed from the TDRL that year. By 2007, this difference grew to 1,442 more cases placed on than removed from the TDRL. Within each service, the difference between the numbers of cases added to and removed from the TDRL varied over time. (See app. II, tables 9 and 10.) DOD-wide, servicemembers placed on the TDRL in each calendar year from 2000 through 2007 varied little with respect to their military status, years of service, and most prevalent disabling conditions. In each of these years, most TDRL placements had been active duty personnel, although the small proportion who had been reservists grew considerably between 2000 and 2007. Most TDRL placements in each year also had fewer than 20 years of service and, over time, their average years of service declined, DOD-wide. The disabilities most prevalent among TDRL placements have consistently been musculoskeletal, mental, or neurological in nature. Among those with mental and neurological disabilities, the incidence of Post Traumatic Stress Disorder (PTSD) and residual conditions related to traumatic brain injury (TBI) increased substantially across all of the services. Eighty-four percent of all servicemembers placed on the TDRL in calendar years 2000 through 2007 were active duty military. The percent of TDRL placements who were reservists grew DOD-wide, from about 8 percent in 2000, to about 21 percent in 2006. (See app. II, table 11.) This overall increase appears to have been driven primarily by the Army, where the proportion of reservists among TDRL placements nearly tripled from 12 percent in 2000, to 35 percent in 2006. Although the majority of servicemembers placed on the TDRL have been active duty military, the overall number of reservists placed on the TDRL, though small, has generally been increasing over time. This increase is consistent with the activation of reservists needed for military operations in Afghanistan and Iraq, which in turn, added to the number of reservists who entered the disability evaluation system during this time. (See app. II, table 12.) DOD-wide, the vast majority of TDRL placements have had fewer than 20 years of service. This has changed little over time. Across the services, this proportion ranged from 91 percent for the Navy and Air Force, to 99 percent for the Marine Corps. (See table 2.) Additionally, the average years of service decreased from 8 years among TDRL placements in calendar year 2000, to 6 years for placements in 2007. (See app. II, table 13.) In each service, the average decreased by 1 or 2 years. The overall decline among TDRL placements who had been Marine Corps reservists was particularly pronounced. Their average years of service decreased from 13 in 2000, to 4 in 2007. (See app. II, table 14.) The decline in average years of service is likely associated, at least in part, with the increasing numbers of reservists on the TDRL, who typically take longer to accumulate years of service than active duty servicemembers. Between calendar years 2000 and 2007, there has been little change in the types of disabling conditions most common among servicemembers placed on the TDRL each year. Over this period, the most prevalent disabilities, DOD-wide, have largely fallen into 1 of 3 out of 15 possible disability categories in the Department of Veterans Affairs Schedule for Rating Disabilities (VASRD): (1) the musculoskeletal system, (2) mental disorders, and (3) neurological conditions and convulsive disorders. (See fig. 4.) For DOD-wide placements in each calendar year from 2000 through 2007, the most common musculoskeletal disabling condition was degenerative arthritis, accounting for 24 percent of all musculoskeletal disabilities. Many of the other disabling conditions in this category were unspecified, although the combination of various types of spinal injuries accounted for about an additional 30 percent of musculoskeletal disabilities. The most common neurological conditions and convulsive disorders among TDRL placements were migraines and residuals of TBI, each accounting for 16 percent of all types of disabilities within this category. In recent years, the DOD-wide number of TDRL placements due to a residual condition from TBI has increased fourfold, DOD-wide, from 63 in 2000, to 274 in 2007. (See app. II, table 15.) The incidence of residuals of TBI, as a percentage of all neurological conditions and convulsive disorders among TDRL placements grew from 10 percent in 2000, to 21 percent in 2007. (See app. II, table 16.) The Army experienced the greatest increase in TBI residuals cases—from 9 percent, to 26 percent—as the proportion of all neurological conditions and convulsive disorders among TDRL placements. The most common mental disorder among TDRL placements in calendar years 2000 through 2007 was PTSD, which accounted for 26 percent of all mental disorders. The number of TDRL placements with PTSD increased dramatically, DOD-wide, from 44 in 2000, to 672 in 2007. (See app. II, table 17.) PTSD incidence, as a percentage of all mental disorders among TDRL placements, also grew, DOD-wide, from 8 percent in 2000, to 43 percent in 2007. (See app. II, table 18.) The Marine Corps experienced the greatest increase—from 6 percent, to 52 percent. According to some DOD officials, the increase in TBI residuals and PTSD among TDRL placements may be due to the increasing numbers of servicemembers returning from military operations in Afghanistan and Iraq with these conditions. The increased incidence of these disabling conditions among TDRL placements could also be attributed to growing acceptance of PTSD as a disabling condition and more concerted efforts to identify residuals of TBI. Very Few TDRL Placements Returned to Military Service, Half Received a Final Determination within 3 Years, and Many Received a Final Disability Rating Identical to the Initial Rating While there are variations in TDRL results across the services, some outcomes for this group were more common than others. Specifically, very few TDRL placements between calendar years 2000 and 2003 returned to military service. Further, about half received a final determination within 3 years or less. Finally, only 7 percent of TDRL placements, DOD-wide, received a final disability rating that would have resulted in permanent disability payment amounts higher than their TDRL payments. DOD-wide, only 1 percent of those placed on the TDRL in calendar years 2000 through 2003 eventually returned to military service. More than 80 percent were determined to be permanently disabled. Of these, 5,465 were placed on the PDRL. The remaining 2,315 received a lump sum severance payment for their disability because their final rating was lower than 30 percent and they had fewer than 20 years of military service. Another 9 percent of these placements received no military disability benefits after they were removed from the TDRL. (See fig. 5.) It should be noted that of all those placed on the PDRL, nearly 10 percent (1,004) did not receive a final disability determination until some time after they were removed from the TDRL. As a result, they experienced a gap in benefits that, in 18 percent (176) of these cases, lasted longer than 6 months. Each service’s distribution of outcomes for those placed on the TDRL in calendar years 2000 through 2003 differed somewhat from the distribution DOD-wide. (See app. II, table 19.) Specifically, the Marine Corps and Air Force returned about 4 percent of temporary retirees to military service, while the Army and Navy returned less than one half of one percent of their respective TDRL retirees to active duty. About half (46 percent) of all those placed on the TDRL, DOD-wide, in calendar years 2000 through 2003 received a final determination on their case within 3 years. (See app. II, table 20.) The amount of time spent waiting for a final determination varied by type of determination and by service. We found that, DOD-wide, final determinations placing temporary retirees on the PDRL happened somewhat sooner (median time, 56 months) than final determinations returning temporary retirees to civilian status with either no military disability benefits or with severance for a disability (median time, 60 months). We also found that TDRL placements from the Air Force tended to receive final determinations in fewer months than TDRL placements from other services. (See fig. 6.) For example, by 36 months after placement on the list, the percent of temporary retirees from the Air Force, Army, Marine Corps, and Navy who had received their final determination and were removed from the list were 83 percent, 57 percent, 25 percent, and 22 percent, respectively. The law provides that a temporary retiree can spend no more than 5 years on the TDRL and must receive a final determination upon the expiration of 5 years, in cases where the individual remains on the list for the full 5 years. However, we found that about 12 percent of TDRL placements in calendar years 2000 to 2003—1,163 cases—did not receive a final determination within the 5 years, although they were removed from the TDRL and their temporary retirement payments were discontinued. While most of these individuals—735—were eventually placed on the PDRL, none received monthly disability retirement payments between the time they were removed from the TDRL and the time they were placed on the PDRL. The amount of time that individuals spent waiting for a final determination in some cases was significant. For example, of the 1,004 cases that were first removed from the TDRL and then subsequently placed on the PDRL, there were 176 (18 percent) who waited longer than 6 months between being removed from the TDRL to being placed on the PDRL, and very few received any military disability payments during this period. When asked about these cases, DOD officials reported that extra time is needed to reach a final determination in some cases. For example, if TDRL placements who have been on the list nearly 5 years are having trouble scheduling a medical reexamination for their final determination, it may take an extra month or two before a final determination can be made. Also, DOD officials stated that they need the flexibility to allow some to remain on the TDRL more than 5 years because their disabilities are still not stable to rate at 5 years. Nevertheless, as stated earlier, a final determination must be made upon the expiration of 5 years on the TDRL, at which time disability is considered to be permanent and stable by statute. Final disability ratings for temporary retirees determine whether retirees are ultimately eligible for a disability severance payment or permanent disability retirement. Final disability ratings also help determine the amount of permanent monthly payments TDRL placements are eligible for. DOD-wide, for those placed on the TDRL in calendar years 2000 through 2003 who were ultimately placed on the PDRL, 73 percent were assigned a final disability rating that was no different from their initial disability rating. (See app. II, tables 21 and 22.) In other words, in these cases, the severity of disabilities when placed on the TDRL was no different from their severity when removed from it. Because one would expect to find a difference between the initial and final ratings when disabilities are determined to be unstable, the appropriateness of the TDRL placement decision in cases where initial and final ratings are identical could be called into question. Another 14 percent of those ultimately placed on the PDRL received a final rating that was lower than their initial one, indicating that their disabilities were less severe when they left the TDRL than when they were placed on it. Finally, 13 percent received a final rating that was higher, indicating that their disabilities were more severe when they left the TDRL. The differences between initial and final disability ratings for temporary retirees in each of the service branches who were placed on the PDRL were generally similar to the differences among these temporary retirees DOD-wide. According to military officials, being on the TDRL provides additional time for the military services to determine an individual’s final disability rating, which could result in more accurate payments. Although we could not determine whether differences in initial and final ratings resulted in more accurate payments, we estimated that for the 5,465 TDRL placements that were placed on the PDRL, 7 percent would have received higher monthly disability retirement payments, 20 percent would have received the same disability payments, and 73 percent would have received lower payments, based on their final ratings. Lower permanent disability retirement payments were either due to a decrease in the disability rating or to the fact that PDRL payments are not subject to the TDRL minimum payment provision. For example, a temporary retiree with an initial rating of 40 percent who is moved to the PDRL with a final rating of 40 percent would receive PDRL payments lower than their TDRL payments. Of the 3,190 TDRL placements that were ultimately determined not to be eligible for permanent disability payments, 73 percent received a disability severance payment, and 26 percent had their disability benefits terminated when they were removed from the TDRL. DOD and the services do not effectively manage key aspects of the TDRL process. While TDRL determinations vary considerably across the services, neither DOD nor the services systematically examine PEB stability decisions for accuracy and consistency, although these decisions determine whether servicemembers are placed or retained on the TDRL. They also do not routinely compile information on TDRL outcomes that could better inform PEB determinations related to the stability of disabilities. Despite indications that the services face challenges providing medical reexaminations at least once every 18 months as required by law, none monitor the extent to which this requirement is met. Moreover, although TDRL reexamination requirements can place burdens on TDRL retirees and MTFs, the use of examinations by nonmilitary physicians to reduce these burdens is limited. Finally, the services lack procedures to ensure consistent enforcement of TDRL rules. One of the primary goals of any disability evaluation system is making accurate and consistent disability determinations. In order to meet this goal, there should be appropriate policies, procedures, and control mechanisms in place to ensure that no one is placed or retained on the TDRL who does not meet the criteria established by law. Such policies, procedures, and control mechanisms are an important part of an effective system of internal controls. The accuracy and consistency of decisions to place servicemembers on the TDRL are particularly important because of the significant impact these decisions have on the military and on servicemembers’ lives. According to military officials, placing servicemembers on the TDRL provides an opportunity for the military to recover some of its investment in recruitment and training by returning servicemembers to duty, and provides more time to make an appropriate disability determination in cases where a condition is likely to improve or deteriorate. Despite these potential benefits, many military officials noted that the TDRL is administratively burdensome and contributes to the workload of an already overburdened disability evaluation system. For servicemembers, benefits of being on the TDRL may include potentially higher disability payments or returning to military service. Conversely, many focus group participants said that being on the TDLR limited their ability to move forward in their lives, and they expressed confusion, uncertainty, and a sense of being adrift while on the TDRL. To ensure uniformity in military disability case processing and decision making, DOD requires each service to establish a quality assurance process. However, decisions related to the stability of disabilities for rating purposes—a key criterion for initially placing servicemembers on the TDRL—are not systematically examined within or across the services. For their part, the services do review some individual cases to ensure that the medical evidence supports the determination. However, they do not compare TDRL determinations made in cases with similar disabilities and other characteristics. Military officials we spoke with acknowledged that instability is defined broadly and can be open to different interpretations by the PEBs. Specifically, some military officials said that predicting whether or not a disability rating may fluctuate within 5 years is not always easy and can involve considerable professional judgment. In fact, our analysis shows that some services have been classifying disabilities as “unstable” more often than other services. TDRL determinations have consistently accounted for a larger proportion of all PEB determinations in the Navy and Marine Corps than in the other services. (See fig. 7.) Specifically, between fiscal years 2001 and 2007, TDRL determinations constituted 27 percent of all Navy PEB determinations and 26 percent of all Marine Corps PEB determinations. In contrast, TDRL determinations accounted for 15 percent of all Army PEB determinations and 11 percent of all Air Force PEB determinations. Another possible explanation for why some services classify disabilities as unstable more often than other services, according to DOD officials, is that there may be greater incidence of disabilities in some services that are more likely to be unstable. Currently there are no data available from either DOD or the services that could be used to determine why placement rates vary. Further, DOD does not compare PEB instability decisions across the services. As a result, DOD and the services have no way of knowing the extent to which the military is making consistent decisions. Furthermore, although most TDRL disability ratings did not change even after several years on the list, DOD and the services do not routinely compile and study how TDRL outcomes are related to different types of disabilities, even though this information could help inform future TDRL placement and retention decisions. For example, such information could shed additional light on which conditions are more likely to change over time and which ones are not. Meanwhile, participants in our focus groups often questioned the appropriateness of their placement on the TDRL, and the perceived unfairness of TDRL placement and retention decisions was a theme that emerged in each of our focus groups. Some of the military physicians we spoke with also questioned the value of having placed individuals with certain conditions, such as certain types of cancer, on the TDRL. For example, we were told that in one case, a cancer patient whose cancer had metastasized was placed on the list, even though he was not expected to recover. Officials that we spoke with in each of the services told us that TDRL medical reexaminations do not necessarily occur every 18 months, as required by law. As previously noted, an effective system of internal controls would include policies, procedures, and mechanisms to help the services ensure that the requirements of the law are being met. However, the services do not collect data needed to know how often and why TDRL medical reexaminations are late or fail to occur, nor have they established performance measures or goals to guide the timely processing of TDRL reexaminations. The services’ procedures for tracking TDRL cases and enforcing the statutory requirements are roughly similar. (See fig. 8.) Each service assigns someone from their TDRL administrative unit to monitor when a TDRL case is due for a reexamination and to forward the details of the servicemember’s case, including which medical tests need to be performed, to the MTF located nearest to the most current address on file for the temporary retiree. Typically, the MTF is notified 2 months before the reexamination is due, to allow the MTF time to schedule the examinations and forward orders to the temporary retiree, and to allow the temporary retiree to make other arrangements, if needed. The services do not track the extent to which TDRL reexaminations occur every 18 months, as required. However, late or missed TDRL medical reexaminations are not uncommon, based on our interviews with staff at MTFs, PEB officials, and focus group discussions with temporary retirees. When asked about the reasons for late or missed TDRL reexaminations, military officials and administrative staff responsible for scheduling them in each of the services offered several possible reasons. They cited temporary retiree noncompliance, such as failure to update contact information or to attend scheduled appointments, as an obstacle to completing examinations on time. They also acknowledged that the MTFs cannot always schedule examinations on time. This may be because they do not always receive the reexamination package far enough in advance from TDRL administrators or because appointment slots for certain medical specialties, particularly mental health, are limited. Staff at MTFs across the services also reported that TDRL cases are not always given the appropriate level of priority when appointments are scheduled. Nevertheless, without better data, the services cannot effectively identify and address the reasons for delayed or missed reexaminations. To better leverage limited resources and expedite TDRL case processing, current service procedures allow MTF’s to rely on the results of medical examinations performed by civilian and VA physicians to meet reexamination requirements. However, staff at most MTFs we contacted said that they knew of few instances in which the military allowed TDRL reexaminations to be conducted by nonmilitary physicians to reduce the travel burden on a temporary retiree, or to ease MTF workloads. Generally, TDRL administrators refer temporary retirees to the closest MTF that has all medical specialties needed to evaluate their case. However, many temporary retirees do not live near an MTF with all needed medical specialties. Staff at some MTFs reported that, among those for whom they schedule TDRL reexaminations, between one-quarter to one-half travel more than a few hours to be examined—despite having easier access to nonmilitary physicians. One MTF staff member we spoke with described a case in which a temporary retiree from the Navy traveled by car for nearly 10 hours—approximately 460 miles—from Sacramento, Calif., to Camp Pendleton Hospital in southern California. In another case, an MTF staff member described a case in which an Army retiree drove for nearly 8 hours—approximately 480 miles—from Wisconsin to Ireland Community Hospital in Fort Knox, Ky. Lengthy travel can be particularly burdensome for those who experience pain as a result of their medical conditions or for those who have limited finances or inflexible employment situations. Moreover, according to some MTF staff, some temporary retirees have told them that they fear losing their job if they miss work to keep a medical appointment for a TDRL reexamination. As noted, the limited availability of appointment slots for certain medical specialties and a lack of priority in scheduling at some MTFs can contribute to delays in completing TDRL reexaminations. This may be a result of rising MTF workloads, caused by increasing numbers of injured servicemembers returning from combat and increasing disability caseloads. Despite travel burdens for some temporary retirees and difficulties in completing timely TDRL reexaminations at MTFs in the face of heavy workloads, the use of nonmilitary physicians to help prepare TDRL medical examination reports has been limited, according to MTF staff. Military officials said that this is because VA and civilian physicians, who are not subject to DOD requirements, are not always familiar with military disability evaluation requirements and may not include information that the services need to make a determination about whether a temporary retiree should be removed from the TDRL. However, military officials said that this could be addressed by providing clearer guidance to nonmilitary physicians on how to prepare TDRL reexamination reports. It should be noted that one VA hospital is already conducting medical examinations for three MTFs as part of the joint DOD-VA disability evaluation pilot. DOD requires temporary retirees to submit to a periodic medical examination at least once every 18 months. In addition, the services require temporary retirees to provide them with current contact information to facilitate these examinations. Although the services do not collect data on the extent to which temporary retirees fail to comply with reexamination requirements, MTF staff in each service reported problems with temporary retirees not showing up for scheduled appointments. Some MTF staff that we spoke with said that cancelled TDRL appointments due to temporary retirees’ failure to show up happened in relatively few cases each month, while others said that this happened much more often. Although DOD and military service regulations allow for suspending TDRL pay if temporary retirees fail to satisfy these requirements, the procedures in place across the services are insufficient to ensure that these provisions are enforced consistently. For example, when temporary retirees fail to update their contact information, each service’s procedures specify what TDRL staff should do to locate and contact them, but do not clearly specify at what point these efforts should be discontinued. In addition, when temporary retirees fail to keep appointments for medical reexaminations, these procedures allow for rescheduling them, but do not specify how many appointments the retirees can miss before TDRL monthly payments are stopped or what constitutes a valid reason for missing an appointment. As a result of the lack of specificity, the number of steps taken at different MTFs to locate and encourage temporary retirees to go to their reexaminations before sending these cases back to TDRL administrators for a stop-pay decision may vary widely. Service officials said that the flexibility they have in making stop-pay decisions allows them to consider extenuating circumstances, including the potential impact that temporary retirees’ disabilities may have on their ability to comply. For example, those with certain brain injuries or mental health conditions may have trouble remembering what they are required to do while on the TDRL. Stopping pay in these circumstances may be unfair to the temporary retiree, particularly when servicemembers have dependents who rely on these benefits. However, DOD regulations do not provide guidance to the services on permissible exceptions. Information about temporary disability retirement that the services provide to those they place on the TDRL is not always clear or complete and can be difficult for TDRL retirees to access. The official PEB findings forms, themselves, do not fully explain the reason for an individual’s placement on the list or what is required of the TDRL retiree. Counseling provided by PEBLOs was reported to be inconsistent and lacking in follow-through, while the information contained in the services’ pamphlets, brochures, and fact sheets was not always complete. Military Web sites that might have provided more thorough and ongoing information were also incomplete or difficult to find. TDRL retirees participating in our focus groups expressed considerable confusion about and dissatisfaction with their limited access to information and contacts. A PEB findings form is used to document each PEB disability decision. A copy of this form is also given to servicemembers to notify them of the PEB’s decision in their case. In addition to indicating the decision, each service’s PEB findings form provides basic information about all disabling conditions—how each is related to military service, a disability rating for each disabling condition, and an overall rating—and the servicemember’s years of qualifying service. When the decision is made to place a servicemember on the TDRL, the PEB findings form can lack important information about the TDRL, and the information that is provided can be confusing. (See apps. III, IV, and V for examples of each service’s PEB findings form.) For example, in TDRL cases, the services are not required to explain the following on the findings form: Why disability retirement benefits were granted temporarily rather than permanently—specifically, that the PEB was unable to determine, based on the medical evidence at that time, what the servicemember’s permanent disability rating should be. When a final disability decision will be made—specifically, that the PEB will determine the servicemember’s permanent disability rating when the medical evidence shows that the disabling condition has stabilized or when the TDRL retiree has been on the list for 5 years, whichever comes first. We examined a limited number of actual PEB findings forms that temporary retirees had received. None clearly explained why the servicemembers were granted temporary versus permanent disability retirement, when they could expect to receive a final disability decision, or which disabling conditions have been determined to be unstable. Further, the Army’s finding form does not specify for a TDRL determination which, if any, of the listed conditions is considered permanent and stable. It does, however, include standard language about the servicemember’s duty to keep the Army informed about their current mailing address and to report for medical reexaminations associated with PEB determinations, as well as when the servicemember’s first TDRL reexamination is likely to occur. In contrast, the Air Force, Marine Corps, and Navy PEB findings forms do not include information about the servicemember’s responsibilities while on the list or when their first reexamination is likely to occur, but they do indicate that the servicemember has a medical condition that may be permanent. In some cases, the information in PEB findings forms is presented in a way that makes it difficult for servicemembers to understand, regardless of the disability decision made in their case. Based on the information contained in their PEB findings forms, some TDRL retirees in our focus groups found it difficult to understand how ratings for individual disabling conditions are combined into a single overall disability rating. For example, one Army PEB findings form that we reviewed presented the equation, shown in figure 9, to demonstrate how one servicemember’s overall disability rating had been calculated. CR: 50 + 40 = 70 + 20 = 76 + 20 = 81 + 10 = 83 + 10 = 85 = 90 percent Although the equation includes all of the percentage ratings for each of the servicemember’s rated conditions, it is not clear as to how the numbers correspond to each percentage rating and how each of the listed percentages logically results in the final placement rating. Furthermore, many TDRL retirees in our focus groups indicated their difficulty in understanding this information. DOD requires that servicemembers evaluated by a PEB be provided counseling about the significance and consequences of their PEB disability determination and any associated rights and benefits. For temporary retirees, this should occur at the time a PEB places them on the list and when any subsequent decisions to retain them on the list are made. In practice, each service provides this counseling through a PEBLO. PEBLOs have a critical role in helping temporary retirees understand what it means to be placed on the TDRL. According to focus group discussions, however, PEBLO counseling was not necessarily thorough or consistent. It involved meeting one-on-one with a PEBLO in some cases and participating in a group meeting in others. While some focus group participants knew of someone they could call if they needed information about the TDRL, many did not. Moreover, the counseling that temporary retirees receive also appears to vary across services. Air Force and Navy procedures allow for PEBLO counseling to be available at any time throughout the disability evaluation process, while the Army requires only that counseling be provided at specific times in the process. Although officials from each of the services told us that temporary retirees are provided with a point of contact, the lack of access to someone who could answer their questions was a repeated theme in our focus groups. There are several reasons why the quality of PEB counseling may vary across the services. In a previous report, we found that, although each service employs PEBLO counselors in accordance with DOD rules, each places them in a different organizational unit, provides them with different levels of training, and begins the counseling process at different points in the disability evaluation process. In each of our focus groups, the quality of counseling was a common theme, and not all participants remembered receiving counseling at the time they were placed on the TDRL. Although some participants in each of our focus groups said that counseling had been helpful, the prevailing opinion across all groups was that it did not meet their needs and that it was not helpful. In addition to what appears on the PEB findings form and what is provided by PEBLOs, each of the services provides information about the TDRL through written handouts. However, the additional material provided by the Air Force and Navy does not always address what temporary retirees indicated was confusing or of most importance to them. Specifically, the Air Force and Navy material does not always include information about the overall disability evaluation system, stability of disabilities, the consequences of not complying with TDRL requirements, or what the eventual outcome of a TDRL case might be. It also does not always provide a correct point of contact for questions temporary retirees might have about the TDRL after they have read through this additional material. The information the Air Force and Navy have developed includes general information about the TDRL process. The Air Force’s one-page fact sheet offers a broad explanation of why a servicemember may be placed on the TDRL, the rights and responsibilities of TDRL retirees, and points of contact for general questions about retired pay. It does not provide specific information servicemembers may need about the TDRL, such as who servicemembers may notify when they need to report changes to their addresses and phone numbers. The Navy also has a brochure that answers seven questions about TDRL pay and benefits, and like the Air Force fact sheet, offers a broad explanation of why a servicemember may be placed on the TDRL and the rights and responsibilities of temporary retirees. The Navy brochure also provides a list of administrative offices that temporary retirees may contact about pay and benefits; however, the phone number listed for TDRL information was not working when we called it. Additionally, while some MTF staff reported that paying for travel costs up-front can be an issue for temporary retirees with limited finances, the Navy brochure does not mention that temporary retirees may request an advance payment for travel costs prior to incurring them. Lastly, the Air Force and Navy materials do not explain that in addition to loss of monthly pay, noncompliance with TDRL requirements may also result in a loss of health insurance, including coverage for family members. In contrast, the Army provides temporary retirees with a frequently asked questions (FAQ) sheet, with answers to 25 questions about why a servicemember is placed on the TDRL, their rights and responsibilities while on the TDRL, potential final determinations, and points of contact servicemembers can go to for answers to their questions about the TDRL. The Army has also developed a handbook that describes the entire disability evaluation process and includes basic information about the TDRL. Information on the TDRL was also generally available on service Web sites, but we found that it was not easy to locate and was often incomplete. None of the services’ home pages included a direct link to TDRL information, and simple searches for TDRL information on each of these pages did not lead directly to TDRL information. A more lengthy search of the services’ individual Web sites eventually led to information about the TDRL, although the amount of information varied by branch. On the Army’s Web site, information on the TDRL could be found by accessing a link to the Army’s Physical Disability Evaluation System handbook. Although the Navy’s printed TDRL brochure offered a Web address for TDRL information, the address was not available when we attempted to access it. However, the Bureau of Naval Personnel Web page included a TDRL information page that offered a series of links to relevant regulations, potential final determinations for temporary retirees, and likely reexamination time frames. A phone number was also provided on this Navy Web page, but it was the same, nonworking phone number provided in the Navy’s printed brochure. The Air Force Web site included a brief summary of the TDRL, but lacked information about noncompliance with TDRL requirements and the 5-year limit on receipt of temporary retirement benefits. Based on the results of our focus groups with temporary retirees, in particular the gaps in information we found in the PEB findings forms and lack of a specific TDRL point of contact, appear to result in confusion about the TDRL and dissatisfaction with placement on the list. In most of our focus groups, there was confusion about why participants had been placed on the TDRL or what participants might expect throughout the TDRL process. In some cases, participants were unable to reconcile what they knew about the TDRL with the circumstances in their individual case. Specifically, there was little understanding across our focus groups of the concept of stability and how it applied to their particular disabilities. Furthermore, in several focus groups, participants said that they had learned what they were required to do while on the TDRL through their own initiative, largely relying on contacts with colleagues or their own research to obtain information about the purpose of TDRL reexaminations and decisions to retain them on the TDRL as opposed to receiving permanent disability. The growth in TDRL caseloads further taxes limited resources available to the military disability evaluation system, which is already struggling to efficiently process increasing numbers of cases involving ill and injured servicemembers. Processing TDRL cases adds to the complexity of this system and to its cost. The TDRL process also has a significant impact on servicemembers’ lives. If not managed effectively and efficiently, it can deprive servicemembers of timely, appropriate, and fair disability determinations, and prevent many from moving on with their lives after incurring service-related disabilities. There are several indications that the services’ management of the TDRL is problematic. Currently, DOD’s quality assurance procedures do not take advantage of available data on outcomes in past TDRL cases to avoid postponing final disability determinations for servicemembers with disabilities whose severity is unlikely to change. Current quality assurance procedures also do not provide for the systematic review of TDRL placement decisions. Therefore, the DOD has no way of knowing whether these placements are appropriate or consistent. Further, DOD does not have effective mechanisms for holding staff accountable for the timeliness of TDRL reexaminations or otherwise ensuring the overall efficiency of TDRL case processing. Without a system for monitoring the timeliness of reexaminations, a clear policy for addressing noncompliance, and a strategy for leveraging nonmilitary resources to complete reexaminations, DOD cannot avoid sometimes lengthy delays in final determinations in TDRL cases. Further, by failing to make a final determination as soon as temporary retirees are removed from the TDRL, the services are denying some temporary retirees benefits to which they are entitled. Finally, inadequate information on PEB finding forms about why individuals are placed on the TDRL and little or no access to a point of contact that can address temporary retirees’ questions about the process, make it less transparent. This may generate distrust and frustration among many temporary retirees and affect their ability and willingness to comply with TDRL requirements. Without a better understanding of the information needs of temporary retirees and more proactive contact with them, DOD is missing an important opportunity to remove potential obstacles to temporary retirees’ compliance with TDRL requirements. In addition to the TDRL management issues we identified, the outcomes we found in TDRL cases raise questions about the list’s design and purpose. In most of the cases we reviewed, the temporary retiree received a permanent disability rating well before the 5-year TDRL limit, which suggests that the current TDRL time limit could be shortened. With only 1 in 100 temporary retirees returning to active duty, the TDRL also does not appear to be a very effective mechanism for meeting the needs of the military. Finally, most temporary retirees received a final rating equal to or lower than their initial one, and very few were eventually eligible for higher permanent disability payments. As a result, the TDRL simply postponed the inevitable for many with service-related disabilities and delayed their transition from military to civilian life. To ensure that TDRL placement and retention decisions are appropriate and consistent, the Secretary of Defense should take the following two actions: Direct the Secretaries of the Air Force, Army, and Navy to better inform their decisions about whether or not to place or retain someone on the TDRL by taking into account data from past TDRL cases on outcomes for particular types of disabilities; and systematically review the appropriateness and consistency of each service’s PEB decisions regarding the stability of disabilities. To ensure that TDRL reexaminations occur at least once every 18 months, the Secretary of Defense should take the following four actions: Direct each service to track and periodically report on the timeliness of medical reexaminations in TDRL cases; develop DOD-wide standards and goals for the timeliness of TDRL establish a clearer policy specifying how the services should enforce the requirements that temporary retirees submit to periodic reexaminations and notify TDRL administrators when they have a change of address; and expand the use of nonmilitary physicians for conducting TDRL reexaminations, in accordance with DOD guidance. To prevent unnecessary delays in permanent disability determinations for temporary retirees and gaps in the receipt of disability benefits they are entitled to, the Secretary of Defense should take the following action: Direct the services to ensure that temporary retirees receive a final determination upon expiration of their 5 years on the TDRL, as required by law. To ensure that temporary retirees receive adequate information to understand why they are placed on the list and the importance of complying with TDRL requirements, we recommend that the Secretaries of the Air Force, Army, and Navy take the following three actions: Assess the adequacy of information they provide regarding the TDRL, including the information contained on their PEB findings forms and other materials, and provided by PEBLOs, and make improvements where needed; take steps to encourage ongoing contact between temporary retirees and TDRL administrators by, for example, maintaining a working and easily accessible TDRL administrative telephone hotline for temporary retirees; and improve access to Web-based information about the TDRL. Given the low number of temporary retirees who return to the military, the high proportion who eventually become eligible to receive permanent military disability retirement benefits, and the added cost to the military of administering TDRL cases, the Congress may wish to consider shortening the current 5-year maximum tenure on the TDRL. We provided a draft of this report to DOD and the services for review and comments. DOD provided written comments, which are reproduced in appendix IX. DOD indicated that it concurs with each of our recommendations, with comments in a few cases. With respect to our recommendation that DOD establish a clearer policy for how the services should enforce TDRL requirements for temporary retirees, DOD commented that the services provide servicemembers directions regarding TDRL requirements that they must comply with, and that it is not reasonable to assume that DOD can keep track of every change of address if temporary retirees fail to keep the information current. We agree. However, our recommendation calls for DOD to establish more specific guidelines on when and what action should be taken in response to temporary retirees’ failure to comply with TDRL requirements, and is intended to ensure equitable treatment in all cases of noncompliance across the services. DOD noted that our recommendation to expand the use of nonmilitary physicians for conducting TDRL reexaminations should include a statement that nonmilitary physicians should be “trained in and will accept examinations of individuals using VA-approved templates.” DOD also indicated that “use of non-military physicians should also include specific reference to reexaminations at non-military and non-VA facilities given training and qualification consistent with Title 10 and Title 38, USC.” We believe that our recommendation falls within the services’ current authority to use reports of medical examinations from nonmilitary physicians and facilities under DOD Instruction 1332.38, which assigns the responsibility for assuring the adequacy of these examinations to MTFs. In addition, this instruction currently encourages physicians performing reexaminations for the TDRL to use VA’s physician’s guide. Our recommendation is not suggesting a change to the underlying guidelines prescribing the use of nonmilitary physicians; rather, we are recommending that use of nonmilitary physicians should be expanded. In response to DOD’s comments, we have added the phrase “in accordance with DOD guidance” to our recommendation. Finally, DOD concurred with our recommendations for ensuring that temporary retirees are provided easier access to military personnel who can answer their TDRL questions and to Web-based TDRL information. It also commented that both are readily available to temporary retirees. While we acknowledge the services’ current efforts in this area, they do not appear to be enough to meet the needs of temporary retirees. The results of our review of the accessibility of TDRL points of contact and Web-based information, as well as temporary retirees’ reports of difficulty accessing both, indicate a need for improvement in these areas. DOD also provided technical comments, which we incorporated in the report as appropriate. We are sending copies of this report to relevant congressional committees, the Secretary of Defense, the Secretary of Veterans Affairs, and other interested parties. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-7215 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix X. The objectives of our review were to examine (1) recent trends in the Temporary Disability Retired List (TDRL) caseload size, (2) recent trends in the characteristics of servicemembers placed on the TDRL, (3) disability retirement outcomes for TDRL placements, (4) the adequacy of TDRL management, and (5) the adequacy of information provided to temporary retirees. To identify trends in TDRL caseload size, we examined data provided by the Department of Defense’s (DOD) Defense Manpower Data Center (DMDC) on the size and makeup of each service’s annual TDRL caseload for fiscal years 2001 through 2007. More specifically, we compared TDRL caseload sizes in the last month of each fiscal year (September) over time, both within and across the services. We also compared the relative proportion of former active duty and reserve servicemembers in the annual TDRL caseload over time. To determine what could have contributed to the growth in TDRL caseloads, we compared the trend in TDRL caseload size to the trend in the (1) number of cases that received disability evaluation system determinations, (2) TDRL placement rate, and (3) number of cases removed from the TDRL each year, for fiscal years 2001 through 2007. We obtained these data from the Air Force Military Personnel Data System; the Army Physical Disability Case Processing System; and the Joint Disability Evaluation System, which captures Physical Evaluation Board (PEB) case data for the Navy and Marine Corps. To assess the reliability of each of these systems, we reviewed documentation related to each that provided information such as record layout, data dictionary, how data were collected and stored, measures taken to ensure data quality, and screens used to extract the data we required. We also interviewed military personnel knowledgeable about each system to obtain more detailed information about the system and the data in it. Based on our assessment, we determined that data from each of these systems were sufficiently reliable for our analyses. To identify the characteristics of individuals placed on the TDRL each month from January 2000 through December 2007 (see table 3), we analyzed monthly transaction-level data DMDC had extracted for us from its Retired Pay File, a database containing information on individual retirees from the Army, Air Force, Marine Corps, and Navy. To determine the characteristics of temporary retirees placed on the TDRL in calendar years 2000 through 2007—including disability rating percentages, their years of service, and the proportions who were formerly active duty servicemembers and reservists—we analyzed data for these individuals the DMDC extracted for us from their Retired Pay File. To identify disabilities among temporary retirees placed on the TDRL in calendar years 2000 through 2007, we obtained the Department of Veterans Affairs Schedule for Rating Disabilities (VASRD) diagnostic codes associated with each temporary retiree’s case from the services’ PEBs, and grouped these disabilities under the appropriate disability categories provided in the VASRD. We focused many of our analyses of TDRL outcomes on individuals placed on the list in calendar years 2000 through 2003. At least 5 years (the maximum amount of time someone can spend on the TDRL) had elapsed since these individuals had been placed on the list, so a final disability determination should already have been made in each case. To determine what final PEB disability determinations were for TDRL placements from calendar years 2000 through 2007, we examined monthly transactions from January 2000 through August 2008 for each case, contained in the data we received from DMDC, to identify movement off the TDRL due to (1) placement on the PDRL, (2) separation from the service, (3) death, or (4) return to active duty. We counted the first of these pay actions encountered after the date of placement on the TDRL as the final disability determination in that case. We examined data we had received from the relevant PEB in each case to determine which of those separated from the service had received a disability severance payment and which had been separated with no disability benefits. We also used the same DMDC monthly transaction data to determine how long after placement on the TDRL temporary retirees received a final disability determination. We counted the number of months, from the month the individual in each TDRL case was initially placed on the list, to the month that the individual was first removed from the TDRL due to (1) placement on the PDRL, (2) separation from the service, (3) death, or (4) return to active duty. In 1,004 cases, a separation from the service action was followed in 1 or more months by a placed on the PDRL action. In these cases, the time it took to receive a final disability determination was based, instead, on the month in which placement on the PDRL occurred. Finally, data from the DMDC Retired Pay File on the initial and final disability percentage ratings for TDRL placements in calendar years 2000 through 2003 were used to identify how these ratings differed, if at all. To determine the amount of monthly benefits individuals would receive, we multiplied the disability rating as a percentage of base pay. Thus, we looked at the disability rating and applied the following pay guidelines to determine what percentage of base pay TDRL retirees would be eligible to receive: (1) TDRL payments are a minimum of 50 percent of base pay; (2) the PDRL is not subject to any minimum payments; and (3) for both the PDRL and the TDRL, the maximum payment is 75 percent of base pay. We then compared the percentage of base pay individuals would be eligible for while on the TDRL verses the percentage they would be eligible for on the PDRL. From here, we could determine the number of TDRL retirees whose monthly payments would increase, decrease, or stay the same once they moved to the PDRL. To assess the reliability of data from DMDC’s Retired Pay File, as well as the TDRL caseload data we received from the DMDC, we performed initial tests and checks on the data to verify that records matched our selection criteria and were sufficiently reliable for our analyses. We obtained documents from the military on the Retired Pay File edit file layout, the record layout of the pay file, the definition of the data variables, how the data in this file were collected, and the measures taken to assure data quality. We also conducted interviews with DMDC staff to obtain more specific information regarding the data, such as how they are stored and maintained and how they should be interpreted and used. Based on our assessment, we determined that these data were sufficiently reliable for our analyses. In addition to our own analysis, we reviewed and discussed with DOD officials the results of their recent study of the TDRL, which also examined TDRL retirees’ characteristics and outcomes. To assess the adequacy of TDRL management, we reviewed relevant laws, regulations and procedures to determine how TDRL decisions were made, monitored, and evaluated; how reexaminations for TDRL were arranged and tracked for timeliness; what use was made of reexaminations by nonmilitary physicians to reduce the burden on MTFs; and how TDRL requirements for temporary retirees were enforced. Specifically, we interviewed military officials and staff from each service involved in the TDRL process, including PEB members and physicians, Medical Command representatives, staff in each service’s TDRL administrative office or unit, Physical Evaluation Board Liaison Officers (PEBLO), and staff at selected military treatment facilities (MTF) responsible for scheduling and monitoring the completion of TDRL reexaminations. We assessed the adequacy of what we learned about the management of the TDRL based on (1) our review of TDRL laws, regulations, and other written policies and guidance; (2) the results of our interviews; and (3) its consistency with internal control standards for the federal government and the requirements of the Government Performance and Results Act of 1993. For our discussions with PEBLOs, we selected MTFs across the services. We also considered geographic diversity and facility size when selecting these facilities. The information we obtained from PEBLOs at these facilities is testimonial in nature and not intended to reflect the practices, experiences, or opinions of PEBLOs at MTFs, in general. (See table 4.) To help assess the adequacy of TDRL management, we also examined the experiences and views of temporary retirees from the Air Force, Army, Marine Corps, and Navy. To obtain this information, we conducted a series of 12 focus groups in June and August 2008 with individuals who were on the TDRL. Three focus groups were conducted at each of four locations— Norfolk, Va.; Quantico, Va.; San Antonio, Tex.; and Killeen, Tex. These locations were selected because each provided a large pool of temporary retirees from which to draw focus group volunteers. Together, these locations also enabled us to obtain the perspectives of temporary retirees from each of the services. To recruit volunteers for these focus groups, we obtained a list of temporary retirees who resided within a 50-mile radius of each location from the Defense Finance and Accounting Service. We attempted to contact each temporary retiree on the list to invite them to participate in a focus group conducted in their area. A total of 57 temporary retirees participated in these focus groups. (See table 5.) Focus group participants had a wide range of characteristics. They had an average of 12 years of military service, ranging from a minimum of 2, to a maximum of 28 years. About three-quarters had been active duty, and about one-quarter had been in the reserves. About one-quarter had served in Operations Enduring Freedom or Iraqi Freedom. To obtain information from the focus groups, we established a standard protocol to facilitate the discussions. Each focus group covered several major topics, including the overall disability evaluation process, placement on the TDRL, periodic reexaminations while on the TDRL, and advantages and disadvantages of being placed on the list. A GAO facilitator led each discussion to keep participants focused on the specified issues within discussion time frames. With the consent of focus group participants, we recorded each discussion and had each recording professionally transcribed. To summarize the results of our focus groups, we identified themes participants raised that were common to more than one group. We verified our analysis to ensure its reliability. While we identified a number of common themes across the 12 focus groups, our results cannot be generalized to the universe of all temporary retirees. Finally, we contacted six veterans’ service organizations to obtain their views about the TDRL process and how it affects servicemembers placed on the list. We obtained written comments from the Disabled American Veterans, the Iraq and Afghanistan Veterans Association, and the Military Officers Association of America. (See apps. VI, VII, and VIII.) To assess the completeness, clarity, and accessibility of information provided to individuals placed on the TDRL, we reviewed each service’s PEB findings form and other written materials, as well as information available on the services’ Web sites. (See table 6.) The specific topics we looked for in PEB findings forms and other written materials, and on a service’s Web site were (1) the purpose of the TDRL, (2) definitions of “stability” and “permanency,” (3) rolls and responsibilities of temporary retirees while on the list, (4) ramifications of noncompliance with TDRL requirements, and (5) potential final disability determinations. We also obtained information from our focus groups about the types of information they needed and wanted about the TDRL, their sources for information about the list, and the adequacy of the information they received. Num Pct Num Pct Num Pct Num Pct 118 12 102 10 148 14 158 16 8 252 10 222 10 271 12 16 6 4.6 26 63 uest from DMDC yielded Retired Pay File records through August 200. Thus, 1 (6 Air Force, 54 Army, 14 Marine Corps, and 64 Navy) of the cases shown as still on the TDRL in the 2000 through 200 cohort had less than 5 years worth of data in our dataset. It is possible that some of these cases could have had final dispositions before or at 5 years that occurred after August 200 and were not captured in our analysis. Appendix III: Sample Army Form: Physical Evaluation Board Proceedings (DA Form 199) Appendix V: Sample Air Force Form: Findings and Recommendations of the USAF Physical Evaluation Board (AF Form 356) Clarita Mrena (Assistant Director), Regina Santucci (Analyst-in-Charge), Salvatore Sorbello, Mark Ward, John Fisher, and Susan Bernstein made major contributions to this report. Walter Vance, Beverly Ross, and Anna Maria Ortiz assisted with study design and data analysis; James Rebbe and Doreen Feldman provided legal advice; Almeta Spencer assisted with study processing; Mimi Nguyen and Armetha Liles assisted with graphics; and Holly Dye assisted with editing. Traumatic Brain Injury: Better DOD and VA Oversight Can Help Ensure More Accurate, Consistent, and Timely Decisions for the Traumatic Injury Insurance Program. GAO-09-108. Washington, D.C.: January 29, 2009. Military Disability Systems: Increased Supports for Servicemembers and Better Pilot Planning Could Improve the Disability Evaluation Process. GAO-08-1137. Washington, D.C.: September 24, 2008. DOD and VA: Preliminary Observations on Efforts to Improve Care Management and Disability Evaluations for Servicemembers. GAO-08-514T. Washington, D.C.: February 27, 2008. VA Health Care: Mild Traumatic Brain Injury Screening and Evaluation Implemented for OEF/OIF Veterans, but Challenges Remain. GAO-08-276. Washington, D.C.: February 8, 2008. DOD and VA: Preliminary Observations on Efforts to Improve Health Care and Disability Evaluations for Returning Servicemembers. GAO-07-1256T. Washington, D.C.: September 26, 2007. Military Disability Evaluation: Ensuring Consistent and Timely Outcomes for Reserve and Active Duty Service Members. GAO-06-561T. Washington, D.C.: April 6, 2006. Military Disability Systems: Improved Oversight Needed to Ensure Consistent and Timely Outcomes for Reserve and Active Duty Service Members. GAO-06-362. Washington, D.C.: March 31, 2006. | Service members found unfit for duty due to a service-related illness or injury may be eligible for military disability retirement. When their disability is not stable, however, they may be placed on the military's Temporary Disability Retired List (TDRL) and granted temporary benefits for as long as 5 years. GAO was asked to respond to concerns about TDRL caseloads, management, and impact on servicemembers. To address these concerns, we analyzed TDRL data; interviewed military officials; reviewed laws, regulations, and other relevant documents; and conducted 12 focus groups with temporary retirees. This report examines (1) recent trends in the TDRL caseload size, (2) recent trends in the characteristics of those placed on the TDRL, (3) disability retirement outcomes for TDRL placements, (4) the adequacy of TDRL management, and (5) the adequacy of information provided to TDRL retirees. TDRL caseloads within the Department of Defense (DOD) grew by 43 percent, from 9,983 in fiscal year 2003 to 14,285 in fiscal year 2007. Growth in caseloads could be attributable to a combination of increases in the number of cases going through the military's disability evaluation system, higher TDRL placement rates, and low numbers of cases removed from the TDRL relative to new cases added to the list. DOD-wide, servicemembers placed on the TDRL in each calendar year from 2000 through 2007 varied little with respect to their military status, years of service, and disabilities. In each of these years, most TDRL placements had been active duty personnel, although the small proportion who had been reservists grew considerably. Most TDRL placements in each year also had fewer than 20 years of service and, over time, their average years of service declined. The disabilities most prevalent among TDRL placements were musculoskeletal, mental, or neurological in nature. Among those with mental and neurological disabilities, the incidence of post traumatic stress disorder and conditions related to traumatic brain injury increased substantially across the services. Although the experiences of temporary disability retirees varied, some outcomes were more common than others. DOD-wide, very few who were placed on the list between calendar years 2000 and 2003 returned to military service. Further, about half received a final determination within 3 years and, of those who ultimately received permanent disability benefits, 73 percent had final disability ratings that were no different than their initial ratings. Finally, only 7 percent of TDRL placements, DOD-wide, received a final disability rating that qualified them for permanent disability payment amounts higher than their TDRL payments. DOD and the services do not effectively manage key aspects of the TDRL process. The military does not systematically examine physical evaluation board (PEB) stability decisions for accuracy and consistency or routinely compile information on TDRL outcomes to better inform its assessments of stability. According to TDRL administrative staff, ensuring that medical reexaminations are done in TDRL cases at least once every 18 months is often a challenge. However, the military does not monitor the extent to which this requirement is met. Moreover, there is limited use of nonmilitary physicians to perform reexaminations, which could reduce burdens on medical treatment facilities. Finally, military procedures do not ensure consistent enforcement of TDRL rules. Information about the TDRL that the services provide is not always clear or complete and can be difficult to access. PEB findings forms provided to temporary retirees do not fully explain why service members are placed on the list or what is required of them. Temporary retirees reported that counseling related to PEB decisions was inconsistent and lacking in followthrough. Information from military pamphlets, brochures, fact sheets, and Web sites is often incomplete or difficult to find. Temporary retirees participating in our focus groups expressed considerable confusion about and dissatisfaction with their limited access to information and points of contact. |
VA’s mission is to serve America’s veterans and their families and to be their principal advocate in ensuring that they receive medical care, benefits, and social support in recognition of their service to our nation. VA, headquartered in Washington, D.C., is the second largest federal department and has over 235,000 employees, including physicians, nurses, counselors, statisticians, computer specialists, architects, and attorneys. VA carries out its mission through three major line organizations—VHA, Veterans Benefits Administration, and National Cemetery Administration—and field facilities throughout the United States. VA provides services and benefits through a nationwide network of 156 hospitals, 877 outpatient clinics, 136 nursing homes, 43 residential rehabilitation treatment programs, 207 readjustment counseling centers, 57 veterans’ benefits regional offices, and 122 national cemeteries. Our July 2004 report found significant property management weaknesses, including weaknesses in controls over IT equipment items valued at under $5,000 that are required to have inventory control. In that report, we made several recommendations for improving property management, including actions to (1) clarify existing policy regarding sensitive items that are required to be accounted for in the property control records, (2) provide a more comprehensive list of the type of personal property assets that are considered sensitive for accountability purposes, and (3) reinforce VA’s requirement to attach bar code labels to agency personal property. The Assistant Secretary for Information and Technology serves as the CIO for the department and is the principal advisor to the Secretary on matters relating to IT management in the department. Key functions in VA’s IT property management process are performed by IRM and property management personnel. These functions include identifying requirements; ordering, receiving, and installing IT equipment; performing periodic inventories; and identifying, removing, and disposing of obsolete and unneeded IT equipment. Figure 1 illustrates the IT property management process. In general, this is the process we observed at the four VA locations we audited. The steps in the IT property management process are key events, which should be documented by an inventory transaction, financial transaction, or both, as appropriate. Federal records management law, as codified in Title 44 of the U.S. Code and implemented through National Archives and Records Administration (NARA) guidance, requires federal agencies to adequately document and maintain proper records of essential transactions and have effective controls for creating, maintaining, and using records of these transactions. IRM personnel determine IT equipment requirements for a particular VA medical center or headquarters office based on strategic planning, medical center or office needs, specific requests, and budgetary resources. IRM personnel then submit requests to the cognizant Veterans Integrated Service Network (VISN), the CIO, and VA headquarters in Washington, D.C., for approval. For VA medical centers, the VISN generally purchases or leases IT equipment to realize economies of scale, but individual medical centers also may place incidental orders to meet their needs. In addition, headquarters offices may place individual orders or use purchase cards to acquire IT equipment. Medical equipment with IT capability is generally acquired through procurement contracts. When contracting personnel create a purchase order and submit it to the vendor, contracting personnel are required to send a copy of the purchase order to the appropriate property management personnel to notify them of a new order. When the vendor delivers ordered IT equipment to the loading dock, property management warehouse personnel inspect the boxes for visible signs of damage, and after accepting delivery, store IT equipment until they can transfer it to IRM personnel. Warehouse personnel confirm receipt and acceptance in the Integrated Funds Distribution Control Point Activity, Accounting, and Procurement System (IFCAPS), which then notifies the Financial Management System so that payment can be made to the vendor. Once the receipt is confirmed within IFCAPS, warehouse personnel notify IRM personnel of the delivery and arrange a transfer of the equipment to them. Upon transfer, an IRM official signs the receipt document, signifying acceptance of custody for the IT equipment. VA medical center property management personnel use information from the purchase order, including item name, item description, model number, manufacturer, vendor, and acquisition cost, to create property record(s) in the Automated Equipment Management System/Medical Equipment Repair Service (AEMS/MERS) for new IT equipment acquisitions. AEMS/MERS is a general inventory management system that is local to each VA medical center. Headquarters personnel also use purchase order information to enter records of new IT equipment in the Inte-GreatTM Property Manager system. Property management personnel also identify the department responsible for the IT equipment by recording an equipment inventory listing (EIL) code at VA medical centers and a consolidated memorandum receipt (CMR) code at headquarters. Once property records are created, property management personnel generate a bar code label for each piece of IT equipment. IRM personnel may prepare the equipment for issuance to specific users by installing VA-specific software and configurations prior to installation. In addition, VA medical center biomedical engineering personnel may test medical equipment for electrical safety before placing it in service. IRM personnel or, in some cases, contractor personnel deliver new IT equipment to the appropriate service or location for installation. IRM or contractor personnel also remove and replace old IT equipment that has been approved for replacement. At some VA facilities, a bar code label is affixed to a door jam or other physical element of the specific location in which the IT equipment has been installed to document item locations in the property management system. Once the new equipment is installed, IRM or contractor personnel transfer the replaced equipment to an IRM storage room pending disposal. VA policy mandates that each VA facility take physical inventory of its accountable property using one of two methods. The first method determines when the next inventory will be taken based on the accuracy rate for each EIL or CMR during the previous inventory. If an EIL or CMR was found to have an accuracy rate of 95 percent or above, the VA facility may inventory that EIL or CMR in 12 months. If the EIL or CMR has an accuracy rate of less than 95 percent, the VA facility must inventory that EIL or CMR within 6 months. The second method permits physical inventories to be performed on an exception basis. Under this method, a VA facility uses property management system data to identify the item bar codes that were scanned since the last inventory. If items have been scanned since the last inventory, they may be excluded from the current physical inventory. When a VA facility determines that items listed in inventory cannot be located, those items are listed on a Report of Survey and facility personnel convene a Board of Survey. Reports of Survey are provided to medical center VA Police or the Federal Protective Service officers at VA headquarters, as appropriate. The Report of Survey documents the circumstances of loss, damage, or destruction of government property. VA policy mandates that a Board of Survey be appointed when there is a possibility that a VA employee may be assessed pecuniary liability or disciplinary action as a result of loss, damage, or destruction of property and the value of the property involved is $5,000 or more. The Board of Survey reviews the Report of Survey, which identifies IT equipment that is unaccounted for and explains efforts made to account for the missing items. An approved Report of Survey provides necessary support for writing off lost and missing items. For items on the Report of Survey, VA personnel are supposed to update the use status in the property management system from “in-use” to “lost.” Updating the use status allows for the generation of an exception report in case any of the items unaccounted for are subsequently located. An IRM technician originates the request for turn-in of old IT equipment using VA Form 2237, “Request, Turn-In, and Receipt for Property or Services,” or users may submit an electronic form 2237. Pending final approval of VA Form 2237, electronic notification is given to property management and IRM personnel, who use this documentation to ensure that they are removing and disposing of the correct item(s). IRM or contractor personnel transfer the old IT equipment to an IRM storage room for hard drive sanitization and subsequent reuse or disposal. Medical equipment with IT capability is generally traded in to the vendor for upgraded models after medical center IRM personnel have documented that data sanitization procedures were completed. Federal agencies, such as VA, are required to protect sensitive data stored on their IT equipment against the risk of data breaches and thus the improper disclosure of personal identification information, such as names and Social Security numbers. Such information is regulated by privacy protections under the Privacy Act of 1974 and, when information concerns an individual’s health, the Health Insurance Portability and Accountability Act of 1996 (HIPAA) and implementing regulations. VA facilities have two options for removing data from hard drives of IT equipment in the excess property disposal process. Under the first option, the VA medical center removes the hard drives from the IT equipment and ships them to a vendor for sanitization (data erasing). The vendor physically destroys any hard drives it cannot successfully erase. The vendor submits certification of hard drive sanitization or destruction to IRM personnel and ships the sanitized hard drives back to the VA facility for disposal. Under the second option, VA IRM personnel perform the procedures to sanitize the hard drives using VA-approved software, such as Data EraserTM. IRM personnel complete VA Form 0751, “Information Technology Equipment Sanitization Certification,” to document the erasing of the hard drives. Hard drives that Data EraserTM software cannot successfully sanitize are held at the VA facility in IRM storage for physical destruction by another contractor at various intervals throughout the year. After data have been removed from the hard drives, the hard drives can be placed back into the IT equipment from which they were previously removed so that the computers can be reused or shipped directly to a VA IT equipment disposal vendor. For IT equipment that is not selected for reuse within VA, IRM personnel will notify cognizant property management personnel that the IT equipment is ready for final disposal and property management personnel transfer the items to a warehouse. VA facilities use different processes to handle the final disposal of IT equipment. For example, property management personnel may contact transportation personnel at the VA Central Office, who then contact a shipper to take the IT equipment to a disposal vendor, or a disposal vendor may pick up the IT equipment from the VA facility. Disposal vendors, including Federal Prison Industries, Inc., determine what IT equipment is to be donated to schools. Generally, within several days of the equipment being shipped to the disposal vendor, property management personnel change the status field of the equipment in the property management system from “in-use” to “turned-in” and designate the property record as inactive. Our tests of IT equipment inventory controls at four case study locations, including three VA medical centers and VA headquarters, identified a weak overall control environment and a pervasive lack of accountability for IT equipment items across the four locations we tested. Our Standards for Internal Control in the Federal Government states that a positive control environment provides discipline and structure as well as the climate that influences the quality of internal control. However, as summarized in table 1, our statistical tests of key IT inventory controls at our four case study locations found significant control failures related to (1) missing IT equipment items in our existence tests, (2) inaccurate information on user organization, (3) inaccurate information on user location, and (4) other recordkeeping errors. None of the case study locations had effective controls to safeguard IT assets from risk of loss, theft, and misappropriation. Moreover, our statistical tests identified a total of 123 lost and missing IT equipment items across the four case locations, including 53 IT equipment items that could have stored sensitive personal information. Personal information, such as names and Social Security numbers, is regulated by privacy protections under the Privacy Act of 1974 and information concerning an individual’s health is accorded additional protections from unauthorized release under HIPAA and implementing regulations. Although VA property management policy establishes guidelines for holding employees and supervisors pecuniarily (financially) liable for loss, damage, or destruction because of negligence and misuse of government property, except for a few isolated instances, none of the case study locations assigned user-level accountability. Instead, these locations relied on information about user organization and user location, which was often incorrect and incomplete. In addition, although our standards for internal control require timely recording of transactions as part of an effective internal control structure and safeguarding of sensitive assets, we found that VA’s property management policy neither specified what transactions were to be recorded for various changes in inventory status nor provided criteria for timely recording. Further, IRM and IT Services personnel responsible for installation, removal, and disposal of IT equipment did not record or assure that transactions were recorded by property management officials when these events occurred. Under this lax control environment, missing IT equipment items were often not reported for several months and, in some cases several years, until the problem was identified during a physical inventory. As shown in table 2, our statistical tests of IT equipment existence at the four case study locations identified a total of 123 missing IT equipment items, including 53 items that could have stored sensitive personal data and information. Although VA headquarters had the highest number of missing items, none of the four test locations had effective controls. Missing IT equipment items pose not only a financial risk but also a security risk associated with sensitive personal data maintained on computer hard drives. Because of the lack of user-level accountability and the failure to consistently update inventory records for changes in inventory status and user location, VA officials at our test locations could not determine the user or type of data stored on the 53 missing IT equipment items that could have stored sensitive personal information and, therefore, the risk posed by the loss of these items. The details of our test work at each location follow. Our physical inventory existence testing at the Washington, D.C., medical center identified an estimated 28 percent failure rate related to missing items in the recorded universe of 8,728 IT equipment items. Our analysis determined that the primary cause of these high control failure rates was a lack of coordination and communication between medical center IRM and property management personnel to assure that documentation on IT items in physical inventory was updated in the property management system when changes occurred. VA records management policy that implements federal records management law and NARA guidance requires the creation and maintenance of records of essential transactions, such as creating a timely record of newly acquired IT equipment in the property management system, and recording timely updates for changes in the status of IT equipment, including transfers, turn-ins, and replacement of equipment, and disposals. The medical center’s IT equipment inventory records included 550 older IT equipment items that property management officials told us should have been removed from active inventory. Because the inventory status fields for these items were either blank or indicated the items were “in use,” we included these items in the universe of current inventory for purposes of our statistical sample. Of the 44 missing IT equipment items identified in our statistical tests at the Washington, D.C., medical center, 9 items related to the 550 older IT equipment items of questionable status. Washington, D.C., medical center officials asserted that because of their age, these items would likely have been turned in for disposal. However, because the property system had not been updated to reflect a turn-in or disposal and no hard copy documentation had been retained, it was not possible to determine whether any of the 44 missing IT equipment items, including 19 items that could have stored sensitive personal information, had been sent to disposal or if any of them were lost or stolen. For other IT equipment items that could not be located during our existence testing, IRM or property management officials were able to provide documentation created and saved outside the property management system that showed several of these items had been turned in for disposal without recording the corresponding inventory transaction in the property management system. In March 2006, the Washington, D.C., medical center initiated an automated process for electronic notification and documentation of property turn-ins in the property management system. If effectively implemented, the electronic process should help resolve this problem going forward. With regard to the use and type of data stored on the 19 computers that our tests identified as missing, Washington D.C., medical center officials could not tell us the users or the types of data that would have been on these computers. This is because local medical center property management procedures call for recording the local IRM organization as the user for most IT equipment in the property management system, rather than the actual custodian or user of the IT equipment. The Indianapolis medical center had an estimated failure rate of 6 percent related to missing items in the recorded universe of 7,614 IT equipment items. However, our test results do not allow us to conclude that the center’s controls over existence of IT equipment inventory are effective. Our statistical tests identified 9 missing IT equipment items, including 3 items that could have stored sensitive personal and medical information. Of the 3 missing items that could have stored sensitive information, medical center inventory records showed that 2 of these items were medical devices assigned to the radiology unit. Although medical center officials provided us with turn-in documentation for one of these items—a magnetic resonance imaging (MRI) machine that had just been disassembled and removed from service—the documentation did not match the bar code (property identification number) or the serial number for our sample item, indicating possible recordkeeping errors. The user of the third item, a computer, was not known. In addition, our review of Indianapolis medical center purchase card records determined that some IT equipment items that were not included in property inventory records had been acquired with a government purchase card. We found that VA purchase card policy does not require cardholders to notify property management officials of the receipt of property items acquired with a purchase card, including IT equipment. As a result, there is no asset visibility or accountability for these items. Further, there is no assurance that sensitive personal data, medical data, or both that could be stored on these items are properly safeguarded. We estimated an overall failure rate of 10 percent related to missing items in the San Diego medical center’s recorded universe of 11,604 IT equipment items. Our statistical tests at the San Diego medical center identified 17 missing IT equipment items, including 8 items that could have stored sensitive personal data and information. San Diego medical center officials could not tell us the user or type of data that would have been stored on the missing computers. San Diego medical center officials noted that some of the missing items were older IT equipment that would no longer be in use. However, without valid turn-in documentation, it is not possible to determine whether these IT equipment items were disposed of without creating the appropriate transaction record or if any of these items, including items that could have stored sensitive personal and medical information, were lost, stolen, or misappropriated without detection. Our tests also determined that San Diego medical center officials were not following VA policy for physical inventory control and accountability of IT equipment. Consistent with a finding in our July 2004 report, we found that the San Diego medical center had not included IT equipment items valued at less than $5,000 in annual physical inventories. Although San Diego medical center property management officials record IT equipment ordered through the formal property acquisition process in inventory records at the time it is acquired, absent an annual physical inventory, center officials have no way of knowing whether these items are still in use or if any of these items were lost, stolen, or misappropriated. VA property management policy requires that sensitive items, including computer equipment, be subjected to annual physical inventories. At the time of our IT equipment inventory testing in January 2007, San Diego medical center officials told us that consistent with requirements in VA Handbook 7127/4, they were initiating a physical inventory of all IT equipment items, including those items valued at less than $5,000. In addition, our analysis of San Diego medical center purchase card records identified several purchases of IT equipment that had not been recorded in the medical center’s inventory records. As a result, our statistical tests did not include these items. Because the medical center’s IT Services and property management officials are not tracking IT equipment items that were acquired with government purchase cards, there is no accountability for these items. As a result, San Diego medical center management does not know how many of these items have not been recorded in the property inventory records or how many of these items could contain sensitive personal information. If San Diego medical center officials properly perform their fiscal year 2007 physical inventory, they should be able to locate and establish an accountable record for IT equipment items acquired with purchase cards that are being used within their facility. However, additional research would be required to identify all IT equipment items that were acquired with a purchase card and are being used at employees’ homes or other off-site locations. San Diego medical center IT Services personnel told us that they created and maintained informal “cuff records” outside the property management system to document installation and removal of IT equipment because property management officials did not permit them to have access to the property management system. In addition, IT Services personnel did not provide information from their informal cuff records to property management officials so that they could update the formal records maintained in property management system. As a result, the formal IT equipment inventory records saved in the property management system remained out-of-date, while more accurate records were maintained as separate IT Services files outside the formal system and were not available for management decision making. Further, San Diego IT Services personnel were not provided handheld scanners so that they could electronically update inventory records when they installed or removed IT equipment. The San Diego medical center IT Services’ informal cuff records create internal control weaknesses because they do not provide reasonable assurance of furnishing information the agency needs to conduct current business. We statistically tested a random sample of VA headquarters IT equipment items, which included IT equipment for each headquarters office. Based on our sample, we estimate an 11 percent failure rate related to missing items in the VA headquarters recorded universe of 25,353 IT equipment items. In addition, our tests of VA headquarters IT inventory identified 53 missing IT equipment items, including 23 computers that could have stored sensitive personal information. VA headquarters officials could not tell us the use or type of information that would have been stored on the missing computers. Table 3 identifies missing IT equipment items in our stratified sample by VA headquarters office. We found that VA headquarters property records were incomplete and out- of-date, particularly with regard to users and locations. VA headquarters officials told us that IT coordinators had access to the headquarters property system for purposes of updating records for their units. However, we found that the IT coordinators maintained informal spreadsheets, or cuff records, to track IT equipment assigned to their units instead of updating IT equipment records in the formal VA headquarters property system. As stated previously, the use of informal cuff records creates an internal control weakness because management does not have visibility over this information for decision making purposes. VA headquarters officials also told us that various headquarters offices acquire IT equipment using government purchase cards and that these items are not identified and recorded in inventory unless they are observed coming through the mail room or they are identified during physical inventories. As previously discussed, VA purchase card policy does not require purchase card holders to notify property management officials at the time they receive IT equipment and other property acquired with government purchase cards. VA management has not enforced VA property management policy and has generally left implementation decisions up to local organizations, creating a nonstandard, high-risk environment. Although VA property management policy establishes guidelines for user-level accountability, the three medical centers we tested assigned accountability for most IT equipment to their IRM or IT Services organizations, and VA headquarters organizations tracked IT equipment items through their IT inventory coordinators. However, because these IT personnel and IT coordinators did not have possession (physical custody) of all IT equipment under their purview, they were not held accountable for IT equipment determined to be missing during physical inventories. This weak overall control environment at the four case study locations resulted in a pervasive lack of user-level accountability for IT equipment. Absent user-level accountability, accurate information on the using organization and location of IT equipment is key to maintaining asset visibility and control over IT equipment items. The high failure rates in our tests for correct user organization and location of IT equipment, shown in table 4, underscore the lack of user-level accountability at the four case study locations. The lack of accountability has in turn resulted in a lax attitude about controlling IT equipment. As a result, for the four case study locations, we concluded that under the current lax control environment, essentially no one was accountable for IT equipment. Our statistical tests found numerous instances where inventory records were not updated when equipment was transferred to another VA unit, moved to another location, or removed from a facility. We also found that critical inventory system data fields, such as user and location, were often blank. Completion of these data fields would have created records of essential transactions for IT inventory events. Because property management system inventory records were incomplete and out-of-date, it is not possible to determine the timing or events associated with lost IT equipment as a basis for holding individual employees accountable. In addition to failures in our tests for accurate user organization and location, we found that the inventory system data field for identifying IT coordinators at headquarters units was often blank or incorrect. The IT coordinator role, which is unique to VA headquarters offices, is intended to provide an additional level of control for tracking and managing assignment of IT equipment within each headquarters organizational unit. Our tests for accurate and complete information on headquarters IT coordinators found 85 errors out of a sample of 344 records tested. We estimated the failure rate for the IT coordinator records at VA headquarters units to be 47 percent. Further, although VA headquarters officials told us they use hand receipts for user-level accountability of mobile IT equipment that can be removed from VA offices for use by employees who are on travel or are working at home, we found this procedure was not used consistently. For example, we requested hand receipts for 15 mobile IT equipment items in our statistical sample that were being used by VA headquarters employees. These items either could be or were taken off-site. We received 9 hand receipts—1 that had expired, 6 that were dated after the date of our request, and 2 that were valid. Officials at the three medical centers we tested were able to provide hand receipts for IT equipment that was being used by their employees at home. Officials at all four case study locations expressed concerns that it would be difficult and burdensome to implement user-level accountability for IT equipment, particularly in the case of shared workstations used by multiple employees. However, Washington, D.C., medical center officials initiated actions to establish user-level accountability for individual employees and unit heads who have shared workstations. In March 2007, Washington, D.C., medical center officials implemented a policy for user- level accountability and began training their employees on the new requirements. The new policy requires employees to sign personal custody receipts for IT equipment assigned to them, and it requires supervisors to be responsible for IT equipment that is shared among staff in their sections. The policy states that users of IT equipment will be held accountable for acts deemed inappropriate or negligent and that employees are personally and financially responsible for loss, theft, damage, or destruction of government property caused by negligence. VA headquarters officials told us that they are considering approaches for implementing a VA-wide policy for user-level accountability of IT equipment. As shown in table 5, we also found some problems with the accuracy of IT equipment inventory records, including inaccurate information on status (e.g., in use, turned-in, disposal), serial numbers, model numbers, and item descriptions. The estimated overall error rates for these tests were lower than the error rates for the other control attributes we tested, and the Indianapolis medical center had no errors. The errors we identified affect management decision making and create waste and inefficiency in operations. For example, inaccurate information on the status of IT equipment inventory items impairs management’s ability to determine what items are available or in use. Errors in item descriptions impair management decision making on the number and types of available items and timing for replacement of these items, and serial number errors impair accountability. Further, inaccurate inventory information on the IT equipment item status, as well as the location errors discussed above, caused significant waste and inefficiency during physical inventories. Many of these errors should have been detected and corrected during annual physical inventories. To assess the effect of the lax control environment for IT equipment, we asked VA officials at the case study locations covered in both our current and previous audits to provide us with information on the results of their physical inventories performed after issuance of recommendations in our July 2004 report, including Reports of Survey information on identified losses of IT equipment. VA policy requires that when property items are determined to be lost or missing, they are to be listed in a Report of Survey and an investigation is to be conducted into the circumstances of the loss before these items are written off in the property records. As of February 28, 2007, the four case study locations covered in our current audit reported over 2,400 missing IT equipment items with a combined original acquisition value of about $6.4 million as a result of inventories they performed during fiscal years 2005 and 2006. Based on information obtained through March 2, 2007, the five case study locations we previously audited had identified over 8,600 missing IT equipment items with a combined original acquisition value of over $13.2 million. Because inventory records were not consistently updated as changes in user organization or location occurred and none of the locations we audited required accountability at the user level, it is not possible to determine whether the missing IT equipment items represent recordkeeping errors or the loss, theft, or misappropriation of IT equipment. Further, missing IT equipment items were often not reported for several months and, in some cases several years, because most of the nine case study locations had not consistently performed required annual physical inventories or completed Reports of Survey promptly. Although physical inventories should be performed over a finite period, at most of the nine case study locations these inventories were not completed for several months or even several years while officials performed extensive searches in an attempt to locate missing items before preparing Reports of Survey to write them off. According to VA Police and security specialists, it is very difficult to conduct an investigation at this point because the details of the incidents cannot be determined. As law enforcement officers, VA Police are trained in investigative techniques that could potentially track and recover lost and missing items if promptly reported. Further, because VA Police are responsible for facility security, consistent reporting of lost and missing IT equipment to the Chief of Police at each VA medical center or federal law enforcement officers responsible for building security at VA headquarters locations could identify patterns of vulnerability that could be addressed through upgraded security plans. The timing and scope of the physical inventories performed by the four case study locations in our current audit varied. For example, the Indianapolis medical center had been performing annual physical inventories in accordance with VA policy for several years. As a result, IT equipment inventory records were more accurate and physical inventories identified fewer missing items than most locations tested. The Washington, D.C., medical center performed a wall-to-wall physical inventory in response to our July 2004 report, which found that previously performed physical inventories of IT equipment were ineffective. In this case, inventory results reflected several years of activity involving IT inventory records that had not been updated and lost and missing IT equipment items that had not previously been identified and reported. Although the San Diego medical center had performed periodic physical inventories, it had not followed VA policy for including sensitive items, such as IT equipment valued at less than $5,000. As a result, the San Diego medical center’s Reports of Survey are not a good indicator of the extent of lost and missing IT equipment at this location. The fiscal year 2006 VA headquarters physical inventory identified IT equipment items that may have been lost or missing for several years without detection or final resolution. For example, VA headquarters officials told us that during renovations of headquarters offices 10 years ago, IT equipment was relocated to office space designated as storerooms. When this space had to be vacated for renovation, the IT equipment had to be relocated, and many items were sent to disposal. According to VA headquarters officials, accountability for individual IT equipment items was not maintained during the renovation or disposal process. This weak overall control environment presents an opportunity for theft, loss, or misappropriation to occur without detection. As of February 28, 2007, based on inventories they performed during fiscal years 2005 and 2006, the four case study locations covered in our current audit reported over 2,400 missing IT equipment items with a combined original acquisition value of about $6.4 million. Table 6 provides information on the results of physical inventories performed by our four current case study locations. In response to our test work, in January 2007, the Washington, D.C., medical center prepared an additional Report of Survey to write off 699 older IT equipment items valued at $794,835 that had not been located or removed from current inventory. The VA headquarters physical inventory had initially identified about 2,700 missing IT equipment items, and officials told us that their research has resolved over half of the discrepancies. VA headquarters officials told us that they have not yet prepared a Report of Survey because they believe some of their missing IT equipment items may still be located. We also followed up with the five other case study locations that we previously audited to determine the results of physical inventories performed in response to recommendations in our July 2004 report. As of the end of our fieldwork in February 2007, the Tampa, Florida, medical center had not yet completed its physical inventory. In addition, the Houston, Texas, medical center’s fiscal year 2005 physical inventory procedures continued to exclude IT equipment valued under $5,000 because the center had followed inaccurate guidance from its VISN. Our standards for internal control require federal agencies to have policies and procedures for ensuring that the findings of audits and other reviews are promptly resolved. In accordance with these standards, managers are to (1) promptly evaluate findings from audits and other reviews, including those showing deficiencies and recommendations; (2) determine proper actions in response to findings and recommendations; and (3) complete, within established time frames, all actions that correct or otherwise resolve the matters brought to management’s attention. The failure to ensure that VA organizations take appropriate, timely action to address audit findings and recommendations indicates a significant control environment weakness with regard to a “tone at the top” and does not set an example that supports performance-based management and establishes controls that serve as the first line of defense in safeguarding assets and preventing and detecting errors. Based on information obtained through March 2, 2007, the five case study locations we previously audited had identified over 8,600 missing IT equipment items with a combined original acquisition value of over $13.2 million. As noted in table 7, of the three medical centers that completed their physical inventories, the Los Angeles, California, medical center reported over 8,400 missing IT equipment items valued at over $12.4 million. We found that Houston medical center property management policy did not include IT equipment within its definition of sensitive items requiring annual physical inventories. As a result, the Houston medical center inventoried items valued at $5,000 or more and reported 3 missing IT equipment items valued at $79,703. Houston medical center officials told us that they are now complying with VA policy to include all IT equipment in their current annual physical inventory effort. The Atlanta medical center identified 195 missing IT equipment items valued at $254,666, and the San Francisco medical center reported a total of 68 missing IT equipment items valued at $463,373. Three of the five medical centers—in Atlanta, Los Angeles, and Tampa—had not yet prepared Reports of Survey on the missing items identified in their physical inventories. Our investigator’s inspection of physical security at officially designated IT warehouses and storerooms that held new and used IT equipment found that most of these storage facilities met the requirements in VA Handbook 0730/1, Security and Law Enforcement. However, not all of the formally designated storage locations had required motion detection alarm systems and special door locks. In response to our findings, physical security specialists at the four case study locations told us that they had recommended that the needed mechanisms be installed. We also found numerous instances of IT equipment storage areas at VA headquarters offices that had not been formally designated as IT storerooms, and these informal IT storage areas did not meet VA physical security requirements. In addition, although VA requires that hard drives of IT equipment and medical equipment be sanitized prior to disposal to prevent unauthorized release of sensitive personal and medical information, we found weaknesses in the disposal process that pose a risk of data breach. For example, our tests of computer hard drives in the excess property disposal process found that hard drives at two of the four case study locations that had not yet been sanitized contained hundreds of names and Social Security numbers. We also found that some of the hard drives had been in the disposal process for several years without being sanitized, creating an unnecessary risk that sensitive personal information protected under the Privacy Act of 1974 and personal medical information accorded additional protections under HIPAA could be compromised. Weaknesses in physical security heighten the risk of data breach related to sensitive personal information residing on hard drives in the property disposal process that have not yet been sanitized. As previously discussed, VA requires that hard drives of excess computers be sanitized prior to reuse or disposal because they can store sensitive personal and medical information used in VA programs and activities, which could be compromised or used for unauthorized purposes. For example, our limited tests of excess computer hard drives in the disposal process that had not yet been sanitized found 419 unique names and Social Security numbers on three of the six Board of Veterans Appeals hard drives and one record on one of two VHA hard drives we tested. Our tests of five San Diego medical center hard drives that had not yet been sanitized found that one hard drive held at least 20 detailed patient medical histories, including 5 histories that contained Social Security numbers. Our limited tests of hard drives that were identified as having been subjected to internal or contractor data sanitization procedures did not find data remaining on these hard drives. However, our limited tests identified some problems that could pose a risk of data breach with regard to sensitive personal and medical information on hard drives in the disposal process that had not yet been sanitized. For example, our IT security specialist found that five hard drives stored in a bin labeled by the San Diego medical center as holding hard drives that had not been erased had in fact been sanitized. The lack of proper segregation and tracking of hard drives in the sanitization process poses a risk that some hard drives could make it through this process and be selected for reuse without having been sanitized. Further, based on the file dates on some of the computer hard drives that had not yet been sanitized at the San Diego and Indianapolis medical centers, our IT security specialist noted excessive delays—up to 6 years—in performing data sanitization once the computer systems had been identified for removal from use and disposal. Excessive delays in completing hard drive sanitization and disposal procedures pose an unnecessary risk when sensitive personal and medical information that is no longer needed is not removed from excess computer hard drives in a timely manner. VA Handbook 0730/1, Security and Law Enforcement, prescribes physical security requirements for storage of new and used IT equipment. Specifically, the Handbook requires warehouse-type storerooms to have walls to ceiling height with either masonry or gypsum wall board reaching to the underside of the slab (floor) above. IRM storerooms are required to have overhead barricades that prevent “up and over” access from adjacent rooms. Warehouse, IRM, and medical equipment storerooms are all required to have motion intrusion detection alarm systems that detect entry and broadcast an alarm of sufficient volume to cause an illegal entrant to abandon a burglary attempt. Intrusion detection alarms for storerooms outside facility grounds, such as outpatient clinics, are required to be connected remotely to a commercial security alarm monitoring firm, local police department, or security office charged with building security. Finally, IRM storerooms also are required to have special key control, meaning room door lock keys and day lock combinations that are not master keyed for use by others. Most of the designated IT equipment storage facilities at the four case study locations met VA IT physical security requirements in VA Handbook 0730/1; however, we identified some deficiencies. For example, our investigator found that the Washington, D.C., and San Diego medical center IRM equipment storerooms lacked motion intrusion detection alarm systems and the Washington, D.C., medical center IRM storeroom did not meet door locking requirements. Based on our investigator’s findings, physical security specialists at the San Diego and Washington, D.C., medical centers told us they have recommended that required intrusion detectors be installed in their IRM storerooms. In addition, the Washington, D.C., medical center reduced the number of keys to its IRM storerooms and changed storeroom locks to meet established requirements. Designated IT equipment storage facilities at the Indianapolis medical center met VA physical security requirements. Despite the established physical security requirements, we found numerous informal, undesignated IT equipment storage locations that did not meet VA physical security requirements. For example, our investigator observed an IT workroom at the Indianapolis medical center where new IT equipment was placed on the floor. This room lacked a motion detection alarm system and the type of locking system prescribed in VA policy. Indianapolis VA Police told our investigator that such a level of security was not required for this room under VA policy, because it was not designated as a storeroom. In addition, at the VA headquarters building, our investigator found that the physical security specialist was unaware of the existence of IT equipment in some storerooms. Thus, these storerooms had not been subjected to required physical security inspections. VA Police and physical security specialists at our test locations agreed with our investigator’s assessment that the physical security of these IT storerooms was inadequate. During our statistical tests, we observed one IT equipment storeroom in the VA headquarters building IT Support Services area that had a separate wall, but no door. As shown in figure 2, the wall opening into the storeroom had yellow tape labeled “CAUTION” above the doorway. The store room was within an IT work area that had dropped ceilings that could provide “up and over” access from adjacent rooms, such as the employee store, and no alarm or intrusion detector. This storeroom did not meet VA’s physical security requirements for motion intrusion detection and alarms and secure doors, locks, and special access keys. In another headquarters building, which housed VA’s Office of General Counsel, we observed excess IT equipment, including computers with hard drives that had been awaiting turn-in and disposal for several months. This IT equipment was stacked in the corners of a large work area that had multiple doors and open access to numerous individuals, including vendors, contractors, employees, and others. Because our limited tests found sensitive personal data and information on hard drives that had not yet been sanitized, the failure to provide adequate security leaves this information vulnerable to data breach. Further, because software that can be used to image, or copy, this information is readily available, it is important to provide adequate security for these items. For example, imaging software, such as “Foremost,” which was one of the imaging software products used by our IT security specialist, can be downloaded at no cost from the Internet and used to copy information from one hard drive to another in a few minutes. Thus, it is possible for a data breach to occur without theft of the IT equipment on which the data reside. We also found that VA headquarters IT coordinators used storerooms and closets with office-type door locks to store IT equipment that was not currently in use. Other headquarters organizations stored laptops that were in the “loaner pool” for use by employees on travel or at home in locked filing cabinets in open areas. In addition, during our test work, we observed that very few IT equipment items had been secured by locked cables. Physical security of IT equipment is of particular concern at the VA medical centers because these centers provide open access to visitors, students, contractors, and others. The lack of secure storage leaves this IT equipment and any sensitive personal information stored on this equipment vulnerable to theft, loss, misappropriation, and data breach. Although VA has strengthened existing property management policy in response to recommendations in our July 2004 report, issued several new policies to establish guidance and controls for IT security, and reorganized and centralized the IT function within the department under the CIO, these actions have not yet been fully implemented. For example, the CIO has no formal responsibility for medical equipment that stores or processes patient data. VA headquarters CIO officials agree that this is an area of vulnerability that needs to be addressed. In addition, the new CIO organization structure does not address roles or necessary coordination between IRM and property management personnel with regard to inventory control of sensitive IT equipment items. The Assistant Secretary for Information and Technology, who serves as the CIO, told us that his staff is aware of this problem and the new CIO organization structure includes a unit that will have responsibility for IT equipment asset management once it becomes operational. However, this unit has not yet been funded or staffed. Regarding new policies, on October 11, 2005, VA revised its Handbook on materiel management procedures to emphasize that annual inventory requirements for sensitive items valued at under $5,000 include IT equipment, and specifically lists these items as including desktop and laptop computers, CD drives, printers, monitors, and handheld portable telecommunication devices. However, as noted in this report, VA has not ensured that sensitive IT equipment items valued at less than $5,000 have been subjected to annual physical inventories. In addition, on March 9, 2007, at the time we began briefing VA management on the results of our audit, VA’s Office of Information and Technology issued a policy that includes assignment of user-level accountability for certain IT equipment, including external drives, desktop and laptop computers, and mobile phones that can be taken offsite for individual use. However, this policy had not yet been coordinated with property management officials who will be responsible for implementing the policy. On August 4, 2006, VA issued a new directive entitled Information Security Program, which requires, in part, periodic evaluations and testing of the effectiveness of all management, operational, and technical controls and calls for procedures for immediately reporting and responding to security incidents. A thorough understanding of the IT inventory control process and required internal controls within this process will be key to effective testing and oversight. Managers were not always aware of the inherent problems in their IT inventory processes discussed in this report, including the lack of required controls. Because the directive does not provide specific information on how these procedures will be carried out, the CIO is developing supplementary user guides. Effective implementation will be key to the success of VA IT policy and organizational changes. Poor accountability and a weak control environment have left the four VA case study organizations vulnerable to continuing theft, loss, and misappropriation of IT equipment and sensitive personal data. To provide a framework for accountability and security of IT equipment, the Secretary of Veterans Affairs needs to establish clear, sufficiently detailed mandatory policies rather than leaving the details of how policies will be implemented to the discretion of local VA organizations. Keys to safeguarding IT equipment are effective internal controls for the creation and maintenance of essential transaction records; a disciplined framework for specific, individual user-level accountability, whereby employees are held accountable for property assigned to them, including appropriate disciplinary action; and maintaining adequate physical security over IT equipment items. Although VA management has taken some actions to improve inventory controls, strengthening the overall control environment and establishing and implementing specific IT equipment controls will require a renewed focus, oversight, and continuing commitment throughout the organization. We recommend that the Secretary of Veterans Affairs require that the medical centers and VA headquarters offices we tested and other VA organizations, as appropriate, take the following 12 actions to improve accountability of IT equipment inventory and reduce the risk of disclosure of sensitive personal data, medical data, or both. To help minimize the risk of loss, theft, and misappropriation of government IT equipment used in VA operations, we recommend that the Secretary take the following eight departmentwide actions. Revise VA property management policy and procedures to include detailed requirements for what transactions must be recorded to document inventory events and to clearly establish individual responsibility for recording all essential transactions in the property management process. Revise VA purchase card policy to require purchase card holders to notify property management officials of IT equipment and other property items acquired with government purchase cards at the time the items are received so that they can be recorded in property management systems. Establish procedures to require specific, individual user-level accountability for IT equipment. In implementing this recommendation, consideration should be given to making the unit head, or a designee, accountable for shared IT equipment. Enforce user-level accountability and IT coordinator responsibility by taking appropriate disciplinary action, including holding employees financially liable, as appropriate, for lost or missing IT equipment. Establish specific time frames for finalizing a Report of Survey once an inventory has been completed so that research on missing items is completed expeditiously and does not continue indefinitely without meeting formal reporting requirements. Establish a mechanism to monitor adherence by the San Diego and Houston medical centers and other VA organizations, as appropriate, to VA policy for performing annual inventories of sensitive items under $5,000, including IT equipment. Require that IRM and IT Services personnel at the various medical centers be given access to the central property database and be furnished with hand scanners so they can electronically update the property control records, as appropriate, during installation, repair, replacement, and relocation or disposal of IT equipment. Require physical security personnel to perform inspections of buildings and storage facilities to identify informal and undesignated IT storage locations so that security assessments are performed and corrective actions are implemented, where appropriate. To assure inventory accuracy and prompt resolution of inventory discrepancies and improve security of IT equipment and any sensitive data stored on that equipment, we recommend that the Secretary require the CIO to take the following four actions. Establish a formal policy requiring a review of the results of annual inventories to ensure that IT equipment inventory records are properly updated and no blank fields remain. Establish a process for reviewing Reports of Survey for lost, missing, and stolen IT equipment items to identify systemic weaknesses for appropriate corrective action. Establish and implement a policy requiring IRM personnel and IT coordinators to inform physical security officers of the site of all IT equipment storage locations so that these store rooms can be subjected to required inspections. Establish and implement a policy for reviewing the results of physical security inspections of IT equipment storerooms and ensure that needed corrective actions are completed. In written comments dated June 22, 2007, on a draft of this report, VA generally agreed with our findings, noted significant actions under way, and concurred on the 12 recommendations. For example, with regard to establishing detailed requirements for what transactions must be recorded to document inventory events, VA stated that it is performing a comprehensive update of department policies and procedures and plans to provide additional training and equipment audits, as necessary. With regard to establishing user-level accountability, VA stated that it is developing a policy that will require (1) unit heads or their designees to sign for all IT equipment issued to their service/unit and (2) hand receipts for IT equipment at the user-level. VA also provided technical comments regarding the information in tables 6 and 7. Specifically, VA stated that our data did not specify whether the estimated value provided for missing IT equipment was based on a depreciated loss value or a replacement value. Consistent with VA’s reporting requirements for its Reports of Survey on lost personal property items, which include IT equipment, we used the original acquisition value for our estimates. Accordingly, we revised the column headings in the tables to note that the reported dollar value of missing items relates to the original acquisition value. Further, VA stated that some of the missing equipment included in our estimate may, in fact, have been properly disposed of but the proper documentation was not available. As stated in our report, proper documentation of key equipment events, such as transfer, turn-in, and disposal, must be documented by an inventory transaction, financial transaction, or both, as appropriate. Because the property system had not been updated to reflect a transfer, turn-in, or disposal and no hard copy documentation had been retained, it is not possible to determine whether any of the missing IT equipment items had been properly sent to disposal, and VA has no assurance that they were not lost or stolen. As agreed with your offices, unless you announce its contents earlier, we will not distribute this report until 30 days from its date. At that time, we will send copies to interested congressional committees; the Secretary of Veterans Affairs; the Veterans Affairs Chief Information Officer; the Acting Secretary of Health, Veterans Health Administration; and the Director of the Office of Management and Budget. We will make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-9095 or [email protected], if you or your staff have any questions concerning this report. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are acknowledged in appendix III. Pursuant to a request from the Chairman and Ranking Minority Member of the House Committee on Veterans’ Affairs, we audited the Department of Veterans Affairs (VA) information technology (IT) equipment inventory controls. Our audit covered the following. An assessment of the risk of loss, theft, and misappropriation of VA IT equipment items based on statistical tests of VA IT equipment inventory at selected case study locations and our investigator’s evaluations of physical security and VA law enforcement investigations of incidents of loss or theft. Results of physical inventories of IT equipment performed by case study locations covered in this audit and our previous audit. An assessment of the adequacy of VA’s physical security and accountability procedures for IT equipment in the property disposal process. Management actions taken or under way to address previously identified IT equipment inventory control weaknesses. We used as our criteria applicable law and VA policy, as well as our Standards for Internal Control in the Federal Government and our Internal Control Management and Evaluation Tool. To assess the control environment at our test locations, we obtained an understanding of the processes and controls over IT equipment from acquisition to issuance and periodic inventories and disposal. We performed walk- throughs of these processes at all four test locations. We reviewed applicable program guidance provided by the test locations and interviewed officials about their IT inventory processes and controls. In selecting our case study locations, we chose one location—the Washington, D.C., VA medical center—that had the most significant problems identified in our July 2004 report and two other geographically dispersed VA medical centers. We also tested inventory at VA headquarters as a means of assessing the overall control environment, or “tone at the top.” Table 8 shows the VA locations selected for IT equipment inventory control testing and the number and reported value of IT equipment items at each location. To follow up on actions taken in response to recommendations in our July 2004 report for improving physical inventories, we obtained and reviewed information on physical inventory results at the four case study locations as well as the five other case study locations previously audited. We performed appropriate data reliability procedures, including an assessment of each VA test location’s procedures for assuring data reliability, and tests to assure that IT equipment inventory was sufficiently complete for the purposes of our work. Our procedures and test work identified a limitation related to IT equipment inventory completeness at our four test locations. IT equipment inventories at the Indianapolis and San Diego medical centers and VA headquarters organizations did not include all IT equipment acquired with purchase cards or purchased directly from local vendors. Also, the Washington, D.C., medical center inventory did not include one inventory category consisting of 149 older computer monitors and workstations. This data limitation prevented us from projecting our test results to the population of IT equipment inventory at each of our four test locations. However, we determined that these data were sufficiently reliable for us to project our test results to the population of current, recorded IT equipment inventory at each of the four locations. From the universe of current, recorded IT equipment inventory at the time of our tests, we selected stratified random probability samples of IT equipment, including medical equipment with data storage capability, at each of the three medical center locations. For the 23 VA headquarters organizations, we stratified our sample by 6 major offices and used a seventh stratum for the remaining 17 organizations. With these statistically valid samples, each item in the population for the four case study locations had a nonzero probability of being included, and that probability could be computed for any item. Each sample item for a test location was subsequently weighted in our analysis to account statistically for all items in the population for that location, including those that were not selected. We performed tests on statistical samples of IT equipment inventory transactions at each of the four case study locations to assess whether the system of internal controls over physical IT equipment inventory was effective (i.e., provided reasonable assurance of the reliability of inventory information and accountability of the individual items). For each IT equipment item in our statistical sample, we assessed whether (1) the item existed (meaning that the item recorded in the inventory records could be located), (2) inventory records and processes provided adequate accountability, and (3) identifying information (property number, serial number, model number, and location) was accurate. We explain the results of our existence tests in terms of control failures related to missing items and recordkeeping errors. The results of our statistical samples are specific to each of the four test locations and cannot be projected to the population of VA IT transactions as a whole. We present the results of our statistical samples for each population as (1) our projection of the estimated error overall and for each control attribute as point estimates and (2) the two-sided, 95 percent confidence intervals for the failure rates. Our investigator supported our tests of IT physical inventory controls by assessing physical security and reporting of missing items for purposes of law enforcement investigations. As part of our assessment, our investigator interviewed VA Police at the three medical centers and federal agency law enforcement officers at VA headquarters about reports and investigations of lost, stolen, and missing IT equipment. Our investigator also met with physical security specialists at each of the test locations to discuss the results of physical security inspections and the status of VA actions on identified weaknesses. To determine if the four test locations had adequate procedures for control and removal of data from hard drives of IT equipment in the property disposal process, our IT security specialist selected a limited number of computer hard drives for testing. We attempted to test a total of 10 hard drives in each category—drives with data and drives that had been sanitized—at each of the four test locations. Because some hard drives we selected were damaged or computer systems pulled for hard drive testing did not contain hard drives, the number of hard drives actually tested was less than the number we selected for testing. At the San Diego medical center, 5 hard drives selected for testing that were labeled as unerased had in fact been sanitized, and we included these hard drives in our sanitization testing. Table 9 shows the numbers of hard drives tested at the four locations we audited. In performing these tests, our specialist used SMARTTM and Foremost software. SMARTTM is a software utility that has been designed and optimized to support forensic data practitioners and information security personnel in pursuit of their respective duties and goals. SMARTTM is currently used by federal, state, and local law enforcement; U.S. military and intelligence organizations; accounting firms; and forensic data examiners. Foremost is a program used to recover files based on their headers, footers, and internal data structures. Foremost, originally developed by the United States Air Force Office of Special Investigations and the Center for Information Systems Security Studies and Research, is now available to the general public. In addition, our investigator performed physical security inspections and assessed accountability over computer hard drives in the disposal process. To identify management actions taken in response to previously identified control weaknesses, we interviewed VA officials at our test locations, walked through the IT inventory processes to observe controls as implemented, and met with VA’s Chief Information Officer (CIO). We also obtained and reviewed copies of new and revised VA policies and procedures. We briefed VA managers at our test locations and VA headquarters, including VA medical center directors, VA headquarters information resource management and property management officials, and VA’s CIO on the details of our audit, including our findings and their implications. On April 9, 2007, we requested comments on a draft of this report. We received comments on June 22, 2007, and have summarized those comments in the Agency Comments and Our Evaluation section of this report. We conducted our audit work from September 2006 through March 2007 in accordance with generally accepted government auditing standards, and we performed our investigative work in accordance with standards prescribed by the President’s Council on Integrity and Efficiency. In addition to the contact named above, Gayle L. Fischer, Assistant Director; Andrew O’Connell, Assistant Director and Supervisory Special Agent; Abe Dymond, Assistant General Counsel; Monica Perez Anatalio; James D. Ashley; Francine DelVecchio; Lauren S. Fassler; Dennis Fauber; Jason Kelly; Steven M. Koons; Christopher D. Morehouse; Chris J. Rodriguez; Special Agent Ramon J. Rodriguez; Lori B. Tanaka; and Danietta S. Williams made key contributions to this report. Technical expertise was provided by Keith A. Rhodes, Chief Technologist, and Harold Lewis, Assistant Director, Information Technology Security, Applied Research and Methods. | In July 2004, GAO reported that the six Department of Veterans Affairs (VA) medical centers it audited lacked a reliable property control database and had problems with implementation of VA inventory policies and procedures. Fewer than half the items GAO selected for testing could be located. Most of the missing items were information technology (IT ) equipment. Given recent thefts of laptops and data breaches, the requesters were concerned about the adequacy of physical inventory controls over VA IT equipment. GAO was asked to determine (1) the risk of theft, loss, or misappropriation of IT equipment at selected locations; (2) whether selected locations have adequate procedures in place to assure accountability and physical security of IT equipment in the excess property disposal process; and (3) what actions VA management has taken to address identified IT inventory control weaknesses. GAO statistically tested inventory controls at four case study locations. A weak overall control environment for VA IT equipment at the four locations GAO audited poses a significant security vulnerability to the nation's veterans with regard to sensitive data maintained on this equipment. GAO's Standards for Internal Control in the Federal Government requires agencies to establish physical controls to safeguard vulnerable assets, such as IT equipment, which might be vulnerable to risk of loss, and federal records management law requires federal agencies to record essential transactions. However, GAO found that current VA property management policy does not provide guidance for creating records of inventory transactions as changes occur. GAO also found that policies requiring annual inventories of sensitive items, such as IT equipment; adequate physical security; and immediate reporting of lost and missing items have not been enforced. GAO's statistical tests of physical inventory controls at four VA locations identified a total of 123 missing IT equipment items, including 53 computers that could have stored sensitive data. The lack of user-level accountability and inaccurate records on status, location, and item descriptions make it difficult to determine the extent to which actual theft, loss, or misappropriation may have occurred without detection. GAO also found that the four VA locations reported over 2,400 missing IT equipment items, valued at about $6.4 million, identified during physical inventories performed during fiscal years 2005 and 2006. Missing items were often not reported for several months and, in some cases, several years. It is very difficult to investigate these losses because information on specific events and circumstances at the time of the losses is not known. GAO's limited tests of computer hard drives in the excess property disposal process found hard drives at two of the four case study locations that contained personal information, including veterans' names and Social Security numbers. GAO's tests did not find any remaining data after sanitization procedures were performed. However, weaknesses in physical security at IT storage locations and delays in completing the data sanitization process heighten the risk of data breach. Although VA management has taken some actions to improve controls over IT equipment, including strengthening policies and procedures, improving the overall control environment for sensitive IT equipment will require a renewed focus, oversight, and continued commitment throughout the organization. |
Historically, as figure 2 shows, woodland caribou were distributed throughout much of Canada and portions of the northern tier of the United States. There are two varieties, or ecotypes, of woodland caribou—mountain and northern. The two ecotypes are not genetically distinct and differ only in the use they make of their habitat and in their behavior. Currently, the only mountain caribou that regularly inhabit the contiguous United States is the population of the southern Selkirk Mountains. The range of these caribou is restricted to a relatively small area in southeastern British Columbia and extreme northeastern Washington and northern Idaho. While records suggest that caribou in this area were plentiful in the 19th century, the population had declined to about 100 animals by the 1950s. By the early 1980s, the population had further declined to about 30, and the woodland caribou had become one of the most critically endangered mammals in the United States. In 1971, U.S. and Canadian resource management agencies signed a cooperative agreement to investigate and monitor the caribou. The agencies included the Forest Service, the Washington Department of Game, the Idaho Fish and Game Commission, the British Columbia Fish and Wildlife Branch, the British Columbia Forest Service, and the University of Idaho. The agreement resulted in the formation of the International Mountain Caribou Steering Committee and the International Mountain Caribou Technical Committee. The steering committee was established to approve study plans and funding and to help set direction for caribou recovery efforts and for the technical committee. The technical committee was tasked with coordinating caribou management and research studies and serving as a clearinghouse for information that promotes management activities designed to reverse the decline of the caribou population. The cooperative agreement produced a series of population and habitat studies in the 1970s and 1980s. Both committees are still active and are key participants in current caribou recovery efforts. In 1977, the Idaho Fish and Game Commission designated the caribou as an endangered species in the state. The Washington Game Commission designated the caribou as endangered in 1982. In February 1984, the U.S. Fish and Wildlife Service (FWS) listed the southern Selkirk population of woodland caribou as endangered under the Endangered Species Act (ESA). Under ESA, once a species is identified as threatened or endangered the responsible agency (in the case of the caribou, FWS) must generally develop and implement a recovery plan. A recovery plan details the specific tasks that are considered necessary to recover a species. The plan can identify (but not obligate) other parties, such as federal, state and private entities, as cooperating agencies. Implementing a recovery plan is contingent upon appropriations, priorities, and other budgetary constraints affecting the participants. A recovery plan may also be modified to reflect changes in the status of a species, the completion of recovery tasks, and new findings that reflect the latest available scientific information. In 1982, the International Mountain Caribou Technical Committee began preparing a management plan for the woodland caribou. FWS adopted a revised version of this document as the official recovery plan for the caribou in 1985. The recovery plan identified the following as cooperating agencies in the caribou recovery effort: FWS; the Fish and Wildlife Branch of the British Columbia Ministry of Environment (currently, the Wildlife Branch of the Ministry of Environment, Lands and Parks); the British Columbia Forest Service (part of the Ministry of Forests); the Forest Service (Colville and Idaho Panhandle National Forests); the Idaho Department of Fish and Game; the Washington Department of Game (currently the Washington Department of Fish and Wildlife); and the University of Idaho. In 1991, FWS appointed its own caribou recovery team to advise the agency on caribou recovery efforts. The recovery team completed a revised recovery plan in 1994. The revised plan identified all of the previously identified entities as cooperators in the new plan, as well as Washington State University and the Idaho Department of Lands. While these agencies agreed to cooperate in carrying out the recovery plans, the resources to implement the plans are controlled by congressional appropriations and the agencies’ budgets and priorities. FWS’ recovery plans for the southern Selkirk woodland caribou identified a variety of management and research actions necessary for the species’ recovery. These included collecting information on and managing caribou habitat, determining caribou population characteristics, maintaining the population through various efforts to reduce caribou mortality, and informing and involving the public and agency personnel about caribou and caribou management. The 1985 recovery plan also called for assessing the feasibility of augmenting the existing population by introducing caribou transplanted from other herds. The consensus of the biological community at the time was that augmentation was the only available method that could reasonably be expected to achieve the population’s recovery. As figure 3 shows, a recovery zone that includes the general area used by the caribou has been delineated. It covers about 2,200 square miles and includes national forest, state, private, and Canadian lands. The recovery zone encompasses the geographic area in the southern Selkirk Mountains where caribou management efforts are now focused. For more background on the history of woodland caribou in the southern Selkirk Mountains and the history of recovery efforts, see appendix II. From 1984, when woodland caribou were listed as endangered under ESA, through 1998, federal and state agencies in the United States and British Columbia’s Ministry of Environment, Lands and Parks spent an estimated $4.7 million on efforts to recover the southern Selkirk population. Federal expenditures are estimated at about $4 million and include primarily those of FWS and the Forest Service and, to a much lesser extent, those of the Department of the Interior’s Bureau of Land Management and the Department of Agriculture’s Animal and Plant Health Inspection Service. Idaho and Washington reported expenditures of about $240,000 and $419,000, respectively. Finally, British Columbia’s Ministry of Environment, Lands and Parks reported estimated expenditures of about $31,000. As figure 4 shows, most of the caribou recovery expenditures came from the U.S. government. However, it should be noted that the estimated expenditures for British Columbia include only the salary expenses of staff who participated in augmentation activities and costs related to a study of cougar predation on caribou. The British Columbia estimates do not include the direct and indirect value (expressed in monetary terms) of caribou that the province donated to the recovery effort and other recovery-related activities for which no expenditure records were available. FWS estimated that its expenditures on the woodland caribou recovery program totaled about $3.2 million. The largest category of FWS’ expenditures, about $1.6 million, was the federal share of the ESA Section 6 grants provided to Idaho and Washington for recovery activities. States that have active programs for the conservation of species protected under ESA and cooperative agreements with FWS may receive Section 6 grants to fund their recovery efforts. The grants provided to Idaho and Washington specify a federal cost share of 90 percent and a state share of 10 percent. The Idaho Department of Fish and Game and the Washington Department of Fish and Wildlife performed the recovery work using the grants primarily to fund activities related to augmenting the existing southern Selkirk population, including monitoring the distribution, movement, and survival of the transplanted caribou. Other recovery activities funded by these grants include developing a census technique for counting the caribou and performing the census, conducted annually since 1991. In addition to Section 6 grants, Idaho received grants administered by FWS under the Federal Aid in Wildlife Restoration Act, commonly referred to as the Pittman-Robertson Act. This act provides federal aid to states for the management and restoration of wildlife. The estimated federal funding for caribou under these grants, which specify a federal cost share of 75 percent and a state share of 25 percent, totaled about $47,000. The work performed under these grants included research on caribou ecology and assistance in developing caribou management plans. FWS also spent about $924,000 for research on woodland caribou. Specifically, the National Ecology Research Center conducted a series of research projects over a 9-year period that focused primarily on the caribou’s early winter habitat and diet but also included research on such topics as caribou genetics and late winter caribou foraging ecology.Additional information on this research is provided in appendix I, which contains a summary of reports that were based, in whole or in part, on this research. Finally, FWS’ remaining expenditures, approximately $600,000, included general recovery funding and funding for law enforcement efforts. General recovery funding covers the salary, travel, and office expenses of FWS staff working on caribou recovery. For example, under this category, FWS funded the preparation of a revised recovery plan and of an augmentation plan, staff salaries associated with participation in augmentation efforts, and the costs of organizing and participating in caribou recovery team meetings. We used estimated expenditure information in this report for a number of reasons. Specifically, FWS does not generally maintain complete records of its ESA expenditures on a species-by-species basis. Instead, FWS maintains its expenditure records by ESA funding categories, such as listing, recovery, consultation, and law enforcement. Accordingly, FWS’ expenditure information is based on the best available data but includes some estimated expenditures, and some data are missing. For example, for the period from 1984 through 1988, FWS’ expenditure estimate is primarily limited to research and Section 6 grants. (FWS officials noted that records on additional expenditures were not required until the passage of the 1988 amendments to ESA). Therefore, the expenditure estimate for these years is conservative. In other years, the best available information on caribou-related expenditures, according to FWS, was a combined total that included some funding categories that are not specifically related to recovery efforts. However, FWS officials believe the reported expenditure information presents a reasonably accurate estimate of its expenditures on woodland caribou recovery efforts. The Forest Service estimated that it spent about $781,000 on caribou recovery efforts from 1984 through 1998. The largest identifiable expenditure the Forest Service reported, totaling about $60,000, was for surveying and analyzing caribou habitat. However, some of this habitat work also related to the grizzly bear. Other Forest Service funds were spent for augmentation activities, mapping caribou habitat, monitoring the caribou population, purchasing radio collars for an investigation of cougar predation on caribou, funding graduate student research on caribou, and costs associated with attending caribou recovery team and technical committee meetings. The Forest Service’s expenditure estimate also includes the indirect costs of implementing caribou-related tasks and of implementing threatened and endangered species program activities that benefited both the caribou and other species. Indirect costs include such items as the staff time spent designing timber sales to prevent adverse effects on caribou, considering the effects of other proposed land management activities on caribou, developing land and resource management plans to conserve caribou and their habitat, and coordinating with states or other agencies on caribou habitat management. Like FWS, the Forest Service does not generally maintain complete expenditure records on a species-by-species basis. As a result, the Forest Service’s expenditure data include estimates. Also, the Forest Service did not have complete records of its expenditures on caribou recovery efforts for the entire 15-year period covered by our review. For example, for 1984 through 1988, the only available information concerned those expenditures that could be identified by the Idaho Panhandle National Forest and did not include expenditures by the Colville National Forest or Forest Service regional offices. Accordingly, the estimates for this period are conservative. According to the Forest Service, for 1989 through 1997, its expenditure estimates are more complete and include indirect costs as detailed in the preceding paragraph. For fiscal year 1998, the estimate includes only those expenditures that could be attributed directly to caribou recovery efforts by the Idaho Panhandle and Colville National Forests. As of February 1999, the Forest Service was compiling additional 1998 cost data; however, these data were not available when we completed our review. As a result, the cost estimate for fiscal year 1998 may be also conservative. The Bureau of Land Management and the Department of Agriculture’s Animal and Plant Health Inspection Service also reported expenditures for caribou recovery efforts. The Bureau of Land Management estimated that it spent about $10,000 for monitoring the caribou population while the Animal and Plant Health Inspection Service estimated that it spent $720 that was related to checking quarantined caribou for disease before they were transplanted to the United States. Idaho and Washington estimated their expenditures for caribou recovery work at about $240,000 and $419,000, respectively. As noted, both of these states received Section 6 grants to fund the recovery work. In addition, Idaho received Pittman-Robertson grants. Accordingly, Idaho’s and Washington’s expenditure estimates include their contributions of funds required by these grants. Both states noted, however, that they have spent funds in excess of their contributions to these grants. Idaho’s expenditures supported law enforcement work; the supervision of staff working under Section 6 grants; and the administration of Section 6 grants, including the development of grant proposals, the development of public information and education programs, and the review of caribou-related reports. Washington’s estimated expenditures went for such activities as preparing an augmentation plan; mapping caribou habitat features using Geographic Information System technology; providing law enforcement; providing information and education, including establishing a caribou-related Internet site; performing tasks related to transplanting and monitoring caribou; and attending various meetings on caribou. There are some limitations to the expenditure estimates provided by the states. Specifically, the states did not have complete records of their expenditures for all 15 years covered in our review. Accordingly, the estimates of the states’ expenditures are based on the best available information. For example, during the period from 1986 through 1988, Idaho’s estimated expenditures are limited to the state’s share of the Section 6 grant in effect then and are, therefore, conservative. This limitation is due to a lack of historical program expenditure records. Additionally, the Washington Department of Fish and Wildlife’s estimated expenditures for the period from 1984 through 1992 are limited mainly to the salary and travel costs incurred by the biologist with lead responsibility for the agency’s caribou recovery efforts. Moreover, for 1998, Washington’s expenditures are limited to the state’s share of the Section 6 grant that was then in effect because a total expenditure estimate for the year was not available for our review. Accordingly, for these time periods, Washington’s expenditure estimates are also conservative. According to the Ministry of Environment, Lands and Parks, British Columbia’s expenditures were primarily related to efforts to augment the southern Selkirk caribou population with caribou from other parts of British Columbia and to study cougar predation on caribou. The Ministry estimated these expenditures to be about $31,000. The augmentation-related expenditures (about $26,500) represent the salaries of staff who participated in planning and conducting the transplant operations, including preparing the plans and assisting in locating and capturing the caribou for transplant. The remaining expenditures were for the purchase of radio collars and associated costs for the study of cougar predation on caribou. The Ministry characterized its estimated expenditures as conservative because they do not cover such costs as the salaries and travel expenses for staff from the Ministry of Environment, Lands and Parks and the Ministry of Forests who attended recovery team, steering committee, or technical committee meetings. The estimate also does not include the salaries of staff from the ministries who were involved in planning timber harvests so as to protect caribou habitat. According to the Ministry of Environment, Lands and Parks, since the ministries do not keep records of such expenditures on a species-by-species basis, no information on these expenditures was available. The Ministry of Environment, Lands and Parks also noted that British Columbia would likely have incurred the costs for planning timber harvests even if there were no U.S. caribou recovery program, since British Columbia, including the Ministry of Forests and private industry, is taking actions to protect the habitat of the southern Selkirk caribou on its own behalf. FWS’ recovery plans for the southern Selkirk Mountains caribou called for taking a variety of actions to assist the declining population. One of the most significant has been the transplanting of over 100 caribou from other parts of British Columbia to the southern Selkirk Mountains area. Most recovery program officials we spoke to believe that this action is probably responsible for the continued existence of a caribou population in the southern Selkirk Mountains. However, because many transplanted and some resident caribou have died, the net effect of the augmentation effort has been a relatively small increase in the overall population, from about 30 animals when the recovery effort started in 1984 to about 48 animals today. FWS noted that the mortality among the southern Selkirk transplants is in line with long-term recovery objectives established by the Canadian Wildlife Service for caribou in other areas. Furthermore, FWS believes that the information gained from the augmentation effort is essential in sustaining the recovery and is consistent with “adaptive management.”The current population consists of both transplanted and resident caribou and moves freely across the borders of Washington, Idaho, and British Columbia. Although the recovery program has not succeeded in establishing two new self-sustaining herds in the United States as planned, it has mapped caribou habitat in the recovery zone, developed habitat management guidelines, and completed research on certain aspects of caribou ecology. Furthermore, according to recovery program officials, restrictions on land use due specifically to the caribou have been relatively minor. Other restrictions, such as road closures on Forest Service lands to protect old-growth timber reserves, watersheds, and grizzly bear, would remain even if there were no recovery plan for the caribou. FWS’ initial caribou recovery plan, approved in April 1985, called for an assessment of the use of augmentation as a possible method of increasing the southern Selkirk caribou population. At the time, the existing population occupied the international border area of extreme northeastern Washington, northern Idaho, and southeastern British Columbia. Later that year, the Forest Service issued a decision notice that called for augmenting the existing population in accordance with an augmentation plan that had been prepared by representatives of the cooperating agencies. The augmentation plan identified potential caribou capture locations in British Columbia and evaluated potential release sites in Idaho and Washington. Ball Creek in northern Idaho was selected as the release site because of such factors as the condition and availability of suitable habitat for a new caribou herd. In March 1987, 24 caribou were transplanted from British Columbia to Ball Creek. A nearly identical operation provided 24 additional caribou the following year. Caribou were not available for transplant in 1989, but 12 more caribou were transplanted to Ball Creek in March 1990. All transplanted animals were fitted with radio collars and have been monitored extensively to determine their distribution and movement, as well as their reproduction, mortality (including the causes when possible), and survival rates. Through these transplants, a second caribou herd was established in the southern Selkirk Mountains, although it has decreased in size over time and is therefore not currently self-sustaining. In March 1994, FWS issued a revised recovery plan. The revised plan called for, among other things, establishing a third self-sustaining herd of caribou, this time in Washington. Additional transplants were needed in Washington to reduce the risk of losing caribou to a catastrophic event such as a large fire, and to improve the distribution of caribou, increase the size of the population, and further enhance the probability of recovery. After a second augmentation plan was completed and approved, in April 1996, 19 caribou from British Columbia were released in the Sullivan Lake area of the Colville National Forest in Washington. An additional 13 caribou were transplanted to the same general area in March 1997. Finally, in March 1998, 11 more caribou were transplanted to the southern Selkirk Mountains. However, because previously transplanted animals moved back and forth between British Columbia and the United States, the 1998 transplants were released just north of the U.S.-Canadian border at Kootenay Pass in British Columbia. According to the Washington Department of Fish and Wildlife, the Canadian release site had several advantages. Specifically, it decreased transport-driving time and thereby reduced stress on the caribou; it placed the caribou directly in a late winter feeding site; and it reduced the project’s costs, since roads near the release site did not have to be plowed. An official from British Columbia’s Ministry of Environment, Lands and Parks noted that using the Kootenay Pass release site also eliminated the need for a costly and dangerous quarantine period and increased the likelihood of the transplants’ encountering other caribou and taking up residence in that area rather than dispersing. Researchers had also noticed by this time that while the caribou transplanted during the 2 prior years exhibited considerable movement, they tended to congregate in the Stagleap Provincial Park area, just north of the Canadian border. The transplants released in British Columbia followed the same pattern. Within 2 weeks of their release near Kootenay Pass, all the animals were located within the Idaho portion of the recovery zone. These caribou continued to move and currently tend to congregate with the core population centered around the Stagleap Provincial Park area. All of the Washington and British Columbia transplants were also fitted with radio collars, and the Washington Department of Fish and Wildlife has monitored their movements, survival, and causes of death. Figure 5 shows the locations of the four release sites in the recovery zone. Through the augmentation efforts, 103 caribou were transplanted from British Columbia to the southern Selkirk Mountains—60 in Idaho, 32 in Washington, and 11 in British Columbia. As of October 1998, 59 of the 103 transplanted caribou had died (38 of the Idaho transplants and 21 of the Washington transplants). Of the remaining 44 transplanted caribou, 23 are alive (1 from Idaho and 22 from Washington/British Columbia) and the status of the 21 others is unknown, primarily because their radio collars are lost or have failed. Most recovery program officials we contacted believe that the augmentation efforts have probably been responsible for maintaining a core population of woodland caribou in the southern Selkirk Mountains. However, an official from the Idaho Department of Fish and Game said that he is not convinced that the caribou population would no longer exist without augmentation. He stated that a population of 25 to 30 animals around Stagleap Provincial Park has survived for some time and remains the core population. However, he added that the population probably would not have grown or expanded without intervention. Because so many transplanted and some resident caribou have died, the increase in the overall size of the southern Selkirk population is relatively small. Specifically, when the population was listed under ESA, it was estimated to include about 30 caribou. In 1991, the year following the last of the Idaho transplants, the population numbered about 47 caribou. The population reached its highest level under the recovery effort in 1993, when it totaled about 51 individuals. However, it has declined since to about 48 individuals, even with the addition of the 43 caribou transplanted to Washington and British Columbia. FWS stated that it would be inappropriate to judge the success or failure of a reintroduction program on the basis of only 103 individuals transplanted over a 12-year period. According to FWS, mortality of 57 percent (59 confirmed deaths out of a total of 103 transplanted caribou) would not be considered excessive, especially for these types of animals. FWS noted that this mortality is in line with long-term recovery objectives established by the Canadian Wildlife Service in its recovery plan for a population of woodland caribou located within the boundaries of the Gaspesie Conservation Park in Canada. For example, the long-term goal of this plan was to maintain a survival rate of 50 percent for calves aged 6 months to 2 years. Furthermore, FWS stated that the information gained from the augmentation effort could be used to conduct studies, pinpoint problems, and make adjustments in recovery actions. According to FWS, “adaptive management” is an ongoing, essential effort in sustaining the recovery of the woodland caribou and of many other listed species and typifies why recovery is frequently a slow, incremental process that is modified as monitoring and research indicate a need for change. In commenting on our report, the British Columbia Ministry of Environment, Lands and Parks stated that, in general, the Ministry considers annual adult caribou mortality rates in excess of 15 percent to be high. The Ministry noted that recent estimates of adult mortality based on data from radio-collared caribou suggest that the annual mortality rate is even higher. This is of significant concern to the Ministry, which stated that identifying and addressing the cause of this high mortality remains very important for ensuring the long-term recovery of caribou in the southern Selkirk Mountains. The cause of death is not known for many southern Selkirk caribou, primarily because by the time carcasses are located and examined, too little remains to make an accurate determination. However, predation, mainly by cougars, is the most common known cause of death. Natural causes, poaching or hunting, and accidental falls are other known causes. Some recovery program officials cautioned, however, that the primary cause of the decline in the southern Selkirk caribou population is currently unknown and it is important not to designate predation as the ultimate reason. For example, these officials noted that marginal habitat may be the major problem. Augmentation efforts have not succeeded in establishing two additional self-sustaining herds in the United States as planned. Some of the Idaho transplants remained near the release site and established a small herd that is centered around Two Mouth Lakes, Idaho. However, the size of this herd has declined steadily over time—from about 26 caribou in 1991 to 5 caribou in 1999. The remaining Idaho transplants have died, left the southern Selkirk Mountains, or congregated with the core population centered around Stagleap Provincial Park. The Washington transplants have moved throughout the recovery zone but have also tended to congregate with the core population. In October 1998, the Washington Department of Fish and Wildlife issued a progress report on its augmentation efforts. The report stated that instead of transplanting 60 or more caribou during the first 3 years of the project as planned, the Department was able to transplant only 43 caribou. The primary reason for this shortfall was concern about straining the source populations in British Columbia. The report indicated that transplanting only a limited number of animals might have diminished the success of the augmentation effort. In addition to the augmentation efforts, FWS’ recovery plans included a variety of other tasks. Generally, these tasks involved such activities as gathering information on and managing caribou habitat, conducting research on characteristics of the caribou population, endeavoring to reduce caribou mortality, and informing and involving the public and agency personnel about caribou and caribou management. Further information on other recovery program tasks and accomplishments appears in appendix III. According to recovery program officials, the impact on land use due specifically to caribou recovery efforts has been relatively minor. Specifically, some restrictions have been placed on timber harvesting within the recovery zone, and a small portion of the recovery zone has been closed to snowmobiling. Forest Service officials noted that even if the caribou recovery efforts were terminated, many land-use restrictions would remain in effect to protect, among other things, old-growth timber reserves; watersheds; and other species, such as grizzly bears. When considering the southern Selkirk caribou for listing under ESA, FWS identified improperly designed timber harvesting as a threat to the population. For example, timber harvesting alters caribou habitat and creates additional human access to habitat, which can increase the potential for mortality. Timber cutting can eliminate escape cover, migration corridors, and the ability of the habitat to produce lichens—a major source of nutrition for the caribou. As a result of the caribou recovery effort, some types and methods of timber harvesting have been restricted or modified on lands administered by the Forest Service. According to Forest Service officials, while caribou habitat management guidelines do not prohibit timber harvesting in the recovery zone, they do affect the amount and type of timber that can be harvested within important caribou habitat. For example, to protect or promote the long-term improvement of caribou habitat, commercial operations to thin forests are designed from the outset to develop habitat with high canopy cover or higher levels of lichen production. Besides imposing some restrictions on timber harvesting, the Forest Service has closed about 25 square miles of the 2,200-square-mile recovery zone to snowmobiling specifically to protect the caribou. Snowmobiling can harm caribou and their habitat either by directly harassing the animals or by disturbing the habitat to the extent that it becomes unacceptable. The closure was instituted in 1994, after the caribou herd was twice displaced by snowmobiles. Forest Service officials also stated that no Forest Service roads have been closed specifically to protect the caribou. However, because the caribou recovery area overlaps with the Selkirk grizzly bear recovery area, the majority of the road-use restrictions have been put in place primarily to provide security and core habitat for bear. Forest Service officials noted that these road closures and restrictions also benefit caribou and other wildlife species. Forest Service officials noted that even if the recovery efforts for caribou were terminated, many land-use restrictions would remain in the recovery area. These restrictions include land management objectives for the protection and management of other species, such as grizzly bear and their habitat, and of other areas, including the Salmo-Priest Wilderness area, the proposed Upper Priest Wild and Scenic River, roadless areas, and unsuitable timberland areas. The recovery area is also managed for the protection of old-growth timber reserves and for the preservation of watersheds and riparian areas. Finally, the recovery zone includes areas that contain typical or unique natural ecosystems and are reserved for scientific and educational purposes. In January 1999, officials involved in caribou recovery efforts drafted an action plan that set priorities for the future of the program. Maintaining the core population of caribou currently residing in the southern Selkirk Mountains was identified as the highest-priority task. However, the availability of caribou for further augmenting the population, if needed, is uncertain. The draft action plan also identified the investigation and management of caribou mortality, including predation by cougar, as high-priority tasks. Other immediate needs include producing a consolidated habitat map for the recovery area, minimizing the impact of winter recreation on caribou, and expanding information and education efforts. However, an overriding concern of the officials involved in these planning efforts is whether adequate funding will be available from the cooperating agencies to accomplish these high-priority tasks. According to FWS, other long-term efforts needed to ensure the recovery of the caribou would be examined during FWS’ status review of the recovery plan, which is due in 1999. After the last augmentation effort was completed in March 1998, the caribou recovery team, the International Mountain Caribou Steering Committee and the International Mountain Caribou Technical Committee began a series of meetings to plan the future of the recovery program. As a result of these meetings, they drafted an action plan that outlines efforts immediately needed to maintain the existing caribou population and its habitat. In March 1999, members of the steering committee agreed to name the action plan the “Emergency Caribou Recovery Action Plan.” To accomplish the highest-priority need–maintenance of the core population, the draft action plan proposes to continue the annual census to determine the size of the remaining population and to augment the population when it reaches a level equal to or less than 50 animals. The draft action plan notes that 50 is considered to be the short-term critical threshold for augmentation. However, the plan also states that augmentation will occur if the annual population trend is decreasing and the 3-year recruitment rate (the percentage of calves that live to be a year old) is less than 15 percent or if British Columbia has additional animals available for transplant. While the success of this strategy is likely to depend on future augmentation efforts, as of January 1999, the availability of caribou for such efforts was uncertain. For example, although the current population includes only about 48 animals, no caribou are available for transplant in 1999. In commenting on our report, British Columbia’s Ministry of Environment, Lands and Parks stated that the availability of caribou for transplant to the southern Selkirk population has, and continues to be, a major issue for British Columbia. The Ministry noted it is currently reviewing the population status of mountain caribou in British Columbia to determine whether potential source populations can sustain the loss of additional caribou for transplant. The draft action plan also addresses the need to establish a goal for the total southern Selkirk caribou population. It was agreed, on the basis of the best professional judgment of those involved in the recovery effort, that the preliminary goal would be 200 animals. This figure could change with additional research. The group further agreed on the area near Stagleap Provincial Park as the preferred release site for future augmentation efforts. However, some U.S. agency representatives are concerned about the impression created by using U.S. funds to transplant caribou to the Canadian portion of the recovery zone. In response, other officials noted that the range of these animals still includes the United States. Furthermore, they stated that many different species of wildlife, including grizzly bear and certain waterfowl, regularly move back and forth across the international border and managing all aspects of these ecosystems necessitates work across these boundaries. The draft action plan identified a number of other tasks, including investigating and managing caribou mortality. This task involves (1) monitoring radio-collared caribou to locate those that have died and attempt to determine the causes of death and (2) studying cougar predation on caribou. Currently, researchers in the United States and British Columbia believe that cougar predation may be the most important factor affecting the caribou’s survival. Accordingly, a study of cougar predation has already been initiated. The study plan calls for radio collaring and monitoring 40 cougar (10 each in Idaho and Washington, and 20 in British Columbia). The objectives of the study include (1) assessing the extent and frequency of cougar predation on caribou, (2) determining whether predation is specific to individual cougar, and (3) determining whether cougar predation is based on opportunity or need. Using ESA Section 6 grant funding, the Washington Department of Fish and Wildlife has hired a doctoral candidate from Washington State University who will coordinate the analysis of the cougar monitoring data. As of March 22, 1999, 11 cougar had been collared—7 by Washington and 4 by British Columbia. The Idaho Department of Fish and Game had also begun its collaring effort. If cougar that kill caribou are identified, the agency with jurisdiction over where they are found will have responsibility for deciding how to deal with them. Other tasks identified as immediate needs include producing a consolidated map of the entire recovery zone, using Geographic Information System data. The effort would focus initially on Forest Service land, but recovery officials hope to extend the map to include Idaho State and British Columbia lands as well. Another task is to minimize the impact of recreation on caribou. This effort will focus on winter recreation, particularly snowmobiling, and will identify areas of existing or anticipated high snowmobile use, determine where such use conflicts with caribou, and develop recommendations for reducing or eliminating conflicts. An immediate need to expand information and education efforts has also been identified. This effort will involve summarizing ongoing activities, improving the dissemination of existing information, and identifying alternative funding sources. In commenting on our report, the British Columbia Ministry of Environment, Lands and Parks stated that it supports the following priorities for caribou recovery in the southern Selkirks: (1) ensure a commitment to maintain funding for future recovery tasks; (2) produce a consolidated map of caribou habitat for British Columbia, Idaho, and Washington; (3) establish agreements for zoning and protecting critical winter habitats; (4) minimize recreational disturbance within those habitats; (5) proceed with a caribou/cougar morality study, including an action plan to deal with cougars identified as killing caribou; and (6) expand information and education programs to obtain public support for caribou recovery. As of February 1999, officials planning the recovery effort were also developing an estimate of the costs to implement these high-priority needs. In addition, the draft action plan states that there are other longer-term tasks that need to be addressed to ensure the recovery of the caribou. According to FWS, these long-term efforts would be examined during FWS’ status review of the recovery plan, which is due in 1999. An overriding concern of officials planning future caribou recovery efforts is whether adequate funding will be available to implement the program’s short-term and long-term needs. For example, in fiscal years 1997 and 1998, Washington and Idaho received only about 65 and 57 percent, respectively, of the Section 6 grant funding they requested. Specifically, in fiscal year 1997, Washington asked for $225,000 and Idaho asked for $189,000 for caribou recovery efforts. They received $140,000 and $96,000, respectively. Both states asked for the same amounts in fiscal year 1998; they received $153,200 and $120,200, respectively. For fiscal year 1999, Washington was allocated about $97,000 of the $202,500 it requested and Idaho was allocated $120,000 of the $189,000 it requested. Idaho’s Section 6 funding requests for these years covered the Selkirk ecosystem, including grizzly bear recovery projects. Only about 35 percent of the funds were used for caribou recovery projects. FWS acknowledged that it has not been able to fund caribou recovery work at requested levels but noted that it receives a limited appropriation for Section 6 grants that must be divided among 50 states. FWS stated that these funds, which are allocated to FWS regions on the basis of the number of species listed, are not sufficient to fund all state-proposed recovery projects. The funding concern was reiterated in a January 1999 letter from the chairman of the steering committee to the director of FWS’ Region 1 in Portland, Oregon. The chairman noted that the partial funding of recovery efforts financed through Section 6 grants has compromised the success of these efforts over the past few years. For example, because of funding constraints, the Washington Department of Fish and Wildlife has had to reduce the number of flights it makes to monitor radio-collared caribou. This, in turn, has made it difficult to determine the causes of some caribou deaths. Furthermore, there is also concern about whether enough funding will be available to conduct a complete predator study that will yield valid data. The steering committee has also asked for an additional commitment of FWS staff to the recovery program. According to the chairman, caribou recovery is a multiagency, international program that cannot succeed without the commitment of FWS staff to coordinate the effort. Currently, according to FWS, its representative to the caribou recovery team can spend only a relatively small portion of her time on caribou recovery efforts because of a heavy workload pertaining to other ESA issues and activities. British Columbia officials have also expressed concern about the commitment of adequate U.S. resources to the recovery effort. For example, at a December 1998 steering committee meeting, the Kootenay regional director for the Ministry of Environment, Lands and Parks (the region that encompasses the Canadian portion of the recovery zone) indicated that unless British Columbia gets a clear signal of definite resolve from the United States to recover the southern Selkirk caribou population, further augmentation of the population will not be a high priority for British Columbia. Finally, the chairman of the steering committee stated that reversing the negative trend for the remaining caribou population would require a strong commitment of staff and funding from all of the participating agencies. He noted that while the other agencies have provided, and are continuing to provide, financial support, caribou recovery ultimately depends on a strong financial commitment from FWS. Officials involved in planning future recovery efforts recognize that all cooperating agencies need to determine whether caribou recovery is a high priority, since funding from these agencies is controlled by the priorities they set. Accordingly, as of January 1999, recovery officials had focused their efforts on obtaining a commitment for funding future recovery tasks from their own agencies and from outside sources, such as conservation groups. We provided copies of a draft of this report to the Department of the Interior and its Fish and Wildlife Service; the Department of Agriculture’s Forest Service; the British Columbia Ministry of Environment, Lands and Parks; and the states of Idaho and Washington for their review and comment. We received letters commenting on the report from the Department of the Interior; the Forest Service; the British Columbia Ministry of Environment, Lands and Parks; and the Washington Department of Fish and Wildlife. We also received comments from the Idaho Department of Fish and Game. Interior’s letter stated that the Department was in general agreement with our findings and offered a technical clarification that we incorporated in the report. Interior’s letter and our response are included in appendix IV. The Forest Service’s letter stated that the agency concurred with the report as written (see app. V). According to the letter from the British Columbia Ministry of Environment, Lands and Parks, the report provides a good overview of the recovery program. The Ministry noted, however, that it was discouraged by the slow progress of the caribou recovery program. Furthermore, the Ministry expressed significant concern about the recent high mortality among radio-collared caribou and stated that identifying and addressing the cause of this high mortality remains a very important issue for ensuring the long-term recovery of the southern Selkirk herd. In addition, the Ministry identified the actions or priorities that it supports for caribou recovery in the Selkirks. Finally, the Ministry noted that the availability of caribou for transplant to the southern Selkirk population has, and continues to be, a major issue for British Columbia. The Ministry stated it is currently reviewing the population status of mountain caribou in British Columbia to determine if any of these populations could sustain a loss for transplants. The Ministry noted, however, that any future transplants from British Columbia would also depend upon a clear signal of definite resolve from the United States to recover the southern Selkirk caribou population. We included this information in the report. The Ministry’s letter and our responses are included in appendix VI. Washington’s Department of Fish and Wildlife noted that the report is a good summary of caribou recovery efforts and accurately reflects Washington’s expenditures on this effort. The Department also provided some technical clarifications that we incorporated into the report. The Department’s letter and our responses are included in appendix VII. The Idaho Department of Fish and Game provided us with updated information on the size of the caribou population, the number of caribou remaining in the Idaho (Two Mouth Lakes) herd, and the location of the Idaho release site. We revised the report accordingly. To determine the amount and source of funds expended on the woodland caribou recovery program, we collected documentation and interviewed officials from the U.S. Fish and Wildlife Service’s headquarters office in Washington, D.C.; Region 1 office in Portland, Oregon; and Upper Columbia River Basin field office in Spokane, Washington. We also collected information on expenditures for research by FWS’ National Ecology Research Center from 1984 through 1992. Additionally, we collected documentation and interviewed officials from the Forest Service’s headquarters office in Washington, D.C., and Idaho Panhandle and Colville National Forests; the Bureau of Land Management; the Animal and Plant Health Inspection Service; the Idaho Department of Fish and Game; the Washington Department of Fish and Wildlife; and the British Columbia Ministry of Environment, Lands and Parks. We did not independently verify the accuracy of this expenditure information. We also reviewed ESA and additional information on funding sources for recovery efforts. Much of the expenditure information we obtained from the agencies consisted of estimates of expenses for caribou recovery efforts. Moreover, while we generally collected expenditure data for fiscal years 1984-98, in some cases, the agencies did not have complete records of their expenditures for this period. Accordingly, in these cases, the expenditures reported here are limited to the information that was available from the agencies and, in some instances, are likely to be conservative estimates of expenditures for the caribou recovery program. In addition, in some cases, we relied on expenditure information that the state and federal agencies provided for inclusion in FWS’ annual report to the Congress entitled Federal and State Endangered Species Expenditures. As with other expenditure data we collected, we did not independently verify the accuracy of this information. With respect to FWS and the Forest Service, the annual expenditure data provided in this report differed, in most cases, from expenditure information that we collected independently. However, FWS’ Assistant Director for Planning and Budget and the Forest Service’s Deputy Chief for Business Operations stated that, for certain years covered in our review, the estimates provided for the congressional report for their agencies are the most accurate available. The Forest Service noted, for example, that the data it provided for the congressional report included a more complete array of reasonably identified expenditures, including various indirect costs, such as those for the staff time spent designing timber sales that would not adversely affect caribou and considering the effects of other proposed land management activities on caribou. To report expenditures by the Bureau of Land Management and the Animal and Plant Health Inspection Service, we generally relied on data provided in FWS’ annual reports to the Congress. This report was first issued for fiscal year 1989. Accordingly, the first year for which we collected expenditure data for these agencies was fiscal year 1989. In addition, at the completion of our review, fiscal year 1995 was the most recent year for which FWS had completed its report. The Bureau of Land Management, however, provided us with some additional expenditure data that were not included in FWS’ reports. We included these data in our report. To determine the results of the recovery program, including the outcome of augmentation efforts and the impact of recovery efforts on land use, we interviewed officials from agencies participating in caribou recovery efforts. We also collected and reviewed relevant documentation, such as ESA, proposed and final rules leading to the caribou’s listing under ESA, the initial and revised caribou recovery plans, augmentation plans, and reports of research performed and/or funded by FWS. We also reviewed reports from the Idaho Department of Fish and Game and the Washington Department of Fish and Wildlife that summarize the results of completed caribou augmentation efforts and other recovery activities. To determine the future direction of the recovery program, we interviewed officials and obtained documentation from the participating agencies. We also collected and reviewed the minutes of meetings held by the caribou recovery team, the International Mountain Caribou Steering Committee, and the International Mountain Caribou Technical Committee. Finally, we reviewed their draft action plan identifying high-priority tasks for future recovery efforts. We conducted our review from July 1998 through April 1999 in accordance with generally accepted government auditing standards. We are sending copies of this report to the Honorable Bruce Babbitt, Secretary of the Interior; the Honorable Jamie Rappaport Clark, Director, U.S. Fish and Wildlife Service; the Honorable Daniel J. Glickman, Secretary of Agriculture; the Honorable Mike Dombeck, Chief, U.S. Forest Service; and the Honorable Jacob Lew, Director, Office of Management and Budget. We will also make copies available to others upon request. If you have any questions or need additional information, please contact me at (202) 512-3841. Major contributors to this report are listed in appendix VIII. The following reports, summarized in chronological order, were based on woodland caribou studies performed or funded by the U.S. Fish and Wildlife Service. This research was initiated at the Ecology Branch of FWS’ Denver Wildlife Research Center in 1984. The Ecology Branch then joined FWS’ Western Energy and Land Use Team, which later became part of the National Ecology Research Center. In 1993, the National Ecology Research Center and other organizations (or portions of organizations) were merged to form the National Biological Survey. This organization was renamed the National Biological Service in 1995 and was subsequently merged into the U.S. Geological Survey in 1996. Although FWS has not provided funding for caribou research since fiscal year 1992, the results of funded studies have continued to be published, most recently in 1998. For each report we identified, we included an abstract describing its findings. In most cases, the researchers that wrote the reports prepared these abstracts. However, GAO prepared abstracts for 10 of the reports. The GAO-prepared abstracts were subsequently reviewed and approved by the primary researcher who prepared the reports. Rominger, E.M., and J.L. Oldemeyer. 1986. Forest and Snow Components of Selkirk Mountain Caribou Early Winter Habitat. Unpublished Report, U.S. Fish and Wildlife Service, Fort Collins, Colorado. 45 pp. The Selkirk Mountain caribou population of northern Idaho, northeastern Washington, and southeast British Columbia was listed as an endangered species in 1983 under the Endangered Species Act of 1973. This isolated remnant caribou population resides primarily in British Columbia, with a few individuals as part-time residents in the United States (Scott and Servheen 1985). Although woodland caribou originally occurred in all Canadian border states (Hall 1981) and 350 miles south of their present range in Idaho (Johnson 1967), the Selkirk population of 25-30 woodland caribou is considered the last remaining herd in the 48 contiguous states. Selkirk caribou select seasonal habitats within their home range and movements include the classic double migration described by Edwards and Ritcey (1959) for woodland caribou in Wells Gray Provincial Park, British Columbia. Ecological and socioeconomic factors combine to make early winter habitat the most critical seasonal habitat. Early winter habitat is located in the old-growth cedar/hemlock forest types and between this type and the higher-elevation spruce/fir forest type. Most early winter habitat occurs between 1375 and 1675 meters, generally on northerly slopes (Scott and Servheen 1985). Old-growth cedar/hemlock is economically important to the timber industry because of the efficiency of harvest and consequently has been extensively logged in both Canadian and U.S. caribou habitat. Caribou begin a major shift in diet selection during the onset of early winter as plant aging and early snows decrease the availability and efficiency of harvest of vascular plants. Soft deep snows physically inhibit caribou from using the arboreal lichen component of the spruce/fir community until snow packs settle and harden. Therefore, caribou must adapt a foraging strategy intermediate to open fall grazing and late winter foraging on arboreal lichens. Weather conditions make early winter the most difficult time to monitor woodland caribou. Lack of information during early winter for Selkirk caribou and studies of woodland caribou (Edwards and Ritcey 1959, Stardom 1975, Bloomfield 1980, Antifeau 1985) and the need to better understand caribou use of early winter habitat in relation to forestry practices was the impetus for this research. Rominger, E.M., and J.L. Oldemeyer. 1987. Habitat Component Mapping of Selkirk Mountain Caribou Early Winter Habitat in Southeastern British Columbia, Canada. Unpublished Report, U.S. Fish and Wildlife Service, National Ecology Research Center, Fort Collins, Colorado. 56 pp. The Selkirk Mountain caribou population of northern Idaho, northeast Washington, and southeast British Columbia was listed as endangered in 1983 in accordance with the Endangered Species Act of 1973. This isolated remnant caribou population resides primarily in British Columbia, with a few individuals as part-time residents in the United States (Scott and Servheen 1985). Preliminary research during 1983-84, by the Idaho Department of Fish and Game, delineated population status, home range and seasonal habitat use (Scott and Servheen 1985). This research determined early winter habitat to be the most critical seasonal habitat because of the substantial use of the economically important old-growth western red cedar/western hemlock community and because snow reduced the availability of forage and initiated the transition from summer forage comprised primarily of vascular forage, to the late winter diet of almost exclusively arboreal lichens. These concerns were the impetus for the initiation of an in-depth study by the U.S. Fish and Wildlife Service to map habitat components in critical drainages used by caribou during early winter and monitor habitat components at actual early winter caribou use sites during early winter (Rominger and Oldemeyer 1986). The objective of this report is to describe the physical and silvicultural components of the Waldie and Curtis Creek drainages and their tributaries. These two drainages are in British Columbia on the west side of the Selkirk Range, where a majority of early winter sightings of caribou during 1983-84 occurred. This report includes maps and site descriptions of the area mapped into habitat components during the summer of 1985 and site descriptions of caribou early winter sightings from 1983-86 (Scott and Servheen 1985, Rominger and Oldemeyer 1986). This report will enable resource managers to evaluate future impacts of logging, mining, and recreation on this portion of Selkirk caribou early winter habitat. These data can also be compared with data from caribou use sites and proportions of these drainages that provide optimal habitat. Comparisons of these habitats with historical range in the United States will enable biologists to better manage reintroduced caribou. Climate, geology, caribou use of early winter habitat, and other aspects of Selkirk caribou ecology are addressed in separate reports (Crawford and Scott 1985, Scott and Servheen 1985, Rominger and Oldemeyer 1986). Rominger, E.M. 1987. “Lichen-Bearing Windthrown Trees Are Important to Selkirk Caribou Early-Winter Habitat.” U.S. Fish and Wildlife Service, Research Information Bulletin No. 87:124. The native woodland caribou population that inhabits northern Idaho, northeastern Washington, and southeastern British Columbia is currently composed of 25-30 animals, with most seasonal ranges occurring in Canada. In March 1987, 24 additional woodland caribou were transplanted into northern Idaho from two populations in British Columbia. The National Ecology Research Center began investigating early winter habitat of the native population in 1985. Early winter in the Selkirk Mountains is defined as the period from first snowfall until snow depths and other conditions enable caribou to ascend to late-winter habitats in higher-elevation Engelmann spruce/subalpine fir forests. This seasonal habitat has been determined to be the most critical for caribou survival. Rominger, E.M., and J.L. Oldemeyer. 1988. “Quantification of Woodland Caribou Early Winter Habitat, Selkirk Mountains, British Columbia.” Proceedings of the 3rd North American Caribou Workshop. Alaska Department of Fish and Game, Wildlife Technical Bulletin No. 8:161-162. In winter 1986-87, there were 25-30 woodland caribou in the endangered population inhabiting the Selkirk Mountains in the Pacific Northwest. These caribou ranged primarily in southeastern British Columbia but also frequented northern Idaho and northeastern Washington. In March 1987, 24 woodland caribou from two British Columbia populations were transplanted to northern Idaho to improve the Selkirk population’s chances of long-term survival. In 1985, the National Ecology Center, U.S. Fish and Wildlife Service, began studying early winter habitat of the Selkirk population, specifically during the period from first snowfall until snow conditions permit/cause caribou to move upslope to forest communities at 1,500 meters to 1,800 meters elevation. Early winter use occurs primarily in mature/old-growth stands of economically important timber in both the Engelmann spruce/subalpine fir and the western red cedar/western hemlock communities; the area between the two communities is also used extensively. The lower-elevation, more densely canopied cedar/hemlock community is particularly important because snow is shallower there, which reduces energy costs to caribou and extends the availability of green vascular forage. In the higher-elevation, more open-canopied spruce/fir community, the increased costs of locomotion through deeper snow are apparently offset by increased availability of highly digestible arboreal lichens. Compared with randomly selected locations, actual caribou use sites had significantly (P<0.05) more lichen-bearing, recently windthrown trees; were at higher elevation; and had lower slope angles, canopy cover, and tree basal area. Arboreal lichen on windthrown trees was apparently important forage because vascular plants were buried by snow. Because Selkirk caribou use spruce/fir and cedar/hemlock communities extensively during early winter, we recommend that mature old-growth stands for both forest types be maintained. Special considerations should be given to stands on less steep slopes where available arboreal lichen biomass is relatively high and is replenished by trees which are commonly blown down. Rominger, E.M., and J.L. Oldemeyer. 1989. “Early-Winter Habitat of Woodland Caribou, Selkirk Mountains, British Columbia.” Journal of Wildlife Management 53(1):238-243. We monitored early-winter habitat use by woodland caribou in the southern Selkirk Mountains, British Columbia, during November and December 1985-86. We compared biological and physical attributes of random locations within known early-winter caribou range to actual caribou use sites. Univariate and descriptive discriminate analysis indicated significant (P<0.05) separation of several habitat variables between random sites and sites used by caribou. We observed caribou in old-growth stands with moderate slopes (<30 degrees); greater density of recently windthrown, lichen-bearing trees; higher elevations; and less canopy cover and total tree basal area than measured at random plots. Because the Selkirk caribou use Engelmann spruce-subalpine fir and western red cedar/western hemlock communities, we recommend maintenance of old-growth timber in these habitat types. Rominger, E.M. 1990. Caribou Diets and Arboreal Lichen Availability. Proceedings of the Caribou Workshop, Ministry of Environment, British Columbia. 4 pp. Mr. Rominger looked at the lichen biomass estimates of standing trees, blowdown/litterfall, and effects of landform on tree density. He also deals with forage intake rates, primarily for barren ground caribou and reindeer. He suggests 2 kg/day rather than 5 kg/day may be a more reasonable estimate. This is a more reasonable estimate when compared with the dry forage and intake of other species. He cites Detrick (1984) as the most complete work, using the destructive technique of cutting branches, collecting all the lichen, and weighing it. The literature available usually refers to subalpine fir and Engelmann spruce. Factors to be considered in regard to the lichen intake rate of woodland caribou are the nutritional values, energy variation in foraging strategy, body size and winter severity. There is up to twice the protein in arboreal lichen as compared with terrestrial lichen. Foraging on arboreal lichen is probably more energy efficient than cratering of barren ground caribou. Milder (maritime) climates where caribou were not subjected to temperature extremes should also be considered. However, the larger body size of woodland caribou may cause an increase in intake rate compared with barren ground caribou. Rominger, E.M. 1990. “Research Continues on Augmentation of the Southern Selkirk Mountain Caribou Herd.” Endangered Species Technical Bulletin, Vol. XV(8):6. Woodland caribou once occurred widely in forested regions from southeastern Alaska, through much of Canada, to the northern conterminous United States. Due to extensive habitat alteration and unrestrictive shooting, however, only one population still naturally occurs in the conterminous United States. In 1983, this remnant herd, which occurs in the Selkirk Mountains of northern Idaho, northeastern Washington, and southeastern British Columbia, was estimated at 25-30 individuals. The animals in this herd were rarely seen in the United States because most of their seasonal habitats were in Canada. The potential threats to the survival of the southern Selkirk Mountain caribou herd while in the United States, including poaching, habitat loss, collisions with motor vehicles, and genetic problems from inbreeding, led the Fish and Wildlife Service to list the population as endangered in February 1984 (see BULLETIN Vol. IX, No. 3). Rominger, E.M., and J.L. Oldemeyer. 1990. “Early-Winter Diet of Woodland Caribou in Relation to Snow Accumulation, Selkirk Mountains, British Columbia, Canada.” Canadian Journal of Zoology, Vol. 68(12): 2691-2694. Woodland caribou in the southern Selkirk Mountains of British Columbia shift from a diet of primarily vascular plants during snow-free months to an arboreal lichen-conifer diet during late winter. We present evidence that caribou diets, during the early-winter transition period, are influenced by snow accumulation rates. Caribou shift to an arboreal lichen-conifer diet earlier during winters of rapid snow accumulation and forage extensively on myrtle boxwood, an evergreen shrub, and other vascular plants during years of slower snow accumulation. The role of coniferous forage in early-winter food habits is examined. Forest management strategies can be developed to provide habitat that will enable caribou to forage in response to varying snow accumulation rates. Rominger, E.M., J.L. Oldemeyer, R.W.T. Detrick, and D.R. Johnson. 1990. Arboreal Lichen Biomass on Live and Dead Subalpine Fir, Northern Idaho. Unpublished Report, U.S. Fish and Wildlife Service, Fort Collins, Colorado. 35 pp. Two estimates of arboreal lichen biomass on subalpine fir were summed separately and combined to estimate the availability of this forage for woodland caribou in high-snowpack ecosystems of Southwest British Columbia and northwestern United States. We estimated lichen biomass between two and six meters on standing trees to determine availability at various snow depths during late winter. This estimate was combined with a biomass value between six meters and treetop to estimate lichen availability on whole trees made available to caribou via windthrow. We sampled arboreal lichen from more than 1,050 branches on 266 trees and snags between two and six meters and more than 1,100 branches on 111 trees and snags between six meters and treetop. Total biomass estimates for three diameter-size classes ranged from 444 to 1,170 grams for dead trees and from 716 to 3,075 grams for live trees. Despite the universally large variances concomitant with estimating mean arboreal lichen biomass, the averages of several other studies on arboreal lichen biomass are similar to our estimate for two to six meters on whole trees. These estimates of arboreal lichen biomass will enable us to better understand the winter ecology of woodland caribou. Warren, C.D. 1990. Ecotypic Response and Habitat Use of Woodland Caribou Translocated to the Southern Selkirk Mountains, Northern Idaho. M.S. Thesis, University of Idaho, Moscow. 194 pp. Between April 1987 and March 1990 the ecotypic response and habitat use of translocated woodland caribou were studied in northern Idaho and southern British Columbia. Two populations, each representing an ecotype of woodland caribou, were used as sources for the reintroduction effort. Anahim Lake caribou (woodland ecotype) were captured in west-central British Columbia. Revelstoke caribou (mountain type) were captured in southeastern British Columbia. Over the first two years, 48 radio-collared caribou were released into the southern Selkirk Mountains, including 26 Anahim and 22 Revelstoke animals. A total of 962 relocations were recorded, 443 of which were sampled for habitat characteristics. Significantly more Revelstoke caribou emigrated from the release area and joined resident caribou herds in southern British Columbia, while Anahim caribou incurred significantly greater mortality. These differences were most apparent during the first year after release. Habitat use patterns revealed important interactions between the two translocated populations and the nearest resident (Stagleap, mountain ecotype) caribou herd. The two most important influences affecting the response of the caribou appeared to be their traditional habitat use patterns acquired from their native herds and the habitat use patterns learned, or assimilated, from other caribou after release. The late winter period showed the greatest difference between the caribou ecotypes. Anahim caribou used mature, densely forested areas on south-facing slopes, while the late winter habitat use of Revelstoke and Stagleap-area caribou showed no distinct pattern. There were also differences specific to the caribou populations during the other seasons. Summer habitat use patterns suggest that differences exist between the release area in northern Idaho and the area occupied by the resident Stagleap herd. Differences in habitat use between years of study indicated that some “random” searching behavior occurred for several months following release and that the translocated caribou could adjust certain habitat use patterns in response to being placed in unfamiliar territory. All seasons revealed some similarities in habitat use between the caribou populations, indicating universal habitat needs of the woodland subspecies. The taxonomic and evolutionary status of mountain caribou are discussed. Finally, the implications of this studies’ findings for translocation efforts conducted on other species and recommendations for the continued management of the Selkirk Mountains caribou are presented. Rominger, E.M., and J.L. Oldemeyer. 1991. “Arboreal Lichen on Windthrown Trees: A Seasonal Forage Resource for Woodland Caribou, Selkirk Mountains, British Columbia.” Proceedings of the 4th North American Caribou Workshop, Newfoundland and Labrador Wildlife Division: 475-480. Arboreal lichen, particularly fruticose beard lichens, are important early-winter forages in the high snowpack ecosystems of western North America. As snow depth increase in the Selkirk Mountains of northern Idaho and southeastern British Columbia, woodland caribou feed extensively on recently windthrown lichen-bearing trees and snags. One-hectare areas around caribou early-winter locations had significantly (P< 0.001) greater amounts of recently windthrown trees compared with randomly placed 1-hectare plots within caribou early-winter habitat. This study estimates the potential contribution of windthrow to the woodland caribou forage base in Selkirk Mountains. Subalpine fir trees and snags dominated (85 percent) the windthrow component at both caribou and random locations. We sampled arboreal lichen on subalpine fir trees and snags felled at logging operations in northern Idaho. Subalpine fir trees and snags were stratified by 3 size classes and sampled in proportion to their occurrence in the windthrow measured at caribou and random locations. The estimates of arboreal lichen biomass made available via windthrow are compared with biomass available in standing trees up to 3 meters. Rominger, E.M., J.L. Oldemeyer, and C.T. Robbins. 1991. “Foraging Dynamics and Woodland Caribou: A Winter Management Conundrum,” Proceedings of the Fifth North American Caribou Workshop, Rangifer, Special Issue No. 7(123). Research, primarily on the endangered Selkirk woodland caribou population, has enabled biologists to answer many of the basic ecology questions pertaining to caribou in high snowpack ecosystems. Data have been collected on habitat selection (Freddy 1974; Scott and Servheen 1985; Simpson et al. 1985; Rominger and Oldemeyer 1989; Warren 1990), food habits (Freddy 1974; Scott and Servheen 1985; Simpson et al. 1985; Rominger and Oldemeyer 1990), arboreal lichen biomass (Stevenson 1979; Detrick 1984; Rominger et al. submitted), tree density in subalpine forests (Rominger and Oldemeyer submitted), and arboreal lichen nutritional quality (Antifeau 1987; Robbins 1987). Specific knowledge that is lacking for caribou winter nutritional ecology includes forage intake rates during winter and the constraints upon this process. The interrelationship of snow depth, aspect, lichen biomass within vertical strata of trees, daily intake, constraints upon this intake, and tree density in relation to both forage dynamics and potential predator detection combine to make this process very complex. The nearly monophagous late-winter diet reported for woodland caribou in these high snowpack ecosystems affords a unique opportunity in wild ungulate ecology to recreate an accurate facsimile of diet choices in a laboratory setting. We propose a dissertation research project to test specific hypotheses related to late-winter foraging ecology using pen-raised woodland caribou at Washington State University. Rominger, E.M., and J.L. Oldemeyer. 1991. Comparison of Fixed-Plot and Variable-Plot Sampling to Estimate Tree Density in Selkirk Woodland Caribou Subalpine Forest Habitat. Unpublished Report, U.S. Fish and Wildlife Service, Fort Collins, Colorado. 20 pp. An accurate estimate of tree composition and density is important to the management of woodland caribou because of their relationship to the biomass of arboreal lichens. The fruticose arboreal lichens within these trees are the principal winter forage of woodland caribou in high snowpack ecosystems. We tested four density estimation techniques in timber stands with known densities. A fixed subplot (400 square meters) was determined to be the most accurate technique, and point-centered quarter was the least accurate. Mean stem density of live and dead standing trees greater than or equal to 13 centimeters’ diameter at breast height in homogeneous stands of mature to old-growth subalpine fir/Engelmann spruce was 395 plus or minus 37.7 stems per hectare (mean and 95-percent confidence interval). Rominger, E.M. 1992. Early-Winter Habitat of the Selkirk Woodland Caribou. U.S. Fish and Wildlife Service, National Ecology Research Center, Fort Collins, Colorado. 19 pp. Early winter is bounded by the abiotic constraint of snowfall and snow condition rather than by a temporal frame. The first persistent snowfall initiates early winter, and crusted deep snow that enables caribou to ascend into late-winter habitat terminates this season. This period may overlap with rut activities in October or may not occur until January or February. The bioenergetic costs of travel in deep soft snow and the relatively minor vertical lift afforded by early-winter snow conditions are among the parameters that constrict Selkirk caribou below high elevation late-winter habitat. The potential for caribou to use lower elevation, often snow-free habitats exists. However, during early winter, caribou are primarily found in mature/old-growth subalpine fir/Engelmann spruce and western hemlock/western red cedar forests and the area between these two forest types on moderate slopes between 1500 and 1900 meters. The conclusions presented in this chapter on early-winter ecology of Selkirk caribou are based on data collected on the extant population in British Columbia during early winters 1985-86 (Rominger and Oldemeyer 1989a,b; 1990) and earlier research (Freddy 1974, Scott and Servheen 1985). Rominger, E.M. 1992. Revision for the Early-Winter Habitat Chapter, Selkirk Woodland Caribou Recovery Plan. National Ecology Research Center, Fort Collins, Colorado. 26 pp. Early winter is bounded by the abiotic constraint of snowfall and snow condition rather than a temporal frame. The first persistent snowfall initiates early winter, and crusted deep snow that enables caribou to ascend into late-winter habitat terminates this season. This period may overlap with rut activities in October or may not occur until January or February. The bioenergetic costs of travel in deep, soft snow and the relatively minor vertical lift afforded by early-winter snow conditions are among the parameters that constrict Selkirk caribou below high-elevation late-winter habitat. The potential for caribou to use lower elevation, often snow-free habitats exists. However, during early winter, caribou are primarily found in mature/old-growth subalpine fir/Engelmann spruce and western hemlock/western red cedar forests and in the area between these two forest types on moderate slopes between 1500 and 1900 meters. The conclusions presented in this chapter on the early-winter ecology of Selkirk caribou are based on data collected on the extant population in British Columbia during early winters 1985-86 (Rominger and Oldemeyer 1989a,b, 1990) and earlier research (Freddy 1974, Scott and Servheen 1985). Habitat parameters of caribou use sites were compared with random locations within predicted caribou early-winter habitat during 1985 and 1986. Rominger, E.M., L. Allen-Johnson, and J.L. Oldemeyer. 1994. “Arboreal Lichen in Uncut and Partially Cut Subalpine Fir Stands in Woodland Caribou Habitat, Northern Idaho and Southeastern British Columbia.” Forest Ecology and Management 70:195-202. To better understand the effects of partial cutting on arboreal lichen biomass production within woodland caribou habitat, lichen was hand picked from 1228 branches on 307 subalpine fir trees in Idaho and in British Columbia. Lichen biomass from partially cut stands was compared with biomass on trees from adjacent uncut stands at each site. Arboreal lichen biomass did not differ significantly between uncut and partially cut stands. The total number of branches per tree did not differ significantly between uncut and partially cut stands. Live branches had more lichen than dead branches. Species composition of arboreal lichen changed in partially cut stands compared with adjacent uncut stands. The ratio of live to dead branches was substantially different within the British Columbia partial cut. Rominger, E.M. 1995. Late Winter Foraging Ecology of Woodland Caribou. Ph.D. Dissertation, Washington State University, Pullman. 68 pp. To better understand the late winter foraging ecology of woodland caribou in the arboreal lichen feeding niche, bottle-raised caribou were used in laboratory and field trials. Variables with the greatest influence on intake rate differed between laboratory and field trials. Bite size was the most important variable in laboratory trials; bite rate was the most important in field trials. During late winter field trials, caribou foraged on lichen primarily on standing subalpine fir and dead trees. Bite size, bite rate, intake rate, tree resident time, and amount of lichen eaten per tree were included in a general linear model with tree species, tree size class, and tree lichen class as the independent variables. All variables except bite size increased significantly with an increase in tree lichen class. Compared with theoretical maximums, intake rate was low on all lichen class trees (range 1.4 to 2.1 g/min). Caribou would have to forage 14 to 21 hours to meet predicted daily requirements. Tree resident time and time between trees varied inversely with tree density. In cafeteria style preference trials using the two primary arboreal lichen genera, caribou strongly preferred Bryoria spp. (92 percent) compared to Alectoria Sarmentosa (8 percent). Apparent dry matter digestibility of this diet was 82 percent. Data from late winter field trials were used to test recent functional response models relative to optimality and mechanisms. Observed patch resident time, amount of lichen eaten per patch, lichen intake rate, and bite rate of caribou were significantly lower than model predictions. I conclude that short temporal frame foraging trials with fasted ungulates do not accurately reflect foraging ecology under field conditions, that caribou do not forage “optimally” as defined by current models, and that multiple tests of models will be required to integrate foraging theory and management. Rominger, E.M., C.T. Robbins, and M.A. Evans. 1996. “Winter Foraging Ecology of Woodland Caribou in Northeastern Washington.” Journal of Wildlife Management 60(4): 719-728. To better understand the late winter foraging ecology of woodland caribou feeding on arboreal lichens, we used bottle-raised caribou in experimental arena trials with artificial trees, and in field trials within historical late-winter habitat. Factors with the greatest influence on intake rate differed between experimental arena and field trials. Bite size was the most important variable in experimental arena trials; bite rate was the most important in field trials. During late winter field trials, caribou forged on lichen primarily on standing subalpine fir and dead trees. Bite size, bite rate, intake rate, tree resident time, and amount of lichen eaten per tree were included in a general linear model with tree species, tree size class, and tree lichen class (<average, average, and >average) as the independent variables. Tree lichen class was the most important variable in the model, and 76 percent of all bites occurred on >average lichen class trees. Compared with theoretical maximums, intake rate was low on all lichen class trees (range = 1.4-2.1 g/min). At these intake rates caribou would have to forage 14-21 hours to meet predicted daily requirements. Tree resident time and time between trees varied inversely with tree density. In cafeteria style preference trials with the 2 primary arboreal lichen genera, caribou strongly preferred Bryoria (92 percent) compared to Alectoria Sarmentosa (8 percent). Apparent dry matter digestibility of this diet was 82 percent. Timber stands must be substantially older than traditional harvest rotation lengths to provide the high lichen biomass found on >average lichen class trees. Caribou remained in habitats where Bryoria was the predominant genus of arboreal lichen and would not forage in Alectoria Sarmentosa dominated valley bottom habitat. Warren, C.D., J.M. Peek, G.L. Servheen, and P. Zager. 1996. “Habitat Use and Movements of Two Ecotypes of Translocated Caribou in Idaho and British Columbia.” Conservation Biology 10(2): 547-553. Two woodland caribou ecotypes, mountain and northern, were translocated to the southern Selkirk Mountains in northern Idaho to augment a remnant subpopulation. The translocation resulted in an additional subpopulation that used the general area of the release site. The mountain ecotype stock exhibited patterns of movement and habitat use similar to those of the resident subpopulation. The northern ecotype stock exhibited more variable habitat use, especially in the first year after translocation. Dispersal of the northern stock was not as extensive as that of the mountain stock. Fourteen of 22 caribou from the northern stock and 6 of 18 caribou from the mountain stock died during the 3-year period after the release. Our results suggest that when donor subpopulations must be used that do not closely compare with resident subpopulations extinct or extant, larger numbers of individuals may be needed to establish a self-sustaining population. Rominger, E.M., and C.T. Robbins. 1996. “Winter Foraging Dynamics of Woodland Caribou in an Artificial Landscape.” Proceedings of the Sixth North American Caribou Workshop. Rangifer, Special Issue No. 9:235-236. Woodland caribou subsist on a nearly monophagous diet of alectorioid arboreal lichens during winter in the high snowpack ecosystems of western North America. This phenomenon provided an opportunity to mimic an entire seasonal diet in a laboratory situation using bottle-raised woodland caribou. Arboreal lichen biomass is reported to vary significantly among tree species (i.e., more lichen on subalpine fir than on Engelmann spruce), among topographical sites (i.e., more lichen on valley bottom trees than on mid-slope trees) and along the vertical axis of trees (i.e., more lichen on branches between 4 and 5 meters than between 2 and 3 meters; Detrick, 1984). The objective of this experiment was to quantify arboreal lichen intake rates of woodland caribou foraging on natural branches collected from two land types, and two foraging heights within trees. We report the results of foraging trails using 8 woodland caribou (3, 2.5-year-old steers; 1, 1.5-year-old female; and 4 steer calves) conducted in an artificial forest during the autumn of 1992. Rominger, E.M., and C.T. Robbins. 1996. “Generic Preference and In-Vivo Digestibility of Alectorioid Arboreal Lichens by Woodland Caribou.” Proceedings of the Sixth North American Caribou Workshop. Rangifer, Special Issue No. 9:379-380. Lichens are eaten by most ungulate species in North America (Bergerud, 1972; Steveson, 1978; Jenkins & Wright, 1987; Fox & Smith, 1988; Klein & Bay, 1990). However, none of these species are more obligate lichen feeders than woodland caribou in ecosystems of western North America where deep snowpacks preclude cratering. The digestibility of lichens is reported to vary substantially (21 percent to 85 percent; Hanley & McKendrick, 1983; Robbins, 1987) depending on technique and, in the case of in-vitro analyses, inoculum source (Person et al., 1980; Thomas et al., 1984; Antifeau, 1987). The objective of this experiment was to determine the in-vivo digestibility of and generic preference for the 2 primary arboreal lichens found in late-winter woodland caribou habitat in southeastern British Columbia, northern Idaho, and northeastern Washington. Rominger, E.M. 1998. “Autumn Foraging Dynamics of Woodland Caribou in Experimentally Manipulated Habitat.” Proceedings of the Seventh North American Caribou Conference. Rangifer, Special Issue No. 10:261. Unlike other North American cervids, woodland caribou in the Selkirk ecosystem do not forage or browse. Therefore, during autumn, as forbs become senescent and deciduous shrubs defoliate, caribou foraging decisions are narrowed. Shallow snow depths preclude a diet shift to arboreal lichen in standing trees, as is observed in late winter. The objective of this research was to determine the importance of the two principal forage items previously reported in autumn diets: (1) arboreal lichen on windthrown trees and (2) the evergreen shrub myrtle boxwood. Foraging trails were conducted with three tame woodland caribou in six 5000 square meter pens experimentally manipulated to either remove all windthrown trees and myrtle boxwood or retain extant myrtle boxwood and add “windthrown” trees by felling trees. Additionally, the pen design was such that half was in an old-growth stand of western red cedar/western hemlock and half was in an adjacent clear-cut. Arboreal lichen, as a result of a large bite size, had the greatest influence on intake rate. Caribou in pens with lichen bearing windthrown trees had significantly higher intake rates (P<0.006) and significantly lower (P<0.01) eating bite rates (exclusive of search time between plants). Foraging bite rate (inclusive of search time between plants) did not differ (P<0.20) due to treatment. Intake rates (P<0.005) and foraging bite rates (P<0.03) of caribou were significantly greater in timbered portions of pens. Search time was significantly greater (P<0.005) in clear-cut portions of pens. In the timbered portion of treatment pens, lichen comprised 34 percent of the total bites and 67 percent of the dry matter intake and arboreal lichen from windthrown trees comprised 27 percent of the total bites and 52 percent of the dry matter intake. These data suggest that aboreal lichen is an important dietary component earlier in autumn than previously reported and extends the period that woodland caribou subsist primarily or solely on arboreal lichen 30 to 60 days in the high snowpack ecosystems of western North America. Tame caribou autumn diets comprised less than one-percent myrtle boxwood, in apparent conflict with observations of wild caribou in timbered habitats with myrtle boxwood. However, in these trials, more then 95 percent of the myrtle boxwood occurred in the clear-cut portion of trial pens, and forages in clear-cuts have been reported to have significantly higher levels of secondary plant compounds. Total phenolics in myrtle boxwood samples collected from the clear-cut portion of trial pens and from clear-cuts in British Columbia were 3 times greater than levels in myrtle boxwood samples collected from old-growth stands in British Columbia. In addition, snow depths underneath the forest canopy never covered the primary forage plants. I hypothesize that these woodland caribou forage very little on myrtle boxwood because of (1) the availability of other forage species, and (2) the high level of phenolics present in myrtle boxwood during these trials. Woodland caribou are one of seven remaining subspecies of caribou in North America. There are two varieties, or ecotypes, of woodland caribou–mountain and northern. The two ecotypes are not genetically distinct and differ only in the use they make of their habitat and in their behavior. For example, mountain caribou do not congregate in large herds, as do northern caribou. Mountain caribou also live in areas of high snowfall where they feed largely on tree-borne lichen in the winter, whereas northern caribou inhabit less mountainous terrain and dig in the snow for low-growing lichens and other plants. Mountain caribou in the southern Selkirk Mountains use different types of habitat, at varying elevations, depending on the season. For example, they spend the early winter at elevations of 3,000 to 6,200 feet, where they feed on tree-borne lichens that have blown to the ground and on remaining green forage. As snow hardens later in the winter, they move to elevations generally above 6,000 feet, where they feed primarily on lichens hanging from trees. In the spring, mountain caribou move down to areas where new green forage is available. Although mountain caribou exhibit seasonal movements, they depend on mature to old-growth forests for habitat and food for much of the year. The mountain ecotype of woodland caribou is found mainly in central and southeastern British Columbia. The northern ecotype ranges over much of the remainder of Canada. Historically, woodland caribou were distributed throughout much of Canada and portions of the northern tier of the United States. Currently, the only caribou population that regularly inhabits the contiguous United States is the mountain caribou population of the southern Selkirk Mountains. Its range is restricted to a relatively small area in southeastern British Columbia, extreme northeastern Washington, and northern Idaho. While records suggest that caribou in the area were plentiful in the 19th century, the population had declined to about 100 individuals by the 1950s. By the early 1980s, the population had further declined to about 30, and the caribou had become one of the most critically endangered mammals in the United States. Interest in managing the woodland caribou in the southern Selkirks increased as the population decreased. In 1971, U.S. and Canadian resource management agencies signed a cooperative agreement to investigate and monitor the caribou. The agencies included the Forest Service, the Washington Department of Game, the Idaho Fish and Game Commission, the British Columbia Fish and Wildlife Branch, the British Columbia Forest Service, and the University of Idaho. The agreement resulted in the formation of the International Mountain Caribou Steering Committee and the International Mountain Caribou Technical Committee. The steering committee was established to approve plans for studies and funding and to help set direction for caribou recovery efforts and for the technical committee. The steering committee’s members include management-level representatives of the participating agencies. The technical committee was tasked with coordinating caribou management and research studies and with serving as a clearinghouse for information that promotes management activities designed to reverse the decline of the caribou population. Membership in the technical committee is open and includes wildlife biologists from the participating agencies; individuals working on caribou research; and other interested parties, such as private citizens, timber companies, and environmental groups. The cooperative agreement produced a series of population and habitat studies in the 1970s and 1980s. Both committees are still active and are key participants in current caribou recovery efforts. In 1977, the Idaho Fish and Game Commission designated the caribou as an endangered species in the state. The Washington Game Commission designated the caribou as endangered in 1982. In 1980, the Idaho Department of Fish and Game and a private citizen petitioned the U.S. Fish and Wildlife Service (FWS) to list the southern Selkirk population of woodland caribou under the Endangered Species Act (ESA). FWS issued an emergency rule designating the population as endangered in January 1983. The emergency rule was extended in October 1983, and a final rule listing the species as endangered was issued in February 1984. Under ESA, once a species is identified as threatened or endangered, the responsible agency (in the case of the caribou, FWS) must develop and implement a recovery plan unless such a plan would not contribute to the conservation of the species. For example, some species have not been recently sighted and may be extinct. For those species, the preparation of a recovery plan is deferred until individuals are found in the wild. In addition, state management plans are used in place of recovery plans for some species, and some species do not have individual recovery plans because they are covered by multispecies plans. A recovery plan details the specific tasks that are considered necessary to recover a species. The plan can identify (but not obligate) other parties, such as federal, state and private entities, as cooperating agencies. Implementing a recovery plan is contingent upon appropriations, priorities, and other budgetary constraints affecting the participants. A recovery plan may also be modified to reflect changes in the status of a species, the completion of recovery tasks, and new findings that reflect the latest available scientific information. In 1982, the International Mountain Caribou Technical Committee began preparing a management plan for the woodland caribou. FWS adopted a revised version of this document as the official recovery plan for the caribou in 1985. The recovery plan identified the following as cooperating agencies in the caribou recovery effort: FWS; the Fish and Wildlife Branch of the British Columbia Ministry of Environment (currently, the Wildlife Branch of the Ministry of Environment, Lands and Parks); the British Columbia Forest Service (part of the Ministry of Forests); the Forest Service (the Colville and Idaho Panhandle National Forests); the Idaho Department of Fish and Game; the Washington Department of Game (currently, the Washington Department of Fish and Wildlife); and the University of Idaho. In 1991, FWS appointed its own caribou recovery team to advise the agency on caribou recovery efforts. The recovery team completed a revised recovery plan in 1994. The revised plan identified all of the entities identified by the initial plan as cooperators in the new plan, as well as Washington State University and the Idaho Department of Lands. While these agencies agreed to cooperate in carrying out the recovery plans, resources to implement the plans are controlled by congressional appropriations and the agencies’ budgets and priorities. FWS’ recovery plans for the southern Selkirk Mountains woodland caribou identified a variety of management and research actions necessary for the species’ recovery. These included collecting information on and managing caribou habitat, determining caribou population characteristics, maintaining the population through various efforts to reduce caribou mortality, and informing the public and agency personnel about caribou and involving them in caribou management. The 1985 recovery plan also called for assessing the feasibility of augmenting the existing population by introducing caribou transplanted from other herds. The consensus of the biological community at the time was that augmentation was the only available method that could reasonably be expected to achieve the population’s recovery. The 1994 revised recovery plan added the need to establish a third self-sustaining herd in the state of Washington to reduce the risk of losing caribou through a catastrophic event, such as a large fire, and to better distribute the caribou, increase their number, and further enhance the probability of the species’ recovery. A recovery zone that includes the general area used by the caribou as habitat was delineated in the initial recovery plan. It covers about 2,200 square miles and includes national forest, state, private and Canadian lands. The recovery zone encompasses the geographic area in the southern Selkirk Mountains where caribou management efforts are now focused. In addition to augmentation efforts, FWS’ recovery plans included a variety of other tasks. Generally, these tasks involved such activities as gathering information on managing caribou habitat, conducting research on the characteristics of the caribou population, endeavoring to reduce caribou mortality, and developing public information and education programs. The following illustrate some of the recovery program’s tasks and other accomplishments. Habitat Mapping: The recovery plans called for the agencies to inventory existing caribou habitat. Accordingly, the agencies have mapped most of the caribou habitat in the recovery zone. They are now focusing on consolidating the mapping efforts completed to date so that they can produce a single uniform map of the recovery zone. Caribou Management Units: Forest Service land, which provides the majority of the habitat for caribou in the United States, has been further divided into caribou management units. These units include all seasonally important habitat and provide more localized information on the distribution of caribou habitat within the recovery zone. FWS is attempting to get individual management plans developed for each caribou management unit to assist in long-term planning for protecting and improving these habitat. Habitat Management Guidelines: The cooperating agencies have developed caribou habitat management guidelines, and the Forest Service is using them to design timber sales in caribou habitat. These guidelines attempt to minimize the effects of logging on caribou and can also be used to develop silvicultural standards that may enhance the caribou habitat over the long term. Although the development of these guidelines began in the 1970s, they have been revised over time and were used to develop the most recent forest plans for the two national forests located within the recovery zone (the Colville and the Idaho Panhandle National Forests). The cooperating agencies have recognized the need to update the guidelines again to take into account the results of more recent research (see our discussion of the habitat suitability index model below). Efforts to Protect Habitats in British Columbia: The Ministry of Environment, Lands and Parks and the Ministry of Forests have undertaken efforts to protect caribou habitat in the British Columbia portion of the recovery zone. These efforts include planning timber harvests to minimize their impact on caribou habitat, establishing a land-use planning process that resulted in guidelines for the retention of an old-growth forest in a high-priority caribou habitat, and protecting additional caribou habitat in a recently established provincial park and wildlife management area. The Ministry of Environment, Lands and Parks is also developing a comprehensive mountain caribou management strategy for British Columbia. This strategy will address the viability of, threats to, and habitat conditions needed for maintaining all populations of caribou in British Columbia, including the southern Selkirk population. Research: A substantial amount of research has been completed on various aspects of woodland caribou ecology. According to FWS, the results of this research have helped tailor recovery efforts to the specific needs of the species. For example, the National Ecology Research Center conducted a series of research projects that focused primarily on issues related to the mountain caribou’s early winter habitat and diet. Early winter habitat is believed to be the most critical seasonal habitat for caribou because they begin a major shift in their diet during the onset of early winter, as plants age and early snows decrease the availability and ease of harvesting plants. The National Ecology Research Center effort also included research on caribou genetics, late winter caribou foraging ecology, and the ecotype response and habitat use of transplanted caribou. These projects included field studies and resulted in the publication of numerous peer-reviewed reports and articles. The reports that resulted from this research effort are summarized in appendix I. Other completed research on caribou has addressed the population characteristics, seasonal habitat use and food habitat of the resident southern Selkirk caribou population, as well as the seasonal habitat use of transplanted caribou. British Columbia has also invested extensively in research on the characteristics of other mountain caribou herds in the province. Habitat Suitability Index Model: Information gained from tracking transplanted and resident caribou, as well as research on their use of seasonal habitat, has been used to draft a habitat suitability index model. This model can be used to rate the suitability of caribou habitat during a given season by taking into account such variables as elevation, slope, type of tree cover, percentage of forest canopy closure, and the age of the uppermost canopy of the forest. According to FWS, the model will be used to revise the agency’s habitat management guidelines and will allow for more accurate and predictable timber management in the recovery zone. Caribou Census Technique: The Idaho Department of Fish and Game has developed a technique that is used to estimate the number of caribou in the southern Selkirk Mountains, even though some caribou are not fitted with radio collars. The census has two phases. In the first phase, a fixed-wing aircraft survey is performed to determine the distribution of caribou from tracks made in the snow or animal sightings. In the second phase, a helicopter census is taken to count and classify the caribou. The census, which has been performed since 1991, provides the most accurate available accounting of the overall caribou population. The census is conducted in the winter (Feb.-Apr.) when caribou are at higher elevations and in open-canopy forests. Information and Education: To better inform the public about the endangered southern Selkirk Mountains caribou and gain support for recovery efforts, the recovery plans called for various information and education efforts. For example, the Idaho Department of Fish and Game sponsored an “Adopt-a-Caribou” program that allowed school children to name and monitor the location of transplanted caribou. The Washington Department of Fish and Wildlife has also developed an Internet Web site that provides general information on the southern Selkirk caribou and the progress of Washington’s augmentation efforts. It also includes a “Track-a-Caribou” feature that provides middle and high school students with opportunities to monitor the movements of transplanted caribou and the success of the recovery program. Other informational and educational efforts include a slide series and video describing caribou ecology and management, newspaper and magazine articles, and presentations in local communities to children and adults. The International Mountain Caribou Technical Committee also serves as a forum for disseminating information on the caribou. Law Enforcement: Law enforcement efforts conducted by U.S., state, and Canadian agencies have included the distribution of identification cards and pamphlets to hunters so that they will be better able to identify and not accidentally kill caribou. Other efforts have included discussing caribou identification, natural history, and management with hunters, as well as placing signs in caribou habitat warning hunters that caribou may be present. In addition, patrols to enforce a ban on the use of snowmobiles in caribou habitat have been instituted to protect caribou. Enforcement efforts focusing on illegal caribou mortality have also led to the successful prosecution of some offenders. The following are GAO’s comments on the Department of the Interior’s letter dated April 14, 1999. 1. We revised the report as suggested. The following are GAO’s comments on the Ministry of Environment, Lands and Parks’ letter dated April 8, 1999. 1. We included the Ministry of Environment, Lands and Parks’ concerns about the modest gains of the caribou recovery program in the Agency Comments section of the report. 2. Our reference to 57-percent caribou mortality refers to the percentage of caribou transplanted to the southern Selkirks (59 of 103) that are known to have died. We added the Ministry’s view that annual adult mortality rates in excess of 15 percent are high, its statement that recent estimates of adult mortality suggest that the annual mortality rate is higher than this, and its concern about the need to identify and address the cause of this high mortality. 3. We added the Ministry’s priorities for caribou recovery in the southern Selkirk Mountains to the report. 4. We included the issues that the Ministry raised about the availability of caribou for transplant to the United States in the report. The following are GAO’s comments on Washington Department of Fish and Wildlife’s letter received April 7, 1999. 1. We revised the report to include information on the two ecotypes of woodland caribou. 2. The map of caribou release sites has been revised and now includes all four release sites. 3. We revised the report to note the title of the action plan. Robert B. Arthur William K. Garber Tim R. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the Caribou Recovery Program, focusing on the: (1) amount and source of funds expended on the woodland caribou recovery program; (2) results of the program, including the outcome of efforts to augment the population and the impact of the recovery efforts on land use; and (3) future direction of the recovery program. GAO noted that: (1) the United States and British Columbia spent an estimated $4.7 million on efforts to restore the woodland caribou population from 1984 through 1998; (2) the Fish and Wildlife Service provided the majority of these funds, spending about $3.2 million; (3) these funds were used primarily for increasing the existing caribou population by transplanting other caribou to the southern Selkirk Mountains and conducting follow-up monitoring; (4) the Forest Service and British Columbia estimated that they spent about $781,000 and $31,000, respectively, on caribou recovery efforts; (5) the caribou recovery program has achieved modest gains; (6) however, despite these efforts, the overall size of the southern Selkirk population has increased by only about 18 animals, to a total of about 48; (7) the recovery program also has not achieved its goal of establishing two new self-sustaining herds, one in Idaho and another in Washington; (8) this limited population increase is due to high mortality among transplanted caribou and the deaths of some resident caribou; (9) although the cause of death is unknown for many caribou, researchers believe that predation, mainly by cougars, is the most common cause; (10) the recovery program has succeeded in mapping caribou habitat, developing caribou habitat management guidelines, completing research on various aspects of caribou ecology, developing information and education programs, providing law enforcement, and monitoring the caribou population; (11) the impact on land use due specifically to caribou recovery efforts has been relatively minor; (12) according to the Forest Service, some restrictions have been placed on timber harvesting and a small portion of the caribou habitat has been closed to snowmobiling; (13) officials involved in planning future caribou recovery efforts agreed that, for the immediate future, the program's highest priority is to maintain the core population of caribou centered around Stagleap Provincial Park; (14) the range of this population includes northeastern Washington and northern Idaho, as well as southeastern British Columbia; (15) however, the availability of caribou for further augmenting the population is uncertain; (16) another high-priority task will be to investigate the causes of and manage caribou mortality; (17) the cooperating agencies recently initiated a study of cougar populations and their predation on caribou in the southern Selkirks; and (18) an overriding concern of officials involved in planning future recovery efforts is whether there will be adequate funding for the program. |
To manage major construction projects, DOE project directors in EM and NNSA are required to follow specific DOE directives, policies, and guidance for contract and project management. Among these is DOE Order 413.3B, which provides direction for planning and executing projects. To oversee projects and approve critical decisions, DOE conducts its own reviews, often with the help of independent technical experts. For example, for large projects (i.e., projects with a total cost of greater than $100 million), DOE’s Office of Acquisition and Project Management is required to validate the accuracy and completeness of a project’s performance baseline as part of each important project step. NNSA’s largest ongoing construction project involves the disposition of surplus U.S. weapons-grade plutonium as part of the Plutonium Disposition Program. Under an agreement signed in 2000, the United States and Russia will each dispose of at least 34 metric tons of surplus weapons-grade plutonium by irradiating it as MOX fuel in nuclear reactors. A key part of the U.S. program includes the construction of two nuclear facilities at DOE’s Savannah River Site: a MOX facility that will produce MOX fuel for nuclear reactors and a Waste Solidification Building to dispose of the liquid waste from the MOX facility. A third nuclear facility had been planned for the Savannah River Site to disassemble nuclear weapon pits (i.e., the spherical central core of a nuclear weapon that is compressed with high explosives to create a nuclear explosion)—the Pit Disassembly and Conversion Facility—and to provide plutonium feedstock for fuel fabrication. NNSA canceled the facility in January 2012 and, instead, decided to meet its feedstock requirements through existing facilities at DOE’s Los Alamos National Laboratory and the Savannah River Site, including potentially the MOX facility. NNSA spent approximately $730 million on the design of this facility prior to its cancellation. A basic tenet of effective project management is the ability to complete projects on time and within budget. DOE has continued to experience management weaknesses in major projects (i.e., those costing $750 million or more). In response, since March 2009, DOE has undertaken a number of new reforms to improve its management of major projects, including those overseen by EM and NNSA. For example, DOE has updated program and project management policies and guidance in an effort to improve the reliability of project cost estimates, better assess project risks, and better ensure project reviews that are timely and useful and that identify problems early. Further, in November 2010, DOE took steps to enhance project management and oversight by requiring peer reviews and independent cost estimates for projects with values of more than $100 million. NNSA has also taken actions to improve the management of projects that it oversees. For example, in August 2012, the NNSA issued guidance calling for design work to be 90 percent complete before construction can begin to minimize design changes and associated cost increases and schedule delays. Our 2012 work examining DOE’s management of nonmajor projects— those costing less than $750 million—indicates that DOE’s reform efforts have helped in managing the department’s cost and schedule targets. In particular, in December 2012, we reported that EM and NNSA were making some progress in managing some of the 71 nonmajor projects that were completed or ongoing for fiscal years 2008 to 2012 and that had a total estimated cost of approximately $10.1 billion. For example, we identified some nonmajor projects that used sound project management practices, such as the application of effective acquisition strategies, to help ensure the successful completion of these projects. This was consistent with what we found in our October 2012 report on EM’s cleanup projects funded by the American Recovery and Reinvestment Act of 2009. Of the completed projects we examined, 92 percent met the performance standard of completing project work scope without exceeding the cost target by more than 10 percent, according to EM data. In recognition of these improvements in the management of nonmajor projects, we narrowed the focus of the designation of EM and NNSA on our 2013 high-risk list to major contracts and projects at EM and NNSA. DOE’s actions to improve project management are promising, but their impact on meeting cost and schedule targets is not yet clear. Because all ongoing major projects have been in construction for several years, neither EM nor NNSA has a major project that can demonstrate the impact of DOE’s recent reforms. As we have reported in the past few years, ongoing major projects continue to experience significant cost increases and schedule delays as shown in the following examples: In December 2012, we reported that the estimated cost to construct the Waste Treatment and Immobilization Plant in Hanford, Washington, had tripled to $12.3 billion since its inception in 2000 and that the scheduled completion date had slipped by nearly a decade to 2019. Moreover, we found that DOE’s incentives and management controls were inadequate for ensuring effective project management, and that DOE had in some instances prematurely rewarded the contractor for resolving technical issues and completing work. In March 2012, we reported that NNSA’s project to design and construct the Chemistry and Metallurgy Research Replacement Nuclear Facility—a new plutonium facility at NNSA’s Los Alamos National Laboratory—was expected to cost between $3.7 billion to $5.8 billion—nearly a six-fold increase from the initial estimate. In February 2012, NNSA deferred construction of the facility by at least an additional 5 years, bringing the total delay to between 8 and 12 years from NNSA’s initial plan. A number of major problems contributed to this increase, including infrastructure-related design changes. GAO, Modernizing the Nuclear Security Enterprise: New Plutonium Research Facility at Los Alamos May Not Meet All Mission Needs, GAO-12-337 (Washington, D.C.: Mar. 26, 2012). In November 2010, we reported that NNSA’s plans to construct a modern Uranium Processing Facility at its Y-12 National Security Complex in Oak Ridge, Tennessee, had experienced significant cost increases. More recently, in September 2011, NNSA estimated that the facility would cost from $4.2 billion to $6.5 billion to construct—a nearly seven-fold cost increase from the original estimate. In addition, NNSA has delayed the expected completion date by 11 years, to 2023. In the November 2010 report, as well as in a January 2010 report, we found a number of major problems that contributed to this increase, including preparation of a cost estimate in 2007 that did not meet all cost estimating best practices. Also, 6 of 10 technologies to be used in the facility were not sufficiently mature, which could lead to cost and schedule delays if the technologies do not perform as intended. In regard to nonmajor projects, while we reported in December 2012 on progress by EM and NNSA in managing nonmajor projects, we also found that of the 71 nonmajor projects that EM and NNSA completed or had under way from fiscal years 2008 to 2012, 23 projects did not meet or were not expected to meet one or more of their three performance targets for scope, cost, and completion date. We also noted that, for 27 projects, many had insufficiently documented performance targets for scope, cost, or completion date, which prevented us from determining whether they met their performance targets. As we noted in our February 2013 high-risk report, while we have shifted our focus to major contracts and projects, we will continue to monitor the performance of these nonmajor projects. In these reports and others, we have made recommendations calling on DOE to ensure that project management requirements are consistently followed, to improve oversight of contractors, and to strengthen accountability, among others. DOE has generally agreed with these recommendations and has taken action to address many of them. We will continue to monitor DOE’s project management and its implementation of their actions to resolve project management weaknesses. Our ongoing review of NNSA’s Plutonium Disposition Program, including examining recent problems with the ongoing construction of the MOX facility—a major project—and the Waste Solidification Building—a nonmajor project—has resulted in some preliminary observations that highlight the need for continued efforts by DOE to improve contract and project management. DOE is currently forecasting an increase in the total project cost for the MOX facility from $4.9 billion to $7.7 billion and a delay in the start of operations from October 2016 to November 2019. Specifically, DOE is evaluating a project baseline change proposal prepared by NNSA’s contractor for the MOX facility. The cost increase and schedule delay will not be known until DOE completes its review of the contractor’s proposal and DOE’s project oversight office completes an independent cost estimate. DOE currently plans to complete its review and approve a new project baseline by September 2013. With regard to the Waste Solidification Building, DOE approved in December 2012 a revised performance baseline to increase the cost from the initial estimate of $344.5 million to $414.1 million and a delay in the start of operations from September 2013 to August 2015. Our ongoing work is focused on several areas, including the following: Critical system components’ design adequacy. According to NNSA officials and the contractor for the MOX facility, one of the primary reasons for the proposed cost increase and schedule delay is due to inadequately designed critical system components, such as the gloveboxes used in the facility for handling plutonium and the infrastructure needed to support these gloveboxes. According to these officials, although the design of the facility is based on a similar facility in France, the cost of adapting the French design to the design needs of this project was not well understood when the project was approved for construction. The performance baseline for the MOX facility was also set several years before NNSA issued guidance in 2012 to set cost and schedule baselines only after design work is 90 percent complete. As part of our ongoing work, we are evaluating whether such guidance would have been useful for NNSA to apply to the MOX facility, as well as the potential impact this guidance might have had on mitigating cost increases and schedule delays. Understanding the nuclear supplier base. According to NNSA officials and the contractor for the MOX facility, another primary reason for the proposed cost increase and schedule delay is not adequately understanding the ability of the nuclear industry to fabricate and deliver nuclear-quality components to meet the project schedule. Under the terms of the MOX facility contract, the contractor was required to submit, beginning at the completion of preliminary design, semiannual reports regarding the condition of the construction and equipment markets and identify factors, such as availability of labor, materials, and equipment that may affect the cost or schedule for completing the MOX facility. As part of our ongoing work, we plan to review these reports to understand the extent to which the contractor had assessed market conditions. Changes in project scope. Our ongoing review of the MOX facility includes examining NNSA’s direction to its contractor to add to the scope of the construction contract to include capability that NNSA had planned for the cancelled Pit Disassembly and Conversion Facility. As part of our ongoing work, we will examine the extent to which this change in scope affects the cost and schedule of the project and the extent to which this change is consistent with a December 2012 memo from the Deputy Secretary of Energy that emphasizes the importance of improving upfront planning, including changes in scope, as well as defining contract requirements prior to issuing a solicitation. Effectiveness of project reviews. NNSA project reviews of the MOX facility and the Waste Solidification Building have identified challenges to meeting the facilities’ performance baselines and made related recommendations. For example, 2011 and 2012 peer review reports of the MOX facility identified concerns regarding installation rates for equipment and recommended that realistic installation rates be included in the cost estimate. However, the NNSA contractor’s 2012 baseline change proposal ultimately cited installation rates as one of the drivers of the proposed cost increase. As part of our ongoing work, we are continuing to gather information on what actions NNSA and its contractor took when the 2011 peer review first raised the concern and the extent to which any actions were taken in response to the review. We are also continuing to gather information on project reviews of the Waste Solidification Building, to determine how responsive program officials were to the findings and recommendations of these reviews. Life-cycle cost estimate for the Plutonium Disposition Program. In addition to setting the cost and schedule performance baselines of the MOX facility and Waste Solidification Building, NNSA has developed a life-cycle cost estimate for the overall effort of the Plutonium Disposition Program to dispose of at least 34 metric tons of surplus weapons-grade plutonium. NNSA officials told us that there has never been a review of this life-cycle estimate by an outside entity but that they are conducting an independent assessment of portions of the life-cycle cost estimate, including the operating cost of the MOX facility. As part of our ongoing work, we are reviewing NNSA’s preliminary life-cycle cost estimate and the steps NNSA is taking to validate this cost estimate. We plan to report on this ongoing work later this year. Chairman Frelinghuysen, Ranking Member Kaptur, and Members of the Subcommittee, this completes my prepared statement. I would be pleased to respond to any questions that you may have at this time. If you or your staff members have any questions about this testimony, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. GAO staff who made key contributions to this testimony are Dan Feehan and Kiki Theodoropoulos, Assistant Directors; and Joseph Cook, and Cristian Ion. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | DOE relies primarily on contractors to carry out its diverse missions and operate its laboratories and other facilities, with about 90 percent of its annual budget spent on contracts and capital asset projects. Since 1990, GAO has reported that DOE has suffered from substantial and continual weaknesses in effectively overseeing contractors and managing large, expensive, and technically complex projects. As of February 2013, EM and NNSA remained on GAO's list of areas at high risk of fraud, waste, abuse, and mismanagement for major contract and project management. This testimony, which is primarily based on GAO reports issued from March 2009 to December 2012, focuses on (1) prior GAO findings on DOE major projects and the impact of recent DOE steps to address project management weaknesses and (2) preliminary observations from GAO's ongoing work on the reasons behind the planned increase in the performance baseline--a project's cost, schedule, and scope--for two projects being constructed as part of NNSA's Plutonium Disposition Program--the MOX facility and the Waste Solidification Building. GAO is making no new recommendations. DOE and NNSA continue to act on the numerous recommendations GAO has made to improve management of the nuclear security enterprise. GAO will continue to monitor DOE's and NNSA's implementation of these recommendations. In response to GAO reports over the past few years on management weaknesses in major projects (i.e., those costing $750 million or more), the Department of Energy (DOE) has undertaken a number of reforms since March 2009, including those overseen by the Office of Environmental Management (EM) and the National Nuclear Security Administration (NNSA). For example, DOE has updated program and project management policies and guidance in an effort to improve the reliability of project cost estimates, better assess project risks, and better ensure project reviews that are timely and useful, and that identify problems early. In addition to actions taken to improve project management, in its 2012 work, GAO has noted DOE's progress in managing the cost and schedule of nonmajor projects--those costing less than $750 million. DOE's actions to improve project management are promising, but their impact on meeting cost and schedule targets is not yet clear. Because all ongoing major projects have been in construction for several years, neither EM nor NNSA has a major project that can demonstrate the impact of DOE's recent reforms. GAO's ongoing review of NNSA's Plutonium Disposition Program, including examining recent problems with the ongoing construction of the Mixed Oxide (MOX) Fuel Fabrication Facility and the Waste Solidification Building at the Savannah River Site in South Carolina, has resulted in some preliminary observations that highlight the need for continued efforts by DOE to improve contract and project management. DOE is currently forecasting an increase in the total project cost for the MOX facility from $4.9 billion to $7.7 billion and a delay in the start of operations from October 2016 to November 2019. Specifically, DOE is evaluating a project baseline change proposal prepared by NNSA's contractor for the MOX facility--a major project. The cost increase and schedule delay will not be known until DOE completes its review of the contractor's proposal and DOE's project oversight office completes an independent cost estimate of the project. With regard to the Waste Solidification Building--a nonmajor project--DOE approved a revised performance baseline in December 2012 to increase the cost from the initial estimate of $344.5 million to $414.1 million and a delay in the start of operations from September 2013 to August 2015. GAO's ongoing work is focused on several areas, including the following: critical system components' design adequacy, understanding the nuclear supplier base, changes in project scope, the effectiveness of project reviews; and lifecycle cost estimates for the Plutonium Disposition Program. GAO plans to report on this ongoing work later this year. |
Information security is a critical consideration for any organization reliant on information technology (IT) and especially important for government agencies, such as NARA, where maintaining the public’s trust is essential. The dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet have changed the way our government, the nation, and much of the world communicate and conduct business. Although this expansion has created many benefits for agencies in achieving their missions and providing information to the public, it also exposes federal networks and systems to various threats. Without proper safeguards, systems are unprotected from attempts by individuals and groups with malicious intent to intrude and use the access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. This concern is well-founded for a number of reasons, including the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, the steady advance in the sophistication and effectiveness of attack technology, and the dire warnings of new and more destructive attacks to come. Over the past few years, federal agencies have reported an increasing number of security incidents, many of which involved sensitive information that has been lost or stolen, including personally identifiable information, which has exposed millions of Americans to the loss of privacy, identity theft, and other financial crimes. NARA is the nation’s record keeper. It was created by statute as an independent agency in 1934. On July 1, 1949, the Federal Property and Administrative Services Act transferred the National Archives to the General Services Administration, and its name was changed to National Archives and Records Services. It attained independence again as an agency in October 1984 (effective April 1, 1985) and became known as the National Archives and Records Administration. NARA’s mission is to ensure continuing access to essential documentation of the rights of American citizens and the actions of their government. NARA also publishes the Federal Register, stores classified materials, and plays a role in the declassification of these classified records. The Archivist of the United States is NARA’s chief administrator and has responsibilities that include providing federal agencies with guidance and assistance for records management and establishing standards for records retention. The Archivist also has overall responsibility for ensuring the confidentiality, integrity, and availability of the information and information systems that support the agency and its operations. The Assistant Archivist for Information Services has the responsibilities of NARA’s Chief Information Officer. In fiscal year 2009, NARA’s appropriation was about $459 million, while its fiscal year 2010 appropriation is about $470 million. NARA is composed of six major divisions (see table 1) that include 44 facilities such as the headquarters locations in Washington, D.C., and College Park, Maryland; presidential libraries; and regional archives nationwide. NARA depends on a number of key information systems to conduct its daily business functions and support its mission. These systems include networks, telecommunications, and specific applications. As of fiscal year 2009, NARA reported having 39 IT systems and 4 externally hosted systems. According to NARA, as part of its key transformation initiative, in 2001 the agency responded to the challenge of preserving, managing, and assessing electronic records by beginning the development of the modern Electronic Records Archives (ERA) system. This major information system is intended to preserve and provide access to massive volumes of all types and formats of electronic records, independent of their original hardware or software. NARA plans for the system to manage the entire life cycle of electronic records, from their ingestion through preservation and dissemination to customers. We have previously made numerous recommendations to NARA to improve its acquisition and monitoring of the system. Table 2 lists examples of key NARA systems. The Office of Information Services at the Archives II facility provides centralized management and control of NARA’s IT resources and services, including NARANET, the primary general support system of NARA. As shown in figure 1, NARANET is centrally located at Archives II and connects to other government and academic entities. NARANET is extended to field sites via a private network, operated by a service provider. In addition, at locations where the public has research access, NARA provides access to the Internet through the use of public access computers. The Federal Information Security Management Act of 2002 (FISMA) requires each federal agency to develop, document, and implement an requires each federal agency to develop, document, and implement an agencywide information security program to provide security for the agencywide information security program to provide security for the information and information systems that support the operations and information and information systems that support the operations and assets of the agency, including those provided or managed by other assets of the agency, including those provided or managed by other agencies, contractors, or other sources. FISMA requires the Chief agencies, contractors, or other sources. FISMA requires the Chief Information Officer or comparable official at federal agencies to be Information Officer or comparable official at federal agencies to be responsible for developing and maintaining an information security responsible for developing and maintaining an information security program. program. The Office of Information Services centrally administers NARA’s IT The Office of Information Services centrally administers NARA’s IT security program at the Archives II facility. The Assistant Archivist for security program at the Archives II facility. The Assistant Archivist for Information Services, who also serves as the Chief Information Officer Information Services, who also serves as the Chief Information Officer (CIO), is the head of the Office of Information Services. As described in (CIO), is the head of the Office of Information Services. As described in table 3, NARA has designated certain senior managers or divisions at table 3, NARA has designated certain senior managers or divisions at headquarters to fill the key roles in IT security designated by FISMA and headquarters to fill the key roles in IT security designated by FISMA and agency policy. agency policy. FISMA also requires the National Institute of Standards and Technology (NIST) to provide standards and guidance to agencies on information security. NARA has a directive in place to establish its policy and guidance for information security, delineate its security program structure, and assign security responsibilities. NARA has taken steps to safeguard the information and systems that support its mission. For example, it has developed a policy for granting or denying access rights to its resources, employs mechanisms to prevent and respond to security breaches, and makes use of encryption technologies to protect sensitive data. However, security control weaknesses pervaded NARA’s systems and networks, thereby jeopardizing the agency’s ability to sufficiently protect the confidentiality, integrity, and availability of its information and systems. These deficiencies include those related to access controls, as well as other controls such as configuration management and segregation of duties. A key reason for these weaknesses is that NARA has not yet fully implemented its agencywide information security program to ensure that controls are appropriately designed and operating effectively. These weaknesses could affect NARA’s ability to collect, process, and store critical information and records, and protect that information from risk of unauthorized use, modification, and disclosure. In addition to access controls, other important controls should be in place to ensure the confidentiality, integrity, and availability of an organization’s information. These controls include policies, procedures, and techniques for securely configuring information systems, sufficiently disposing of media, implementing personnel security, and segregating incompatible duties. Weaknesses in these areas increase the risk of unauthorized use, disclosure, modification, or loss of sensitive information and information systems supporting NARA’s mission. One of the purposes of configuration management is to establish and maintain the integrity of an organization’s work products. It involves identifying and managing security features for all hardware, software, and firmware components of an information system at a given point and systematically controlling changes to that configuration during the system’s life cycle. By implementing configuration management and establishing and maintaining baseline configurations and monitoring changes to these configurations, organizations can better ensure that only authorized applications and programs are placed into operation. NARA policy requires the most restrictive mode possible of the security settings of information technology products. NIST standards state and NARA policy requires system changes to be controlled. Patch management is an additional component of configuration management, and is an important factor in mitigating software vulnerability risks. Up-to-date patch installation can help diminish vulnerabilities associated with flaws in software code. NIST states that organizations should promptly install newly released security relevant patches, service packs, and hot fixes and test them for effectiveness and potential side effects on the organization’s information systems. NARA had not securely configured several of its systems. For example, network configurations were not always restricted in accordance with best practices; additionally, Web applications and operating systems were not always restricted in accordance with NIST guidance. While NARA has maintained and tracked configuration changes for its ERA system, it has not consistently documented the status of those changes. NARA documented, maintained, and tracked approvals for ERA’s system change requests in its meeting minutes as well as in a system for managing those change requests, but the information in meeting minutes and the change repository were inconsistent. For example, change requests agreed to in meeting minutes from October 2009 to March 2010 did not always match those entered in the repository storing those changes. Specifically, some change requests were approved for implementation in the meeting, but were listed in the repository as closed. Others were reflected as being on hold, but were actually listed as canceled in the repository. According to ERA configuration management staff, these inconsistencies exist because the configuration control board status represents a single point in time of each change request. Subsequent changes to the system related to each change request are handled by release management staff. Therefore, the status in the repository will continue to change. Configuration management staff have the responsibility to document updates to changes in status at various points in the process. In addition, NARA had not implemented an effective patch management program for the systems we reviewed. For example, patches had not been consistently applied to critical systems or applications in a timely manner. Specifically, several critical systems had not been patched or were out of date, some of which had known vulnerabilities. Additionally, NARA used out-of-date or unsupported software and products in some instances. As a result of these control deficiencies, increased risk exists that the integrity of NARA systems could be compromised. Media destruction and disposal is key to ensuring confidentiality of information. Media can include magnetic tapes, optical disks (such as compact disks), and hard drives. Organizations safeguard used media to ensure that the information they contain is appropriately controlled. Media that is improperly disposed of can lead to the inappropriate or inadvertent disclosure of an agency’s sensitive information or the personally identifiable information of its employees and customers. NARA uses degaussers to remove sensitive information from hard drives and tapes before reuse or destruction. This equipment should then be certified that it was tested and that it performed correctly. NIST recommends that organizations test sanitization equipment and procedures to verify correct performance. NARA’s policy for protection of media requires that sanitization equipment be tested annually. However, NARA has not always ensured that equipment used for removing sensitive information was tested annually. For example, while the degausser located at one location was certified annually, one at another location was not. Specifically, one degausser was certified on January 2010, while the other had not been certified since July 2008, about 20 months prior to our on-site visit. By not testing and certifying its degausser, NARA has reduced assurance that the equipment is performing according to certified requirements. The greatest harm or disruption to a system comes from the actions, both intentional and unintentional, of individuals. These intentional and unintentional actions can be reduced through the implementation of personnel security controls. According to NIST, personnel security controls help organizations ensure that individuals occupying positions of responsibility (including third-party service providers) are trustworthy and meet established security criteria for those positions. For employees and contractors assigned to work with confidential information, confidentiality, nondisclosure, or security access agreements specify required precautions, acts of unauthorized disclosure, contractual rights, and obligations during employment and after termination. NARA’s security policy for personnel screening states that the type of investigation is based on the sensitivity of the position to be held. NARA conducted the appropriate background investigations for the employees and contractors we reviewed. These individuals also had appropriate nondisclosure agreements signed when applicable to their position. However, at one location contractors had not signed nondisclosure agreements for the ERA system. NARA staff acknowledged the issue and subsequently had the contractors sign the nondisclosure agreements. Segregation of duties refers to the policies, procedures, and organizational structures that help ensure that no single individual can independently control all key aspects of a process or computer-related operation and thereby gain unauthorized access to assets or records. Often, organizations achieve segregation of duties by dividing responsibilities among two or more individuals or organizational groups. This diminishes the likelihood that errors and wrongful acts will go undetected, because the activities of one individual or group will serve as a check on the activities of the other. Effective segregation of duties includes segregating incompatible duties and maintaining formal operating procedures, supervision, and review. Inadequate segregation of duties increases the risk that erroneous or fraudulent transactions could be processed, improper program changes implemented, and computer resources damaged or destroyed. For systems categorized as high or moderate impact, NIST states that incompatible duties should be segregated, such as, by not allowing security personnel who administer system access control functions to administer audit functions. NARA also has a policy requiring segregation of duties. NARA did not always implement effective segregation of duties controls. For example, two staff members were each assigned security and system administration roles and responsibilities, as either a primary or backup for the ERA system (a high impact system). In addition, those individuals had privileges that allowed them to delete logs generated by the system used for auditing and logging security events. According to NARA staff, periodic reviews of the administrators’ access were performed using checklists that require administrators to review each other’s access activities. However at the time of our review, NARA had not documented its oversight process to ensure controls for separation of duties were implemented appropriately. As a result, NARA may face an increased risk that improper program changes or activities could go unnoticed. A key reason for the weaknesses in information security controls intended to protect NARA’s systems is that the agency has not yet fully implemented its agencywide information security program to ensure that controls are effectively established and maintained. FISMA requires each agency to develop, document, and implement an information security program that, among other things, includes periodic assessments of the risk and the magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information and information systems; policies and procedures that (1) are based on risk assessments, (2) cost- effectively reduce risks, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; plans for providing adequate information security for networks, facilities, security awareness training to inform personnel of information security risks and of their responsibilities for complying with agency policies and procedures, as well as training personnel with significant security responsibilities for information security; periodic testing and evaluation of the effectiveness of information security policies, procedures, and practices, which is to be performed with a frequency depending on risk, but no less than annually, and which includes testing the management, operational, and technical controls for every system identified in the agency’s required inventory of major information systems; a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in its information security policies, procedures, or practices; procedures for detecting, reporting, and responding to security incidents; plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. Although NARA has developed and documented a framework for its information security program, key components of the program have not been fully or consistently implemented. In order for agencies to determine what security controls are needed to protect their information resources, they must first identify and assess their information security risks. FIPS publication 199 provides risk-based criteria to identify and categorize information and information systems based on their impact to the organization’s mission. In addition, the Office of Management and Budget (OMB) states that a risk-based approach is required to determine adequate security, and it encourages agencies to consider major risk factors, such as the value of the system or application, threats, vulnerabilities, and the effectiveness of current or proposed safeguards. By increasing awareness of risks, these assessments can generate support for policies and controls. NIST states that organizations should also assess physical security risks to their facilities when they perform required risk assessments of their information systems. Federal standards require that NARA conduct vulnerability risk assessments at least every 3 years for the buildings and facilities we visited. NARA has developed and conducted risk assessments, but has not consistently documented risk or assessed risk in a timely manner at its facilities. For example, NARA had developed risk assessments for all 10 of the systems in our review, but other system documentation for 4 of the 10 systems cited FIPS 199 impact levels that did not match those listed in NARA’s systems inventory. Documents for 3 systems reflected impact ratings higher than those listed in the systems inventory and the fourth one reflected a lower rating. Similarly, while NARA had conducted physical security risk assessments for the sites we reviewed, several had not been conducted within the required 3-year time frame. As a result, NARA may not have assurance that adequate controls are in place to protect its information and information systems. Another key element of an effective information security program is to develop, document, and implement risk-based policies, procedures, and technical standards that govern security over an agency’s computing environment. FISMA requires agencies to develop and implement policies and procedures to support an effective information security program. If properly implemented, policies and procedures should help reduce the risk that could come from unauthorized access or disruption of services. Developing, documenting, and implementing security policies are the primary mechanisms by which management communicates its views and requirements; these policies also serve as the basis for adopting specific procedures and technical controls. NARA has developed information security policies and procedures that are based on NIST guidelines. For example, NARA has developed individual policy documents that address all of the families of controls listed in NIST Special Publication 800-53. To illustrate, NARA has developed information security methodologies that correspond to the controls required by NIST in the areas of access controls, configuration management, contingency planning, and security awareness training. However, NARA’s policies and procedures were not always consistent with NIST guidance. For example, NARA has not always prescribed controls based on the system’s impact. NIST requires organizations to determine their information systems’ impact using the security objectives of confidentiality, integrity, and availability and states that this information system impact level must be determined prior to the consideration of minimum security requirements and the selection of security controls for those information systems. Instead, NARA prescribed controls based on individual security objectives without taking into consideration the predetermined impact level (based on the three security objectives) of an individual system. To illustrate, NARA’s access control policy only specifies controls for systems with moderate or high confidentiality, rather than suggesting controls according to the impact of the system, as determined by all three security objectives. Similarly, NARA’s certification and accreditation and contingency planning methodologies prescribed controls for systems with moderate or high integrity and availability, respectively, and not based on the impact level of the system. As a result, NARA’s policy may not provide the information needed to ensure that appropriate systems controls are selected that protect its information systems. An objective of system security planning is to improve the protection of information technology resources. A system security plan provides an overview of the system’s security requirements and describes the controls that are in place—or planned—to meet those requirements. OMB Circular No. A-130 requires that agencies develop system security plans for major applications and general support systems, and that these plans address policies and procedures for providing management, operational, and technical controls. NIST Special Publication 800-53 states that the security plan should be updated to address changes to the system, its environment of operation, or problems identified during plan implementation or security control assessments. One of the controls recommended by NIST Special Publication 800-53 is the development of an inventory of an information system’s components. This inventory should, among other things, accurately reflect the current information system, be consistent with the authorized boundary of the system, and be available for review. NARA’s Security Architecture Planning Methodology also outlines security responsibilities, including responsibilities for information system owners and information owners to carry out related to system security plans. This methodology in turn mandates the use of baseline controls identified by NIST in Special Publication 800-53. NARA prepared and documented security plans for the 10 systems and networks we reviewed. All system security plans that we reviewed, with the exception of NARANET’s wireless plan, identified management, technical, and operational controls, in accordance with NIST guidance and NARA policy. However, NARA did not always include required controls in its system security plans. For example, 7 of the 13 system security plans reviewed did not include a system component inventory or address where that inventory could be found. In addition, NARA has not updated its badge and access system security plan since 2003, despite replacing the system in 2007. NARA had scheduled to correct this weakness by the end of 2009, but as of September 2010 it had not been corrected. Further, NARA system security plans varied in documenting security roles and responsibilities for key individuals. Some plans were missing one or more assignments for these roles. Specifically, 6 of the 13 plans did not have the required information system owner role identified, and none of the plans reviewed had the information owner role identified or assigned. By not addressing inventory control and assigning key security responsibilities in the system security plan, NARA increases the risk that critical information may not be available to those responsible for implementing system security plans, potentially causing a misapplication of controls to the system. According to FISMA, an agencywide information security program must include security awareness training for agency personnel, contractors, and other users of information systems that support the agency’s operations and assets. This training must cover (1) information security risks associated with users’ activities and (2) users’ responsibilities in complying with agency policies and procedures designed to reduce these risks. FISMA also includes requirements for training personnel with significant responsibilities for information security. In addition, OMB requires that personnel be trained before they are granted access to systems or applications. The training is intended to ensure that personnel are aware of the system or application’s rules, their responsibilities, and their expected behavior. Further, NARA policy requires that managers and users of NARA information systems be made aware of the security risks associated with their activities and of the applicable laws, executive orders, directives, policies, standards, instructions, regulations, or procedures related to the security of NARA information systems. The policy also states that NARA must ensure that personnel are adequately trained to carry out their assigned information security-related duties and responsibilities. NARA has a security awareness training program in place and maintains records of this training in its Learning Management System. Users are required to complete a Web-based course and, after completion, acknowledge they have reviewed and understand their security responsibilities. According to NARA’s fiscal year 2009 FISMA report, the CIO reported that 100 percent of NARA’s employees had received security awareness training. NARA’s Inspector General concurred with this assessment. The CIO also reported that 50 employees had significant security responsibilities, and that all 50, had received specialized training. NARA’s Inspector General reported a higher number stating that 114 employees had significant security responsibilities, and that 83 (73 percent) received specialized training. However, records from NARA’s training system indicated that not all users had both completed the training and acknowledged that they reviewed and understood their security responsibilities in fiscal year 2009. According to NARA’s records, as of August 20, 2009, 563 of 4,536 individuals had completed only the class portion (12 percent) and 369 individuals (8 percent) had completed only the acknowledgment portion (although in many cases had at least started the class portion). Seven hundred and forty-nine individuals (17 percent) had not completed either portion (see fig. 2). According to NARA’s Chief Information Security Officer, limitations in the training tracking system led NARA to give credit for a user interacting with the system in some way, meaning that a user who had at least started the training course received credit for the security awareness training. In addition, records of specialized security training provided by NARA indicated that 115 individuals were required to take specialized security training; of these 115, 48 (42 percent) had no record of taking specialized training. NARA officials stated that these individuals were provided with an alternate form of training to ensure their compliance with FISMA, such as a one-on-one review or an opportunity to review briefing slides. Without an effective method for tracking that employees and contractors fully complete security awareness training, NARA has less assurance that staff are aware of the information security risks and responsibilities associated with their activities. In addition, without ensuring that all employees with specialized security responsibilities receive adequate specialized training, NARA’s ability to implement security measures effectively could be limited. A key element of an information security program is to test and evaluate policies, procedures, and controls to determine whether they are effective and operating as intended. This type of oversight is fundamental because it demonstrates management’s commitment to the security program, reminds employees of their roles and responsibilities, and identifies and mitigates areas of noncompliance and ineffectiveness. FISMA requires that the frequency of tests and evaluations of management, operational, and technical controls be based on risks and occur no less than annually. OMB requires that systems be authorized for processing at least every 3 years. NARA’s policy for testing is consistent with FISMA and requires that certification testing be conducted in support of system authorizations or accreditations. NARA had conducted tests for each of the 10 systems we reviewed; however, it had not sufficiently tested controls for 2 systems. For example, the management and operational controls for 1 system were not tested at least annually. Although NARA tested technical controls and documented test results for that system, it did not test and document the results for the system’s management and operational controls. Another system had not been tested to support its accreditation since 2003. While an annual assessment was conducted in 2009 for that system, NARA’s 2007 security accreditation memorandum stated that certification testing had not been performed. As a result, NARA may have reduced assurance that controls over its information and information systems are adequately implemented and operating as intended. Remedial action plans, also known as plans of action and milestones (POA&M), help agencies identify and assess security weaknesses in information systems, set priorities, and monitor progress in correcting the weaknesses. NIST guidance states that each federal civilian agency must report all incidents and internally document remedial actions and their impact. POA&Ms should be updated to show progress made on current outstanding items and to incorporate the results of the continuous monitoring process. In addition, FISMA and NARA policy require the agency CIO to report annually to the agency head on the effectiveness of the agency information security program, including progress on remedial actions. NARA has implemented a remedial action process to assess and correct security weaknesses. The format for its system-level POA&Ms includes the types of information specified in NIST and OMB guidance, such as a description of the weakness, resources required to mitigate it, scheduled completion date, the review that identified the weakness, and the status of corrective actions (ongoing or completed). Although NARA has developed POA&Ms to address known weaknesses, the agency does not always update these plans or complete remedial actions in a timely manner. For example, a POA&M for a system designed to receive, preserve, and provide access to electronic records is dated December 2008. None of the remedial actions described in this plan were marked as completed as of April 2010. Additionally, 8 of 10 POA&Ms that we assessed contained blank entries or “to be determined” notations for some required information. These 8 did not provide all of the information for resources needed, scheduled completion dates, milestones, or the security review that identified the weakness. In addition, a POA&M maintained by the Office of Information Services did not include information about resources required to correct these weaknesses. This lack of information about resource requirements may inhibit the agency’s efforts to correct the security weaknesses. Outdated and incomplete POA&Ms compromise the ability of the CIO and other NARA officials to track, assess, and report accurately the status of the agency’s information security. Although strong controls may not block all intrusions and misuse, agencies can reduce the risks associated with such events if they take steps to detect and respond to them before significant damage occurs. Accounting for and analyzing security problems and incidents are also effective ways for an agency to improve its understanding of threats and the potential costs of security incidents, and doing so can pinpoint vulnerabilities that need to be addressed so that they are not exploited again. FISMA requires that each federal agency implement an information security program that includes procedures for detecting, reporting, and responding to security incidents. When incidents occur, agencies are to notify the federal information security incident center—the United States Computer Emergency Readiness Team (US-CERT). NARA has an incident response methodology and maintains an incident database with information about the categorization and analysis of incidents. However, NARA was not able to locate all of its weekly reports for incidents and did not consistently apply its criteria for incident categorization. According to the NARA incident response methodology, incidents involving the disclosures of personally identifiable information, even if the disclosure did not involve an IT system, should be categorized under “Investigation” (Category 6). While the records indicate that NARA reported these disclosures to US-CERT, NARA did not list them as Category 6. NARA also categorized many of its computer security incidents inconsistently. Of 640 total incidents, 139 were classified as “Explained Anomaly” (Category 7). According to the NARA incident response methodology, this category is usually reserved for false positives and other explained anomalies. However, NARA classified a number of incidents in this category, even when the incident was not a false positive or could have been placed into another category. For example, NARA experienced site-redirection events—where a user was unwittingly directed to a malicious Web site while trying to access a legitimate site. This is a form of social engineering, which is categorized in the NARA incident response methodology under a separate category (Category 5). In addition, incidents where encrypted laptops were stolen were included in the “Explained Anomaly” category, though the NARA incident response methodology indicates that they should have been placed in Category 1, which indicates that unauthorized access may have occurred. NARA policy requires that staff be assigned and trained for the incident response team. While NARA tracks information security incidents and their resolution, it has not formally tracked training held for incident response. NARA officials have stated that they are in the process of formalizing this training program. Without ensuring that incident response personnel have received appropriate training, NARA’s ability to implement security measures effectively could be limited. Further, without categorizing incidents appropriately, NARA’s ability to analyze incidents for follow-on actions could be diminished, and corrective actions for protecting agency resources may not be taken. Contingency planning is a critical component of information protection. If normal operations are interrupted, network managers must be able to detect, mitigate, and recover from service disruptions while preserving access to vital information. Therefore, a contingency plan details emergency response, backup operations, and disaster recovery for information systems. It is important that these plans be clearly documented, communicated to potentially affected staff, updated to reflect current operations, and regularly tested. Moreover, if contingency planning controls are inadequate, even relatively minor interruptions can result in lost or incorrectly processed data, which can lead to financial losses, expensive recovery efforts, and inaccurate or incomplete information. FISMA requires each agency to develop, document, and implement plans and procedures to ensure continuity of operations for information systems that support the agency’s operations and assets. Both NIST and NARA require that contingency plans be developed and tested for information systems. NARA developed contingency plans for 9 of the 10 systems we reviewed. Further, NARA had tested each of the contingency plans. However, a contingency plan was not developed for a system key to tracking physical records. NARA identified this weakness, but had not corrected it during the time of our review. Although all the systems in our review were tested for contingencies, NARA has less assurance that it can appropriately recover a key system in a timely manner from certain service disruptions. NARA has taken important steps in implementing controls to protect the information and systems that support its mission. However, significant weaknesses in access controls and other information security controls exist that impair its ability to ensure the confidentiality, integrity, and availability of the information and systems supporting its mission. The key reason for many of the weaknesses is that NARA has not yet fully implemented elements of its information security program to ensure that effective controls are established and maintained. Effective implementation of such a program includes establishing appropriate policies and procedures, providing security awareness training, responding to incidents, and ensuring continuity of operations. Ensuring that NARA implements key information security practices and controls also requires effective management oversight and monitoring. However, until NARA implements these controls, it will have limited assurance that its information and information systems are adequately protected against unauthorized access, disclosure, modification, or loss. To help establish an effective information security program for NARA’s information and information systems, we recommend that the Archivist of the United States take the following 11 actions: Update NARA’s system documentation and inventory to reflect accurate FIPS 199 categorizations. Conduct physical security risk assessments of NARA’s buildings and facilities based on facility-level and federal requirements. Revise NARA’s IT security methodologies, including those for access controls, certification and accreditation, and contingency planning, to include NIST’s minimum system control requirements. Include inventory information and roles and responsibilities assignments in system security plans. Improve NARA’s training process to ensure that all required personnel meet security awareness training requirements. Implement a process that ensures all required NARA personnel with significant security responsibilities meet specialized training requirements. Test management, operational, and technical controls for all systems at least annually. Conduct certification testing when authorizing systems to operate. Update remedial action plans in a timely manner and include required resources necessary for mitigating weaknesses, scheduled completion dates, milestones, and how weaknesses were identified. Improve the incident tracking process to ensure that incidents are appropriately categorized and that personnel responsible for tracking and reporting incidents are trained. Develop a contingency plan for the system that tracks physical records. In a separate upcoming report with limited distribution, we plan to make 213 recommendations to enhance NARA’s access controls to address the 142 weaknesses identified during this audit. In providing written comments on a draft of this report (reprinted in app. III), the Archivist of the United States stated that he was pleased with the positive recognition of NARA’s efforts and that he generally concurred with our recommendations. NARA also provided technical comments, which we have incorporated as appropriate. In addition, the Archivist in his comments disagreed with three of the report’s findings. First, he disagreed that NARA’s risk assessments in its systems inventory were incorrectly applied. However, our finding does not state that the risk assessments were incorrectly applied. Rather, as we discuss in the report, NARA system documentation and system inventories do not consistently reflect the FIPS 199 impact levels of its systems. These inconsistencies may reduce NARA’s assurance that adequate controls are in place to protect its information and information systems. Thus, we continue to believe our finding is appropriate. Secondly, the Archivist disagreed that NARA policies and procedures were not always consistent with NIST guidance. As we discuss in our report, NIST states that an agency must first determine the security category of its information systems and then apply the appropriately tailored set of baseline security controls. However, NARA’s policy prescribed controls based on the individual security objectives of confidentiality, integrity, and availability instead of applying controls based on a prior determination of the system’s impact. We believe that without first identifying the impact of the system, NARA’s policy may not provide the information needed to ensure that appropriate systems controls are selected that protect its information systems. Thus, we continue to believe our finding is valid. Lastly, the Archivist disagreed that the information owner role must be identified in each system security plan. However, NARA’s policy as discussed in the report outlines key individual roles and responsibilities, including the information owner, which should be assigned for each system. By not clearly and consistently assigning these roles, NARA increases the risk that critical information may not be available to those responsible for implementing system security plans. Thus, we continue to believe our finding is valid. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies of this report to interested congressional committees and to the Archivist of the United States. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions about this report, please contact Gregory C. Wilshusen at (202) 512-6244 or Dr. Nabajyoti Barkakati at (202) 512-4499. We can also be reached by e-mail at [email protected] or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix IV. The objective of our review was to determine whether the National Archives and Records Administration (NARA) has effectively implemented appropriate information security controls to protect the confidentiality, integrity, and availability of the information and systems that support its mission. To determine the effectiveness of security controls, we gained an understanding of the overall network control environment, identified interconnectivity and control points, and examined controls for NARA’s networks and facilities. Using our Federal Information System Controls Audit Manual which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized information; National Security Agency guidance; National Institute of Standards and Technology (NIST) standards and guidance; and NARA’s policies, procedures, practices, and standards, we evaluated these controls by reviewing network access paths to determine if boundaries were adequately protected; reviewing the complexity and expiration of password settings to determine if password management was enforced; analyzing users’ system authorizations to determine whether they had more permission than necessary to perform their assigned functions; observing methods for providing secure data transmissions across the network to determine whether sensitive data were being encrypted; reviewing software security settings to determine if modifications of sensitive or critical system resources were monitored and logged; observing physical access controls over unclassified and classified areas to determine if computer facilities and resources were being protected from espionage, sabotage, damage, and theft; examining configuration settings and access controls for routers, network management servers, switches, and firewalls; inspecting key servers and workstations to determine if critical patches had been installed and/or were up to date; reviewing media handling policy, procedures, and equipment to determine if sensitive data were cleared from digital media before media were disposed of or reused; reviewing nondisclosure agreements at select locations to determine if they are required for personnel with access to sensitive information; and examining access roles and responsibilities to determine whether incompatible functions were segregated among different individuals. Using the requirements identified by the Federal Information Security Management Act of 2002 (FISMA), which establishes key elements of an agencywide information security program, and associated NIST guidelines and NARA requirements, we evaluated the effectiveness of NARA’s implementation of its security program by reviewing NARA’s risk assessment process and risk assessments for 10 systems to determine whether risks and threats were documented consistent with federal guidance; analyzing NARA policies, procedures, practices, and standards to determine their effectiveness in providing guidance to personnel responsible for securing information and information systems; analyzing security plans for 10 out of 43 systems to determine if management, operational, and technical controls were in place or planned and whether security plans reflected the current environment; examining the security awareness training process for employees and contractors to determine if they received training prior to system access; examining training records for personnel with significant responsibilities to determine if they received training commensurate with those responsibilities; analyzing NARA’s procedures and results for testing and evaluating security controls to determine whether management, operational, and technical controls were sufficiently tested at least annually and based on risk; evaluating NARA’s process to correct weaknesses and determining whether remedial action plans complied with federal guidance; reviewing incident detection and handling policies, procedures, and reports to determine the effectiveness of the incident handling program; examining contingency plans for 10 systems to determine whether those plans were developed and tested; and reviewing three IT contracts to determine if security requirements were included. We also discussed with key security representatives and management officials whether information security controls were in place, adequately designed, and operating effectively. To establish the reliability of NARA’s computer-processed data we performed an assessment. We evaluated the materiality of the data to our audit objectives and proceeded to assess the data by various means including: reviewing related documents, interviewing knowledgeable agency officials, and reviewing internal controls. Through a combination of methods we concluded that the data were sufficiently reliable for the purposes of our work. We conducted this performance audit from December 2009 to October 2010 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objective. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objective. In addition to the individuals named above, Edward Alexander, Lon Chin, West Coile, Anjalique Lawrence, and Chris Warweg (Assistant Directors); Gary Austin; Angela Bell; Larry Crosland; Saar Dagani; Kirk Daubenspeck; Denise Fitzpatrick; Fatima Jahan; Mary Marshall; Sean Mays; Lee McCracken; Jason Porter; Michael Redfern; Richard Solaski; and Jayne Wilson made key contributions to this report. | The National Archives and Records Administration (NARA) is responsible for preserving access to government documents and other records of historical significance and overseeing records management throughout the federal government. NARA relies on the use of information systems to receive, process, store, and track government records. As such, NARA is tasked with preserving and maintaining access to increasing volumes of electronic records. GAO was asked to determine whether NARA has effectively implemented appropriate information security controls to protect the confidentiality, integrity, and availability of the information and systems that support its mission. To do this, GAO tested security controls over NARA's key networks and systems; reviewed policies, plans, and reports; and interviewed officials at nine sites. NARA has not effectively implemented information security controls to sufficiently protect the confidentiality, integrity, and availability of the information and systems that support its mission. Although it has developed a policy for granting or denying access rights to its resources, employed mechanisms to prevent and respond to security breaches, and made use of encryption technologies to protect sensitive data, significant weaknesses pervade its systems. NARA did not fully implement access controls, which are designed to prevent, limit, and detect unauthorized access to computing resources, programs, information, and facilities. Specifically, the agency did not always (1) protect the boundaries of its networks by, for example, ensuring that all incoming traffic was inspected by a firewall; (2) enforce strong policies for identifying and authenticating users by, for example, requiring the use of complex (i.e., not easily guessed) passwords; (3) limit users' access to systems to what was required for them to perform their official duties; (4) ensure that sensitive information, such as passwords for system administration, was encrypted so as not to be easily readable by potentially malicious individuals; (5) keep logs of network activity or monitor all parts of its networks for possible security incidents; and (6) implement physical controls on access to its systems and information, such as securing perimeter and exterior doors and controlling visitor access to computing facilities. In addition to weaknesses in access controls, NARA had mixed results in implementing other security controls. For example: (1) NARA did not always ensure equipment used for sanitization (i.e., wiping clean of data) and disposal of media (e.g., hard drives) was tested to verify correct performance. (2) NARA conducted appropriate background investigations for employees and contractors to ensure sufficient clearance requirements have been met before permitting access to information and information systems. (3) NARA did not consistently segregate duties among various personnel to ensure that no one person or group can independently control all key aspects of a process or operation. The identified weaknesses can be attributed to NARA not fully implementing key elements of its information security program. Specifically, the agency did not adequately assess risks facing its systems, consistently prepare and document security plans for its information systems, effectively ensure that all personnel were given relevant security training, effectively test systems' security controls, consistently track security incidents, and develop contingency plans for all its systems. Collectively, these weaknesses could place sensitive information, such as records containing personally identifiable information, at increased and unnecessary risk of unauthorized access, disclosure, modification, or loss. GAO is making 11 recommendations to the Archivist of the United States to implement elements of NARA's information security program. In commenting on a draft of this report, the Archivist generally concurred with GAO's recommendations but disagreed with some of the report's findings. GAO continues to believe that the findings are valid. |
We defined the financial services industry to include the following sectors: depository credit institutions, which include commercial banks, thrifts (savings and loan associations and savings banks), and credit unions; holdings and trusts, which include investment trusts, investment companies, and holding companies; nondepository credit institutions, which extend credit in the form of loans, and which include federally sponsored credit agencies, personal credit institutions, and mortgage bankers and brokers; the securities sector, which is made up of a variety of firms and organizations (e.g., broker-dealers) that bring together buyers and sellers of securities and commodities, manage investments, and offer financial advice; and the insurance sector, including carriers and insurance agents that provide protection against financial risks to policyholders in exchange for the payment of premiums. The financial services industry is a major source of employment in the United States. EEO-1 data showed that the financial services firms we reviewed for this work, which have 100 or more staff, employed nearly 3 million people in 2004. Moreover, according to the U.S. Bureau of Labor Statistics, employment in the financial services industry was expected to grow at a rate of 1.4 percent annually from 2006 through 2016. EEO-1 data for 1993 through 2006 generally do not show substantial changes in representation by minorities and women at the management level in the financial services industry, but some racial/ethnic minority groups experienced more change in representation than others. Figure 1, which is based on information that we obtained in preparation for our June 2006 report, shows that overall management-level representation by minorities increased from 11.1 percent to 15.5 percent from 1993 through 2004. Specifically, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American Indians from 0.2 to 0.3 percent. Management-level representation by white women was largely unchanged at slightly more than one-third during the period, while representation by white men declined from 52.2 percent to 47.2 percent. As shown in figure 2, EEO-1 data also show that the depository and nondepository credit sectors, as well as the insurance sector, were somewhat more diverse at the management level than the securities and holdings and trust sectors. In 2004, minorities held 19.9 percent of management-level positions in nondepository credit institutions, such as mortgage banks and brokerages, but 12.4 percent in holdings and trusts, such as investment companies. In preparation for this testimony, we contacted EEOC to obtain and analyze EEO-1 for 2006 and found that diversity remained about the same at the management level in the financial services industry (see fig. 3) as it had in previous years. For example, the 2006 EEO-1 data show that African-Americans and Asians represented about 6.4 percent and 5.0 percent, respectively, of all financial services managers in 2006. In addition, the 2006 EEO-1 data show that commercial banks and insurance companies continued to have higher representation by minorities and women at the management level than securities firms. However, it is important to keep in mind that EEO-1 data may actually overstate representation levels for minorities and white women in the most senior-level positions, such as Chief Executive Officers of large investment firms or commercial banks, because the category that captures these positions—“officials and managers”—covers all management positions. Thus, this category includes lower-level positions (e.g., Assistant Manager of a small bank branch) that may have a higher representation of minorities and women. Recognizing this limitation, starting in 2007, EEOC revised its data collection form for employers to divide the “officials and managers” category into two subcategories: “executive/senior-level officers and managers” and “first/midlevel officials.” We hope that the increased level of detail will provide a more accurate picture of diversity among senior managers in the financial services industry over time. However, it is too soon to assess the impact of this change on diversity measures at the senior management level. Officials from the firms that we contacted said that their top leadership was committed to implementing workforce diversity initiatives, but they noted that making such initiatives work was challenging. In particular, the officials cited ongoing difficulties in recruiting and retaining minority candidates and in gaining employees’ “buy-in” for diversity initiatives, especially at the middle management level. Minorities’ rapid growth as a percentage of the overall U.S. population, as well as increased global competition, have convinced some financial services firms that workforce diversity is a critical business strategy. Since the mid-1990s, some financial services firms have implemented a variety of initiatives designed to recruit and retain minority and women candidates to fill key positions. Officials from several banks said that they had developed scholarship and internship programs to encourage minority students to consider careers in banking. Some firms and trade organizations have also developed partnerships with groups that represent minority professionals and with local communities to recruit candidates through events such as conferences and career fairs. To help retain minorities and women, firms have established employee networks, mentoring programs, diversity training, and leadership and career development programs. Industry studies have noted, and officials from some financial services firms we contacted confirmed, that senior managers were involved in diversity initiatives. Some of these officials also said that this level of involvement was critical to success of a program. For example, according to an official from an investment bank, the head of the firm meets with all minority and female senior executives to discuss their career development. Officials from a few commercial banks said that the banks had established diversity “councils” of senior leaders to set the vision, strategy, and direction of diversity initiatives. A 2005 industry trade group study and some officials also noted that some companies were linking managers’ compensation with their progress in hiring, promoting, and retaining minority and women employees. A few firms have also developed performance indicators to measure progress in achieving diversity goals. These indicators include workforce representation, turnover, promotion of minority and women employees, and employee satisfaction survey responses. Officials from several financial services firms stated that measuring the results of diversity efforts over time was critical to the credibility of the initiatives and to justifying the investment in the resources such initiatives demanded. While financial services firms and trade groups we contacted had launched diversity initiatives, officials from these organizations, as well as other information, suggest that several challenges may have limited the success of their efforts. These challenges include the following: Recruiting minority and women candidates for management development programs. Available data on minority students enrolled in Master of Business Administration (MBA) programs suggest that the pool of minorities, a source that may feed the “pipeline” for management-level positions within the financial services industry and other industries, is relatively small. In 2000, minorities accounted for 19 percent of all students enrolled in MBA programs in accredited U.S. schools; in 2006, that student population had risen to 25 percent. Financial services firms compete for this relatively small pool not only with one another but also with firms from other industries. Fully leveraging the “internal” pipeline of minority and women employees for management-level positions. As shown in figure 4, there are job categories within the financial services industry that generally have more overall workforce diversity than the “official and managers” category, particularly among minorities. For example, minorities held 22 percent of “professional” positions in the industry in 2004 as compared with 15 percent of “officials and managers” positions. According to a 2006 EEOC report, the professional category represented a possible pipeline of available management-level candidates. The EEOC report states that the chances of minorities and women (white and minority combined) advancing from the professional category into management-level positions is lower when compared with white males. Retaining minority and women candidates that are hired for key management positions. Many industry officials said that financial services firms lack a critical mass of minority men and women, particularly in senior-level positions, to serve as role models. Without a critical mass, the officials said that minority or women employees may lack the personal connections and access to informal networks that are often necessary to navigate an organization’s culture and advance their careers. For example, an official from a commercial bank we contacted said he learned from staff interviews that African-Americans believed that they were not considered for promotion as often as others partly because they were excluded from informal employee networks needed for promotion or to promote advancement. Achieving the “buy-in” of key employees, such as middle managers. Middle managers are particularly important to the success of diversity initiatives because they are often responsible for implementing key aspects of such initiatives and for explaining them to other employees. However, some financial services industry officials said that middle managers may be focused on other aspects of their responsibilities, such as meeting financial performance targets, rather than the importance of implementing the organization’s diversity initiatives. Additionally, the officials said that implementing diversity initiatives represents a considerable cultural and organizational change for many middle managers and employees at all levels. An official from an investment bank told us that the bank has been reaching out to middle managers who oversaw minority and women employees by, for example, instituting an “inclusive manager program.” In closing, despite the implementation of a variety of diversity initiatives over the past 15 years, diversity at the management level in the financial services industry has not changed substantially. Further, diversity at the most senior management positions within the financial services industry may be lower than the overall industry management diversity statistics I have discussed today. While EEOC has taken steps to revise the EEO-1 data to better assess diversity within senior positions, this data may not be available for some period of time. Initiatives to promote management diversity at all levels within financial services firms appear to face several key challenges, such as recruiting and retaining candidates and achieving the “buy-in” of middle managers. Without a sustained commitment to overcome these challenges, management diversity in the financial services industry may continue to remain generally unchanged over time. Mr. Chairman, this concludes my prepared statement. I would be pleased to respond to any questions you or other Members of the Subcommittee may have. For further information about this testimony, please contact Orice M. Williams on (202) 512-8678 or at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Individuals making key contributions to this testimony include Wesley M. Phillips, Assistant Director; Emily Chalmers; William Chatlos; Kimberly Cutright; Simin Ho; Marc Molino; and Robert Pollard. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | As the U.S. workforce has become increasingly diverse, many private and public sector organizations have recognized the importance of recruiting and retaining minority and women candidates for key positions. However, previous congressional hearings have raised concerns about a lack of diversity at the management level in the financial services industry, which provides services that are essential to the continued growth and economic prosperity of the country. This testimony discusses findings from a June 2006 GAO report and more recent work on diversity in the financial services industry. Specifically, GAO assesses (1) what the available data show about diversity at the management level from 1993 through 2006 and (2) steps that the industry has taken to promote workforce diversity and the challenges involved. To address the testimony's objectives, GAO analyzed data from the Equal Employment Opportunity Commission (EEOC); reviewed select studies; and interviewed officials from financial services firms, trade organizations, and organizations that represent minority and women professionals. GAO's June 2006 report found that, from 1993 through 2004, overall diversity at the management level in the financial services industry did not change substantially, but some racial/ethnic minority groups experienced more change in representation than others. EEOC data show that management-level representation by minority women and men increased overall from 11.1 percent to 15.5 percent during the period. Specifically, African-Americans increased their representation from 5.6 percent to 6.6 percent, Asians from 2.5 percent to 4.5 percent, Hispanics from 2.8 percent to 4.0 percent, and American Indians from 0.2 percent to 0.3 percent. In preparation for this testimony, GAO collected EEOC data for 2006, which shows that diversity at the management level in the financial services industry remained about the same as it had in previous years. Financial services firms and trade groups have initiated programs to increase workforce diversity, but these initiatives face challenges. The programs include developing scholarships and internships, partnering with groups that represent minority professionals, and linking managers' compensation with their performance in promoting a diverse workforce. Some firms have developed indicators to measure progress in achieving workforce diversity. Industry officials said that among the challenges these initiatives face are recruiting and retaining minority candidates, as well as gaining the "buy-in" of key employees, such as the middle managers who are often responsible for implementing such programs. Without a sustained commitment to overcoming these challenges, diversity at the management level may continue to remain generally unchanged over time. |
Following Iraq’s invasion of Kuwait in August 1990, the United States and other allied nations sent troops to the Persian Gulf region in Operation Desert Shield. In the winter of 1991, the allied forces successfully attacked Iraq in an air campaign and subsequent invasion by ground forces (Operation Desert Storm). Approximately 700,000 American troops participated in these actions. Although casualties were relatively light, thousands of veterans have come forward complaining of various illnesses, including cancer, in the years following the war. During the Gulf War, American troops may have been exposed to several known and potential health risks. These included chemical and biological warfare agents, depleted uranium from munitions, smoke from oil-well fires, infectious diseases, pesticides, petroleum fuels, and vaccines. Some of these substances have been previously associated with different types of cancer through animal laboratory studies and other epidemiological research investigations. For example, combustion products from petroleum include polyaromatic hydrocarbons, benzene, and carbon disulfide, some of which are known to cause lung cancer when inhaled. Exposure to certain pesticides has also been linked to lymphatic and lung cancers. In addition, exposure to radioactive particles has been tied to higher rates of respiratory and other cancers. Information on exposures that took place during the Gulf War, however, has been either incomplete or nonexistent due to the lack of record keeping and measurement before, during, and after the deployment of troops; loss of key records; poor recall by veterans; and other factors. The development of cancer is usually characterized by a long latency period of several years from an initial exposure to a harmful agent to a definitive medical diagnosis. Depending on the nature and extent of the exposure, type of cancer, and characteristics of different individuals, the latency period may be as long as 30 years or more. The most common types of cancers have a latency period of 15 years or more, but in certain situations cancer can develop more quickly. For example, when the immune system is compromised, such as in cases of organ transplants, certain types of cancer may appear within 1 year. Given that there is a lengthy latency period for most tumors, it may be too soon to detect any increase in tumors occurring among Gulf War veterans. Also, since cancer is a relatively rare event, large population groups may need to be observed over several years to assess incidence and determine whether it has changed over time. Furthermore, without credible exposure information, it is hard to form specific hypotheses about what kinds of tumors might occur with what individuals. Although such constraints exist, it is nonetheless important to begin monitoring and assessing whether Gulf War veterans are suffering from an increase in tumors so that appropriate health care and treatment can be provided where needed. With many types of tumors, early detection is important to more effective treatment outcomes. One source for estimating the incidence of cancer among Gulf War veterans utilizes mortality as an indicator for incidence. VA maintains a large administrative database containing records of claims for benefits made by veterans and their dependents. This database, the Beneficiary Identification and Records Locator Subsystem (BIRLS), includes information on more than 40 million individuals. Although not designed as a research database, it does contain information on the vital status of veterans and the location of veterans’ claim forms so that death certificates can be retrieved to ascertain causes of death. VA pays death benefits, including fixed payments for burial and funeral expenses, to eligible survivors of deceased veterans. Dependents are required to submit a copy of the veteran’s death certificate in order to receive these benefits. The BIRLS datafile also contains the veteran’s name, social security number, claim number, current address, and other benefits information. In addition, the file includes a code that indicates whether the veteran was deployed to the Gulf War. VA and other researchers have estimated that death reporting in the BIRLS database is relatively complete in terms of its coverage of the veteran population. Studies using large samples of known deaths have compared vital status reporting in BIRLS with reporting in other national sources of mortality data, such as the Master Beneficiary Record of the Social Security Administration and the National Death Index, and found that BIRLS covers 80 to 90 percent of the deceased veteran population. Another strength of the BIRLS data is that they provide a relatively cost-effective way to assess causes of death among veterans. Obtaining death certificates directly from state health departments involves paying a fee of several dollars for each certificate. Using BIRLS or other mortality databases to assess overall cancer incidence has several key limitations. First, mortality is a lagging indicator of incidence. The latency period for most tumors can be more than 10 years and the period of time until mortality is even longer. Second, in general, mortality is an incomplete measure of cancer incidence because cancer is not always fatal. Mortality data provide good estimates of incidence for cancers that have a high mortality rate (such as lung and liver cancers) but they are less useful for cancers with lower rates of mortality (such as prostate and breast cancers). Because of these limitations, mortality data will systematically underreport overall cancer incidence. In addition, by the time cases show up in the data, it may be too late to help Gulf War veterans. Furthermore, while the reporting of external causes of death, such as accidents, or broad disease categories, such as coronary heart disease, is reasonably reliable, some inconsistencies in cause of death reporting on death certificates have occurred. Death certificates are less accurate in tracking difficult to diagnose diseases, deaths involving multiple causes, and where there are underlying causes of death that are not readily discernible. VA in one published study used data from BIRLS to assess the mortality risk from a range of diseases (including cancer) for all Persian Gulf veterans compared with a sample of veterans who were not deployed to the Persian Gulf. The study covered deaths occurring in a 2-year period after the war (May 1991 to September 1993). Death certificates for those veterans who had been identified as having passed away were obtained from VA regional offices and other locations and were reviewed for cause of death. The study found that overall there was a small but significant excess of deaths among Gulf War veterans (1,765 deaths) compared with nondeployed veterans (1,729 deaths) and that the excess was due mainly to accidents and not disease. Of the 1,765 Gulf War veterans who died during the study period, 119 died from cancer, and there was no statistically significant difference compared with the cancer death rate among nondeployed veterans. If a higher death rate from cancer was expected among Gulf War veterans as a result of some exposure occurring during deployment, then they would be unlikely to appear in this study given the short time period that elapsed. VA is currently updating the study, extending the study period through 1995, and the results should be published later this year. The study’s authors identified another limitation (but it is not clear what effect it had on the study’s findings)—specifically, whether the study’s comparison groups were appropriately matched. Military personnel who were ill or recovering from an illness would not have been deployed to the Gulf War area. However, these personnel were included in the comparison group of nondeployed veterans. This meant that the comparison group may have been somewhat less healthy than the deployed veterans group. The extent to which a higher rate of prior illnesses among nondeployed veterans resulted in a different rate of mortality (or cancer mortality in particular) and thus biased the study findings is unknown. Finally, the use of broad comparisons between deployed and nondeployed veterans rather than more targeted comparisons of veterans based on specific types and levels of exposures may also have affected the soundness of the study. A comparison of deployed and nondeployed veterans has merit for identifying potential widespread and severe health consequences. However, defining the exposed population group as “all those who served in the Gulf War” without regard to individual groups’ exposure histories may obscure some service-connected illnesses. Efforts to exclude from such studies portions of the deployed force who were at low risk of exposure to harmful agents could lead to more meaningful results in such comparative studies. DOD and VA each maintain an automated database containing medical and demographic information on patients discharged from DOD and VA hospitals. DOD’s system collects information from DOD military hospitals. These hospitals are open to active duty personnel and, to a limited extent, retired personnel. VA’s data system, the Patient Treatment File, covers all VA hospitals. VA hospital care is generally available to veterans for service-connected illnesses. Care is also provided on a discretionary basis for nonservice-connected illnesses, depending on the availability of facilities and resources and payment of a required co-payment by the veteran. Veterans who may have been exposed to a toxic substance or environmental hazard while serving in the Gulf War are included in a designated category of veterans who have special eligibility for VA medical care services. Both the DOD and VA data systems include medical discharge diagnoses, which are coded according to standard ICD-9 (International Classification of Diseases, 9th Revision) disease categories. In addition, the data contain relevant information such as social security numbers, date and place of birth, period of military service, length of hospital stay, and surgical and other medical procedures conducted. DOD’s and VA’s hospitalization data systems are large and contain millions of records, but they do not represent the entire active duty and veteran population. While DOD’s data include most hospitalizations of active duty personnel, in large part because DOD medical care is free and readily available to active duty personnel, there have been reports from some veterans’ groups of Gulf War veterans seeking medical care outside DOD. According to these groups, veterans have done so to obtain specialized care or because of concerns that the acknowledgment of their illnesses within DOD could have a negative effect on their military careers. It is not clear whether this would more often be the case for Gulf War veterans with tumors than for nondeployed veterans. VA also has an extensive network of medical centers across the country but the overwhelming majority of veterans use other private and public hospitals. A survey conducted by VA in the late 1980s, estimated that only about 20 percent of veterans had ever used a VA hospital. With respect to Gulf War veterans, it is not known whether there is greater or less use of VA medical facilities. Since Gulf War veterans have been authorized special eligibility for medical care, there may be greater use of VA medical centers compared with some other groups of veterans. On the other hand, there have been numerous accounts in the media and by veterans’ groups of dissatisfaction with government efforts to address Gulf War veterans’ health problems. This may contribute to a greater reluctance among some veterans to seek hospital care at VA medical facilities. Another weakness of the hospitalization data systems has been the lack of coverage of outpatient medical care. DOD currently has no centralized reporting system for its outpatient facilities, although an automated system is under development. Until recently, VA did not have an automated system either. VA established an automated system in October 1996 to begin collecting information on the use of its outpatient facilities and the different types of medical care provided. Information is not available yet on the accuracy and completeness of the reporting. Coverage of outpatient facilities is important because there is a current trend in the health field toward outpatient diagnosis and treatment of many types of tumors. In addition to limitations in terms of population coverage, there are also issues regarding the accuracy and completeness of hospitalization data reporting. One strength of the reporting process is that standard disease categories are coded so that comparable data can be collected from each hospital and more specific types of diseases can be assessed. Furthermore, the reporting allows for multiple discharge diagnoses to be recorded and not just the principal cause for hospitalization. Miscoding of discharge diagnoses, however, is a potential problem as shown by VA researchers in previous assessments of certain types of cancer among Vietnam veterans. In a case-control study, for example, of over 400 Vietnam veterans identified in VA’s Patient Treatment File with a malignant tumor of connective and other soft tissue, close to 40 percent of the records were found to be miscoded or misclassified when hospital pathology reports were subsequently collected and independently reviewed by an expert pathologist. In May 1996, VA completed an analysis requested by your Subcommittee that provided some information on the number of tumors among Gulf War veterans compared with the number in a sample of nondeployed veterans. The analysis sought to identify cases of tumors occurring immediately after the war up through the early part of 1996. Existing VA databases, including the Persian Gulf Health Registry, Patient Treatment File, and BIRLS, were used as means to identify tumors. A breakdown by type of tumor, age, gender, race, and branch of service was conducted after merging the health registry and hospitalization data records; however, these records were not subsequently merged with the benefits records data (BIRLS) because the diagnostic coding used in the two systems is different. As reported by VA, based only on the combined health registry and hospitalization data, the number of individuals with diagnosed tumors was relatively low but the number of Gulf War veterans was substantially higher as compared with nondeployed veterans (1,691 out of 697,000 Gulf War veterans compared with 1,092 out of 1,605,087 nondeployed veterans). Most of the tumors identified, though, were benign and not malignant cancers. Possible reasons for the higher rate according to VA are that (1) priority eligibility status is given to Gulf War veterans for inpatient treatment and (2) a special health registry exists for Gulf War veterans. In contrast to these results, a larger number of diagnosed tumors was reported from the benefits records data (BIRLS) but the number of cases among Gulf War veterans was lower compared with the number among nondeployed veterans (6,397 out of 697,000 Gulf War veterans compared with 21,227 out of 1,605,087 nondeployed veterans). Thus, the different VA data sources present a different result for tumor cases in these population groups. VA has acknowledged that its analysis is quite limited because of weaknesses in the existing data sources used. A key limitation is the poor coverage the data provide of the veteran population. Veterans who use non-VA medical care facilities are excluded. A potential source for augmenting this is the use of the BIRLS data, which in addition to reporting information on mortality claims reports information on medical disability claims. Veterans, regardless of whether they receive medical treatment from VA or elsewhere, can apply for disability claims. BIRLS tracks denied and approved claims, including those for disabilities associated with tumors. As a condition for qualifying for disability compensation, it must be established that the disability is service-connected and that the condition leading to the disability appeared either while the veteran was on active duty or within a presumptive period after separation from the service. For most cancers, however, the presumptive period is limited to 1 year. In principle, BIRLS includes other cases than those reported in the VA hospital reporting system. The major restriction to using the data to identify illnesses among Gulf War veterans, though, has been the difficulty of merging the claims records with other VA hospitalization records because of the different diagnostic coding systems used. The extent to which a crosswalk could be developed to link the diagnostic codes has not been determined. A large DOD-funded study was published last year examining the hospitalization experience of all active duty Gulf War veterans compared with a sample of other active duty military personnel who were not deployed to the Gulf region. The purpose was to determine whether participation in the Gulf War was associated with the occurrence of serious illnesses requiring hospitalization. Using inpatient hospitalization data records obtained from DOD, the study assessed hospitalizations occurring during the period August 1991 through September 1993. Overall, the authors found there was no excess in hospitalizations among Gulf War veterans compared with other military personnel. Among specific types of hospitalizations, however, Gulf War veterans had higher rates in specific years for tumors (in 1991), mental disorders (both 1992 and 1993), diseases of the blood (in 1992), and diseases of the genitourinary system (in 1991). For tumor cases reported in 1991, most involved benign conditions and, although the rates were higher for Gulf War veterans, the differences were not statistically different. The one exception, where a significant difference (higher rate) was found, was for testicular cancer in 1991 hospitalizations. The investigators conducted a follow-on review of hospitalizations for testicular cancer through March 1996 and found that male Gulf War veterans who remained on active duty after the war were not at increased risk of hospitalization for testicular cancer. A major strength of this study is its large size and statistical power to detect differences in rates of hospitalizations between deployed and nondeployed military personnel. However, a key limitation of the study, which influences the interpretation of the results, is that hospitalizations of Gulf War veterans who separated from the service as well as any hospitalizations of active duty personnel who used non-DOD hospitals are excluded. The number of hospitalizations excluded from the study is not known, but the number of veterans who separated from the service increased substantially since the end of the war. According to DOD figures, Gulf War veterans who remained on active duty declined to 66 percent in 1993 and to below 50 percent by 1995. Another important limitation of the study is that the timeframe was far too short for detecting any diseases resulting from possible exposures during the war, such as tumors, which have lengthy latency periods. Extending the time period would address the latency issue, but then the problem of missing hospitalizations would increase as the number of Gulf War veterans remaining on active duty gets smaller over time. A related follow-up study is currently underway by the same researchers, to examine hospitalizations of Gulf War veterans in military and nonmilitary hospitals in the state of California. This study will merge hospitalization data from three sources: DOD, VA, and the state government. California maintains a database of patient hospital discharge information collected from nonfederally licensed hospitals in the state (diagnoses are coded using the ICD-9 classification system). The study will seek to identify all Gulf War veterans who resided in the state at the time of or at least a year prior to deployment. Internal Revenue Service files will be matched with DOD’s roster of 697,000 Gulf War veterans to identify those residing in the state (estimated to be about 12 percent of the Gulf War force), and the resulting resident file will then be matched with the various hospital data files to identify hospitalizations for each veteran. Although the study results will probably not be generalizable to the entire Gulf War population, the study is large and one of the first to systematically combine military and nonmilitary hospitalizations. The study period is longer (1991-95); however, the problem of detecting diseases with a lengthy latency period is still an issue, and outpatient data will be excluded. Currently, the study is in the initial data merging phase and is not expected to be completed until 1998 or later. Another source for estimating the incidence of cancer is the population-based cancer registries along with other baseline demographic data. Cancer registries are compilations of reports of cancer cases that are filed by medical facilities (typically hospitals) on an ongoing basis according to prescribed data coding procedures. Cancer registries can be effective tools for determining incidence rates and for directing cancer control efforts. Typically they are used to identify and monitor trends, patterns, and variations in cancer incidence and mortality by geographic location, ethnicity, gender, and age. Cancer registries exist at the national, state, and local level. The national cancer registry (the Surveillance, Epidemiology and End Results [SEER]) was established in 1973 by the National Cancer Institute. SEER collects data from designated cancer registries that operate in various areas of the country. Currently, it covers a group of five states and four metropolitan areas that were selected for “their ability to operate and maintain a population-based cancer reporting system and for their epidemiologically significant population subgroups.” Most states also maintain cancer registries. In 1992, Congress enacted the National Program of Cancer Registries (P.L. 102-515), which authorized the Centers for Disease Control and Prevention to fund states to improve existing cancer registries and develop registries where they do not exist. In 1996, 41 funded states were collecting statewide cancer data. The Centers for Disease Control and Prevention has set standards for reporting accuracy, timeliness, and completeness. However, some differences exist across states in the level and quality of reporting. Voluntary reporting is also encouraged from DOD and VA hospitals. In addition to these registries, DOD administers its own cancer registry (the Automated Central Tumor Registry) for active duty troops and others (i.e., retirees and family members) who use DOD military medical facilities. It was set up as a central registry in 1986 to compile, track, and report cancer patient information from military medical treatment facilities. SEER is a comprehensive system for tracking cancer incidence for the general population and key subgroups. In addition, provisions are made for quality assurance checks on data reliability. However, in terms of its suitability for assessing cancer rates in Gulf War veterans, SEER only collects and reports aggregate information and does not include the necessary individual-level identifiers that would be needed to distinguish Gulf War veterans. SEER can provide incidence rates for the general population and key population subgroups but not for the Gulf War veteran population. Many of the state registry systems generally do include individual identifiers such as social security numbers, so a match against a roster of Gulf War veterans, using common identifiers, could be conducted to identify cancer cases within this group. Such a match of course would need to address potential confidentiality issues involving the privacy of cancer patient information. The accuracy, timeliness, and completeness of reporting also varies by state registries. For example, many states only require reporting by hospitals and do not capture cases diagnosed by private physicians, laboratories, and health maintenance organizations. Many of the registries also have different data field structures and are not designed to be readily merged with other registries. DOD’s central tumor registry contains over 188,000 records of current and past cancer patients. While the reporting system is designed to capture all cancer cases treated at DOD medical facilities, DOD officials have indicated that complete reporting is not occurring. No systematic assessment has been conducted to measure how complete the reporting is, and no quality assurance system is in place to ensure that reporting is being done. VA has provided initial funding to the Boston Environmental Hazards Center to assess cancer incidence among Gulf War veterans in New England. The Center previously examined cancer incidence among Vietnam veterans and will employ a similar methodology for looking at Gulf War veterans. The approach entails developing a roster of Gulf War veterans and linking it (by identifying information such as names, dates of birth, and social security numbers) with cancer cases that appear in the state registries. The first phase of the study has been funded to create a roster of Gulf War veterans in the New England area and develop a framework for merging data together from the individual state registries. The next phase of the study, to begin by 1999, will involve an assessment of cancer incidence and mortality. The study design notes that it would not be informative to analyze cancer incidence sooner because the time interval between any exposures that may have occurred during the Gulf War and the diagnosis of most cancers is “probably at least 10 years and may extend as long as 20 to 40 years.” It is also intended that these health outcomes be linked to information about potential environmental exposure factors that may exist or become available from DOD military records and other sources, including the location database being compiled by the U.S. Army Center for Health Promotion and Preventive Medicine. Although this study is several years away from completion, it appears to provide a useful means for obtaining information about cancer incidence in the future. Some of the strengths of the study are that it will use existing data systems, identify and assess a large cohort of Gulf War veterans, and can be readily updated over time. One key limitation of the study, however, is that the results will not be generalizable to the entire Gulf War population since only the New England states will be included. Also, it is not known whether there is complete reporting of cases to the registries, particularly with respect to cases diagnosed outside of the hospital setting and cases from border areas that may get reported in other state registries outside the New England area. Both DOD and VA have established separate programs that provide medical examinations and diagnostic services, free of charge, to Gulf War veterans. VA began its Persian Gulf Health Registry Examination Program in 1992, and DOD started its Comprehensive Clinical Evaluation Program in 1994. The programs are open to all active duty, separated, and retired military personnel who were veterans of the Persian Gulf deployment. An existing health problem is not necessary for participation in the programs; any Gulf War veteran with health questions or concerns is eligible to enroll on a voluntary basis. Currently, the programs are designed to follow a standard protocol that requires registry physicians to obtain a detailed medical history, conduct a physical examination, and order basic laboratory tests. Further diagnostic procedures and referral to specialized medical centers are available for veterans with health problems that cannot be satisfactorily diagnosed from the initial evaluation. As of April 1997, approximately 66,000 veterans completed VA’s registry examination, and over 31,000 veterans completed DOD’s examination. While the registry programs are primarily intended to provide diagnostic services and treatment to Gulf War veterans, the programs also gather and report data on the nature of the veterans’ health problems and the types of risk factors veterans may have been exposed to in the Gulf War. The most common symptoms reported among veterans examined include fatigue, skin rashes, muscle and joint pain, headaches, and memory loss. Approximately 80 percent of the veterans with symptoms have been diagnosed with one or more recognizable diseases; however, the other 20 percent with symptoms remain undiagnosed. Diseases involving musculoskeletal and connective tissue, psychological conditions, and the respiratory system were diagnosed most frequently. The number of registry veterans with a primary diagnosis of a malignant or benign tumor is very small, less than 1 percent. The suitability of the registries for assessing cancer incidence is extremely limited. As designed, the registries are not intended to be used to determine the frequency and causes of illnesses among the general Gulf War veteran population. A principal reason for this is that the participants volunteered for their examinations and were not selected based on a random sample (selection bias). Therefore, there is no way to know whether the health problems found among the registry participants are similar to those of the general population of Gulf War veterans. In addition, because there is no ready comparison or control group for the registry participants, there is no means to interpret the significance of the data that are reported. A further limitation of the registry data is that they capture information about the health of veterans only at one point in time. Thus, if a veteran develops cancer or another illness later on, the registry data will not reflect this. Data quality concerns also have been raised in a previous review of the VA registry by the Institute of Medicine. The Institute found, for example, that there was a considerable delay between the collection of the examination data and their entry into the registry database. In other ongoing work we are conducting on the quality of health care Gulf War veterans are receiving, we also found that VA medical facilities have not reported registry examination information consistently. It appears that a large number of case records submitted for input into the registry database have been rejected and sent back to the medical facilities due to coding errors. At the same time, effective quality assurance procedures have not been in place to ensure that rejected records are corrected and reentered into the database. Thus, data coverage even for those who participated in the registries has been incomplete. Another data approach involves developing information about incidence by using survey methods, such as administering a questionnaire to a sample of veterans. As opposed to the other approaches, which employ data from databases administered by federal or state agencies, the researcher has more control over the data that are being gathered. Specifically, the researcher could ensure that the data are representative of the overall population of Gulf War veterans. Significant advantages to using the survey approach include the ability to draw a random sample of Gulf War veterans and a comparison group (e.g., veterans who had not deployed to the Gulf War region). A survey also permits the researcher to gather other information, such as information about exposures and family history, that might shed light on the etiology of disease. Limitations with this approach include the possibility of response bias (individuals who complete the survey not being representative of the sample as a whole) and the subjectivity of self-assessments. There are standard ways of dealing with these limitations. The problem of response bias can be dealt with first by sending out multiple questionnaires. The extent to which response bias is a factor can be estimated through a special survey of nonrespondents, which is typically conducted by telephone. The results of the nonrespondent survey are compared against the results of the principal survey to gauge the degree to which respondents are typical of the overall sample. Subjectivity of the assessments of cancer can also be gauged to a degree through an independent medical review of a subsample of respondents. In addition, subjectivity of assessments is somewhat less of a concern in terms of tumors than many other illnesses. Also, care needs to be taken to ensure that the size of the sample is large enough to characterize with confidence differences between the Gulf War veteran and the comparison groups. Tumors that have a low background incidence would need to be studied with extremely large sample sizes to detect an elevated incidence among Gulf War veterans. Sample sizes required to draw conclusions would need to be determined at the earliest stages of the study. A further concern in implementing large population surveys is that they tend to be much more costly than the other approaches being presented here. In addition, the type and number of questions must be restricted or people will not respond. This approach is being employed by VA to study the general health status of Gulf War veterans. The National Health Survey of Persian Gulf War Era Veterans uses a mailed survey to compare self-reported symptoms and illnesses between a random sample of 15,000 Gulf War and 15,000 nondeployed veterans. The questionnaire includes a checklist of illnesses, including skin cancer and “any other cancer” and a checklist of symptoms such as “coughing” and “skin rashes.” In addition to questions about current health status, respondents are also asked to report about their exposure to a list of agents including nerve gas, depleted uranium, and smoke from oil well fires while they were in the Gulf War region. The overall response rate to the survey has been relatively low (57 percent). VA is conducting a survey of nonrespondents in order to evaluate nonresponse bias. VA is also addressing the limitation imposed by subjective assessments through an independent review of medical records and “comprehensive physical examination” of a subsample of 2,000 respondents (1,000 in each of the Gulf War veteran and nondeployed veterans groups). The sample size of VA’s survey may also be too small to identify elevated incidence of most cancers. With respect to the issue of statistical power, VA has acknowledged that, “the study may provide inadequate statistical power to detect a small increase in risk for rare adverse health outcomes in a particular subgroup of veterans.” In 1996, the Institute of Medicine concluded, “This is a well-designed and well-intended study.” According to the Institute, however, “there appeared to be little statistical input in the analysis plan reviewed, and these data will require sophisticated statistical adjustment.” A population-based survey to assess the prevalence of self-reported symptoms and illnesses among Gulf War veterans was also conducted in Iowa. The study used a telephone interview approach to survey a random sample of Gulf War and non-Gulf War veterans from Iowa. Approximately 3,700 veterans were interviewed during the period September 1995 through May 1996. Overall, the study found that Gulf War veterans reported a significantly higher prevalence of a wide range of medical and psychiatric conditions compared with military personnel who were not deployed to the Gulf War. The primary conditions where differences were reported include depression, posttraumatic stress syndrome, chronic fatigue, cognitive dysfunction, and respiratory diseases. The rate of cancer reported among these Gulf War veterans was generally low (an estimated rate of about 1 per 100 subjects), but it was slightly higher than that of the comparison group. No direct link has been established between potential exposures that occurred during the Gulf War and the development of tumors among veterans. However, concerns have been raised because many of the exposure agents in question have previously been associated with certain cancers. This has led to interest in determining if the cancer incidence rate among Gulf War veterans is higher than the rates within other appropriate comparison groups. If there is a higher incidence that identifies an emerging health problem, then outreach efforts could be conducted to target appropriate diagnosis and treatment to those potentially at risk. Due to the long latency period of most tumors, it may be too soon to detect whether there is an increased incidence of tumors among Gulf War veterans. Nonetheless, it may be important to collect information now and begin planning for monitoring the future health status of veterans. However, the existing data sources and research applications we reviewed, provide very limited information about the incidence of tumors or other illnesses among Gulf War veterans. Federal research studies that are currently underway to assess tumors should help fill the gap, but these studies are limited in terms of their coverage of the Gulf War veteran population, data quality, and timeliness. Thus, it will also be difficult to determine whether Gulf War veterans have a higher incidence of tumors than other veterans in the future. In our June report of last year, we found that DOD and VA had no effective means to determine whether ill Gulf War veterans were getting better or worse over time and recommended that DOD and VA develop a plan to monitor their medical progress. This recommendation was effectively incorporated into the recently enacted National Defense Authorization Act for Fiscal Year 1998, as part of a broader initiative requiring the Secretaries of Defense and Veterans Affairs to monitor health care services and treatment to Gulf War veterans. In response to this, DOD and VA have asked the Institute of Medicine to establish a committee of experts to assess the appropriate methodology for monitoring health outcomes. However, the ability to monitor veterans’ health conditions may be seriously handicapped by the data constraints we have noted in this report. In order to evaluate more effectively the incidence of tumors and other Gulf War illnesses over time, we recommend that the Secretaries of Defense and Veterans Affairs continue to strengthen existing monitoring capabilities. Attention should be directed toward improving the utility of existing data systems and particularly in developing cost-effective ways to make data systems more compatible with one another so that information from different sources can be linked. In addition, steps should be taken to address the data quality concerns we identified in this report. While we believe such improvements can lead to more effective monitoring capabilities, the existing data systems may be insufficient to answer the question about cancer incidence or other illnesses among Gulf War veterans. Therefore, further research efforts will be needed to supplement the available data systems. For example, little is known about the health status of veterans who receive medical care from sources other than DOD and VA facilities. Practical approaches should be developed to determine whether there may be emerging health problems among these veterans. DOD provided written comments on a draft of this report (see app. I), and VA provided oral comments. Generally, DOD and VA concurred with our overall findings regarding the inadequacies of existing data systems for assessing tumors among Gulf War veterans and our recommendations to improve monitoring capabilities. They emphasized that our recommendations support initiatives they currently have underway to strengthen health information reporting systems and the transfer of data between the two agencies. According to DOD, these actions are part of a long-term effort it is working on to develop a comprehensive system for maintaining medical records of all illnesses and injuries that military personnel may suffer, the care they receive, and their exposure to different hazards. DOD noted a key objective of this work is to apply lessons learned from the Gulf War experience to improve necessary medical surveillance and record keeping for future military deployments. While we recognize that DOD’s efforts will likely improve the utility of these data systems to some extent, we are concerned that they will continue to be insufficient to assess Gulf War illnesses such as tumors. DOD and VA were concerned about references in the report to illnesses other than cancer. They noted the report does a good job in highlighting the strengths and weaknesses of the data sources available for assessing the incidence of tumors among Gulf War veterans, but that it does not include a comparable review of other non-cancer health information systems or research studies that may exist. We modified the report title and some language to clarify the scope of our work, where appropriate. However, we continue to believe that our findings regarding the key data sources discussed in this report, with the exception of the cancer registry reporting systems, are applicable to assessing other illnesses that may be associated with Gulf War veterans. For example, the lack of outpatient data affects the reporting of many types of illnesses, not just tumors. Although there are other research studies underway to investigate different symptoms and illnesses in the Gulf War veteran population, we are unaware of any other government data reporting systems that provide a means to assess illnesses in this population. VA officials also questioned statements we made in the report highlighting the importance of collecting baseline information on tumor incidence among Gulf War veterans at this time. They believe that available research information, which has shown a lack of any increase in cancer mortality or hospitalization rates among Gulf War veterans, does not support investing in further monitoring, given other Gulf War research priorities. VA contends that the usefulness of such baseline information is negligible for future research efforts because any future rates of tumors would need to be compared with military and general population controls from the same time period. While we agree that such comparisons are important, the existing research information on tumor incidence in the Gulf War population is quite limited and, therefore, cannot be used as a basis to say there is no increased rate in tumor cases. Tracking incidence over time is also important in order to assess whether the number of new cases is occurring at a similar or different rate than a comparison group of veterans. DOD also made the point that establishing a national cancer registry with standardized reporting of cancers across the nation, would address many of the data problems noted in our report and be of use in assessing military and nonmilitary populations. A recommendation for establishing such a reporting system was beyond the scope of our work. DOD and VA also provided technical comments, which we incorporated where appropriate. The focus of our work was to identify and assess available data sources and federal research initiatives to estimate the incidence of tumors among Gulf War veterans. To address these objectives, we reviewed relevant literature and agency documents and collected information directly from agency officials and selected outside experts. We identified and reviewed available literature on a variety of topics including Gulf War illnesses, cancer epidemiology, and other uses of federal and state medical information systems (e.g., studies of cancer rates among Vietnam veterans potentially exposed to Agent Orange). We also interviewed officials from DOD, VA, the National Cancer Institute, and the Medical Followup Agency of the Institute of Medicine. Through these interviews and materials collected, we learned about the availability of data, their strengths and limitations, and their applications for monitoring the incidence of tumors and other illnesses. We also discussed past and ongoing research efforts to assess the magnitude and frequency Gulf War illnesses with agency officials. An important limitation of our study is that we did not obtain the databases and independently assess their reliability and validity. We did not, for example, assess data entry procedures to verify the accuracy and completeness of reporting. Furthermore, we did not evaluate the effectiveness of database quality assurance practices. We conducted our review between July and December 1997 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to other interested congressional committees, the Secretaries of Defense and Veterans Affairs, and other interested parties. We will also make copies available to others upon request. If you or your staff have any questions or would like additional information, please contact me at (202) 512-3092. Major contributors to this report were John Oppenheim, Dan Engelberg, and Lê Xuân Hy. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed data on the incidence of tumors among Gulf War veterans, focusing on: (1) the reliability of data sources available for determining the incidence of tumors among Gulf War veterans; and (2) the Department of Veterans Affairs' (VA) and the Department of Defense's (DOD) use of data sources to monitor tumors and other illnesses among Gulf War veterans. GAO noted that: (1) none of the data sources that provide information on the health characteristics of Gulf War veterans can be used to reliably estimate the incidence of tumors; (2) VA's benefits information system can track the vital status and causes of deaths among Gulf War veterans; (3) however, not all cancers result in death and those that do may take several years to show up; (4) as a result, the system will underreport overall incidence; (5) DOD and VA maintain large hospitalization reporting systems; (6) however, a large majority of Gulf War veterans do not use DOD and VA hospitals and there has been little effort to determine whether this hidden population has health conditions similar to those of the population captured by the reporting systems; (7) DOD's reporting system also does not account for outpatient medical care; (8) VA has recently begun to fill this gap for its outpatient facilities, but it may take several years before consistent and reliable reporting is available; (9) a national cancer registry reports aggregate population rates and trends but cannot be used to track the Gulf War population; (10) DOD and VA health registries report information on the type of health problems Gulf War veterans have experienced at the time of their examination; (11) however, because not all veterans are examined, the information collected cannot be used to estimate the frequency of illnesses among all Gulf War veterans; (12) VA is conducting a national survey to study the general health status of Gulf War veterans; (13) the study uses representative samples of deployed and nondeployed veterans; (14) however, the response rate to the survey has been low and the study's sample size may be too small to assess any elevated incidence of most cancers; (15) DOD and VA have initiated efforts to improve the utility of these data systems but have not developed the capability to specifically address questions about tumors or other illnesses among Gulf War veterans; (16) as a result, it is not known how many Gulf War veterans have tumors or whether they have a higher incidence of them than other veterans; and (17) according to agency officials, no other plans aside from periodic assessments of mortality have been made to monitor tumor cases within this population. |
A not-for-profit hospital conversion is a transaction that results in the shift of all or a substantial portion of the assets of a not-for-profit hospital to for-profit use. Most hospital conversions have been structured as asset sales; however, recently some hospitals have, for example, entered into joint venture arrangements. In an asset sale, a not-for-profit hospital sells its physical assets, name, and accounts to a for-profit purchaser in exchange for cash, stock, notes, or other property. In a joint venture, a not-for-profit hospital contributes its assets to a for-profit partnership in exchange for cash and an ownership interest in the new venture. For example, in an 80/20 joint venture, the not-for-profit entity receives cash equal to 80 percent of the value of the hospital’s assets and a 20-percent ownership interest in the for-profit venture. Other methods of conversion include lease arrangements and corporate restructurings. Federal and most state laws require that proceeds from the sale of charitable assets continue to be used for charitable purposes. These proceeds are generally directed to a not-for-profit foundation or other charitable entity. Market and institutional factors, such as the growth of managed care and the need for capital, are often cited as primary reasons for conversions. To be successful in a managed care environment, not-for-profit hospitals must be in a competitive position. This position can be achieved by building networks that guarantee patient flow and increase bargaining power with managed care plans and physician groups. Access to capital is particularly important in a managed care environment, in which substantial investments may be necessary for information systems, network development, and expanding market share. Columbia/HCA Healthcare Corporation, Tenet Healthcare Corporation, and Quorum Health Group are major players in the hospital acquisition market. Columbia/HCA is one of the largest health care services companies in the United States. As of February 1996, Columbia operated 343 hospitals, 135 outpatient surgery centers, 200 home health agencies, and extensive outpatient and ancillary services in 38 states, the United Kingdom, and Switzerland. Columbia reported 50 not-for-profit hospital acquisitions, joint ventures, and lease arrangements between 1994 and 1996. Until recently, Tenet, a nationwide provider of health care services, owned and operated 76 general hospitals and related businesses in 13 states. On January 30, 1997, Tenet acquired OrNda HealthCorp, one of the nation’s largest investor-owned hospital management companies, with 49 hospitals in 15 states. Through this transaction, Tenet now owns, leases, or operates 130 hospitals in 22 states. Tenet reported nine not-for-profit hospital acquisitions and one joint venture since 1990. Quorum owns and operates acute-care hospitals and local and regional health care systems in 43 states and the District of Columbia. As of June 1996, Quorum owned 14 acute-care hospitals and had management contracts with 253 hospitals and consulting contracts with another 161 hospitals. Quorum reported 12 not-for-profit hospital acquisitions and leases since 1990. The hospitals we reviewed followed the same basic process in converting from not-for-profit to for-profit status: They valued the hospital’s assets; sought out a buyer or partner, generally through a competitive process; and negotiated the terms of the final agreement. The methods used to determine the hospitals’ value were commonly used approaches, according to industry experts. A key component considered in estimating the value of the hospitals we reviewed was their most recent earnings. The valuation estimate is a benchmark that hospital officials can use in considering bids from potential buyers or partners. The IRS and others suggest that hospitals solicit competing bids through a request for proposals (RFP) in order to increase the likelihood that fair market value is realized. While few hospitals followed such a formal competitive bidding process, officials at most hospitals said that they received multiple bids and accepted the highest bid offered. Once a bid is accepted, the terms of the purchase or partnership agreement are negotiated and formally agreed to by both parties. Participants in the conversion transactions we reviewed told us that items negotiated included the final purchase price and continued charity care and hospital services. During the conversion process, the communities that the not-for-profit hospitals served generally were not informed about or involved in the various phases of the transaction. However, the not-for-profit hospitals’ boards of directors, who viewed themselves as representatives of the community, reported having responsibility for managing the conversion process and having a fiduciary duty to ensure that the conversion was in the best interests of the organization. The for-profit hospital boards of directors, which usually included former not-for-profit board members, generally monitor and oversee compliance with the purchase agreement. The IRS and valuation consultants cite the income, market, and cost approaches as generally accepted methods for valuing hospital assets (see table 2). One or more of these approaches were used to arrive at a minimum dollar value. This estimated value of a hospital is not intended to represent its fair market value. Instead, in many cases, it represents a benchmark for the not-for-profit hospital to use in negotiating a purchase price. The income and market approaches, which were the approaches most commonly used in the transactions we reviewed, multiply a hospital’s adjusted earnings by a variable—or multiple—to calculate the hospital’s value. The multiple depends on the weight given to certain tangible and intangible factors, which can include a hospital’s debt and competitive position. For example, lower multiples reflect hospitals that are considered a greater financial risk. Multiples that ranged from 5 to 10 were applied by investment bankers to value six of the not-for-profit hospitals we reviewed. In recent years, investment bankers have commonly applied a multiple of six to value independent not-for-profit hospitals. Experts and representatives from organizations who are knowledgeable about hospital finance, such as the Prospective Payment Assessment Commission (PROPAC), suggest that not-for-profit multiples be carefully monitored to ensure that the not-for-profit hospitals are valued appropriately. Each of the 14 hospitals we reviewed had obtained either an independent valuation (or conducted its own valuation of the hospital) or a fairness opinion, which is a documented analysis and confirmation by a reviewer that the valuation process resulted in a fair estimate from a financial point of view. In obtaining their valuation, 13 hospitals hired outside consultants, whereas 1 relied on in-house expertise. The one hospital that relied on in-house expertise for valuation, Lloyd Noland, hired experts to render a fairness opinion. Five hospitals—Arlington, Goodlark Regional Medical Center, Good Samaritan Health System, Tulane, and St. Francis—obtained both a valuation analysis and a fairness opinion from an outside consultant. For the conversions we reviewed, officials with Columbia/HCA, Quorum, and Tenet told us that they did not retain the same consultants that the not-for-profit hospitals did for valuation purposes. However, a Quorum official reported using Valuation Counselors Group, the consultant retained by the Carolinas Hospital System, for asset allocation purposes related to that hospital following completion of the deal. In addition, all three for-profit companies reported using some of the same consultants for business transactions and services unrelated to the conversions in our review. (Table 3 lists the hospitals that hired consultants by the type of service rendered.) Eight hospitals disclosed the valuation estimates they received; however, only four provided documentation to support the information. Mary Black and Retreat reported in their IRS revenue rulings that they received valuation estimates of $56 million and $14 million, respectively. Carolinas’ valuation report provided an estimated range of $55 million to $60 million, and Good Samaritan’s valuation report estimated the hospital’s value at $140 million to $160 million. (See table 4.) The remaining six hospitals would not disclose their valuation estimates. The valuation estimates generally represent a benchmark for the not-for-profit hospital to use in negotiating a purchase price. According to officials involved in the conversion transactions, most of the not-for-profit hospitals in our review received more than one bid from potential buyers or partners (see table 5). The process used to solicit offers varied among the hospitals. According to the IRS, sellers can more accurately determine the fair market value of their hospitals by soliciting competitive bids through an RFP, which opens bidding to the public. Of the 14 hospitals in our review, 4 used an RFP process; 9 said that they considered several not-for-profit and for-profit entities as potential buyers/partners before focusing on one or more from which to solicit a bid(s); and 1, Jacksonville, only considered one buyer, Quorum, which was selected because of its previous experience—an 8-year management contract with Jacksonville Hospital. Of the 14 hospitals, 7 received more than one bid. Although most of the hospitals we reviewed received multiple bids, not all reported accepting the highest offer. Some officials told us that the bid amount is only one of several factors considered by the not-for-profit hospitals in selecting a buyer or partner. The Retreat Hospital, for example, accepted a bid from Columbia/HCA that was $3 million lower than the highest bid it received because the higher bidder did not appear to bring any complementary strengths, such as access to third-party payer contracts and economies of scale in operations, to counter Retreat’s weaknesses. Hilton Head accepted a lower bid from Tenet because of the for-profit’s financial stability, access to tertiary care, philosophy regarding patient care and employees, and other health care relationships. Hospital officials told us that, in addition to bids, they also considered such factors as the bidding entity’s managed care network, presence in the community, corporate culture, reputation for providing quality care, and access to capital, which was reported to be a major factor in the not-for-profit hospitals’ decision to accept an offer from a for-profit company. Officials from many of the hospitals in our review said that their negotiations with purchasers resulted in a mutually agreed upon purchase price. Officials of some of the hospitals we reviewed stated that they negotiated a purchase price for their hospitals that allowed them to pay off their debts and direct money to communities for charitable purposes. According to hospital officials and for-profit purchasers, purchase prices for the hospitals we reviewed ranged from about $16 million to $212 million; most were less than $100 million. (See table 6 for hospitals’ purchase prices.) The Tulane University and Hilton Head joint ventures resulted in the not-for-profit entities’ receiving a percentage of the purchase price in addition to their respective shares of the joint venture. Officials associated with the Arlington joint venture stated that a purchase price was not negotiated because Columbia/HCA contributed three hospitals to the transaction in lieu of cash. Only two of the three purchasers, Quorum and Tenet, provided purchase price information. Purchase prices for the remaining Columbia/HCA transactions were provided by hospital officials. In commenting on a draft of this report, two reviewers raised concerns about conclusions that might be drawn from comparing valuation estimates and purchase prices. Because valuation estimates may or may not reflect a hospital’s fair market value, it could be misleading to compare valuation estimates with purchase price for determining whether the purchaser or partner over- or underpaid for the selling hospital. Most of the not-for-profit hospitals that converted to for-profit status that we reviewed negotiated terms in their purchase agreements with the intent of preserving charity care for the community and securing protections for the hospitals and their staffs. All except two of the hospitals (Baptist Memorial and Retreat) negotiated such contract provisions with their buyers/partners. The types of provisions the 12 hospitals negotiated as part of their purchase agreements included continuing a certain level and duration of charity care and hospital services; retaining employees and certain management positions; and retaining the option to buy back the hospital if the purchaser decided to sell, close, or substantially change the focus of the hospital. Many of the negotiated provisions had time limits—some, a minimum of 3 years; others had no time periods attached. We were provided documentary evidence of the negotiated terms of the agreements for ten of the hospitals. See table 7 for examples of charity care and service provisions that were agreed to. The not-for-profit and for-profit parties to the purchase agreements are relying on the new for-profit hospital boards of directors to monitor compliance and ensure that the terms of the agreements are enforced.Although the for-profit entities and board members are responsible for fulfilling the terms of the agreements, for-profit boards are also responsible for the interests of stockholders and the profitability of the hospital. Therefore, the board might choose to make cost-cutting decisions that, for example, reduce service levels and charity care in the community. Some states are beginning to address the potential for noncompliance by granting third-party oversight and enforcement authority over negotiated terms of not-for-profit conversion transactions to state attorneys general and health insurance commissioners. For example, a Nebraska statute provides that if the Department of Health receives information and can verify that the new for-profit is not fulfilling its commitments to the community, it can revoke the for-profit’s license. Federal and state laws in most states generally have not required that the community be informed about the conversions through mechanisms such as public hearings and disclosure of transaction documents. For the conversions we reviewed, hospital boards of directors viewed themselves as representing the community through their fiduciary responsibility to protect the not-for-profits’ assets. However, the community at large was often unaware of the pending sale and uninformed of the sale price or the structure of the transaction. Nine of the 14 hospitals we reviewed did not involve the public through hearings and open forums before the conversion. While they did not seek community approval of the conversion or the partnership decision, five of the hospitals we reviewed informed the public of the conversion through public meetings and community forums. John Randolph and Lloyd Noland officials reported briefing community and civic organizations about the sale of the hospitals. Arlington officials reported holding 30 to 35 meetings regarding the conversion, including public meetings, briefings for the Arlington County Board, and meetings with civic organizations. Discussions surrounding the sale of the Jacksonville Hospital were open to the public through city council meetings. Hilton Head Hospital officials reported holding public forums to educate the community about the partnership decision and partnership options. In commenting on a draft of this report, two external reviewers raised concerns about full public disclosure and community involvement in the sales transactions. Specifically, they said public participation in the sales transactions could be detrimental to the value of the selling hospital or result in the disclosure of trade secrets. One of the reviewers stated that oversight by a state attorney general’s office, including an independent valuation, is a more effective, realistic, and preferable approach. Because federal and state laws require that net proceeds from not-for-profit conversions be directed toward a charitable purpose, charitable institutions often receive substantial resources as a result of conversions. In most of the conversions we reviewed, the proceeds were directed to foundations, but a university and a city also received proceeds. Most of the foundations had missions and activities that focused primarily on the broad area of health and wellness. Other foundations focused more directly on such areas as the arts, education, and religion, in some cases also supporting community health programs and activities. Community participation in determining the use of sale proceeds was solicited in about half the cases we reviewed. IRS guidance and some state statutes generally require that proceeds resulting from the conversion of not-for-profit entities be used for charitable purposes. The charitable entities that receive proceeds from not-for-profit hospital conversions use the funds to support various projects and activities. The use of charitable assets is typically defined by the mission the foundation adopts. The missions of most of the foundations we reviewed focused on health and wellness, which sometimes included a focus on education, public safety, arts, and religion. Some state regulators argue that a foundation’s mission and the efforts it supports should be closely related to the original mission of the not-for-profit hospital. However, decisions have been made to use hospital conversion proceeds to fund nonhealth-related projects, such as building a school and financing an arts, education, and technology center. Conversions of not-for-profit hospitals have resulted in multimillion-dollar endowments to charitable institutions. Although most recipients of these funds are foundations, millions of dollars have also been directed to other entities. For the conversions we reviewed, hospital and foundation officials reported proceeds that ranged from $13 million to $130 million.In addition to the funds transferred from the for-profit entity, these proceeds may also include previous hospital foundation endowments, hospital reserves, and other not-for-profit assets. For example, in addition to the $8 million received from the conversion transaction, the Arlington Health Foundation also received other monies transferred from the hospital and the previous hospital foundation, which resulted in proceeds totaling $130 million. Of the 14 conversions in our review, 12 directed proceeds to foundations. Moreover, in addition to transferring proceeds to a foundation (Baptist Community Ministries), Mercy Baptist Medical Center directed a portion of the proceeds to the other original sponsor of the medical center, the Sisters of Mercy Health System of St. Louis, which reinvested the proceeds in other community hospitals. The proceeds from the remaining two conversions were directed to Tulane University and the City of Jacksonville, Ala. The total amount generated from the conversions we reviewed was $931 million. (See table 8 for the amounts reported as forwarded to individual charitable entities.) The foundations that resulted from the sale of not-for-profit hospitals that we reviewed used conversion proceeds to support a variety of projects, many of them health related. These foundations do not provide direct health care services; instead most issue grants to existing community organizations that support a range of health- and nonhealth-related activities. Grants have been awarded by 8 of the 12 foundations we reviewed. These grants have supported a variety of health-related activities, including disease prevention, purchase of medical equipment, and CPR and first-aid training. Grants have also been awarded to support education programs, such as a tutoring program, an adult caregiver training program, and a summer remediation program. Other grants supported arts, public safety, and community development. At the time of our review, three foundations (the Arlington Health Foundation, the Good Samaritan Charitable Trust, and the Lloyd Noland Foundation) had not yet awarded grants. One foundation, The Jackson Foundation, is not currently issuing grants but has used the proceeds for projects such as an aerospace program and building an arts, education, and technology center that supports programs in math and science. (See app. II for a summary of each foundation’s mission and grant award activity.) For 2 of the 14 conversions we reviewed, proceeds were not directed to a foundation. The City of Jacksonville and Tulane University received conversion proceeds totaling approximately $115 million. The City of Jacksonville reported using the proceeds to build a new high school and make capital improvements at city facilities. Tulane University reported using the proceeds, in part, for working capital, an addition to its endowment, and capital to fund the development of new programs at the medical school. As the beneficiary of the proceeds, the community is often more involved in determining the future uses of charitable proceeds than in providing input during the earlier stage of structuring the transaction. Community participation regarding the charitable proceeds can include providing input concerning the structure, purpose, governance, and activities of the entity that receives the proceeds. Eight of the entities in our review that received these proceeds sought no community involvement. The remaining six foundations obtained community input regarding community needs and use of charitable proceeds through community needs assessments; meetings with community groups, organizations, and agencies; or both. Three of these (the Arlington Health Foundation, the Mary Black Foundation, and the John Randolph Foundation) conducted community needs assessments or relied on assessments already conducted. The remaining three foundations (the Good Samaritan Charitable Trust, Baptist Community Ministries, and The Jackson Foundation) sought broad community input through public forums and discussions before determining the foundations’ program agenda. Baptist Community Ministries, the Good Samaritan Charitable Trust, and the Mary Black Foundation held public forums or discussions with community leaders, as well as relied on community needs assessments. In addition, the Good Samaritan Charitable Trust formed a community task force to study and recommend how the funds could best serve the health needs of the community. Controversy and concerns about the loss of community health services and the transfer of community assets in not-for-profit conversions have prompted some states to take an active oversight role in protecting the community’s charitable interests. In most states, the attorney general has the authority to monitor conversions to protect the community’s charitable interests but not all attorneys general exercise this authority. Several groups have developed guidance, including a model act, to help attorneys general both develop legislation governing hospital conversions and review proposed not-for-profit conversion transactions. Twenty-four states and the District of Columbia have enacted laws, most in recent years, affecting not-for-profit conversions. These laws contain provisions that include requiring attorney general approval, advance notification, and community involvement. At the time of the conversions of the 14 hospitals in our review, none of the states in which they were located had enacted laws specifically addressing not-for-profit hospital conversions. However, state attorneys general in five of these states did exercise authority granted under state not-for-profit corporation law or common law to review selected conversions. State attorneys general generally have authority to review not-for-profit conversions and, where appropriate, to enforce state requirements that protect charitable benefits. Attorneys general in four states in our review (Alabama, California, South Carolina, and Tennessee) reported that authority to oversee and monitor hospital conversions is granted through state provisions related to not-for-profit corporations. The Virginia attorney general’s authority is founded primarily in common law, from which the doctrine of cy pres is derived. (In this context, the cy pres doctrine provides that when the original purpose of a charitable trust becomes impossible to carry out, another approach may be taken if it is judged to be similar in intent to the original purpose.) In Louisiana, until recently, the attorney general had no authority to oversee hospital conversion activity. (See table 9 for a description of state authorities to oversee hospital conversions.) State attorneys general reviewed about half of the conversion transactions in our review through authority granted under state not-for-profit corporation laws. These laws, which require that the not-for-profit entity give notice of its sale to the attorney general’s office, were the basis for reviews of the transactions involving the Lloyd Noland Hospital (Ala.), the Good Samaritan Health System (Calif.), Mary Black Memorial Hospital and the Carolinas Hospital System (S.C.), and the St. Francis Hospital and the Goodlark Regional Medical Center (Tenn.). These laws may also give the attorney general authority to review the disposition of assets, which could include determining whether fair market value is obtained, charitable proceeds are appropriately directed, and conflicts of interest exist. For example, in the Good Samaritan conversion, the attorney general reviewed the entire transaction, including valuation, inurement issues, and consistency of the sale with the purposes of the trust. The attorney general concluded that Good Samaritan’s administrators and board acted in good faith, in that the institution’s sale price reflected fair market value and all related business decisions had been made with due diligence. The attorney general, in negotiations with Good Samaritan, reached a compromise agreement on how the proceeds would be used. The agreement directs proceeds to fund hospital and medical care for the medically indigent in Santa Clara County and to fund preexisting community health programs historically supported by Good Samaritan. For the Goodlark conversion, the attorney general ruled against a proposed use of the charitable proceeds by The Jackson Foundation. Specifically, the foundation had agreed to purchase a nuclear lab for the new Columbia-owned for-profit hospital. The attorney general prohibited this purchase, ruling that a conflict of interest was present. The common law doctrine of cy pres allows some attorneys general to bring suit if, in a conversion, the not-for-profit assets are found to be directed inappropriately. The Virginia attorney general has authority to review conversion transactions through common law. Officials in the Virginia attorney general’s office reported exercising this authority to review the three Virginia hospital conversions in our study (Arlington, Retreat, and John Randolph). However, these officials would not disclose specifically what was reviewed and the results of their reviews. Several organizations have prepared guidance to assist states in oversight of conversion activity. In 1997, the National Association of Attorneys General (NAAG) adopted a resolution containing six specific guidelines for the conversion process. The Community Catalyst and Consumers Union developed a model act with more specific provisions relating to conversions. These sets of guidance are complementary and provide a framework for state attorneys general who will be reviewing conversion transactions. (See table 10 for a comparison of NAAG resolution and model act features.) In response to the increasing number of not-for-profit hospital conversions and public concern regarding the fairness of the transactions and the potential loss of community benefits, states have enacted legislation affecting conversions. According to the National Council of State Legislatures, 24 states and the District of Columbia have enacted such legislation. These laws often include features similar to those of the NAAG resolution and the model act. Although the features of each state’s legislation vary, most legislation contains specific provisions that require advance notice, state official review and approval, and public disclosure/hearing. (See table 11 for a list of states with laws affecting conversions, and key provisions, and see app. III for a brief summary of relevant state law.) Several other states are also considering similar conversion legislation. The American Hospital Association has also adopted guidelines to help hospital officials deal with the wide range of public accountability questions that surround changes of ownership or control. These guidelines are applicable to not-for-profit hospital conversions as well as transactions between not-for-profit hospitals and are intended to be considered before changes of ownership or control. According to the American Hospital Association, hospital officials should (1) ensure that they have devised a plan for providing charity care and other essential community services, (2) obtain a valuation of charitable assets by an independent party, (3) ensure that the resulting charitable entity continues to serve the appropriate health needs of the community, (4) disclose publicly the terms of the agreement and provide an opportunity for public comment, and (5) inform the appropriate state official of the terms of the conversion. Three federal agencies, the IRS, FTC, and Department of Justice, play limited but key oversight roles in hospital conversions. The IRS is responsible for enforcing the federal tax laws that apply to the status and operation of tax-exempt organizations, including not-for-profit hospitals and foundations. Hospital conversions involving joint venture arrangements, in which ownership interests and income are shared between not-for-profit and for-profit entities, raise both tax-exempt status and conflict-of-interest questions. The IRS believes it needs to develop specific guidance addressing joint venture arrangements. FTC and the Department of Justice, as part of their broad mission to enforce federal antitrust laws, investigate and challenge potentially anticompetitive hospital mergers and acquisitions, as necessary. FTC and Justice do not view hospital conversions as posing unusual antitrust issues. The IRS Exempt Organizations Division is responsible for reviewing and approving applications for recognition of tax-exempt status; issuing revenue rulings, guidance, and other interpretations of tax-exemption law; and performing audits to ensure that tax-exempt organizations are operated for tax-exempt purposes. Revenue rulings are often used as precedents to ensure uniform handling of a tax issue. Of the 14 not-for-profit hospital conversions we reviewed, at least four hospitals (Retreat, Mercy Baptist, Mary Black, and St. Francis) received private letter rulings from the IRS. According to Division officials, the conversion of not-for-profit hospitals does not appear to pose pressing or widespread tax-related issues that require special attention. The IRS has attempted to position itself to react quickly to any unexpected activities and believes it maintains sufficient information to pinpoint areas warranting attention. Moreover, IRS officials told us that states are generally in the best position to act on hospital conversions that are problematic, unless it appears that federal law has been violated. Joint ventures between not-for-profit hospitals and for-profit entities can raise questions about whether the not-for-profit will retain its tax-exempt status and whether income distributed to the not-for-profit partner will be subject to tax. Because of the shared ownership structure in a not-for-profit and for-profit joint venture, the opportunity exists for charitable assets to be used for private benefit. The IRS’ position is that, to maintain its tax-exempt status, a not-for-profit’s participation in a joint venture must advance the not-for-profit’s charitable purposes and not result in more than incidental private benefit. According to IRS officials, if the not-for-profit does not exercise control over the day-to-day activities of the joint venture, it cannot ensure that the assets contributed by the not-for-profit will not be used for the private benefit of the for-profit organization. If these assets benefit the for-profit organization, the tax-exempt status of the not-for-profit partner may be revoked. According to IRS officials, if the majority of the not-for-profit organization’s efforts are directed toward exempt activities, the organization will generally retain exempt status. In such a case, however, the income earned by the not-for-profit organization from the joint venture may be subject to income tax under unrelated business income tax rules. At the time of our review, the IRS had not published a position or issued guidance on joint venture arrangements. IRS and the Department of the Treasury are drafting a revenue ruling to provide guidance on the treatment of joint venture transactions under the federal tax rules. The IRS expects to issue this ruling by the end of 1997. This ruling may significantly affect the tax-exempt status of and income earned by the not-for-profit organization participating in the joint venture. Another issue surrounding joint ventures involves the potential for conflict of interest when the same people serve on both the not-for-profit foundation board and the for-profit hospital board after a conversion. The potential for conflict of interest is particularly apparent in joint venture arrangements because the foundation board members have a stake in maintaining the for-profit’s interests. For all three joint ventures we reviewed, the charitable foundation board members also participated on the for-profit joint venture board. However, foundation officials stated that the foundations had not awarded any grants in support of the new for-profit hospitals, which is one example of maintaining the for-profit’s interest. Joint operating agreements (JOA) raise similar private benefit and conflict-of-interest issues. In a JOA, two or more hospitals or health care entities operate jointly but retain their separate boards, ownership status, and ownership of assets. The profits and losses from JOA activities, however, are shared. Most JOAs have been among not-for-profit entities. However, a JOA can also occur between a not-for-profit hospital and a for-profit entity, an arrangement that is similar to a joint venture. None of the rulings on JOAs has yet involved for-profit participants. Recently, however, a hospital in Jacksonville, Fla., and Columbia/HCA entered into a JOA. The full implementation of the agreement is awaiting an IRS private letter ruling on the tax effects of the operating agreement. While JOAs raise some of the same concerns as joint ventures, the forthcoming IRS and Treasury guidance on joint ventures may not address the specific concerns raised in the context of JOAs. FTC and Justice share responsibility for enforcing the federal antitrust laws; however, according to officials of these agencies, hospital conversions do not raise any special issues under the antitrust laws. In carrying out their oversight roles, FTC and Justice investigate and challenge, where appropriate, potentially anticompetitive hospital mergers and acquisitions. According to FTC officials, antitrust issues presented by not-for-profit conversions do not differ from those presented by mergers and acquisitions between not-for-profit entities, and most hospital mergers do not violate the laws enforced by FTC and Justice. FTC and Justice receive advance notice of many transactions under the premerger notification requirements of Hart-Scott-Rodino. However, according to FTC officials, this filing requirement does not apply to some types of mergers and acquisitions (such as those involving public entities) and to certain joint ventures. FTC has investigated ten of the many proposed acquisitions of not-for-profit hospitals by for-profit firms and, in three of these cases, blocked a merger or obtained divestiture as a condition for allowing the transaction to proceed. For example, in 1995 FTC alleged that the proposed acquisition by Columbia/HCA of John Randolph Medical Center, one of the conversions we reviewed, would endanger competition for psychiatric hospital care because it would bring under common ownership John Randolph’s psychiatric unit and a competing Columbia/HCA psychiatric hospital in nearby Petersburg, Va. In its order, FTC permitted Columbia/HCA to acquire John Randolph Medical Center on the condition that it later divest itself of its psychiatric hospital in Petersburg. Concerns about the conversion of not-for-profit hospitals and the transfer of millions of dollars in charitable assets still exist, because they are carried out essentially privately between boards of the selling hospitals and management of the purchasing for-profit companies. These conversions are not routinely subject to any disclosure requirements, which leaves little opportunity for community involvement outside of the community members who serve on the not-for-profit hospitals’ boards. A growing number of states are recognizing that the public interest is at stake and, as a result, are becoming more involved in overseeing the conversion process and monitoring the terms of such transactions. This increased state oversight may address some questions and concerns related to obtaining fair value for charitable assets, obtaining public disclosure and community input, and ensuring that the proceeds of the transaction are used for appropriate charitable purposes. We provided copies of our draft report to the IRS and several experts on hospital conversion issues for review. IRS officials responded that the report generally reflects the agency’s position. They noted, however, that they have not fully resolved the issues surrounding joint ventures, and we modified the language in our report accordingly. The expert reviewers suggested that we clarify other issues in our report, and we incorporated revisions where appropriate. We also asked 21 officials, including hospital administrators, foundation executives and board members, and attorneys who represented the not-for-profits in the transactions, to validate the information included in the report. These officials generally agreed with the draft report. Some officials provided technical comments, which we incorporated where appropriate. Subsequently, we were asked to provide a draft of our report to Volunteer Trustees of Not-for-Profit Hospitals, a public interest group, for review. We also provided a copy to the Federation of American Health Systems, which represents for-profit hospitals and health care facilities. One issue of major concern to Volunteer Trustees was that we had not obtained documented evidence of sale information. In response to this comment, we revised our draft to indicate those instances where we had documented evidence, including purchase or partnership agreements, IRS revenue rulings, valuation reports, and fairness opinions, to support the testimonial information provided in our report. In those cases where we were not given documentary evidence because of the proprietary nature of the information and confidentiality agreements, we had to rely solely on information provided in interviews. Where appropriate, we clarified the sources used to support information in our report. We are sending copies of this report to the Secretary of Health and Human Services, the Commissioner of Internal Revenue, state attorneys general, appropriate congressional committees, and other interested parties. We will make copies available to others upon request. Please contact me at (202) 512-7119 or James O. McClyde, Assistant Director, at (202) 512-7152 if you or your staff have any questions. Other GAO contacts and contributors to this report are listed in appendix IV. In response to concerns surrounding not-for-profit hospital conversions, we were asked to determine for these conversions the methods used to value assets, to what extent funds from the sale of hospital assets are directed to foundations, to what extent the proceeds from hospital conversions are fulfilling their charitable missions, and what role federal and state governments play in the conversion of hospitals from not-for-profit to for-profit status. As part of our review of the conversion process, we also reviewed the processes used for soliciting interest and receiving bids; the terms negotiated as part of the sales agreement, including provisions for charity care; and the extent of community involvement. To accomplish these objectives, we worked with three major investor-owned hospital corporations—Columbia/HCA Healthcare Corporation, Quorum Health Group, and Tenet Healthcare Corporation—to develop a list of not-for-profit hospital conversions occurring after 1990. We used this list to judgmentally select six states and 14 sites. We chose these states—Alabama, California, Louisiana, South Carolina, Tennessee, and Virginia—and sites because they had one or more of the following characteristics: asset sales and joint venture transactions; multiple conversions, conversions involving multiple investor-owned companies, or both; and transactions in which the proceeds were directed to foundations. Our review focused on reviewing the conversion processes used by the hospitals selected for site visits, and therefore the results cannot be generalized nationally, to a particular state, or to a particular investor-owned company. To determine the methods used to value assets, the processes used for soliciting interest and receiving bids, the terms negotiated as part of the sales agreement, and the extent of community involvement in the conversion process, we interviewed for-profit hospital chief executive officers (CEO); attorneys who represented the not-for-profit hospitals in the conversion transactions; and other hospital, university, city, and foundation officials with knowledge of the not-for-profit hospital conversion process. We also interviewed officials at accounting firms, consulting firms, and valuation companies to determine their overall involvement in the conversion process and, specifically, the process(es) and method(s) used for valuing the hospital assets. From some hospitals, we collected documentation on the valuation estimate or range, purchase price, and purchase agreement; officials at other hospitals stated that because of confidentiality agreements they could not provide such documentation. We also reviewed Internal Revenue Service (IRS) guidance governing the valuation of assets and receiving fair market value. Our review did not include an analysis of whether each hospital received fair market value from the sale. To determine the amount of conversion proceeds directed to a charitable entity and how the proceeds from the sale were used to fulfill a charitable mission, we interviewed officials from the charitable entity that received the conversion proceeds (that is, university officials, foundation board members and presidents, and city officials) and reviewed supportive documentation where available. We also reviewed and analyzed foundation mission and purpose statements, grant award criteria, and board composition. For those foundations that had initiated a grants cycle, we reviewed documentation provided on the grants awarded: recipients, award amounts, and proposed uses. To determine the role the federal government plays in the conversion process, we held discussions with officials at the IRS, Department of the Treasury, Federal Trade Commission (FTC), and Department of Justice. In addition, we reviewed and analyzed applicable federal laws and regulations governing not-for-profit organizations and use of charitable proceeds. We also reviewed selected IRS revenue rulings, hospital and foundation tax return filings, and FTC Hart-Scott-Rodino antitrust filings. In some cases, hospital officials did not provide documentation of the hospitals’ filings with the IRS and FTC. To determine the role that state governments play in the conversion process, for each state reviewed, we conducted interviews with representatives in the attorney general’s office and reviewed and analyzed copies of relevant state legislation. We also coordinated with Consumer Catalyst in Boston and an attorney with The Harrison Institute for Public Law, Georgetown University Law Center, to develop a list and description of enacted and pending state legislation governing hospital conversions. Year, number of grants, and total amount “upport quality health care and effective health care programs in the greater Richmond area.” 1996 - 29 grants - $706,774 — Provide summer “camperships” for disadvantaged and chronically ill children — Provide adult day care services — Fund a community program that provides medication to those who cannot afford to purchase it — Fund a vision screening project for at-risk children — Purchase medical equipment for children of indigent families — Support a program to increase the new blood donor retention rate “Its mission is to establish, promote and support programs to improve the health and well-being of the people of Arlington and surrounding Northern Virginia communities.” The Assisi Foundation of Memphis “ocuses on support for innovative programs that address the needs of Mid-South residents in the categories of health and human services, education, religion, and community development.” FY 1996 - 83 grants - $5,306,593 — Support research in the area of cell and gene therapy — Support patient care and medical research programs — Assist a university’s science and math programs — Increase capacity to provide services in a child care center — Help pay for construction of a new animal hospital and quarantine space “n keeping with our Baptist heritage, Baptist Community Ministries is committed to the development of a healthy community offering a wholesome quality of life to its residents and to improving the physical, mental and spiritual health of the individuals we serve.” Fall 1997 - 40 grants - $7,800,000 — Expand an existing adult caregiver training program and dependent child day care support service in a local housing project — Expand childhood immunization programs in a local housing project — Fund an antiviolence program — Fund a street crime call-in reward system (continued) Year, number of grants, and total amount “o advance the general welfare and quality of all life in the Florence, South Carolina area by providing economic support to qualified programs and non-profit organizations.” 1996 - 10 grants - $200,000 — Provide CPR and first-aid training in public schools — Rehabilitate summer camp facilities — Purchase extraction equipment to rescue entrapped victims — Purchase new therapeutic and testing equipment for speech and hearing disorders — Purchase biology lab equipment at a college “he promotion of fellowship among the individual churches, the extension of the Kingdom of our Lord Jesus Christ by evangelism and other means; the encouragement and enlistment of churches in this Association to promote missions, education, and benevolence . . . .” — Support church and missions development — Fund a Meals on Wheels Program — Provide drug and alcohol education in schools — Purchase a passenger van for transporting youth — Fund scholarships aximizes the health of the people of the greater Santa Clara Valley by expanding access to health care and promoting education and wellness.” “Our mission is to be a growing community-supported, endowment of resources for the betterment of our community.” 7/95-6/96 - 53 grants - $946,032 — Support need-based scholarships for community area students — Support the development of the infrastructure for an affordable housing project — Develop a program to assist patients suffering from diabetes — Support development of a youth symphony orchestra — Implement a new program providing educational support for disadvantaged youth “romotion and development of educational activities supporting and advancing the quality of life within the communities it serves.” “The foundation is committed to identifying and supporting innovative and creative health and quality of life improvements in our community.” 1996 - 18 grants - $250,000 Fund the following agencies: — Hopewell Historic Society — Virginia Blood Services — Crater Community Hospice — American Lung Association (continued) Foundation officials reported their plan is to provide long-term and acute health care services to people in Jefferson County. “o utilize its resources to benefit and enhance the health status and wellness of citizens of Spartanburg County.” As of Jan. 1997, this foundation had not yet awarded grants. This foundation has not yet awarded grants, but it does fund and operate several health-related programs, including nine School Health Centers that provide free primary health care to low-income children. This foundation is not currently issuing grants but has used the proceeds for an aerospace program; construction of an arts, education, and technology center; and other projects. Not-for-profit health care entities must give detailed written notice, made available to the public, to the attorney general and other state officials 90 days before transferring or entering into a joint venture involving all or substantially all of their assets. Within 30 days of the written notice, the parties must, in agreement with state officials, plan a public hearing. Notice of the hearing must be published in the newspaper, and the hearing must be held within 10 days of the last publication. At the hearing, the parties must submit written summary information addressing various factors very similar to the deciding criteria in the model act. The attorney general may also present information at the public hearing. A public record of the hearing must be produced, and the parties must pay all costs associated with the hearing. Not-for-profit health facilities must give written notice, which must include information specified by the attorney general, and get written consent from the attorney general to transfer, or transfer control of, a material amount of assets. The attorney general has 60 days from receiving the not-for-profit’s notice to issue a decision but may extend the period 45 days to obtain additional information. Before reaching a decision, the attorney general must conduct at least one public hearing, which must be publicized in the newspaper at least 14 days before the hearing. The attorney general has discretion in reaching a decision but must consider, at a minimum, various factors very similar to the deciding criteria in the model act. The attorney general may obtain reimbursement for the costs incurred in reviewing, evaluating, and reaching a decision. In addition, not-for-profit board members who negotiate a conversion are prohibited from receiving any renumeration from the for-profit entity. Not-for-profit hospital, medical/surgical, and health service corporations wishing to convert to stock insurance companies must file a detailed conversion plan, which must be available to the public and contain certain assurances, and apply for an amended certificate. The plan must provide, for example, that any officer, director, or staff member of the preconversion corporation is disqualified from serving as an officer, director, or staff member of the postconversion corporation and that no one may own more than 10 percent of the combined voting power of the postconversion corporation for at least 3 years. Within 30 days of filing, the corporation must begin publishing notice of the conversion for 3 consecutive weeks. The commissioner of insurance must hold a hearing before deciding to approve or disapprove the plan and publish the decision within 60 days after the hearing. The commissioner must approve the plan if it meets all filing requirements; is fair, reasonable, and not contrary to law or the interests of subscribers, contract holders, or the public; and provides that the postconversion corporation will meet the standards for stock insurance companies. A not-for-profit hospital may not enter into a conversion agreement with a for-profit entity without providing detailed notice, subject to public disclosure, to the attorney general and the commissioner of health care access. The commissioner must publish a summary of the notice in the local newspaper, and hold a joint public hearing with the attorney general. The commissioner may not approve the conversion unless the community is ensured access to affordable health care; the purchaser has committed to providing health care to the uninsured and underinsured; and, if applicable, safeguard procedures are in place to avoid conflicts of interests. The attorney general must conduct a review and approve or disapprove the conversion within 120 days of the original notice. The conversion may not be approved if it is contrary to state law or the hospital failed to exercise due diligence, disclose conflicts of interest, or establish a fair market price. In addition, the conversion cannot be approved if the fair market price has been manipulated to cause the value of the assets to decrease; the financing will place the hospital’s assets at unreasonable risk; any management contract contemplated is not for reasonable, fair value; or a sum equal to the fair market value of the hospital’s assets is not being transferred for charitable health care purposes, support of health care in the community, or a purpose consistent with the intent of any donors to someone selected by the courts and not affiliated with the hospital. A health care entity may not execute a conversion to a for-profit entity without the approval of the corporation counsel. The counsel must publish a request to convert in local papers, may hold a public hearing, and has 60 days to approve or disapprove the conversion. Approval may not be granted unless necessary steps have been taken to safeguard the value of charitable assets, taking into consideration numerous factors similar to those in the model act. Corporation counsel must ensure that assets are placed into an independently controlled charitable trust and may charge the for-profit entity the costs of investigating the conversion. In addition, the converting not-for-profit entity may be assessed a conversion fee equal to 10 percent of the property tax it would have paid during the past 5 years had it not been tax-exempt. Any county, district, or municipal hospital organized under state law may be sold or leased to, or enter into management or operating contracts with, any Florida corporation. The hospital governing board must find that the arrangements are in the best interests of the public and state the basis of such finding. The terms of any such arrangements must be determined by the applicable county, district, or municipal governing board, which must, if it elects to lease or sell the hospital, publicly advertise the meeting where the terms will be considered and an offer to accept proposals from all interested and qualified purchasers. Any sale must be for fair market value, and any sale or lease must comply with all antitrust laws. If the hospital receives more than $100,000 annually from the county, district, or municipality that owns it, the corporation must be accountable to the government entity regarding how the funds are expended. This is done by making the funds subject to annual appropriations or, where there is a contract to provide funds to the hospital for more than 12 months, making it possible to modify the contract with 12 months’ notice. To convert, a not-for-profit hospital must provide the attorney general with a detailed notice 90 days in advance, make the notice available to the public, and pay a $50,000 fee. Within 10 days of receiving this notice, the attorney general must publicize the proposal in the newspaper and invite comments. Within 60 days of receiving the notice, the attorney general must hold a public hearing to ensure that the public’s interest is protected. Under the law, that interest is not protected unless there has been adequate disclosure that appropriate steps have been taken to ensure that the transaction is authorized, the charitable assets safeguarded, and the proceeds used for charitable purposes. This disclosure must address a long list of factors similar to those in the model act. The attorney general generally must issue his findings regarding compliance with the law’s requirements within 30 days of the hearing. In addition, no hospital owned by a hospital authority may be sold, or leased unless a notice is provided and a local public hearing is held 60 days prior to such transaction. If such a hospital is leased, the lease must provide that at least one member of the hospital authority will serve as a full voting member of the lessee’s governing body and that the governing body will submit financial statements annually to the governing authority of the county where the hospital is located. Provisions enacted in 1990 authorize county-operated hospitals to be transferred, sold, or leased, by ordinance or resolution, to responsible corporations or other entities. A public hearing must be held first with notice about the hearing published in the newspaper at least 10 days before it is held. If the hospital workforce is unionized and the workforce will remain substantially the same, the hospital must continue to recognize the union for collective bargaining purposes if it timely asserts its representational capacity. After a public hearing (notice of which must appear in the newspaper 10 days in advance) and if the county and hospital governing board agree, county-operated hospitals may be leased. If a county and hospital governing board agree that it would be in the county’s best interest, such a hospital may also be sold to a not-for-profit hospital corporation to operate it, but if the corporation ceases operation the hospital reverts back to the county. No conversion of an insurer, including not-for-profit medical and hospital service corporations, may take place unless certain requirements are met. These requirements include filing a detailed statement about the transaction or merger and paying a $1,000 filing fee to the commissioner of insurance. If the commissioner approves, and after a public hearing, the transaction or merger may take place. The commissioner may not approve if the insurer would no longer satisfy licensing requirements, the financial condition of the acquiring party would jeopardize or prejudice the interest of policyholders, the plans are unfair and unreasonable to policyholders and not in the public interest, or the characteristics of the individuals involved are such that the merger would not be in the interest of the policyholders or the public or it is likely to be hazardous or prejudicial to the insurance-buying public. Health care facilities are expressly authorized to enter into cooperative agreements or merge with other health care facilities. Such facilities may apply (for a fee) to the state Department of Justice for a certificate of public advantage, which is intended to immunize them from antitrust laws. After a hearing, the Department may issue the certificate if the transaction is likely to result in lower health care costs or improved access to health care, or higher quality health care without an undue increase in costs. In addition, at least 30 days before a conversion, a not-for profit hospital must submit a detailed application to the attorney general, who must publish a notice about it in the newspaper within 5 working days of receiving it and who has 60 days to review it and approve or disapprove it. The attorney general must hold a public hearing and approve the transaction unless he or she finds the transaction is not in the public interest because appropriate steps have not been taken to safeguard the value of charitable assets and ensure that proceeds are used for appropriate health care purposes, taking into account a range of criteria similar to those in the model act. In order to prevent the acquisition from going forward, the attorney general must seek an injunction blocking the action. All nonprofit hospital and medical service organizations must file a statement of ownership interests and charitable purposes with the attorney general by the end of 1997, and it must be approved by the courts. All assets of such organizations are expressly held in charitable trusts. To engage in a conversion, a nonprofit hospital and medical service organization generally must submit a charitable trust plan to the attorney general that meets certain requirements (related to, for example, meeting unmet health care needs), and the plan must be approved by the courts. No one may engage in the acquisition of a not-for-profit hospital without submitting a detailed application, made available to the public, to the Department of Health and the attorney general. Within 5 days of receiving the application, the Department must publish a notice about it in the newspaper. Within 20 days of receiving the application, the attorney general must decide whether to review it. The Department, and the attorney general if that office will conduct a review, must hold a hearing within 30 days of receiving the application. The Department has 60 days from receipt of the application to approve or disapprove the acquisition solely on the basis of specific criteria in the law. On the basis of whether the acquisition is in the public interest, the attorney general also has 60 days to approve or disapprove the acquisition, or it is deemed approved. Acquisitions are not in the public interest unless appropriate steps have been taken to safeguard charitable assets and ensure that proceeds are used to provide charitable health care. In determining if the appropriate steps have been taken, the attorney general must consider criteria similar to deciding criteria under the model act. In addition to authorities retained by the attorney general and commissioner of insurance, the director of charitable trusts must approve any conversion involving a health care charitable trust. The governing body of any such trust must submit a detailed notice to the director 120 days before the transaction and provide reasonable public notice. The director may hold a public hearing and must ensure that the governing body of any such trust has acted in good faith, fulfilled its fiduciary duties, and met numerous other requirements similar to those in the model act. The commissioner of insurance may, however, waive these requirements if the transaction is necessary to avoid the future impairment or insolvency of health insurer or health maintenance organizations that are involved. For a health service corporation to convert to a domestic mutual insurer, the governing board must adopt a resolution to convert that includes a detailed plan for conversions by a two-thirds vote of all directors. The plan must be submitted to the commissioner of insurance, and after 30 days’ notice, a public hearing must be held. The commissioner must approve or disapprove the plan within 30 days after the hearing. Municipalities and hospital authorities may lease, sell, or convey any hospital facility to a for-profit corporation. To do so, they must first adopt a resolution of intent, request proposals, and hold a public hearing. Then they must hold another public hearing on the proposals, which must be made available to the public before the hearing. Finally a proposal may be adopted only if it is determined at another meeting to be in the public interest. The corporation must agree to provide the same or similar medical services and access to them, and a report must be prepared annually to document compliance. The hospital reverts back to the municipality or hospital authority if the corporation fails to comply. A municipality or hospital authority may also lease hospital land to, or enter into a joint venture with, a for-profit corporation, so long as the hospital facility is maintained as the corporation would have been required to maintain it had the corporation bought it. In addition, a public hospital may acquire ownership interest in a not-for-profit or for-profit managed care organization. Not-for-profit health service corporations may convert to not-for-profit mutual insurance companies, by seeking approval from the commissioner of insurance under the same procedures as required for consolidation, but are not authorized to convert to for-profit status. The new not-for-profit mutual insurance company may continue to provide health care and related service to members and subscribers and make payments directly to hospitals and others rendering such services. The laws governing other mutual insurance companies generally apply, but not-for-profit corporation laws apply to the operation and control of a nonprofit mutual insurance company that converted from a not-for-profit health service corporation. If any assets of the not-for-profit health service corporation were considered to be in a charitable trust, conversion does not create a breach of that trust nor provide grounds for disapproving the conversion. A not-for-profit health care entity proposing a transaction must provide a detailed notice, made available to the public, to the attorney general. Not more than 7 days after providing the notice, the entity must publicize it in the newspaper. The attorney general has 60 days from the time the notice is submitted to approve or disapprove the transaction but may, for good cause, extend the deadline 90 days. In deciding whether to approve or disapprove the transaction, the attorney general must consider, for example, if it will result in a breach of fiduciary duty, if the entity will receive full and fair market value, if the proceeds will be used for the entity’s original purpose, and any other criteria considered appropriate. The attorney general may obtain reasonable reimbursement from the entity for the cost of making the determination. If the attorney general approves the transaction, the entity must hold a public hearing to receive comments on the proposed use of the proceeds not later than 45 days after it receives notice of the approval. The proceeds must be dedicated and transferred to one or more new or existing tax-exempt charitable organizations, which may include a foundation if the attorney general finds that it meets certain conditions. Any public benefit or religious corporation that operates a hospital (unless the hospital is controlled by a political subdivision of the state) must provide a detailed notice to and obtain approval from the attorney general before converting the hospital to a noncharitable entity, unless it has requested and received a waiver, the attorney general has not responded to its request for a waiver within 45 days, or the transaction is of a type the attorney general has by rule excepted. A mailing list must be maintained of members of the public who have requested, and for a fee must be sent, copies of such notices. If requested, however, the attorney general may maintain the confidentiality of submitted information deemed to be “trade secrets” unless it is necessary to the determination of an issue to be considered at a public hearing on the transaction. Such a hearing is required unless the attorney general waives the requirement. Notice must be sent to the people on the mailing list about the hearing or waiver of the requirement to hold one. If the attorney general has received all the necessary information to make a decision, on the basis of whether the conversion meets criteria similar to those in the model act, the attorney general must approve or disapprove the conversion within 60 days of receiving the original notice about it. Fees may be charged to the costs incurred in reviewing and evaluating the transaction. No conversion may take place without the approval of the attorney general and the Department of Health. Detailed applications must be filed and the information in them is generally public. Within 10 days of receiving the application, the attorney general publishes notices about the conversion and a public hearing to consider it in the paper. The attorney general has 120 days after receiving the application to approve or disapprove the conversion and forward it to the Department of Health for review. The attorney general may compel parties to testify, and all costs of reports generated and experts consulted may be charged to the transacting parties. The attorney general must consider a lengthy list of criteria, including criteria similar to those in the model act, in determining whether to approve the conversion. Proceeds from the conversion must be transferred to a charitable foundation, with a judge appointing the initial board of directors. Limits are imposed on the frequency with which a for-profit corporation may acquire greater than a 20 percent interest in a hospital. Upon the sale, transfer, or merger of at least 30 percent of the assets of a not-for-profit corporation, certain information must be submitted within 60 days after the transaction to the secretary of state on a form provided for that purpose. The required information includes information about the parties involved, the terms of the transaction and dollar amounts involved in it, and an explanation of how the transaction furthers the purpose of the not-for-profit corporation. Hospital boards may contract with other facilities to supply services and for the sale or lease of hospital facilities only with the approval of the commissioners’ court. Charity care and community benefit requirements are set for hospitals. A not-for-profit hospital must submit to state officials an annual report that includes its mission statement, information about the charity care and community benefits it provides, and financial data. In addition, state officials must provide the attorney general and comptroller with a list of hospitals that did not meet the charity care and community benefit requirements each year. A mutual insurance company may convert to a stock insurance company, but it must first file copies of documents relating to the conversion plan with the commissioner of insurance, who has 60 days to approve or disapprove the plan but can, on written notice, extend this time by 30 days. The commissioner may hold a public hearing on the plan, and eligible members of the mutual insurance company must have an opportunity to comment on it. If approved by the commissioner, the plan becomes effective only after the affirmative vote of eligible members. No not-for-profit hospital service corporation or medical service corporation may engage in a conversion involving more than 10 percent of its assets without applying to and receiving approval from the commissioner. The commissioner must hold at least one public hearing within 30 days of receiving an application and approve or disapprove it within 30 days of the hearing. In considering an application, the commissioner must consider factors such as whether the transaction will provide cost-effective, high-quality care. Before the disposition of assets, a not-for-profit entity must provide notice to the attorney general in order for the attorney general to exercise common law and statutory authority over the transaction. The notice must be given at least 60 days before the effective date of the proposed transaction in order for the attorney general to exercise his common law and statutory authority over the activities of the entity. Within 10 days of receiving this notice, the attorney general must publish information about the proposed transaction in the newspaper. In addition, with the approval of the State Corporation Commission, a domestic mutual insurer may convert to a domestic stock insurer. After notice and an opportunity to be heard are given to policyholders, the Commission must approve the conversion if, among other things, it is fair and equitable to policyholders. A person may not engage in the acquisition of a not-for-profit hospital without first submitting a detailed application, which is considered a public record, and paying a fee to cover all the costs of considering the application to the Department of Health. The Department must publish a notice regarding the application in the newspaper, conduct one or more public hearings, and forward a copy to the attorney general. Generally within 45 days of the first public hearing, the attorney general must issue an opinion on whether the transaction meets requirements similar to those in the model act. The Department then has 30 days to approve or disapprove the transaction, depending on whether it will detrimentally affect the continued existence of accessible, affordable health care responsive to the community. This is determined on the basis of whether the transaction meets certain minimum standards. In addition to those named above, the following staff made important contributions to this report: Rachel DeMarcus, Assistant General Counsel; Joseph E. Jozefczyk, Assistant Director; Madeline Chulumovich, Senior Evaluator; Rodney Hobbs, Senior Evaluator; Craig Winslow, Senior Attorney; and Nancy Crothers, Communications Analyst. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the process that some not-for-profit hospitals have used in converting to for-profit status, focusing on: (1) the method used to value assets; (2) the process used to solicit interest and obtain bids; (3) the terms negotiated as part of the sales agreement, including provisions for continued charity care; (4) the extent of community involvement in the process; (5) how the proceeds from the sale were used to fulfill charitable missions; and (6) the role state and federal governments play in regulating and monitoring hospital conversions. GAO noted that: (1) the process of converting from a not-for-profit hospital to a for-profit hospital was similar among the transactions GAO reviewed; (2) most transactions were carried out between boards and executives of the selling hospitals and representatives of the for-profit purchasers and not routinely subject to public disclosure; (3) standard industry methodologies were used to estimate the value of the 14 not-for-profit hospitals GAO reviewed; (4) 8 of the 14 hospitals received multiple bids, and almost all of the hospitals reported accepting a purchase price greater than the valuation estimate; (5) in negotiating conversion terms, most hospitals included provisions for continued charity care and services in the agreement; (6) the for-profit hospital or joint venture boards resulting from the conversions are responsible for monitoring compliance with these agreements and ensuring that they are enforced; (7) except for members of the boards of directors, community involvement in conversion decisions was limited; (8) net proceeds reported from the conversions totalled about $950 million; (9) of the 14 transactions, 12 directed net proceeds to charitable foundations; (10) in most states, attorneys general have authority to monitor and oversee hospital conversions through common law and not-for-profit corporation law; (11) for nine of the conversions reviewed, five state attorneys general exercised their authority to review the conversion process; (12) states are beginning to increase the authority of attorneys general through specific conversion legislation, allowing a state official to review the terms of the deal and the direction of the charitable proceeds; (13) the federal government's role in monitoring hospital conversions is carried out mostly by the Internal Revenue Service (IRS) and the Federal Trade Commission (FTC) which oversee tax and antitrust issues; (14) IRS officials stated that the operation of the joint venture may result in more than incidental benefit to the for-profit partner, thereby creating a basis for denying or revoking the tax status of the charitable entity; (15) another issue related to joint ventures involves the participation of individuals on both not-for-profit and for-profit boards, creating a potential conflict of interest; and (16) FTC officials reported that antitrust issues related to hospital conversions do not differ from other mergers and acquisitions, and the agency's involvement has generally been limited to a routine oversight role. |
In 1983, Congress established DOT&E to coordinate, monitor, and evaluate operational testing of major weapon systems. As part of the Office of the Secretary of Defense (OSD), DOT&E is separate from the acquisition community that conducts developmental and operational testing and therefore is in a position to provide the Secretary and Congress with an independent view. Congress created DOT&E in response to reports of conflicts of interest in the acquisition community’s oversight of operational testing leading to inadequate testing of operational suitabilityand effectiveness and the fielding of new systems that performed poorly. (DOD’s system acquisition process is described in app. III.) By law, DOT&E serves as the principal adviser on operational test and evaluation in DOD and bears several key responsibilities, including monitoring and reviewing all operational test and evaluation in DOD, reporting to the Secretary of Defense and congressional committees whether the tests and evaluations of weapon systems were adequate and whether the results confirmed that the system is operationally suitable and effective for combat before a decision is made to proceed to full-rate production, and submitting to the Secretary of Defense and congressional decisionmakers an annual report summarizing operational test and evaluation activities during the preceding fiscal year. In 1993, DOD’s advisory panel on streamlining and codifying acquisition laws concluded that DOT&E was impeding the goals of acquisition reform by (1) promoting unnecessary oversight, (2) requiring excessive reporting detail, (3) inhibiting the services’ discretion in testing, and (4) limiting participation of system contractors in operational tests where such involvement is deemed necessary by the services. The following year, DOD proposed legislative changes that would have reduced the scope and authority of DOT&E. In testimony, we opposed these changes because they were directed at perceived rather than documented problems and would undermine a key management control over the acquisition process—independent oversight of operational test and evaluation. Although the legislative proposals were not adopted, in 1995 the Secretary of Defense implemented several operational test and evaluation initiatives in the Department to (1) involve operational testers earlier in the acquisition process, (2) use models and simulations effectively, (3) combine tests where possible, and (4) combine tests and training. The goals of these initiatives included saving time and money by identifying and addressing testing issues earlier in the acquisition process; merging or closely coordinating historically distinct phases, such as developmental and operational testing to avoid duplication; and using existing technologies and training exercises to create realistic and affordable test conditions. A frequent complaint among representatives of the services’ operational testing agencies was that DOT&E frequently demanded more tests than were proposed by the operational test agencies in draft master plans or test plans. Operational test agency representatives contended that the additional testing was either unnecessary for determining the operational effectiveness or suitability of a program or unrealistic in light of the limitations in the services’ testing resources. However, our review indicated that DOT&E urged more testing to reduce the level of risk and number of unknowns prior to the decision to begin full production, while program and service officials typically sought less testing and were willing to accept greater risk when making production decisions. The additional testing DOT&E advocated, often over the objections of service testers, served to meet the underlying objectives of operational testing—to reduce the uncertainty and risk that systems entering full-rate production would not fulfill their requirements. The impact of DOT&E oversight varies with the system under development. Table 1 summarizes the types of impacts that DOT&E advocated or facilitated in operational testing among the 13 cases we studied. While the impacts vary, one consistent pattern in our case studies was a reduction in uncertainty regarding the weapon systems’ suitability or effectiveness prior to the full-rate production decision. Each of the impacts are discussed in more detail in tables 2-6 and in subsequent sections. Two of DOT&E’s typical concerns in reviewing service test plans are that the proposed test methodologies enable (1) comparisons of a system’s effectiveness through side-by-side testing between the existing and modified systems and (2) assessments of a system’s reliability through a sufficient number of test repetitions. Table 2 illustrates examples of cases where additional testing was conducted at DOT&E’s insistence or with DOT&E’s support to alleviate these and other types of effectiveness and suitability concerns. Table 3 illustrates examples where the design or conduct of operational testing was modified at DOT&E’s insistence or with DOT&E’s support to increase the realism of test conditions and reduce the uncertainty of system suitability or effectiveness. DOT&E can insist on or support changes in data analysis plans that provide more meaningful analyses for decisionmakers. Table 4 illustrates instances in which DOT&E altered the proposed data collection or analysis plans to enhance the reliability or utility of the test data. DOT&E’s independent analysis of service test data may confirm or dispute the results and conclusions reported by the service. In the cases described in table 5, DOT&E’s analysis of service operational test and evaluation data resulted in divergent, often less favorable conclusions than those reached by the service. When DOT&E concludes that a weapon system has not fully demonstrated operational suitability or effectiveness, or if new testing issues arise during initial operational test and evaluation, it may recommend that follow-on operational test and evaluation be done after the full-rate production decision. Table 6 identifies follow-on operational test and evaluation that DOT&E supported. The existence of a healthy difference of opinion between DOT&E and the acquisition community is a viable sign of robust oversight. In nearly all of the cases we reviewed, the services and DOT&E cited at least one testing controversy. For example, services differ on how they view the relationship between operational testing and their development of tactics, techniques, and procedures. In addition, DOT&E’s ability to independently view the development and testing of new systems across the services brings value to the context of testing. However, several current trends have the potential to adversely affect DOT&E’s independence and its ability to affect operational test and evaluation, including (1) service challenges to DOT&E’s authority to require and oversee follow-on operational testing and evaluation, (2) declining resources available for oversight, (3) the management of limited resources to address competing priorities, (4) DOT&E’s participation in the acquisition process as a member of the program manager’s working-level integrated product teams, and (5) greater integration of developmental and operational testing. DOT&E’s impact on operational testing is dependent upon its ability to manage these divergent forces while maintaining its independence. Although the acquisition community has three central objectives—performance, cost, and schedule—DOT&E has but one: operational testing of performance. These distinct priorities lead to testing disputes. Characteristically, the disputes for each system we reviewed revolved around questions of how, how much, and when to conduct operational testing, not whether to conduct operational testing. Conflicts encompassed issues such as (1) how many and what types of tests to conduct; (2) when testing should occur; (3) what data to collect, how to collect it, and how best to analyze it; and (4) what conclusions were supportable, given the analysis and limitations of the test program. The foundation of most disputes lay in different notions of the costs and benefits of testing and the levels of risk that were acceptable when making full-rate production decisions. DOT&E consistently urged more testing (and consequently more time, resources, and cost) to reduce the level of risk and number of unknowns before the decision to proceed to full-rate production, while the services consistently sought less testing and accepted more risk when making production decisions. Among our case studies, these divergent dispositions frequently led to healthy debates about the optimal test program, and in a small number of cases, the differences led to contentious working relations. In reviews of individual weapon systems, we have consistently found that testing and evaluation is generally viewed by the acquisition community as a requirement imposed by outsiders rather than a management tool to identify, evaluate, and reduce risks, and therefore a means to more successful programs. Developers are frustrated by the delays and expense imposed on their programs by what they perceive as overzealous testers. The program office strives to get the program into production despite uncertainties that the system will work as promised or intended. Therefore, reducing troublesome parts of the acquisition process—such as operational testing—is viewed as a means to reduce the time required to enter production. Nonetheless, the commanders and action officers within the service operational test agencies were nearly unanimous in their support for an independent test and evaluation office within OSD. For example, the Commander of the Army’s Operational Test and Evaluation Command commended the style and orientation of the current DOT&E Director and affirmed the long-term importance of the office and its independent reporting responsibilities to Congress. The Commander of the Navy’s Operational Test and Evaluation Force stated that the independence of both DOT&E and the operational test agency was an essential element in achieving their common goal of ensuring that new programs pass sufficiently rigorous and realistic operational testing prior to fielding. The Commander of the Air Force’s Operational Test and Evaluation, while critical of DOT&E oversight of several major weapon systems, said that the services were well served by DOT&E’s potential to independently report to Congress. Moreover, nearly all the operational test agency action officers we interviewed participate in the integrated product teams with the DOT&E action officers and recognized the value of the Office’s independent oversight role. The action officers within the service testing organizations also have a degree of independence that enables them to represent the future users of systems developed in the acquisition community. These action officers stated that their ability to voice positions unpopular with the acquisition community was strengthened when DOT&E separately supported their views. In discussions with over three dozen action officers and analysts responsible for the 13 cases we reviewed, the independence of DOT&E emerged as the fundamental condition to enable effective and efficient oversight. The foundation of interagency (i.e., DOT&E and service operational test agencies) relations is based on the independence of DOT&E, its legislative mandate, and its independent reporting to Congress. DOT&E is outside the chain of command of those responsible for developing and testing new systems. The services need to cooperate with DOT&E primarily because the Office must approve all test and evaluation master plans and operational test plans. Moreover, DOT&E independently reports on the operational suitability and effectiveness at a system’s full-rate production milestone, a report that is sent separately to Congress. DOT&E’s report on a system’s operational suitability and effectiveness is only one of several inputs considered before the full-rate production decision is made. An unfavorable DOT&E report does not necessarily prevent full-rate production. In each of the cases cited below, an affirmative full-rate production decision was made despite a DOT&E report concluding that the system had not demonstrated during operational test and evaluation that it was both operationally suitable and operationally effective: Full-rate production of the M1A2 tank was approved despite DOT&E’s report that found the system unsuitable. Full-rate production of Joint STARS was approved, though the system demonstrated only limited effectiveness for “operations other than war” and found “as tested is unsuitable.” Only 18 of the 71 performance criteria were met; 53 others required more testing. Full-rate production of the C-17 Airlifter was approved despite a number of operational test and evaluation deficiencies, including immature software and failure to meet combination and brigade airdrop objectives. The services contend that DOT&E does not have authority to insist on, or independently approve the conduct of, follow-on operational test and evaluation. However, in several of the systems we reviewed, DOT&E overcame service opposition and monitored follow-on operational test and evaluation. It used several means to achieve success, such as (1) incorporating follow-on operational test and evaluation in test and evaluation master plans developed and approved prior to the full-rate production decision milestone; (2) persuading the Secretary of Defense to specify follow-on operational test and evaluation, and DOT&E’s oversight role, in the full-rate production acquisition decision memorandum; and (3) citing policy, based on title 10, that entitles DOT&E to oversee operational test and evaluation whenever it occurs in the acquisition process. Nonetheless, DOT&E action officers stated that the service’s acceptance of DOT&E’s role in follow-on operational test and evaluation varies over time, by service and acquisition system, and is largely dependent upon the convictions of executives in both the services and DOT&E. Among the cases reviewed in this report, the services offered a variety of arguments against DOT&E’s having a role in follow-on operational test and evaluation. They specifically asserted the following: DOT&E need not be involved because the scope of follow-on operational test and evaluation is frequently less encompassing than initial operational test and evaluation. Follow-on operational test and evaluation has been characterized as testing by the user to determine the strengths and weaknesses of the system and to determine ways to compensate for, or fix, shortcomings observed in initial operational test and evaluation. Title 10 provides DOT&E with the authority to monitor and review—but not necessarily approve—service follow-on operational test and evaluation plans. Follow-on operational test and evaluation is unnecessary when a system is found to be operationally effective and suitable during initial operational test and evaluation—even though DOT&E does not concur. A clear distinction between DOT&E oversight in follow-on operational test and evaluation versus initial operational test and evaluation is that DOT&E is not required to report follow-on operational test and evaluation results to Congress in the detailed manner of the Beyond-LRIP report. Therefore, even if follow-on operational test and evaluation is conducted to assess modifications to correct effectiveness or suitability shortcomings reported to Congress in the Beyond-LRIP report, there is no requirement that Congress receive a detailed accounting of the impact of these modifications. DOT&E’s primary asset to conduct oversight—its cadre of action officers—has decreased in size throughout the decade. This creates a management challenge for the Office because at the same time staff has decreased, the number of programs overseen by DOT&E has increased. As illustrated in table 7, authorized staffing declined from 48 in fiscal year 1990 to 41 in fiscal year 1997, as did funding (in constant dollars) from $12,725,000 in fiscal year 1990 to $11,437,000 in fiscal year 1997. The decline in DOT&E funding is consistent with the general decline in DOD appropriations during this period. However, since fiscal year 1990, while the authorized staffing to oversee operational test and evaluation has declined by 14.6 percent, the number of systems on the oversight list has increased by 17.7 percent. With declining resources, DOT&E must manage competing priorities related to its oversight, advisory, and coordination responsibilities. DOT&E must balance the continuing need to allocate resources to these different priorities while not being perceived as having lost any independence. DOT&E management has flexibility in defining some portion of the scope of its oversight and has continued to electively oversee a substantial number of nonmajor defense acquisition programs and assumed a leading role in advocating an examination of the modernization needs of the test and evaluation infrastructure. Between fiscal year 1990 and 1996, the number of nonmajor acquisition programs overseen annually by DOT&E ranged between 19 and 43. In fiscal year 1996, when the oversight list reached a peak of 219, 1 of every 8 programs was listed at the discretion of DOT&E. Thus, during this period when the resources to oversee operational testing declined and acquisition reforms have placed additional burdens on oversight staff, the directors of DOT&E continued to place extra responsibility on their staff by augmenting the required oversight of major acquisition programs with a substantial number of optional systems. Despite a relative decline in resources for oversight, DOT&E management has also elected to assume “a larger role in test resource management planning and leadership in an attempt to achieve much-needed resource modernization.” Although the Director is designated as the principal adviser to the Secretary of Defense and the Under Secretary of Defense for Acquisition and Technology on operational test and evaluation, including operational test facilities and equipment, assuming the larger role defined by DOT&E may be at the expense of its testing oversight mission and perception of independence. The DOT&E Director is now an adviser to the Central Test and Evaluation Investment Program and previously served as Chairman of the Test and Evaluation Committee. The Committee is responsible for the investment program and presides over the planning, programming, and budgeting for development and operational test resources. When the Director served as chairman, we questioned whether these ties created the perception that the Director was not independent from developmental testing. This issue may resurface as DOT&E seeks a larger role in test resource management planning. Also, as the emphasis, cost, and time for operational test and evaluation are increasingly questioned in the drive to streamline acquisition, and as oversight assets are stretched, new DOT&E initiatives may stress the Office’s capacity to manage oversight effectively. In May 1995, the Secretary of Defense directed DOD to apply the integrated product and process development concept—using integrated product teams—throughout the acquisition process. The revised DOD acquisition regulations (DOD 5000.2-R March 1996) also addressed the use of empowered integrated product teams at the program office level. DOT&E action officers participate as members of the working-level integrated product teams, and the DOT&E Director is a member of the overarching team. One objective of integrated product teams, and DOT&E participation in particular, is to expedite the approval process of test documents by reaching agreement on the strategy and plan through the identification and resolution of issues early, understanding the issues, and documenting a quality test and evaluation master plan that is acceptable to all organizational levels the first time. Integrated product teams are designed to replace a previously sequential test and evaluation master plan development and approval process and therefore enhance timeliness. While this management tool could increase communication between testers and the program managers, it also poses a challenge to DOT&E independence. The challenge was recognized by the Department of Defense Inspector General (DOD IG) when after reviewing the conduct of operational testing it subsequently recommended that “to meet the intent of 10 U.S.C. 139, DOT&E should be a nonvoting member [of the working-level integrated product team] so as to maintain his independence.” {emphasis added} Though integrated product teams were not used throughout the entire time period covered by this report, several action officers noted that this management tool created threats to their effectiveness other than having their positions out-voted. One DOT&E action officer reported having the lone dissenting opinion in a meeting of 30 participants seeking to reach consensus and resolve issues early. The pressure of maintaining independent, contrary positions in large working groups can be a test. Several DOT&E representatives also noted that the frequency of integrated product team meetings to cover the multiple systems for which they were responsible made it impossible for them to attend all, thereby lessening the possibility that testing issues can be identified and resolved as early as possible. Moreover, program managers and DOT&E pursue different objectives through integrated product teams. The services and program managers view the teams as a way to facilitate their program objectives for cost, schedule, and performance; DOT&E’s objective is oversight of performance through operational testing. The program managers and DOT&E share a desire to identify testing issues as early as possible. However, the priority of the program manager to resolve these issues as early as possible through the teams may conflict with DOT&E’s mission. DOT&E must remain flexible and react to unknowns as they are disclosed during developmental testing, operational assessments, and initial operational test and evaluation. Thus, DOT&E’s participation on the teams is a natural source of tension and a potential impediment to the team’s decision-making. The challenge for DOT&E action officers is to maintain an independent and potentially contrary position in an ongoing working group during the life of a program, which may extend over several years. The objectives of developmental and operational testing are distinct. Developmental testing determines whether a system meets its functional requirements and contractual technical performance criteria sufficiently to proceed with operational testing. Operational testing determines whether the system meets the operational requirements and will contribute to mission effectiveness in relevant operational environments sufficiently to justify proceeding with production. The integration of these two disparate test activities is proposed to save the time and resources required for testing and evaluation. The sentiment to more closely link developmental and operational testing dates from at least the 1986 Blue Ribbon Commission on Defense Management (Packard Commission), which found that “developmental and operational testing have been too divorced, the latter has been undertaken too late in the cycle, and prototypes have been used and tested far too little.” However, both we and the DOD IG have found that systems were regularly tested before they were ready for testing. In its 1996 report, the DOD IG reported that “4 of 15 systems we examined for operational testing were not ready for testing. This situation occurred because a calendar schedule rather than system readiness often drove the start of testing.” Similarly, we have observed numerous systems that have been pushed into low-rate initial production without sufficient testing to demonstrate that the system will work as promised or intended. Our reviews of major system development in recent years have found that because insufficient time was dedicated to initial testing, systems were produced that later experienced problems during operational testing and systems entered initial production despite experiencing problems during early operational testing. In 1996 the Secretary of Defense also urged the closer integration of developmental and operational testing, and combined tests where possible, in part to enhance the objectives of acquisition reform. Combined developmental and operational testing is only one of many sources of test data that DOT&E has used to foster more timely and thorough operational test and evaluation. Other sources of information include contractor developmental testing, builder’s trials, component testing, production lot testing, stockpile reliability testing, and operational deployments. While DOT&E has some influence over the quality of operational testing, by independently reviewing the design, execution, analysis, and reporting of such tests, it has no direct involvement or oversight of these other sources of testing information. The use of alternative sources of test data as substitutes for operational test and evaluation will limit DOT&E’s oversight mission, which was created to improve the conduct and quality of testing. DOT&E’s challenge is to manage an expansion in independent oversight while satisfying the efficiency goals of acquisition reform and undergoing the economic pressures of downsizing. DOT&E oversight is clearly affecting the operational testing of new defense systems. DOT&E actions (such as the insistence on additional testing, more realistic testing, more rigorous data analysis, and independent assessments) are resulting in more assurance that new systems fielded to our armed forces are safe, suitable, and effective. However, DOT&E is not, by design or practice, the guarantor of effective and suitable acquisitions. DOT&E oversight reduces, but does not eliminate, the risk that new systems will not be operationally effective and suitable. Affirmative full-rate production decisions are made for systems that have yet to demonstrate their operational effectiveness or suitability. Moreover, the services question DOT&E’s authority regarding follow-on test and evaluation of subsequent corrective actions by the program office. We recommend that the Secretary of Defense revise DOD’s operational test and evaluation policies in the following ways: Require the Under Secretary of Defense for Acquisition and Technology, in those cases where affirmative full-rate production decisions are made for major systems that have yet to demonstrate their operational effectiveness or suitability, to (1) take corrective actions to eliminate deficiencies in effectiveness or suitability and (2) conduct follow-on test and evaluation of corrective actions until the systems are determined to be operationally effective and suitable by the Director, Operational Test and Evaluation. Require the Director, Operational Test and Evaluation, to (1) review and approve follow-on test and evaluation master plans and specific operational test plans for major systems before operational testing related to suitability and effectiveness issues left unresolved at the full-rate production decision and (2) upon the completion of follow-on operational test and evaluation, report to Congress, the Secretary of Defense, and the Under Secretary of Defense for Acquisition and Technology whether the testing was adequate and whether the results confirmed the system is operationally suitable and effective. Further, in light of increasing operational testing oversight commitments and to accommodate oversight of follow-on operational testing and evaluation, we recommend that the Director, Operational Test and Evaluation, prioritize his Office’s workload to ensure sufficient attention is given to major defense acquisition programs. In commenting on a draft of this report, DOD concurred with our first and third recommendations and partially concurred with our second recommendation. Concerning the recommendation with which it partially concurred, DOD stated that system specific reports to the Secretary of Defense and Congress are not warranted for every system that requires follow-on operational test and evaluation. DOD pointed out that for specific programs designated for follow-on oversight, test plans are prepared to correct previously identified deficiencies by milestone III, and DOT&E includes the results of follow-on testing in its next annual report. We continue to believe our recommendation has merit. We recommended that the Secretary require DOT&E approval of follow-on test and evaluation of corrective actions because during our review we found no consensus within the defense acquisition community concerning DOT&E’s role in follow-on operational test and evaluation. In its comments DOD did not indicate whether it intended to give DOT&E a role in follow-on operational test and evaluation that is comparable to its role in initial operational test and evaluation. Moreover, we continue to believe that if a major system goes into full-rate production (even though it was deemed by DOT&E not to be operationally suitable and effective) based on the premise that corrections will be made and some follow-on operational test and evaluation will be performed, DOT&E should report, as promptly as possible, whether or not the follow-on operational test and evaluation results show that the system in question had improved sufficiently to be characterized as both operationally suitable and effective. DOD’s comments are reprinted in their entirety in appendix IV, along with our specific evaluation. As agreed with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 15 days after its date of issue. We will then send copies to other congressional committees and the Secretary of Defense. We will also make copies available to others upon request. If you have any questions or would like additional information, please do not hesitate to call me at (202) 512-3092 or the Evaluator-in-Charge, Jeff Harris, at (202) 512-3583. To develop information for this report, we selected a case study methodology—evaluating the conduct and practices of DOT&E through an analysis of 13 weapon systems. Recognizing that many test and evaluation issues are unique to individual systems, we determined that a case study methodology would offer the greatest probability of illuminating the variety of factors that impact the value or effectiveness of oversight at the level of the Office of the Secretary of Defense (OSD). Moreover, with nearly 200 systems subject to review of the Director, Operational Test and Evaluation (DOT&E) at any one time, we sought a sample that would enable us to determine if the Office had any impact as well as the ability to examine the variety of programs overseen. Therefore, we selected a judgmental sample of cases reflecting the breadth of program types. As illustrated in table I.1, we selected systems (1) from each of the primary services, (2) categorized as major defense systems, and (3) representing a wide array of acquisition and testing phases—from early operational assessments through and beyond the full-rate production decision. We studied both new and modified systems. Table I.1: Characteristics of Weapon Systems Used for Case Studies Service(s) MS III (1995); IOT&E (1995) FOT&E (1995-96); Bosnia (1995) FOT&E (1996-98); MS IIIB (1995) AFSARC III (1997); IOT&E (1995-96) MS III (2003); IOT&E (2002); LRIP (1999) MS III (1997); LUT (1996); UE (1996) (continued) Service(s) FOT&E (1997); MS III (1996); Bosnia (1996) MS III (1998); IOT&E (1997-98); Bosnia (1995) MS II (1996); EOA-2 (1996); EOA-1 (1994-95) FOT&E (1995-96); MS III (1994) FOT&E-1 (1997-98); MS III (1996); IOT&E-2 (1995-96) FOT&E (1997); MS III (1996); OPEVAL (1996) MS III (1997); DT/IOT&E (1994) MS III (1998); OPEVAL (1998); IOT&E (1997) MS III (2000); OPEVAL (1999-00); IOT&E (1999) OPEVAL (1999); OT-IIC (1996) (Table notes on next page) DOT&E, the service operational test agencies, and the Institute for Defense Analyses (IDA) personnel agreed that DOT&E was influential in the testing done on these 13 systems. In several cases, the participating agencies vehemently differed on the value of DOT&E’s actions; however, whether DOT&E had an impact on testing (be it perceived as positive or negative) was not in dispute. In conducting our 13 case studies, we assessed the strengths and weaknesses of the organizational framework in DOD for operational testing via test agency representatives, an assessment on the origins and implementation (exemplified by the 13 cases) of the title 10 amendments creating and empowering DOT&E, and a review of the literature. To compile case study data, we interviewed current action officers in both DOT&E and the appropriate operational test agency and reviewed documentation provided by the operational test agencies, DOT&E, and IDA. Using structured questionnaires, we interviewed 12 DOT&E and 27 operational test agency action officers responsible for the 13 selected systems as well as managers and technical support personnel in each organization. In addition, we interviewed the commanders of each of the service testing agencies and DOT&E. When possible, we corroborated information obtained from interviews with documentation, including test and evaluation master plans, beyond low-rate initial production reports, defense acquisition executive summary status reports, defense acquisition memoranda, and interagency correspondence. In Washington, D.C., we obtained data from or performed work at the Office of the Director of Operational Test and Evaluation, OSD; Deputy Under Secretary of Defense for Acquisition Reform; Directorate of Navy Test and Evaluation and Technology Requirements, Office of the Chief of Naval Operations; Test and Evaluation Management Agency, Director of Army Staff; Air Force Test and Evaluation Directorate; and the DOD Office of the Inspector General. We also reviewed data and interviewed officials from the Army Operational Test and Evaluation Command and the Institute for Defense Analyses, Alexandria, Virginia; the Navy Commander, Operational Test and Evaluation Force, Norfolk, Virginia; and the Air Force Operational Test and Evaluation Command, Kirtland Air Force Base, New Mexico. The use of a systematic case study framework enabled us to identify and categorize the types of impacts attributable to DOT&E among the systems studied. In addition, this framework enabled us to identify trends among factors that correlate with DOT&E effectiveness. However, we were unable to generalize to all systems subject to OSD-level oversight. In light of this limitation, we included only major (high-cost) systems and systems identified by DOT&E and the lead operational test agency as having been affected by DOT&E initiatives. Moreover, while our methodology and data collection enabled us to qualitatively assess the impact of DOT&E, it was not sufficiently rigorous either to evaluate the cost-effectiveness of DOT&E actions or to determine the deterrent effects, if any, the Office exerts over the acquisition and testing process. Finally, our methodology did not enable an assessment of whether the additional testing requested by DOT&E was necessary to provide full-rate production decisionmakers the essential information on a system’s operational effectiveness and suitability or whether the additional data was worth the time, expense, and resources necessary to obtain it. Our review was performed from June 1996 through March 1997 in accordance with generally accepted government auditing standards. The AH-64D Longbow Apache is a remanufactured and upgraded version of the AH-64A Apache helicopter. This Army system is equipped with a mast-mounted fire control radar, fire-and-forget radio frequency Hellfire missile, and airframe improvements (i.e., integrated cockpit, improved engines, and global positioning system navigation). The Airborne Self-Protection Jammer is a defensive electronic countermeasures system using reprogrammable deceptive jamming techniques to protect tactical aircraft from radar-guided weapons. This Navy system is intended to protect Navy and Marine Corps F-18 and F-14 aircraft. The C-17A Airlifter provides strategic/tactical transport of all cargo, including outsized cargo, mostly to main operational bases or to small, austere airfields, if needed. Its four-engine turbofan design enables the transport of large payloads over intercontinental ranges without refueling. This Air Force aircraft will replace the retiring C-141 aircraft and augment the C-130 and C-5 transport fleets. The Air Force’s E-3 AWACS consists of a Boeing 707 airframe modified to carry a radome housing a pulse-Doppler radar capable of detecting aircraft and cruise missiles, particularly at low altitudes. The Radar System Improvement Program replaces several components of the radar to improve detection capability and electronic countermeasures as well as reliability, availability, and maintainability. The F-22 is an air superiority aircraft with a capability to deliver air-to-ground weapons. The most significant features include supercruise, the ability to fly efficiently at supersonic speeds without using fuel-consuming afterburners, low observability to adversary systems with the goal to locate and shoot down the F-22, and integrated avionics to significantly improve the pilot’s battlefield awareness. The Javelin is a man-portable, antiarmor weapon developed for the Army and the Marine Corp to replace the aging Dragon system. It is designed as a fire-and-forget system comprised of a missile and reusable command launch unit. The Joint Surveillance Target Attack Radar System is designed to provide intelligence on moving and stationary targets to Air Force and Army command nodes in near real time. The system comprises a modified Boeing 707 aircraft frame equipped with radar, communications equipment, and the air component of the data link, computer workstations, and self-defense suite as well as ground station modules mounted on Army vehicles. The LPD-17 will be an amphibious assault ship capable of launching (1) amphibious assault craft from a well deck and (2) helicopters or vertical takeoff and landing aircraft from an aft flight deck. It is intended to transport and deploy combat and support elements of Marine expeditionary brigades as a key component of amphibious task forces. The M1A2 Abrams main battle tank is an upgrade of the M1A1 and is intended to improve target acquisition and engagement rates and survivability while sustaining equivalent operational suitability. Specifically, the modified tank incorporates a commander’s independent thermal viewer, a position navigation system, and an intervehicle command and control system. The Sensor Fuzed Weapon is an antiarmor cluster munition to be employed by fighter, attack, or bomber aircraft to achieve multiple kills per pass against armored and support combat formations. Each munition contains a tactical munitions dispenser comprising 10 submunitions containing a total of 40 infrared sensing projectiles. High-altitude accuracy is to be improved through the incorporation of a wind-compensated munition dispenser upgrade. The Standard Missile-2 is a solid propellant-fueled, tail-controlled, surface-to-air missile fired by surface ships. It was originally designed to counter high-speed, high-altitude antiship missiles in an advanced electronic countermeasures environment. The block IIIA version provides improved capacity against low-altitude targets with an improved warhead. The block IIIB adds an infrared seeker to the block IIIA to enhance the missile’s capabilities against specific threats. These improvements are being made to provide capability against theater ballistic missiles while retaining its capabilities against antiair warfare threats. The Tomahawk Weapon System is a long-range subsonic cruise missile for land and sea targets. The baseline IV upgrade is fitted with a terminal seeker, video data link, and two-way digital data link. The primary baseline IV configuration is the Tomahawk multimission missile; a second variant is the Tomahawk hard target penetrator. The V-22 is a tilt rotor vertical/short takeoff and landing, multimission aircraft developed to fulfill operational combat requirements in the Marine Corps and Special Operations Forces. DOT&E’s role in the system acquisition process does not become prominent until the latter stages. As weapon system programs progress through successive phases of the acquisition process, they are subject to major decision points called milestones. The milestone review process is predicated on the principle that systems advance to higher acquisition phases by demonstrating that they meet prescribed technical and performance thresholds. Figure III.1 illustrates DOD’s weapon system acquisition process. Figure III.1: DOD’s Weapon System Acquisition Process (EMD) Per DOD directive, test and evaluation planning begins in phase 0, Concept Exploration. Operational testers are to be involved early to ensure that the test program for the most promising alternative can support the acquisition strategy and to ensure the harmonization of objectives, thresholds, and measures of effectiveness in the operational readiness document and the test and evaluation master plan. Early testing of prototypes in phase I, Program Definition and Risk Reduction, and early operational assessments are to be emphasized to assist in identifying risks. A combined developmental and operational test approach is encouraged to save time and costs. Initial operational test and evaluation is to occur during phase II to evaluate operational effectiveness and suitability before the full-rate production decision, milestone III, on all acquisition category I and II programs. For all acquisition category I programs and other programs designated for OSD test and evaluation oversight, a test and evaluation master plan is prepared and submitted for approval prior to first milestone review (excluding milestone 0). The master plan is to be updated at milestones when the program has changed significantly. DOT&E must approve the test and evaluation master plan and the more specific operational test plans prior to their execution. This process and the required plan approvals provide DOT&E opportunities to affect the design and execution of operational testing throughout the acquisition process. The following are GAO’s comments on the September 19, 1997, letter from the Department of Defense. 1. In prior reviews of individual weapon systems, we have found that operational testing and evaluation is generally viewed by the acquisition community as a costly and time-consuming requirement imposed by outsiders rather than a management tool for more successful programs. Efforts to enhance the efficiency of acquisition, in general—and in operational testing, in particular—need to be well balanced with the requirement to realistically and thoroughly test operational suitability and effectiveness prior to the full-rate production decision. We attempted to take a broader view of acquisition reform efficiency initiatives to anticipate how these departures from past ways of doing business could impact both the quality of operational testing and the independence of DOT&E. 2. We were asked to assess the impact of DOT&E on the quality and impact of testing and reported on the Secretary of Defense initiatives only to the extent they may pose a potential impact on DOT&E’s independence or effectiveness. Moreover, we did not recommend or suggest that testers wait until milestone III to discover problems that could have been learned and corrected earlier. Since its inception, DOT&E has been active in test integration and planning working groups and test and evaluation master plan development during the earliest phases of the acquisition process. In fact, we have long advocated more early testing to demonstrate positive system performance prior to the low-rate initial production decision. DOT&E’s early involvement in test planning is appropriate, necessary, and required by DOD regulations. In this report we do not advocate the elimination of DOT&E participation during the early stages of the acquisition process; rather, we merely observe that DOT&E participation through the vehicle of working-level program manager integrated product teams has the potential to complicate independence and may be increasingly difficult to implement with declining resources and increasing oversight responsibilities following milestone III. 3. We did not recommend or suggest that DOT&E ignore its statutory responsibility to review and make recommendations to the Secretary of Defense on budgetary and financial matters related to operational test facilities and equipment. We only observed that in an era of declining resources, earlier participation, and extended oversight responsibilities, a decision to assume a larger role in test resource management planning and leadership is likely to result in tradeoffs in other responsibilities—the largest being oversight. 4. We made this recommendation because DOT&E, the services, and the program offices did not necessarily agree on the degree to which system performance requirements have been met in initial operational test and evaluation. Furthermore, there was no consensus within the acquisition community concerning DOT&E’s authority to oversee follow-on operational test and evaluation conducted to ensure that proposed corrections to previously identified deficiencies were thoroughly tested and evaluated. 5. Under 10 U.S.C. 2399, DOT&E is required to independently report to Congress whether a major acquisition system has proven to be operationally suitable and effective prior to the full-rate production decision. When follow-on operational test and evaluation is necessary to test measures intended to correct deficiencies identified in initial operational test and evaluation, Congress does not receive an equivalent independent report from DOT&E that concludes, based on required follow-on operational test and evaluation, whether or not a major system has improved sufficiently to be considered both operationally suitable and effective. Tactical Intelligence: Joint STARS Full-Rate Production Decision Was Premature and Risky (GAO/NSIAD-97-68, Apr. 25, 1997). Weapons Acquisition: Better Use of Limited DOD Acquisition Funding Would Reduce Costs (GAO/NSIAD-97-23, Feb. 13, 1997). Airborne Self-Protection Jammer (GAO/NSIAD-97-46R, Jan. 29, 1997). Army Acquisition: Javelin Is Not Ready for Multiyear Procurement (GAO/NSIAD-96-199, Sept. 26, 1996). Tactical Intelligence: Accelerated Joint STARS Ground Station Acquisition Strategy Is Risky (GAO/NSIAD-96-71, May 23, 1996). Electronic Warfare (GAO/NSIAD-96-109R, Mar. 1, 1996). Longbow Apache Helicopter: System Procurement Issues Need to Be Resolved (GAO/NSIAD-95-159, Aug. 24, 1995). Electronic Warfare: Most Air Force ALQ-135 Jammers Procured Without Operational Testing (GAO/NSIAD-95-47, Nov. 22, 1994). Weapons Acquisition: Low-Rate Initial Production Used to Buy Weapon Systems Prematurely (GAO/NSIAD-95-18, Nov. 21, 1994). Acquisition Reform: Role of Test and Evaluation in System Acquisition Should Not Be Weakened (GAO/T-NSIAD-94-124, Mar. 22, 1994). Test and Evaluation: The Director, Operational Test and Evaluation’s Role in Test Resources (GAO/NSIAD-90-128, Aug. 27, 1990). Adequacy of Department of Defense Operational Test and Evaluation (GAO/T-NSIAD-89-39, June 16, 1989). Weapons Testing: Quality of DOD Operational Testing and Reporting (GAO/PEMD-88-32BR, July 26, 1988). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed the Department of Defense's (DOD) Office of the Director of Operational Test and Evaluation's (DOT&E) operations and organizational structure for overseeing operational testing, focusing on: (1) DOT&E's efforts and their impact on the quality of operational testing and evaluation in DOD; and (2) the strengths and weaknesses of the current organizational framework in DOD for operational testing. GAO noted that: (1) GAO's review of 13 case studies indicated that DOT&E oversight of operational testing and evaluation increased the probability that testing would be more realistic and more thorough; (2) specifically, DOT&E was influential in advocating increasing the reliability of the observed performance and reducing the risk of unknowns through more thorough testing, conducting more realistic testing, enhancing data collection and analysis, reporting independent findings, and recommending follow-on operational test and evaluation when suitability or effectiveness was not fully demonstrated prior to initiating full-rate production; (3) the independence of DOT&E--and its resulting authority to report directly to Congress--is the foundation of its effectiveness; (4) that independence, along with its legislative mandate, provides sufficient freedom and authority to exercise effective oversight of the operational testing and evaluation of new systems before a decision is made to begin full-rate production; (5) DOT&E can reduce the risk that systems are not adequately tested prior to the full-rate production decision but DOT&E cannot ensure that: (a) only systems whose operational effectiveness and suitability have been demonstrated through operational testing will proceed to the full-rate production decision; or (b) new fielded systems will accomplish their missions as intended or that the fielded systems are safe, survivable, and effective; (6) DOT&E management must balance its oversight responsibilities for operational testing with the broader acquisition priorities of program managers and service test agencies; (7) though supportive of DOT&E's mission and independence, program and service representatives frequently considered the time, expense, and resources expended to accommodate DOT&E concerns to be ill-advised; (8) several current trends may challenge DOT&E's ability to manage its workload and its ability to impact operational test and evaluation: (a) service challenges to DOT&E's authority to require and oversee follow-on operational testing and evaluation; (b) a decline in resources available for oversight; (c) an expansion of DOT&E involvement in activities other than oversight of major acquisition programs; (d) participation of DOT&E in the acquisition process as a member of working-level integrated product teams; and (e) greater integration of developmental and operational testing; and (9) these trends make it imperative that DOT&E prioritize its workload to achieve a balance between the oversight of major defense acquisition programs and other initiatives important to the quality of operational test and evaluation. |
Bankruptcy is a federal court procedure designed to help both individuals and businesses eliminate debts they cannot fully repay as well as help creditors receive some payment in an equitable manner. The filing of a bankruptcy petition in most cases operates as an “automatic stay” that essentially prohibits most creditors from taking any action to attempt to collect a debt pending the resolution of the bankruptcy proceeding. Individuals usually file for bankruptcy under one of two chapters— Chapter 7 or 13—of the Bankruptcy Code. Under Chapter 7, the filer’s eligible nonexempt assets are reduced to cash and distributed to creditors in accordance with distribution priorities and procedures set out in the Bankruptcy Code. Under Chapter 13, filers submit a repayment plan to the court agreeing to pay part or all of their debts over time, usually 3 to 5 years. Upon the successful completion of both Chapter 7 and 13 cases, the filer’s personal liability for eligible debts is discharged at the end of the bankruptcy process, and creditors may take no further action against the individual to collect any unpaid portion of the debt. The U.S. bankruptcy system is complex and involves entities in both the judicial and executive branches of government (see fig. 1). Within the judicial branch, 90 federal bankruptcy districts have jurisdiction over bankruptcy cases. The Judicial Conference of the United States (Judicial Conference) serves as the judiciary’s principal policy- making body and recommends national policies and legislation on all aspects of federal judicial administration. AOUSC is an agency within the judicial branch and serves as the central support entity for federal courts, including bankruptcy courts, providing a wide range of administrative, legal, financial, management, and information technology functions. The Director of AOUSC is supervised by the Judicial Conference. AOUSC has developed and supports nationwide data systems to manage and maintain information on bankruptcy cases, but these systems are largely operated, managed, and maintained at the local courts. Within the executive branch, the Trustee Program, a component of the Department of Justice, oversees the administration of most bankruptcy cases. The program consists of the Executive Office for U.S. Trustees, which provides general policy and legal guidance, oversees operations, and handles administrative functions, as well as 95 field offices and 21 U.S. Trustees—federal officials charged with supervising the administration of federal bankruptcy cases. The Trustee Program appoints and supervises approximately 1,400 private trustees, who are not government employees, to administer bankruptcy estates and distribute payments to creditors. To document their administration of cases, private trustees file “final reports” with the bankruptcy courts and submit them to the U.S. Trustees. The procedural aspects of the bankruptcy process are governed by the Federal Rules of Bankruptcy Procedure (Bankruptcy Rules) and local rules of each bankruptcy court. The Bankruptcy Rules contain a set of official forms for use in bankruptcy cases. The document filed by the debtor to open a bankruptcy case is known as the voluntary petition, which the debtor may amend (make changes to) at any time before the case is closed. Most debtors who file for bankruptcy use an attorney, but some debtors represent themselves without the aid of an attorney and are referred to as pro se debtors. Most documents associated with bankruptcy cases are public records and, with certain exceptions, the information contained in a bankruptcy file is publicly accessible. The Bankruptcy Reform Act was signed into law on April 20, 2005, and most of its provisions became effective on October 17, 2005. The act made substantial changes to the Bankruptcy Code, significantly changing consumer bankruptcy practice. It also sought to address, at least in part, long-standing concerns about perceived shortcomings of the bankruptcy data system that had been identified by the National Bankruptcy Review Commission and other parties. The act required the federal judiciary to collect and report certain new aggregate statistics. It also required the Attorney General (who delegated the authority to the Trustee Program) to issue rules requiring that private trustees submit uniform final reports containing prescribed information on individual bankruptcy cases. AOUSC publishes certain aggregate statistics related to the numbers of bankruptcy filings. Documents within individual case files contain a range of information, but few data exist on the causes of bankruptcy and the characteristics of bankruptcy filers. There has been long-standing recognition that much of the data in the bankruptcy system may not be accurate—largely because much of the data is self-reported by debtors in the official bankruptcy forms—although these data are sufficiently reliable for the purposes of initiating a bankruptcy case. Several factors create challenges to improving the bankruptcy data system. Most notably, facilitating public access to data in bankruptcy files—which can contain highly personal information—can raise privacy and security concerns. The federal judiciary also has noted that collection of demographic or other additional data is not its mission and would require added resources; further, the judicial process may not be well suited to capturing certain types of information, such as the reasons a consumer files for bankruptcy. Bankruptcy case files are publicly accessible, but not in a format that readily allows for compilation and analysis. The U.S. Party/Case Index was designed to allow nationwide searches of individual bankruptcy cases, and although it serves that function, its search parameters are limited and the results do not include much of the data held by the system. The judiciary reports statistics on the number of bankruptcy filings and collects a variety of financial information from individual filers in the official bankruptcy forms. However, relatively little information is available on the characteristics of people who file for bankruptcy, the factors that contributed to their bankruptcy filings, or the outcomes of their cases. AOUSC generates monthly, quarterly, and annual statistics on the numbers of bankruptcy filings. Prior to 2008, these tables were the only statistics the judiciary released on bankruptcies. (The new statistics required under the Bankruptcy Reform Act are discussed later in this report.) The filing statistics include tables that show the number of bankruptcy cases filed for either a 12-, 3-, or 1-month period, broken down by several factors: status of case (commenced, terminated, and pending), circumstance of filing (voluntary or involuntary), nature of debt (including business or nonbusiness), median time interval from filing the petition to disposition, and adversary proceedings (commenced, terminated, and pending). Most of these tables include the data broken out by each judicial district as well as by bankruptcy chapter; some of the tables include statistics by individual bankruptcy court or county. AOUSC strives to publicly release the quarterly and annual statistics 2 to 3 months after the close of each quarter. Certain additional statistics used internally are not publicly released, such as the number of cases assigned to each judge and numbers of trials in bankruptcy courts. The judiciary generates these statistics largely to meet its statutory requirements to produce statistical reports for Congress and the public on the business transacted by the bankruptcy courts. Data on numbers of bankruptcy filings help the judiciary determine the need for resources to operate the courts, forecast future needs, and formulate the judiciary’s congressional budget requests. For example, data on the number of cases opened (or filed) are one of the principal bases for determining the number of bankruptcy judges that may be needed. The bankruptcy statistics also receive wide attention outside of the judiciary. For example, AOUSC’s statistical tables on the numbers of bankruptcy filings are used by financial analysts and other government agencies as a lagging economic indicator and reported by the mass media as a measure of the financial health of American consumers. The files of individual bankruptcy cases—which are public documents— contain significant amounts of information. For example, the voluntary petition used to initiate a consumer bankruptcy filing includes, among other things, the debtor’s name and address, the estimated number of creditors, and the estimated amount of the debtor’s assets and liabilities. Other schedules and forms require the debtor to provide information on, among other things: real property (real estate), personal property (such as cash, stocks, bonds, and household items), secured debts (such as mortgages and liens), unsecured debts (such as credit card debt and tax obligations), monthly income, and itemized monthly expenses. Bankruptcy case files also include other information filed with the courts. For example, the file may contain a Chapter 13 repayment plan, which identifies specific creditors and the amount of their claims, the monthly repayment amount, the interest rate that the debtor and creditors have agreed on, and the duration of the repayment plan. Similarly, case files may include reaffirmation agreements, including the amount and characteristics of debt being reaffirmed. Bankruptcy case files also include final reports submitted by the private trustees that can include information on disbursements and repayments to creditors. Finally, the file includes the case docket that serves as a chronological record of all significant events that occur during the case, such as motions, applications, and court orders. Although the official bankruptcy forms and case files include this information, they nonetheless are limited in providing certain key information that would help inform the nature and causes of consumer bankruptcy. Bankruptcy files do not contain basic characteristics about the debtor or the nature of the debtor’s circumstances, such as the following: Demographic information. Filers are not asked to provide their age, gender, marital status, education, occupation, race, or ethnicity in the bankruptcy petition and thus this information typically is not available from the case file. Reasons for the bankruptcy. The official bankruptcy forms do not ask for the factors that led to the bankruptcy filing, such as job loss or divorce. The forms also do not collect information on the specific source of debt, such as medical bills, gambling losses, or damages from fire, theft, or flood. Postbankruptcy outcomes. No component of the bankruptcy system collects information once a discharge has been granted and a case is closed. As a result, the bankruptcy system does not have data on such things as the financial status of debtors subsequent to the discharge of their debt, including the accumulation of new debt. As a result, the bankruptcy system provides limited information on who is filing for bankruptcy, why they are filing, and the long-term results of these bankruptcies—all of which can be important in identifying economic and social trends and understanding the impact that bankruptcy may have on families and communities. While this information may be important for public policy purposes, it is not collected as part of the bankruptcy process primarily because it is not information needed by the judiciary or Trustee Program to operate the bankruptcy system. To a limited extent, some nongovernmental entities collect information on consumer bankruptcies. For example, since 1981, the Consumer Bankruptcy Project, an ongoing research effort involving several universities, has gathered information from bankruptcy filers through case file reviews, surveys, and interviews on such things as educational levels, housing, physical health, employment, and reasons for filing for bankruptcy. The project has produced empirical studies of the demographic and financial characteristics of consumer bankruptcy debtors based on samples of Chapter 7 and Chapter 13 petitions filed in 1981, 1991, 2001, and 2007. In addition, the National Data Center, a nonprofit organization, collects case and claims information directly from Chapter 13 trustees, which it consolidates into a database that is used by parties of interest, such as creditors, trustees, and debtors and their attorneys. In the years leading to the enactment of the Bankruptcy Reform Act in 2005, there was significant debate among policymakers, creditors, consumer advocates, and other stakeholders on the factors contributing to the rising rate of consumer bankruptcy, including the relative roles of illness, joblessness, and divorce. While some studies, such as those produced by the Consumer Bankruptcy Project, have examined these issues, it was widely acknowledged that not enough data were available from the bankruptcy system and other sources to help fully inform these discussions. Similarly, in recent work that GAO has conducted examining the bankruptcy system, we have found that limitations in available data have hindered our ability to answer questions of interest to congressional requesters. For example, in October 2007, we reported that information available from the bankruptcy system was not sufficient to allow us to evaluate the impact of the Bankruptcy Reform Act on child support obligations. Further, in our December 2007 report on debtors’ use of reaffirmation agreements, we examined a representative sample of bankruptcy files in five bankruptcy courts, but were unable to do a nationally representative sample because the necessary data needed to be manually extracted from individual databases at the district level. There has been long-standing recognition that much of the data in the bankruptcy system may not be accurate, largely because much of the data is self-reported by debtors in the official bankruptcy forms. For example: The report of the National Bankruptcy Review Commission noted persistent problems with the accuracy of bankruptcy data, pointing out that data extracted from the debtors’ petitions and reported to AOUSC often are inconsistent with other information contained in the same debtors’ schedules and statements of financial affairs. The Trustee Program’s audits of Chapter 7 and Chapter 13 debtors in fiscal year 2007 identified at least one material misstatement of income, expenditures, or assets in 30 percent of the cases for which audit reports were filed. A 1999 study of the consistency and completeness of 200 randomly selected consumer bankruptcy cases in a Michigan district found “errors and problems” in 99 percent of the cases, with an average of three mistakes per case. A 2002 study of 103 consumer asset cases in the same district found that 41 percent of cases had assets that had not been disclosed by debtors in their initial bankruptcy papers. A key reason why information in bankruptcy cases may be inaccurate is that it is largely self-reported by the debtor. Filers and bankruptcy petition preparers must attest, under penalty of perjury, that the information they provide is correct and true. Nonetheless, as seen above, ample evidence indicates that debtors filing a bankruptcy petition do not always accurately estimate, for example, their debts, the value of their assets, and other key information. The unreliability of self-reported data in bankruptcy files is a result of several factors, according to AOUSC staff, private trustees, and academic experts we spoke with. First, individuals entering bankruptcy often have not kept good financial records, a fact that may hinder their ability to provide accurate information. Second, some portion of debtors file for bankruptcy without the assistance of an attorney and their unfamiliarity with the process increases the likelihood they will make errors on the forms. Third, there is little incentive for any party to ensure that certain information is precisely accurate if that information will not affect the outcome of the case. For example, in Chapter 7 cases that involve no eligible assets to be distributed to creditors, calculating the precise amount of a debtor’s liabilities makes little difference since all eligible debt will be discharged anyway. As such, the impact of data in bankruptcy forms that is less than fully accurate varies depending on how the information is being used. The data may be problematic for the purposes of research or the collection of statistics, but are still sufficiently reliable for the purposes of initiating a bankruptcy case. In every consumer bankruptcy case, the private trustee submits to the Trustee Program a “final report” that details the administration of the estate. The Trustee Program reviews these reports and they are then filed with the court. The information in these final reports is generally more accurate than information in the petition and supporting forms, for two primary reasons. First, the trustee has certain responsibilities to review and verify some of the financial information submitted by the debtor. Second, the final report is generated near the end of the bankruptcy process, when more accurate information may be available, whereas the petition is submitted by the debtor at the beginning of the process. At the same time, the scope of the information contained in the trustee final reports is limited—largely to data related to disbursements and repayments to creditors. Some parties have expressed concerns about the measurement of consumer versus business bankruptcies. The Bankruptcy Code defines consumer (nonbusiness) debt as that incurred by an individual primarily for a personal, family, or household purpose. If the debtor is a corporation or partnership, or if debt related to the operation of a business predominates, AOUSC defines the nature of the debt as business. Debtors self-report in the bankruptcy petition whether their debts are primarily consumer or business debts, but such a determination can be ambiguous. For example, certain debtors—such as entrepreneurs, small businesses, self-employed individuals, and independent contractors—may have difficulty determining the predominant nature of their debts if their personal and business liabilities are closely intertwined. In the 2005 study, “The Myth of the Disappearing Business Bankruptcy,” the authors concluded that AOUSC statistics significantly undercount the number of business bankruptcies, which they said may lead policymakers and others to draw inappropriate conclusions about trends in business successes and failures and other important policy issues. AOUSC officials told us that the appropriate definition of whether a debtor is a consumer or a business is open to question, but that the classification used in their statistics—the predominant nature of the debt as reported by the debtor—has a statutory basis. The concerns that exist today about the data available from the bankruptcy system have existed for decades. For example, interest in more detailed, accurate, and reliable information was raised by both the 1973 and 1997 federal bankruptcy commissions. While opportunities may exist to further expand and improve the data available from the bankruptcy system, several factors create challenges to making such improvements. Public accessibility must balance privacy and security concerns. Bankruptcy files can contain personal information such as tax and financial data or documents from creditors that may reveal such things as a filer’s medical circumstances or gambling history. In the past, accessing bankruptcy records required physically retrieving files from a courthouse. However, with the development of the Internet, personal information can be readily and quickly accessed from anywhere in the world, raising privacy concerns. Further, some consumer groups, bankruptcy attorneys, and representatives of the judiciary have raised concerns that increasing electronic access to bankruptcy data, such as through data-enabled forms, could facilitate identity theft or the use of personal data to target bankruptcy filers for potentially exploitative financial products or services. In 2003 and 2007, bankruptcy rules were amended to restrict the publicly accessible personal information in bankruptcy files. For example, only the last four digits of a Social Security number are required in the bankruptcy petition and bankruptcy filers may redact personal identifiers, such as dates of birth and names of minors, from electronic or paper filings made with the court. AOUSC officials told us that if substantial additional bankruptcy information were to be made publicly available, the privacy and security rules themselves might have to be reconsidered to provide additional protections. Collection of demographic and other additional data is not the judiciary’s mission. The basic mission of the federal courts is to interpret and apply the law to resolve disputes. AOUSC officials told us that while the bankruptcy courts have certain statutory requirements to maintain an accurate public record of case proceedings, they have no such requirements, or any need, to collect demographic or financial data that are unrelated to the operations of the courts. As such, the judiciary historically has been reluctant to devote resources to collecting data solely for research and policy purposes. Resources are limited. Improving the judiciary’s data collection and statistical infrastructure can require additional resources for such things as equipment, staff, and training. AOUSC officials noted that their current resources for information technology, data collection, and statistical reporting were limited and would not be able to readily accommodate additional responsibilities. Local courts’ autonomy can hinder centralized data collection. All bankruptcy courts are governed by certain national rules and requirements and must report certain standard data to AOUSC. However, individual courts also have a significant degree of autonomy to develop their own local rules and requirements, and local practices and procedures vary. Further, each individual district manages its own data systems and can choose to track additional data according to its preferences. The traditional autonomy of the 90 individual bankruptcy districts can create challenges for AOUSC in ensuring that processes are followed uniformly and data are collected in a consistent fashion. The bankruptcy process is not wellsuited to collecting certain types of information. The factors that result in a bankruptcy—a key public policy issue—are inherently hard to capture in a bankruptcy form. Bankruptcy petitions include a list of creditors but do not necessarily provide insight as to the source of the debt—for example, credit card debt may derive from medical expenses or from a costly vacation. Moreover, bankruptcy often results from multiple factors that can be difficult to isolate (e.g., both unemployment and poor financial management may be factors). Further, because the courts’ formal role generally ends once a case is closed, the courts are not in a position to collect data about the long-term impact of bankruptcies. As a result of these factors, the judicial process may not be well-suited to collecting certain key information, which may instead best be obtained, for example, by private parties conducting one-on-one interviews with debtors. Collecting demographic data poses concerns. Key demographic information about bankruptcy filers—such as gender, age, and race—is of interest to policymakers and others, but may not be appropriate for inclusion in official bankruptcy forms. Some worry, for example, that formalized collection of this information could introduce the appearance of bias or facilitate discrimination. The federal judiciary uses several major data systems to collect, manage, and disseminate information about bankruptcies. The Case Management/Electronic Case Files (CM/ECF) system is used by nearly all U.S. district, bankruptcy, and appellate courts to manage and track cases. AOUSC requires all bankruptcy courts to maintain certain uniform pieces of information in CM/ECF—including debtor name and case number, county, filing date, and disposition of the case—but individual bankruptcy courts can customize the system to facilitate its functions under local rules and local practices and procedures. CM/ECF permits bankruptcy participants, such as attorneys and trustees, to electronically file documents with the court. The U.S. Party/Case Index is a nationwide locator for U.S. district, bankruptcy, and appellate courts, which can be used by the public to search for individual case filings, including bankruptcy filings. Certain bankruptcy data are obtained from the courts’ CM/ECF systems on a daily basis, and the index allows searches based on case identifiers such as a filer’s name or Social Security number. The index can be used to search all courts nationwide, or to search by judicial circuit, state, or district. Bankruptcy court staff use the index to determine if an individual has filed a bankruptcy petition in other judicial districts. Other parties, such as attorneys and creditors, use the system to determine if an individual is party to any judicial case. The Public Access to Court Electronic Records (PACER) system serves as the portal through which the public can access, via the Internet, individual courts’ CM/ECF systems and the U.S. Party/Case Index. For any given bankruptcy case, a user can retrieve the docket sheet and hyperlinks to nearly all of the case’s documents, including the petition and supporting forms and schedules. Prior to about 2001, parties interested in obtaining bankruptcy files typically needed to physically visit the court where a debtor filed a petition and request hard copies of documents associated with the case. In addition to case documents, PACER also allows a user to retrieve case-related data from CM/ECF. Users of PACER are charged 8 cents a page. At the Trustee Program, the Automated Case Management System functions as the internal case management system used by the agency to carry out its responsibilities, including supervising the administration of cases and private trustees. The system, which is not available to the public, includes information on such things as case status and the names of attorneys and the trustee assigned, as well as a history of case hearings, reports, pleadings, appointments, and fees. Some of the information in the system is obtained from individual courts’ CM/ECF systems, while other information is entered by the Trustee Program itself. Some nongovernmental entities also maintain information on consumer bankruptcies that has been obtained from the courts. For example, Automated Access to Court Electronic Records, a private company, uses PACER to extract information from individual courts’ CM/ECF systems and, for a fee, repackages the data to meet the needs of lenders, attorneys, researchers, and other clients. The bankruptcy petitions, schedules, and other documents available via PACER are provided in a PDF format that is essentially a snapshot image of the document. Thus, the data cannot easily be electronically extracted and transferred to another format for compilation and analysis. As a result, examining the data contained in multiple bankruptcy cases can be time consuming and costly. It involves—for each individual bankruptcy case— locating and accessing the electronic case file in the relevant court’s CM/ECF system; identifying the document that contains the desired pieces of information; and manually extracting the data into a database or spreadsheet format. PACER’s fee of 8 cents per page also can inhibit the collection of information from a large number of cases. To facilitate the use of the data held in bankruptcy files, the judiciary and the Trustee Program have been exploring for several years the use of “data-enabled” bankruptcy forms. Data-enabled forms contain embedded data tags that are invisible to the user. The tags allow a computer system to automatically extract the tagged data, as well as categorize it so that the information can be compared and analyzed. In 2004, AOUSC and the Trustee Program began discussions on using data-enabled forms for bankruptcy filing documents, which would allow the data in those documents to be more easily extracted. In September 2006, the Trustee Program formally requested that the judiciary mandate data-enabled forms through a required technical standard for certain documents filed electronically in the bankruptcy courts. In March 2008, the judiciary declined to mandate data-enabled forms, but said it was examining alternatives that would still facilitate automated case review. The Trustee Program and other parties—including some judges, researchers, and private trustees—have said that the use of data-enabled forms would be beneficial for several reasons. First, data-enabled forms would greatly reduce the number of hours the Trustee Program and other parties devote to manual data entry. Second, it would allow for more efficient collection of bankruptcy data, compilation of national bankruptcy statistics, and analysis of the bankruptcy system. Third, they say, data- enabled forms would allow the Trustee Program to conduct its work more effectively and efficiently. For example, a study prepared for the National Institute of Justice—the research, development, and evaluation agency of the Department of Justice—concluded that implementing data-enabled forms would be an important step toward improving the Trustee Program’s ability to fight bankruptcy fraud and abuse by facilitating statistical fraud detection. Similarly, the Trustee Program has noted that data-enabled forms would allow it to more efficiently administer the “means test” by allowing it to automatically sort cases by whether debtors are above or below the applicable state median income. The judiciary has raised concerns about implementing data-enabled bankruptcy forms. AOUSC officials have said the technology for data- enabled forms must be compatible with the current information system and the electronic and hard copy documents should be identical to comply with rules of court procedures and record-keeping standards. Further, the judiciary, certain attorneys, and software vendors have raised potential privacy and security concerns—for example, that data-enabled forms could make it easier to collect personal information and use it for marketing or undesirable purposes. Finally, the judiciary also has expressed concerns that developing and implementing the forms would impose higher costs on the judiciary, attorneys, and debtors and potentially could limit access to bankruptcy court. For example, pro se debtors may not have access to the data-enabled bankruptcy software needed to file a petition. In January 2008, the Judicial Conference’s Advisory Committee on Bankruptcy Rules established the Bankruptcy Forms Modernization Project to review and revise the official bankruptcy forms. The project, which is expected to last 5 to 7 years, is evaluating technologies that the judiciary could adopt to facilitate the collection, analysis, and dissemination of information collected via the forms. AOUSC officials told us that while the project’s ultimate recommendations will give priority to the requirements of the judiciary, it also will take into consideration the views and needs of external stakeholders, such as policymakers and researchers. Information about bankruptcy cases can be accessed by the public from individual courts’ CM/ECF data systems. For example, a user can search for cases filed in a specific district within a certain time frame and then generate a data file that contains up-to-date information on cases—such as date and chapter of filing, whether the case involves assets, and the disposition of the case. There is no mechanism to conduct a single nationwide search across all 90 districts’ CM/ECF systems. Instead, to conduct a nationwide search, a user must replicate the search in each district’s system. As a result, conducting large-scale studies of bankruptcy cases nationwide can be difficult since the CM/ECF systems cannot readily be used to generate a national sample of cases. The U.S. Party/Case Index, by contrast, can be used to search nationwide for individual bankruptcy cases. To conduct a search, a name, Social Security number, tax identification number, or case number must be entered. However, the index does not allow a user to search using the other data elements it maintains, such as chapter of filing or disposition of the case. Further, not all of the data maintained in the index are made publicly available in the search results. When a search is conducted in the U.S. Party/Case Index, the results for a given bankruptcy case include the name of the filer, the case number, and the chapter filed. However, the results do not show other case information held in the system, such as key dates and the disposition of the case. In addition, presently the U.S. Party/Case Index provides the results of its searches as a text file rather than a data set. As a result, the output the system provides cannot readily be imported into a database for further sorting and analysis. A range of bankruptcy stakeholders, including some judges, researchers, and Trustee Program staff, have suggested improving public access to data that already exist in the judiciary’s data systems. One possible mechanism for doing so might be expanding the search and output capability of the U.S. Party/Case Index, which could enhance the ability to assess and understand the characteristics and outcomes of consumer bankruptcies. For example, it could facilitate the ability to draw a nationwide sample of cases, which is useful in gathering and analyzing real-time information that is representative of the entire country rather than specific districts. It also could facilitate further analysis of certain case dispositions—for example, one could identify Chapter 13 cases that were dismissed for failure to make payments. Moreover, expanding public access to data held in the system would be consistent with recommendations made by the 1997 National Bankruptcy Review Commission and section 604 of the Bankruptcy Reform Act (discussed later in this report), both of which called for a national policy of releasing the maximum amount of bankruptcy data in a usable electronic form, albeit subject to appropriate privacy safeguards. Further examination would be needed before it could be determined whether expansion of the U.S. Party/Case Index would indeed be a practicable and appropriate mechanism for facilitating public access to real-time bankruptcy data. AOUSC staff noted that the index was designed as a basic search mechanism for identifying if certain individuals are parties to cases and was not intended to serve as a tool for providing a range of data on individual cases. The staff told us that expanding the output or search capability of the system would be technically feasible, although it would involve network, database, and other infrastructure costs. Moreover, as noted earlier, any measure to facilitate the availability of bankruptcy data—much of which is personal and sensitive—also would need to address appropriate privacy and security protections. The Inter-University Consortium for Political and Social Research provides free public access via its Web site to case-level data on consumer bankruptcies provided to it by the judiciary. Data sets include numerous variables, such as case number, chapter, assets, liabilities, and case disposition. However, one researcher noted that this resource is of limited use because, among other things, the data are not always up to date and can be inconsistent from year to year. In addition, variables for such things as assets and liabilities are provided as ranges (e.g., $0 to $50,000) rather than as specific values, limiting their usefulness. AOUSC officials told us that implementation of the Bankruptcy Reform Act prevented them from providing timely data to the Inter-University Consortium over the past few years, but that they recently provided the consortium with bankruptcy data through fiscal year 2007. They also noted that any inconsistencies in the data are the result of changes in the law and the data extracted. These led to changes in data fields and codes in those fields, and the code translations are provided to the Consortium with the data sets. The Bankruptcy Reform Act required AOUSC to compile and report certain statistics on consumer bankruptcy cases on an annual basis, and it required the Trustee Program to require uniform forms for the final reports submitted by private trustees at the end of each bankruptcy case. These new data requirements will provide some additional information that may be useful in understanding the characteristics and outcomes of consumer bankruptcy cases and how such cases vary across different regions of the country. However, the usefulness of these data is limited for several reasons. For example, the annual statistics are aggregated, which limits what the information conveys, and the scope of what is provided by some of the specific data elements is relatively narrow. Despite these limitations, many bankruptcy stakeholders believe it would be beneficial for the judiciary to publicly release the raw, case-level data underlying the statistics required by the Bankruptcy Reform Act. The Bankruptcy Reform Act included new requirements that were intended to improve the availability of information about consumer bankruptcies. The data provisions of the act stemmed from the long- standing concern among policymakers about the need for more detailed and reliable information about the bankruptcy system. In large part, the provisions reflected recommendations and specific data needs identified by the 1997 National Bankruptcy Review Commission. The Bankruptcy Reform Act requires each bankruptcy court to collect certain statistics for Chapter 7, Chapter 11, and Chapter 13 bankruptcy cases filed by individuals with primarily consumer debts. The act also requires the director of AOUSC to prescribe a standardized format for these statistics, compile the statistics collected by the courts, make them publicly available, and submit to Congress a report and analysis of this information no later than July 1, 2008, and annually thereafter. The act required each of these data elements to be reported in the aggregate and by district, as well as itemized by chapter. As shown in table 1, the required statistics provide information about a variety of characteristics and outcomes of consumer bankruptcy cases. On June 23, 2008, AOUSC issued its first annual statistical report to Congress, meeting its statutory deadline. The report comprised a summary of findings, a discussion of the methodology of data collection and the limitations of the data, and 21 tables presenting the required statistics, itemized by chapter and presented in the aggregate and for each district. The data systems the judiciary had in place when the Bankruptcy Reform Act was enacted did not capture all of the new data required for reporting purposes, and those data systems were not capable of collecting and reporting all such data. The judiciary undertook several major initiatives to meet its new reporting responsibilities under the act. For example, the official bankruptcy forms were modified to capture certain new data elements needed to generate the new statistics; new procedures were developed for bankruptcy courts to collect the the electronic case management system, CM/ECF, was modified to capture new data elements; bankruptcy court staff received training on the modifications to the data systems and procedures; and a new statistical infrastructure was built to collect, store, and produce the new statistics, and the new statistical tables were designed and developed. AOUSC officials said they struggled to implement these changes using existing funding and staffing resources, noting that the judiciary received no additional funding from Congress to meet the new statistical requirements. They said that many other projects had to be deferred as personnel and resources were diverted to meet the Bankruptcy Reform Act’s data requirements. As of December 2007, the judiciary estimated it had spent $2.8 million to implement its statistical and reporting responsibilities under the act. The Bankruptcy Reform Act required the Attorney General—who delegated this responsibility to the Trustee Program—to issue, within a reasonable amount of time, rules requiring uniform forms for the final reports that private trustees submit for each Chapter 7, Chapter 12, and Chapter 13 case. The act indicated that the forms should be designed to facilitate compilation of data and maximum possible public access, both physical and electronic. It also indicated that in developing the forms, the Attorney General shall strike a balance between the need for public information, undue burden on the private trustees who must generate the forms, and privacy concerns. Although trustees filed final reports prior to the Bankruptcy Reform Act to document their administration of cases, there were more than 100 different versions of the reporting forms in use across the country, according to the Trustee Program. Under the act, a uniform set of forms must be used, and these forms must include certain prescribed data elements, as shown in table 2. Some of these data elements had already been provided in at least some trustees’ final reports, while others are new. In 2005, the Trustee Program began developing drafts of the uniform final report forms after reviewing samples of the forms that were already being used in various bankruptcy courts. The program sought feedback on the draft forms from professional associations representing Chapter 7 and Chapter 13 private trustees and from vendors of software used by these trustees. On February 4, 2008, the Trustee Program issued a notice of proposed rulemaking and publicly released drafts of the uniform forms for Chapter 7 and Chapter 13 trustees’ final reports. The Trustee Program received approximately 70 comments from private trustees, attorneys, and others on the proposed rule and draft forms. On October 7, 2008, the program issued a final rule that will become effective on April 1, 2009, at which time the trustees will be required to use the uniform forms for submitting their final reports for each consumer bankruptcy case. The final rule incorporated changes that reduce the burden on private trustees. For example, final reports for Chapter 7 no-asset cases will not be separate documents, but rather can be completed electronically as a virtual entry form in the court’s docket. Section 604 of the act does not impose any requirements but rather expresses the “sense of Congress” that: the national policy of the United States should be that all public record data maintained by bankruptcy clerks in electronic form should be released in bulk to the public in a usable electronic form, the bankruptcy data system should use a single set of data definitions and forms to collect data nationwide, and data for each bankruptcy case should be “aggregated in the same electronic record.” The statutory language reflects almost verbatim two recommendations of the 1997 report of the National Bankruptcy Review Commission. That report noted that the wealth of data generated by the bankruptcy system should be available for systematic study by making it available to the public electronically, to the extent practical. Bankruptcy stakeholders have expressed varying interpretations of section 604. The Judicial Conference’s Committee on the Administration of the Bankruptcy System noted in a March 2008 report that the judiciary already addresses many of the issues raised in these provisions—such as by providing public access to court electronic records through PACER. At the same time, two academic researchers we spoke with noted that case files available through PACER files are largely PDF image files and expressed the opinion that in accordance with section 604, the judiciary should expedite efforts to make case-level data accessible in an extractable database format that could be used more readily for compilation and analysis. The new annual statistics and the uniform final reports required under the Bankruptcy Reform Act will provide some additional information that may be useful in understanding the characteristics of consumer bankruptcy cases and differences among such cases across the country. The new annual statistics required by the Bankruptcy Reform Act provide Congress, the judiciary, the Trustee Program, and the public with a variety of new information on certain characteristics and outcomes of consumer bankruptcy cases. Prior to 2008, the bankruptcy statistics produced by the judiciary consisted primarily of information related to the numbers of filings, as noted earlier. The new statistics provide, for the first time, comprehensive statistics on certain aspects of consumer bankruptcies and on the debtors themselves that may provide a better understanding of the trends in, basis for, and impact of bankruptcy filings. While these data have significant limitations, some bankruptcy stakeholders identified specific ways these new statistics might be revealing or useful. For example, Trustee Program staff and two judges we spoke with said that the statistics could be useful for identifying differences across districts or regions of the country in the outcomes of cases or the characteristics of bankruptcy filers, such as their assets, liabilities, and income. In addition, an academic researcher noted that the statistics could reveal differences in the legal process or local legal culture in different districts. Similarly, Trustee Program staff noted that certain data on Chapter 13 case outcomes—such as the number of repeat filers, cases dismissed, and cases in which a repayment plan was completed— could provide practical information on how Chapter 13 practices differ across the country. The new statistics also will provide some useful information on the average debtor’s financial circumstances. For example, one researcher noted that the statistics on median debtor income and expenses could provide useful information about the profile of the typical filer. Another researcher told us that the new statistics could be used to calculate debt- to-income ratios and track changes in these ratios over time to examine changes in the typical profile of debtors. Further, comparisons of debtors’ current monthly incomes with their average incomes in the previous 6 months could provide a better understanding of how their financial situations changed in the period leading up to the bankruptcy filing. Some Trustee Program officials, judges, and bankruptcy court clerks said that some of the new data also may be beneficial in conducting their internal operations. For example, Trustee Program officials said these data could potentially help assess the efficiency of its regional offices. In addition, the four bankruptcy judges we spoke with said that the statistics on the outcomes of Chapter 13 cases will provide useful information for their administration of these types of cases. The Trustee Program will require trustees filing the uniform final reports for Chapter 13 cases and for Chapter 7 asset cases to use a “smart form” that is data enabled. As discussed earlier, data entered into these data- enabled forms are “tagged,” and these tags are then available for extraction and searching capability. This data-enabled format will facilitate compilation and analysis of the information the forms include, and it aligns with the sense of Congress expressed in section 604 that bankruptcy data should be released in a usable electronic form. Staff from a Trustee Program regional office told us that the data-enabled format would make it easier for regional staff to compile the distribution statistics on receipts and disbursements that they already generate for internal program use. The format also might allow easy extraction of information from large numbers of forms for research purposes that could inform policy making. Some bankruptcy researchers we spoke with told us they had not used trustees’ final reports in the past but noted that the new data- enabled format of the trustees’ reports would make the reports a potential research tool. The use of a single set of standard forms should improve the consistency of the data included in the reports. According to Trustee Program staff, the uniform forms should facilitate any analysis that may be conducted, particularly across districts. The Trustee Program staff said that the new final reports also may aid their oversight of private trustees. For example, comparisons of such things as administrative expenses and distributions to creditors could be used to evaluate the efficiency and effectiveness of trustees. Because the act requires the uniform final reports to include specific new data elements, the reports will provide additional information about consumer bankruptcy cases—particularly for Chapter 7 no-asset cases, whose final reports previously contained little to no data. In its rule, the Trustee Program noted that the new reports will assist Congress in compiling data to accurately analyze bankruptcy trends when making policy decisions. Trustee Program staff we spoke with cited some specific ways the data potentially could be used to inform policy making. For example, the new final reports will include data on the amount of “assets exempted”—that is, those assets that are shielded from unsecured creditors by fully or partially exempting them from the property of the bankruptcy estate. This information could be used with data on “distributions to claimants” to show the effects of various exemption rules on the availability of funds to make payments to creditors. (In some states, bankruptcy filers have the option to use federal or state exemption rules.) The data also could provide information on the relative effects of bankruptcies on creditors through a comparison of the amount of distributions to claimants with the amount of debt discharged. Our review found that although the data requirements of the act will provide some additional information about consumer bankruptcies, their usefulness is limited for several reasons. Content. The new data do not, nor were they intended to, provide significant information about some of the characteristics of consumer bankruptcies that are of key interest to policy makers—most notably, the reasons consumers filed for bankruptcy, the nature or source of the debts, and the demographic characteristics of the filers. As noted earlier, this type of information is very difficult to capture through the formal bankruptcy system. Aggregation. The data reported by the judiciary are provided in the aggregate as statistics—rather than as case-level data—limiting the value of the information, according to some Trustee Program staff, researchers, and judges we spoke with. Aggregated numbers do not allow researchers and policy makers to drill down into the data to gain an understanding of the bankruptcy system. For example, an academic researcher we spoke with noted that “total assets” and “total liabilities” in the aggregate do not provide a useful picture of the average debtor’s financial situation. Narrow scope. The scope of what is provided by some of the specific data elements is relatively narrow. For example, the act requires the judiciary to report the number of cases in which creditors were “fined for misconduct.” However, because courts may reprimand creditors in a variety of ways, this statistic provides only a limited picture of sanctions imposed against creditors in bankruptcy courts. Lack of specificity. Alternatively, some statistics are so broad in what is included that the usefulness of the data is unclear. For example, the act requires that the judiciary report “total assets,” but this does not distinguish between net assets and assets with liens attached (such as a home with a mortgage). Further, total assets includes assets that are shielded from unsecured creditors, as defined by federal and state exemption laws. As such, the statistic will not be an accurate indicator of debtors’ net worth or of the amount of equity that can actually be liquidated and distributed to creditors. Accuracy. Much of the data in the new annual statistics is based on information that debtors provide when submitting forms, schedules, motions, and other court filings. As noted in AOUSC’s statistical report, self-reported data may be incomplete or inaccurate. For example, as described earlier, debtors do not always correctly designate whether their debts are primarily consumer versus business debt, and thus the new statistics may include some business cases that have been incorrectly designated as consumer cases. Similarly, certain data in the new trustee final reports are derived from information provided by the debtor in the bankruptcy forms. Definitional issues. Certain definitional issues may limit the usefulness of some of the specific data elements in the statistical requirements and uniform final reports. For example: The Bankruptcy Reform Act requires reporting on “the aggregate amount of debt discharged,” but the definition provided in the act does not, in fact, represent the amount of debt actually discharged in bankruptcy, according to AOUSC officials and legal experts we spoke with. In addition, included in this statistic are debts with enforceable liens (such as mortgages on real property). As a result, the statistic does not provide a true picture of the amount of debt eliminated in consumer bankruptcies, which can be a useful macroeconomic indicator. The act requires that uniform final reports include “assets abandoned”—assets that are not liquidated or distributed because they are of little value or benefit or might be too burdensome. The Trustee Program defines assets abandoned for no-asset Chapter 7 cases as the current value of real and personal property on the debtor’s schedules less the total value of exemptions the debtor claimed. Under this definition, the data could include assets secured by reaffirmed debts, which are not actually abandoned. The act also requires the uniform final reports to include “claims discharged without payment,” which the Trustee Program defines for Chapter 7 no-asset cases as the sum of the claims listed by debtors on their official filing forms. Some private trustees have noted that not all claims listed by the debtors are actually discharged without payment— for example, the value of reaffirmed debts and nondischargeable categories of debt such as domestic support obligations and secured claims. As a result, this data element may not provide meaningful information on the amount of debts discharged without payments to creditors in Chapter 7 no-asset cases. Trustee Program officials told us they believed their definitions strike the best achievable balance between the reasonable need of the public for information and the burden of reporting placed on trustees. With regard to the definition of “assets abandoned,” they noted that requiring trustees to determine which debts had been reaffirmed would cause additional burden on trustees and delays in closing cases. With regard to “claims discharged without payment,” they noted that (1) trustees usually file a no- asset report before the expiration of a creditor’s deadline for objecting to the dischargeability of a debt, and (2) the Bankruptcy Code provides that certain debts are not discharged regardless of how they are scheduled by the debtor. As a result, program officials told us, their definition provides information about the amount of claims that have been scheduled to be discharged while allowing trustees to expeditiously close no-asset cases without waiting for the objection deadline to pass and without requiring the trustee to make an independent determination as to which of the debts listed by the debtor are dischargeable. AOUSC currently has no plans to provide public access to the raw, case- level data used to generate the statistics required by the Bankruptcy Reform Act. A variety of stakeholders in the bankruptcy process told us that these case-level data would be useful—despite their limitations—if made publicly available as a data set. For example, two researchers told us that the case-level data would permit additional analyses, such as determinations of statistically significant differences among groups of debtors. The case-level data also would allow the creation of statistics aggregated by categories other than state and judicial district, and also would permit examination of the variability of debtors’ income, assets, and liabilities. A representative of a financial services trade association noted that creditors could use the data to refine their risk models by analyzing the characteristics of filers to determine the likelihood that particular debtors will repay their debts. In addition, Trustee Program staff noted that case-level data on the time elapsed between the filing and closing of cases could be useful in comparing how quickly individual trustees administer cases. Further, several bankruptcy judges we spoke with suggested that case-level data could be useful, in particular, in understanding the characteristics of Chapter 13 cases and the degree to which they have successful outcomes. An AOUSC official noted that the data underlying the new statistics were of uncertain quality and that it would therefore be imprudent to publicly release these raw data until AOUSC has time to better analyze the information. However, other stakeholders have noted that concerns about the quality of the data underlying the statistics should not necessarily prevent AOUSC from releasing it. Further, Trustee Program staff and a researcher told us that access to the case-level data could enable external parties to assess their reliability and limitations—for example, by verifying the data against the case files in PACER and removing erroneous data values. Others have noted that, as a general principle, government agencies should be as transparent as possible in releasing supporting data for public examination and assessment of the quality of the statistics drawn from them. AOUSC staff noted that there was no statutory requirement for releasing the case-level data used to meet the statistical requirements of the Bankruptcy Reform Act, and noted that doing so could raise privacy concerns. However, providing public access to case-level data would be consistent with section 604 of the act, which recommended as national policy releasing in a usable form the electronic public record data held by bankruptcy clerks. More broadly, the judiciary’s 2008 strategic plan for information technology recognizes external parties as major consumers of court data and includes as one of its objectives easy access to appropriate case-related information. The plan notes, however, the need to balance data accessibility with privacy and security concerns, pointing out that certain types of cases, categories of information, and specific documents may require special protection from unlimited public access. Long-standing questions have existed about the information available on consumer bankruptcies. While statistics are published on the numbers of filings, little information is available on the characteristics of individuals who file for bankruptcy or the nature and outcomes of their cases. Much of the information that is collected during the bankruptcy process is not readily accessible by the public in a format that allows for the extraction, compilation, and analysis of data across multiple cases. These shortcomings limit the ability of scholars and other parties to gather and analyze information that would be useful in assessing the bankruptcy system. Congress is similarly limited in its ability to make bankruptcy policy and formulate legislation based on empirical data rather than anecdotal evidence. The data provisions of the Bankruptcy Reform Act were a useful step in addressing this issue by increasing the amount of information available and by facilitating, to some extent, its accessibility and uniformity. The plans by the Trustee Program to use data-enabled “smart forms” for its new final reports will enhance the utility of this new information. At the same time, the value of certain annual statistics is likely to be limited, in part because some of the data elements are narrow in scope and may not provide a meaningful or comprehensive picture of the issues they address. As further statistical reports are issued, the ultimate value and limitations of the Bankruptcy Reform Act’s data requirements will likely become clearer, and Congress may find it beneficial to review whether particular data elements required would benefit from modifications that would help ensure they are providing information useful to policy makers in assessing the consumer bankruptcy system. Progress has been made in recent years in making bankruptcy data more available and accessible to various parties. However, a tension remains in the extent to which the judiciary focuses bankruptcy data efforts solely on internal requirements versus the needs or preferences of researchers and policy makers. It is unclear whether it is the appropriate role of the judicial system to collect certain kinds of additional information from the bankruptcy process, such as the reasons people file for bankruptcy. Nevertheless, policy makers and the public could be better served if the judiciary took steps to further facilitate access to existing data already collected and maintained in its systems. For example, one possible option could be to expand the search and output capability of the U.S. Party/Case Index to enable easier access to, and more productive use of, the full array of data residing in this system. Similarly, despite the limitations of the Bankruptcy Reform Act’s statistics, publicly releasing the case-level data used to generate these statistics could be a valuable resource in efforts to further analyze and understand consumer bankruptcies. Implementation of data-enabled forms by the judiciary also could be beneficial by allowing more efficient use and analysis of information collected. Before such steps could be taken, however, certain issues would need to be resolved—such as privacy and security concerns and the appropriate disclosure of data limitations. Facilitating the public access and usability of data already held in the judiciary’s databases would be consistent with the recommendations of the National Bankruptcy Review Commission and section 604 of the Bankruptcy Reform Act, both of which called for a national policy of releasing the maximum amount of bankruptcy data in a usable electronic form. Policy makers need adequate information about the characteristics and outcomes of bankruptcies to make sound and informed policy choices. Better access to bankruptcy data already held in the judiciary’s data systems could facilitate scholarly research, the informed allocation of bankruptcy resources, and the formulation of bankruptcy policy. To help provide additional information on consumer bankruptcies useful to policy makers and others, we recommend that the Director of AOUSC expeditiously identify and implement—subject to appropriate privacy and security safeguards—measures to further improve public accessibility to those bankruptcy data that AOUSC already maintains in its information systems. For example, AOUSC might consider whether it would be practical to expand the search and output capability of the U.S. Party/Case Index. AOUSC also might explore appropriate options for releasing at least some of the case-level data used to generate the Bankruptcy Reform Act statistics. We provided a draft of this report to AOUSC and the Department of Justice for comment. These agencies provided technical comments that we incorporated as appropriate. In addition, AOUSC provided a written response, which is reprinted in appendix II. In its comment letter, AOUSC said it would carefully consider GAO’s recommendation to identify and implement measures to further improve public accessibility to bankruptcy data. The agency commented that the judiciary already provides a high level of access to case records and information and that over the past decade it has substantially increased the amount of information it makes available to users of the bankruptcy system. The agency also reiterated the need to balance access and privacy interests in making decisions about widespread public disclosure and dissemination of information in case files. AOUSC said that in January 2009, it will begin assessing potential enhancements to the federal judiciary’s electronic public access services and technical interfaces, and will consider making additional existing data available through the U.S. Party Case/Index, as we suggested. The agency also said it will assess issues related to releasing case-level Bankruptcy Reform Act data and will present its recommendation to the appropriate Judicial Conference committees. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. We will then send copies of this report to the Ranking Member of the Committee on the Judiciary, U.S. Senate; the Ranking Member of the Committee on the Judiciary, House of Representatives; the Director of the Administrative Office of the United States Courts; the Attorney General; and other interested committees and parties. The report also is available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions concerning this report, please contact me at (202) 512-6806 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our report objectives were to examine (1) the availability and accessibility of data from the bankruptcy system and (2) the potential benefits and limitations of the new data requirements of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Bankruptcy Reform Act) in addressing these issues. This report focuses on consumer, or personal, bankruptcies rather than business bankruptcies. To address both of the objectives, we gathered documentation from and spoke with representatives of the U.S. Trustee Program’s (Trustee Program) Executive Office for U.S. Trustees, including units responsible for information technology and the oversight of private trustees; two Trustee Program regional offices; the Administrative Office of the United States Courts (AOUSC); and selected individual bankruptcy courts, including four bankruptcy judges and six bankruptcy clerks. We also spoke with, and in some cases gathered documentation from, representatives of the National Association of Bankruptcy Trustees and National Association of Chapter 13 Trustees, two professional associations representing Chapter 7 and Chapter 13 trustees, respectively; companies that provide software for case management for private trustees and bankruptcy filings for attorneys; the National Data Center and Automated Access to Court Electronic Records, private organizations that provide bankruptcy data for a fee; the National Association of Consumer Bankruptcy Attorneys; the National Consumer Law Center; the American Bankruptcy Institute; the Financial Services Roundtable; and academic researchers who study the bankruptcy system and use the data that it generates. In addition, we reviewed the strategic plans for information technology developed by the Trustee Program and AOUSC. We also reviewed correspondence between these two parties on the potential implementation of data-enabled forms, and reviewed public comments they received related to this issue. We also reviewed the meeting minutes and other documentation of relevant committees and subcommittees of the Judicial Conference of the United States related to bankruptcy data and data-enabled forms. To address the first objective, we reviewed academic literature that has used, studied, or commented on the information on consumer bankruptcies available from the court system and the Trustee Program. In addition, we reviewed our prior reports that have used bankruptcy data and have identified some of the limitations of these data, including reports related to child support enforcement and reaffirmation agreements. Further, we reviewed materials produced by the National Bankruptcy Review Commission. We also reviewed user guides, protocols, data dictionaries, and other relevant information for the judiciary’s major bankruptcy data systems, including the Public Access to Court Electronic Records system, U.S. Party/Case Index, and Case Management/Electronic Case Files system. In addition, we reviewed the Official Bankruptcy Forms and visited a bankruptcy court to observe how information from the forms is inputted into the Case Management/Electronic Case Files system. To address the second objective, we reviewed relevant provisions of the Bankruptcy Reform Act and some corresponding legislative history. We also reviewed documentation on the judiciary’s implementation of the new statistical requirements of the act, which included a tracking report developed by AOUSC to monitor its efforts to implement the act; minutes from the Judicial Conference’s Advisory Committee on Bankruptcy Rules; changes to the Official Bankruptcy Forms; documents related to the modifications made to the case management system to collect additional data elements; training materials used to educate court staff on collecting the new data; and documents on the initiation of the NewSTATS statistical infrastructure. We also reviewed documentation on the Trustee Program’s implementation of new requirements related to uniform final reports, including the agency’s proposed and final rules related to these reports and draft and final versions of the agency’s report formats. In addition, we reviewed public comment letters submitted to the Trustee Program in response to the rulemaking and the draft reports. We also reviewed correspondence between the Trustee Program and the judiciary related to the addition of new data fields to the daily downloads the program receives from AOUSC. We conducted this performance audit from June 2007 through December 2008 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Jason Bromberg, Assistant Director; Nicholas Alexander; Krista Breen Anderson; Anne A. Cangi; Emily Chalmers; Wilfred Holloway; Angela Pun; and Omyra Ramsingh made key contributions to this report. | There have been long-standing questions about a lack of comprehensive and reliable information on consumer bankruptcies. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Bankruptcy Reform Act) required the federal judiciary's Administrative Office of the U.S. Courts (AOUSC) to collect and report certain additional bankruptcy statistics and required the U.S. Trustee Program, which oversees bankruptcy case administration, to develop uniform final reports that provide certain specified data about each case. GAO was asked to examine the (1) availability and accessibility of data from the personal bankruptcy system and (2) potential benefits and limitations of the new data requirements of the Bankruptcy Reform Act in addressing these issues. GAO examined bankruptcy data systems and obtained documentation and interviewed staff from AOUSC, bankruptcy courts, and the Trustee Program; groups representing consumers and creditors; data providers; and academic researchers and other stakeholders. There are limitations to the availability, accuracy, and accessibility of data on consumer bankruptcies. AOUSC publishes certain aggregate statistics related to the numbers of filings, but few data are available on the causes of bankruptcy and the characteristics of bankruptcy filers. Studies show that the information in the bankruptcy case files is not always accurate because much of it is self-reported by debtors who frequently make errors, although these data are sufficiently reliable for the purposes of initiating a bankruptcy case. Bankruptcy case files are publicly accessible through the Public Access to Court Electronic Records system, but not in a format that allows the data they hold to be easily extracted and used for research or analysis. Another system, the U.S. Party/Case Index, was designed for nationwide searches for individual cases; while it serves that purpose, its search parameters are limited and the output does not include much of the data held in the system. Several factors create challenges to expanding data on consumer bankruptcies--most notably, privacy and security concerns related to facilitating public access to the highly personal data contained in bankruptcy files. The federal judiciary also has noted that collection of demographic and other additional data is not its mission and would require further resources. Nonetheless, a range of bankruptcy stakeholders, including some judges, researchers, and U.S. Trustee Program staff, have suggested that the judiciary identify and implement practicable ways to improve public access to data that already exist in its data systems, which could facilitate scholarly research and the formulation of bankruptcy policy and legislation. While the data requirements of the Bankruptcy Reform Act are a step toward making more information on consumer bankruptcies available, their value is likely to be limited. The new annual statistics will provide some additional information that may be helpful in identifying differences in bankruptcy cases across judicial districts. In addition, the uniform final reports required by the act will standardize the data in the reports and assist the U.S. Trustee Program in overseeing case administration. However, for several reasons the statistics required under the act are likely to be of limited value. For example, many of the statistics are relatively narrow in scope and were not intended to provide certain key information, such as the causes of bankruptcy and the demographic characteristics of filers. Further, the AOUSC data are provided as aggregated statistics--rather than data on individual cases--which limits the extent to which they can be analyzed. As such, a variety of stakeholders in the bankruptcy process told us that the underlying case-level data used to generate the statistics could be useful if made publicly available as a data set. AOUSC currently has no plans to provide public access to these case-level data, in part, officials say, because they first need to identify and address privacy and security issues. GAO acknowledges the importance of those issues, but believes that better access to bankruptcy data already held in the judiciary's data systems--such as these case-level data--would allow external parties to assess the data's reliability and limitations and could facilitate empirical research and the formulation of bankruptcy policy. |
The Park Service has about 5,200 housing units which include facilities such as detached single-family homes, multiplexes, apartments, cabins, dormitories, and trailers. These housing units are located in many of the 370 parks throughout the country—although about 70 percent of the housing inventory is located in western parks. In accordance with Office of Management and Budget guidance, the Park Service is authorized to provide park housing to seasonal employees in all locations and to permanent employees (1) whose position description requires them to live in the park to provide needed service or protection or (2) when adequate housing in the local community is not available. In November 1996, the Congress passed the Omnibus Parks and Public Lands Management Act of 1996 (P.L. 104-333). This act required the Park Service to review and revise its employee housing policy and conduct a park-by-park assessment of the condition of and need for park housing units. In response to the act, the agency recently modified its housing policy to state that housing will be provided for those not required to live in the park only when all other alternatives have been exhausted. However, Park Service headquarters officials acknowledged that while the agency is taking the steps needed to implement this policy, it may take a few years for the field units to fully comply. Each park that provides housing is required by the Park Service to have a housing management plan. This plan is to identify the park’s need for housing, the condition of housing, and an assessment of the availability and affordability of housing in nearby communities. The agency requires that the parks update their housing management plan every 2 years so that it reflects the current need of the park. Housing management plans are generally approved at the park level by the park superintendent—the senior park official at any park. The plans are not required to be reviewed or approved by agency regional management. In 1993, we reported that the Park Service had not fully justified the need for all of its employee housing. Most park housing is for seasonal employees, employees at isolated parks such as Yellowstone and the Grand Canyon, and employees who are required to live in the park to provide needed service or protection such as law enforcement rangers. In 1993, these employees accounted for about 4,570 of the agency’s 5,200 housing units, and the justifications for these housing units appeared adequate. However, there was little if any justification for the 630 remaining housing units for employees located in nonisolated parks who were not required occupants. Some of these housing units were being provided because park managers believed that adequate housing was not affordable in nearby communities. But, in 1993, we found that only 1 of 11 nonisolated parks we visited had prepared the required assessments to show that local housing was not affordable. Furthermore, even though park managers at some of these parks felt that adequate housing was not affordable, the surrounding evidence suggested otherwise. Specifically, about 75 percent of the permanent employees at the 11 nonisolated parks were living in nearby communities. In updating this information for this hearing, we found that while there has been some improvement, many of the same problems we found 4 years ago are still evident today. For example, at a recent sample of 15 parks, we found 7 parks did not have a current assessment of the availability or affordability of housing in nearby communities. Park Service headquarters housing officials have raised concerns that many assessments conducted at local parks are not being performed consistently across the agency. In addition, these officials said that most Park Service employees are not technically qualified to conduct assessments of real estate markets. Furthermore, according to these officials, because of the culture, tradition, and past practices of the agency, park managers may not be able to provide an unbiased objective review of the housing needs at any park. As a result, and in response to the requirements of the Omnibus Parks and Public Lands Management Act of 1996, the agency is in the process of issuing a contract to provide an assessment of housing needs within the Park Service. The contractor will review the justification of those considered required occupants, the availability and affordability of housing in nearby communities, and the condition of existing housing facilities within each park. If funding is available, Park Service officials expect that the contract will be completed and implemented by 2002. Once this contracted assessment is completed, the agency should have a more consistent and objective assessment of its housing needs. At that point, agency headquarters and regional staff can use the findings to better hold park managers accountable for their management of each park’s housing program. Today, as in 1993, the Park Service cannot provide detailed support for its backlog of housing needs. In 1993, we reported that the Park Service estimated the backlog to be about $546 million—however, at that time, the agency was not able to provide support for this figure. The 1993 report recommended that the agency develop a repair/replacement estimate that is supportable. Today, the agency estimates that its housing backlog is about $300 million. However, a Park Service housing official acknowledged that this estimate is not based on a park-by-park review of the condition of housing facilities but rather a gross estimate based on the total number of houses whose condition has been rated less than good. (The condition of park housing units are rated either excellent, good, fair, poor, or obsolete.) The Park Service anticipates that it will soon make some progress towards having a supportable housing backlog figure as this is one of the requirements of the upcoming contracted needs/facilities assessment. In response to the requirements of the Omnibus Parks and Public Lands Management Act of 1996, the contractor, among the other items previously discussed, will be required to provide a detailed condition assessment for each housing facility within the parks reviewed. Once the contractor has reviewed all parks where housing is provided, the agency will have a supportable backlog estimate of its housing needs. The contractor is scheduled to complete its work in 2002—9 years after we raised this problem in our 1993 report. As required by the Omnibus Parks and Public Lands Management Act of 1996, the Park Service has reviewed and revised its housing policy. Its new policy puts greater emphasis on the use of government housing as a last resort after all other alternatives have been exhausted. However, while the policy has changed, it has not yet been implemented by park managers. Until that happens, the employee housing program will continue as it has—with individual park managers implementing employee housing programs under broad guidelines with little oversight. As a consequence, there is a wide range of employee housing conditions across the national park system and no assurance that housing decisions are being made in the best interests of the Park Service. In the 15 park units we recently surveyed, park managers took a variety of approaches to providing employee housing. Among the sample of parks, we found wide disparities in the quality of the analysis of local housing markets. For example, at Harpers Ferry National Historical Park, the housing management plan provided no analysis of the local housing market. Instead, it simply provided a description of the local situation stating that: “rental units are very difficult to find . . . single income park employees find it difficult to secure adequate housing.” Without supporting analysis, there is no way to determine the validity of this assertion. In comparison, the analysis of local housing markets that accompanied the housing management plan for Santa Monica National Recreation Area was an in-depth analysis prepared by a contractor and exceeded 35 pages. Similarly, at Arches National Park the housing analysis included an in-depth assessment of the local housing market and rental rates as well as an evaluation of the population and economic base of the surrounding area. Furthermore, we found that for 7 of the 15 parks we sampled, assessments of local housing markets were either out of date or had not been done. Another indication of the broad discretion given to individual park managers is how housing units are allocated to employees. Beyond those employees whose position descriptions require them to live in the park, park managers use a variety of methods to determine which employees are provided park housing. These allocation methods include lotteries as well as a variety of ranking systems that give weight to such factors as length of employment, salary, size of family, and number and/or gender of children. The net effect of this is that housing decisions are not made consistently across the national park system. The significance of the broad discretion given to individual park managers is that the potential exists for housing decisions to be made that may not be in the best interest of the agency. This is best illustrated by some recent work done by the Department of the Interior’s Office of the Inspector General at the Grand Canyon. The Interior Inspector General’s Office reported in 1996 that in constructing employee housing at the Grand Canyon, a park manager decided to build 59 single-family houses. At the time of the report, these houses were in the process of being constructed, and many of them had already been completed. According to the report, the decision to build single-family houses was made despite advice from the Park Service regional office and others that building a mix of 114 single-family and multi-family units would better address the park’s overcrowded, unsafe, and substandard housing conditions. According to the report, by building the single-family units, approximately 50 permanent and 100 seasonal employees would still be living in substandard housing at the completion of the construction. In responding to this point, the park manager at the Grand Canyon stated that it was never the park’s intention to only build single-family houses and that a mix of multi-family dwellings would be constructed at a later time. Nonetheless, the park manager’s decision has resulted in more employees living in substandard housing units for a greater period of time. Furthermore, in reviewing records concerning the project’s justification for the high quality of materials, the Interior Inspector General reported that the contracted architectural and engineering firm noted that costs would drop significantly “if some of the top-of-the-line items that the Park is insisting on, i.e., doors and windows, could be lowered a notch in quality.” The report stated that this proposal was not studied nor taken by the park. The park’s decision on these matters is difficult to understand when budgets are so tight and the agency is faced with large maintenance backlogs and cutbacks in park services. The Park Service has taken a different approach to employee housing in comparison to BLM and the Forest Service. While all three are responsible for managing and protecting federal lands, the Park Service provides a much larger portion of its employees with housing than the other two agencies. Also, the Park Service’s housing inventory contains proportionately more houses, multiplex units, and apartments and fewer dormitories and cabins than the other two agencies. The sheer number and mix of the Park Service’s inventory combine to produce higher initial construction costs and recurring maintenance costs for the agency. Compared with the Forest Service and BLM, the Park Service mission emphasizes providing more in-park visitor services such as law enforcement, search and rescue and other supporting activities. As such, the Park Service believes that it needs to provide a larger number of its employees with in-park housing. In 1994, we reported that the Park Service had 23,908 employees and had about 4,718 housing units or about one housing unit for every 5 employees. In comparison, the Forest Service had 50,877 employees and 4,402 housing units or about one unit for every 11 employees. BLM had 11,861 employees and 206 housing units or about one unit for every 58 employees. Another indication of the variance in the agencies’ housing programs is the extent to which the agencies require their employees to live on-site. In 1994, the Park Service required about 1,400 employees (about 9 percent of its permanent employees) to live on-site in park housing to provide necessary visitor services, protect government property and resources, or both. In marked contrast, according to agency officials, the Forest Service required about 70 employees—less than 1 percent of its permanent employees—to live on-site in government housing. BLM had only two employees who were required to live on-site. About 75 percent of the Park Service’s housing inventory is composed of single-family and multiplex units compared with about 50 and 26 percent, respectively, for the Forest Service and BLM. In part, because of the Park Service’s mix of housing types, the agency has experienced far higher repair and rehabilitation costs. For example, in 1993, we reported that the Park Service estimated a backlog of $546 million for repairs, rehabilitation, and replacement of its housing inventory; whereas the Forest Service, having about the same number of units but a different mix, had a backlog of less than a third of the Park Service. A Park Service official had a difficult time substantiating the difference beyond the fact that only a portion of the difference resulted from the agency’s higher rehabilitation and construction standards and higher costs associated with rehabilitating units classified as historic structures. Furthermore, in 1994 we reported that of the three agencies, only the Park Service plans to replace and upgrade its housing. Although the Forest Service and BLM do not plan to stop providing housing altogether, both plan to minimize their involvement in providing housing to employees and instead rely more upon private sector housing. Among the reasons the Forest Service and BLM are minimizing housing is that (1) their current housing inventories were too expensive to maintain, (2) previous justifications for providing housing were no longer valid, (3) better roads have made it easier for employees to live in nearby communities, and (4) employees have shown a preference for living in private residences. In closing, the Park Service has been slow to resolve problems that we have identified in past reports. It has taken an act of Congress to move the agency to review and revise its housing policies and make arrangements to determine its need for and condition of its housing inventory. By taking these steps, the agency appears to be on the right track toward making progress in key areas. However, it’s clear that continued congressional attention is needed to ensure that the Park Service is held accountable to provide housing only where it is absolutely necessary and appropriately justified. Mr. Chairman, this concludes my statement. I would be happy to answer questions from you or any other Members of the Subcommittee. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed its past work on National Park Service (NPS) employee housing issues. GAO noted that: (1) NPS has not clearly justified the need for all of its employee housing units; (2) the agency requires parks to perform needs assessments to justify its housing; (3) however, these assessments may not be in-depth, objective, nor performed consistently from park to park; (4) in response to the Omnibus Parks and Public Lands Management Act of 1996, the agency is beginning to assess the need for its housing units; however, this process is not scheduled to be completed until 2002--9 years after GAO recommended such assessments; (5) NPS has not been able to provide detailed support for its backlog for repairing and replacing its housing inventory; (6) in 1993, GAO reported that the agency estimated its housing backlog at $546 million; however, NPS could not support this figure; (7) today, the agency estimates its housing backlog to be about $300 million; however, NPS acknowledges that this figure is not based on a detailed assessment of its housing repair and maintenance needs but rather a gross estimate based on the total number of houses whose conditions have been rated less than good; (8) individual park managers have broad discretion in implementing park housing policy, resulting in inconsistencies in how the program is managed across the agency and raising questions about whether housing decisions are being made in the best interest of the agency; (9) other federal land management agencies such as the Forest Service and the Bureau of Land Management (BLM) do not provide the same level of housing to their employees; (10) because its mission emphasizes providing more in-park visitor services than the other agencies, NPS believes that it needs to provide a larger number of its employees with in-park housing; (11) for example, in 1994 GAO reported that NPS had one unit for every 5 employees, while the Forest Service had one unit for every 11 employees and the BLM had one unit for every 58 employees; (12) when compared with the other agencies, the NPS mix of housing units has relatively more houses, multiplex units, and apartments and relatively fewer dormitories and cabins, and because of this, the NPS housing inventory is more costly to maintain. |
Since 1872, Congress has set aside natural, cultural, and recreational park sites to leave them unimpaired for future generations. The national park system is now a network of natural, historic, and cultural treasures in 49 states, the District of Columbia, American Samoa, Guam, Puerto Rico, Saipan, and the Virgin Islands. The system’s 391 parks and other sites include 58 national parks, such as Yellowstone in Idaho, Montana, and Wyoming; Yosemite in California; and Cuyahoga Valley in Ohio. The remaining 333 sites fall into other categories, such as national historical parks and national lakeshores. Some of the parks, such as Yellowstone, cover millions of acres and employ hundreds of employees; others, such as Ford’s Theatre, which encompasses two historic structures, are small and have few employees. As the park system’s federal manager, the Park Service is charged with conserving “the scenery and the natural and historic objects and the wild life therein and to provide for the enjoyment of the same in such manner and by such means as will leave them unimpaired for the enjoyment of future generations.” Because of the complexity of its mission, large land area, and the number and diversity of its park units, the agency has the difficult task of balancing resource protection with providing for appropriate public use, including meeting the needs of nearly 300 million park visitors each year—responsibilities that entail substantial management and financial challenges, particularly given current budget constraints. For financial support, the Park Service depends primarily upon federal funding, which totaled over $2.7 billion in fiscal year 2008. As with any federal program, the Park Service is expected to manage within whatever level of funding is provided and to allocate resources to its park units in a way that is both efficient and effective in delivering services. As we reported in 2006, however, operating costs increase each year because of required personnel pay increases, rising costs of benefits for federal employees, and rising overhead expenses such as utilities. In addition, the park system faces a maintenance backlog of about $9 billion, according to Interior fiscal year 2006 estimates. According to the Park Service, these budget realities are making it difficult to accomplish its core mission work, and partnerships are being strongly encouraged by the agency’s leadership. The Park Service relies on donations to supplement federal funding and assist the agency in better fulfilling its mission and fostering a shared sense of stewardship. Donations generally come in two forms—cash and in-kind goods and services. The Park Service reported receiving direct cash donations of $57.6 million in fiscal year 2008, about $30.3 million more than in fiscal year 2007 (see fig. 1). According to a Park Service official, a large part of the 2008 increase was attributable primarily to $15.6 million in privately donated matching funds in response to the $24.6 million appropriated by Congress in fiscal year 2008 for Centennial Challenge projects. These matching funds, combined with an additional $11.3 million of in-kind contributions, supported 110 Centennial Challenge projects at 75 parks in 2008. Annual cash donations to individual parks nationwide ranged from less than $10 to more than $4.5 million, on average, over the last 10 fiscal years, with the great majority of parks receiving less than $50,000 a year. In addition to cash donations, parks receive donations in the form of in-kind goods and services, which, for various reasons, are difficult to value and track. Examples of in-kind donations include artifacts for parks’ museum collections and thousands of volunteers who contribute time and expertise through the Volunteers-in-Parks program. The Park Service is statutorily authorized to accept donations—both cash and in-kind goods and services—from various sources, including individuals, corporations, and nonprofit organizations. Individuals include visitors who drop money in a park donation box or send a check to a park in appreciation for park services provided during a visit, such as a backcountry rescue or a ranger’s informative interpretation. Corporations range from small local businesses—like a lumber company—to large national corporations, such as Macy’s department stores. Nonprofit organizations, which support a specific park, group of parks, or the entire Park Service, also provide donations. Many parks accept donations from, and formally establish partnerships by entering into agreements with, such nonprofit organizations, including the National Park Foundation (Foundation), friends groups, and cooperating associations (see app. II for a description of the applicable authorizing statutes). Each of these types of organizations is described below. In 1967, Congress created the Foundation to encourage private philanthropy to the parks. The Foundation is an official national nonprofit partner of the Park Service; although congressionally chartered, it receives no annual federal appropriations. In accordance with its charter, the Foundation raises private donations from individuals, other foundations, and corporations to support the Park Service and has broad discretion in how it raises and distributes these donations. Friends groups are another type of nonprofit partner that supports the parks. The Park Service describes friends groups as any nonprofit organization established primarily to assist or benefit a specific park area, a series of park areas, a program, or the entire national park system. They are generally formed under state law and must comply with state and federal requirements for charitable fund-raising as well as standards of professional conduct. These include specific standards and philosophies of operation, best practices, codes of professional conduct, fiduciary guidelines and financial accountability requirements, independent audit procedures, and public disclosure requirements, among others. The Park Service does not require friends groups to operate as tax-exempt entities or to have formal partnership agreements with the agency unless they raise funds for the parks. Guidelines for park fund-raising activities are the primary source of park policy covering friends groups’ activities. The Park Service estimated that in 2006, there were 186 friends groups contributing time, expertise, and privately raised funds to support the national parks. The groups vary in size, organizational structure, and nonprofit governance and fund-raising expertise. Some, like the Frederick Vanderbilt Garden Association and Eugene O’Neill Tao House Foundation, are small volunteer organizations, while others, such as the Cuyahoga National Park Association and Golden Gate National Parks Conservancy, are large-scale fund-raising partners that also provide research, interpretive and conservation programming, and park tours. Cooperating associations—another type of nonprofit partner—support primarily interpretation, education, and research in the parks. The Park Service’s relationship with cooperating associations began in 1923 with the founding of the Yosemite Association, and by 2009, the number of cooperating associations had grown to about 70. Led by boards of directors and executive directors responsible for day-to-day management, cooperating associations provide program and financial assistance to national parks by producing and selling educational and interpretive materials in bookstores, providing information to visitors, and managing educational programs and field institutes; they return some portion of their profits from these activities to the parks to support the parks’ interpretive and educational mission. Many cooperating associations support multiple parks and other public land management units. For example, Eastern National and Western National Parks Association—two of the largest cooperating associations—partner, respectively, with more than 130 and about 65 parks and other units. Others, such as Black Hills Parks and Forests Association and Great Smoky Mountains Association, partner with a few parks or a single park. Some cooperating associations use revenue-sharing models that enable them to support—at small parks, for instance—bookstores and other interpretive services that would not be profitable on their own. The Park Service requires that cooperating associations operate as tax-exempt organizations and employs a standardized cooperating association agreement, identifying the specific federal statutes and agency policies governing agency and association responsibilities. Some of the nonprofit partners acting as cooperating associations—such as Golden Gate National Parks Conservancy, Rocky Mountain Nature Association, and Zion Natural History Association—also, like friends groups, actively raise funds to support programs and projects in parks. Partnerships and donations are a key component of the Park Service’s Centennial Initiative—a proposal the Park Service outlined in May 2007 for preparing the national parks for the agency’s 100th anniversary. The initiative is a 10-year plan that includes two funding components: (1) $100 million per year for 10 years in new federal spending to complete operational enhancements such as repairing buildings, improving landscapes, hiring seasonal employees, and expanding educational programs; and (2) a Centennial Challenge, whereby the Park Service would receive up to $100 million per year in federal funding to be matched by an equal or greater amount of private donations toward partnership projects and programs. Although Congress has not passed legislation authorizing this multiyear proposal, it did appropriate $24.6 million for fiscal year 2008 Centennial Challenge projects. With this federal money, the Park Service obtained $26.9 million in contributions from its partners. In 2009, the Park Service plans to spend $4.5 million in federal funds, combined with $4.5 million in nonfederal donations, for eight Centennial Challenge projects and programs. These donations and partnerships have raised concerns among some members of Congress and the public about the potential for donors to have undue influence over agency priorities, for parks to become commercialized, and for partnership projects to create new operations and maintenance costs for the Park Service to absorb. For example, in 1998, members of Congress raised concerns about one park’s proposal for a new visitor center to be supported by a fund-raising partner. From 1998 to 2002, in several hearings and letters to the Park Service about this project, members of Congress and others questioned whether the partner organization—which had ties to a construction company— exercised undue influence over the visitor center project when it developed a proposal and the park selected it without first following agency policies to clarify the need for such a facility; the project was an agency priority, given that it had never reached the nationwide priority list of construction projects in the agency’s budget request; the project was excessively large and costly; Congress might have to cover a funding gap if the partner fell short of its proposed features in the visitor center—including a retail store, café, restaurant, and IMAX theater—would commercialize the park. More generally, in 2001 and 2002, the House Appropriations Committee expressed concerns about large partnership construction projects—noting that such projects included both successes and failures—and reminded the agency to respect its own priority-setting process for construction projects, rather than going outside the process to seek congressional funding. The committee further reminded the Park Service to be cautious about partnership projects that resulted in new operations and maintenance costs, especially in light of the agency’s existing maintenance backlog. In 2002, the committee also said that the Park Service should be sure partnership agreements were in writing because in many instances, the scope of projects changed and the partners and the committee had different recollections of the original commitment. And in 2004 a conference committee reiterated past concerns of both congressional houses about the management of partnership construction projects, calling for the Park Service to carefully consider both construction and long-term operations costs of new facilities and to “make difficult decisions, where necessary, to defer or suspend a project that is not the right project, for the right reason, at the right size, and at the right time.” The public has also registered its concerns. For example, in 2005 the Park Service drafted a new version of its donations and fund-raising policy, including proposals to relax certain provisions related to corporate donations and advertising, but after receiving about 1,000 public comments—many expressing concern that the proposed changes would commercialize the parks—the agency removed these provisions from the final version. To manage donations and related partnerships, officials at all levels of the Park Service—park, region, and headquarters—are involved to varying degrees. The park is the basic management unit of the Park Service, and the agency relies heavily on the judgment of park superintendents (or park managers) who oversee each park unit for most decisions affecting local park operations. In addition to managing park operations, directing program activities, and overseeing administrative functions, superintendents are responsible for developing and fostering external partnerships. Depending on the park, other park staff, such as the deputy superintendent or the chief of interpretation, may also play a significant role in managing partnerships. Superintendents report to the regional director for their respective region (see fig. 2). The Park Service’s seven regional offices offer administrative or specialized support not always available at local parks—regional partnership coordinators who work with local parks on partnership matters within the region, for example. Regional offices are responsible for program coordination, budget formulation, financial management, strategic planning and direction, policy oversight, and assistance in public involvement and media relations for parks and programs within the region. Additionally, they ensure consistency with national policies and priorities and coordinate with Interior’s regional solicitors’ offices. The Park Service’s headquarters office, located in Washington, D.C., and led by the agency’s Director, provides nationwide leadership and advocacy, policy and regulatory formulation and direction, program guidance, and accountability for programs and activities managed by the field and key program offices. It also manages Park Service-wide programs that can be carried out most effectively from a central location. Within the headquarters office, the Office of Partnerships and Philanthropic Stewardship (Partnership Office) oversees the Park Service’s policies on donations and fund-raising; assists parks, regional offices, and program areas by facilitating the review and approval of large-scale donations and fund-raising projects; reviews and coordinates marketing and donor- recognition programs; delivers philanthropy and partnership training for the agency and its partners; and provides coordination between the agency and park-based friends groups and the Foundation. The Partnership Office also coordinates with Interior’s Washington Solicitor’s Office to review the legal sufficiency of agreements and other documents. Similarly, within the Division of Interpretation and Education, an agencywide cooperating association coordinator facilitates relationships between the agency and cooperating associations. Donations from nonprofit partners and corporations have provided significant support to park programs and projects, including interpretation and education, repair and rehabilitation of facilities, and cultural resource management and protection, among others. In addition, related partnerships have amplified the value of those donations with countless other benefits that go beyond dollar values or a simple tally of projects. Donations from several sources have provided support to park programs and projects. Donations from nonprofit partners—including the Foundation, cooperating associations, and friends groups—support various types of programs and projects at the national and park level. Donations from corporations have also supported the Park Service through various programs and projects and have promoted public engagement with parks, in many cases through advertising. Donations from the Foundation generally support programs and projects that are not federally funded, that meet the most critical needs of the park system, and have great impact across the Park Service. The Foundation, in consultation and collaboration with the Park Service, emphasizes the following themes when it raises funds and makes donations to the agency: (1) visitor experience; (2) volunteerism; (3) education; (4) community engagement; and (5) projects of national significance, such as the Flight 93 Memorial and the African American Experience. In 2005-2007, the Foundation addressed several of these themes through its donations to help create and improve Junior Ranger programs—which introduce children and families to the treasures of the national park system—in more than 90 parks. The Foundation’s donations supported volunteer and event coordination and community outreach and funded educational improvements, including redesigned program booklets, updated badges, and activity guides to attract children of different ages. As a result, according to the Foundation, parks are better able to attract families and educate the next generation of national park stewards. In contrast to the national focus of donations from the Foundation, donations from cooperating associations and friends groups generally support projects and programs at individual parks. The Park Service does not track these donations centrally, however, so we asked the 30 cooperating associations and friends groups related to our sample of parks to identify the types of projects and programs their donations have supported in the last 3 years. We found that donations from these cooperating associations and friends groups generally supported projects and programs in one of nine categories, with the top three being interpretation and education, repair and rehabilitation, and cultural resource management and protection (see table 1). The category most often cited by the partners in our sample was interpretation and education, with 29 of the 30 partners reporting that their donations had supported projects and programs in this category during the last 3 years. For example, donations supported free park newspapers, trail guides, and Junior Ranger program materials, as well as the creation and production of exhibits and podcasts to enhance visitor awareness and understanding of park resources (see fig. 3). In addition, several partners donated services to operate field institutes that provide on-site immersion experiences for visitors, such as learning about the ecology of different wildlife species or the art of fly-fishing, among others. Other partners donated their services to provide educational programs that reach audiences outside the parks. The Grand Canyon Association, for example, partners with a diverse group of nonprofit entities throughout the state of Arizona to produce free community lectures, for which they reported a doubling in attendance from 2006 through 2007. Still other partners have harnessed technology to provide virtual park experiences through video blogs and e-field trips. The second- and third-most common categories supported through partners’ donations, according to the partners in our sample, were repair and rehabilitation of facilities and cultural resource management and protection. Partners’ donations supported projects in these categories that are large and highly visible, as well as those that are more specialized and subtle but no less valuable. Some examples include: Statue of Liberty and Ellis Island restoration. Since 1982, the Statue of Liberty-Ellis Island Foundation has raised over $500 million for, among other things, the largest historical restoration in the history of the United States. The foundation’s donations have paid for restoration activities that included replacing the statue’s torch, repairing its crown, and installing new elevators and an informative exhibit in the base. On Ellis Island, the Foundation has restored five buildings—including the Ellis Island Immigration Museum, where many rooms look as they did during the height of immigrant processing—and expanded and upgraded the Museum Library and Oral History Studio, among other projects. The Ellis Island Immigration Museum has welcomed nearly 30 million visitors since opening in 1990. Wright Brothers National Memorial monument restoration. In 2008, the First Flight Foundation donated funds and services to complete the first major restoration in more than a decade of the monument at Wright Brothers National Memorial in North Carolina, improving safety conditions for visitors and Park Service staff and restoring public access to the monument (see fig. 4). The project cost over $400,000 and included cleaning the monument’s interior and exterior, repairing damaged mortar, replacing the electrical and mechanical systems, reworking the monument’s dome and beacon, and designing a new night-lighting scheme to enhance the architectural granite “wing” design. The project also included development of a new maintenance manual with specific instructions, which the park’s maintenance team will use for routine upkeep of the monument in years to come. Historic photograph and painting restoration at Yellowstone National Park. Donations from the Yellowstone Association have long funded conservation of irreplaceable treasures in the park’s collection. Examples include duplication of Yellowstone’s more than 90,000 historic photographs—many of which were stored only on the original deteriorating film negatives—and funding the conservation of an 1887 painting by James Everett Stuart, whose paintings also grace the White House and homes of the Montana, Oregon, and Washington historical societies (see fig. 5). The association’s donations have also funded improved storage for the collected photographs and artwork to protect them from further damage. In addition to the top three categories of projects and programs that partners in our sample cited, several other categories were also supported through the partners’ donations. For example, some partners said their donations supported construction of new facilities. Friends groups tend to provide more support in this category than cooperating associations do, because the associations’ missions are generally more narrowly focused on interpretation, education, and research. From 2005 through 2008, friends groups contributed over $100 million for at least six construction projects. Among these is a new visitor center at Grand Teton National Park. The Grand Teton Foundation donated about $10 million, which was combined with an $8 million federal appropriation and about $600,000 from the park’s cooperating association, to build the new visitor center. Two other categories supported by partners’ donations were (1) natural resource management and (2) trail maintenance, development, and access. Not only did several friends groups and some cooperating associations donate funds to support projects in these categories, but they also donated their services, often by coordinating volunteer programs. More than half the friends groups we spoke with support parks through volunteer services, which range from established programs to coordination of small groups. For example, through its Site Stewardship Program and with the support of local volunteers and education groups, Golden Gate National Parks Conservancy works to restore endangered species habitat at restoration sites in the Golden Gate National Parks. These sites are home to a number of endangered species, including the San Francisco garter snake and the mission blue butterfly (see figs. 6 and 7). Another friends group, the Frederick Vanderbilt Garden Association, consists of about 150 members who donate time to maintain and restore the gardens at the Vanderbilt Mansion National Historic Site in New York. The group also raises funds in the local community to purchase equipment and supplies such as lawn mowers, garden tools, and plants for the gardens, but its primary donation to the park consists of its members’ time. Not only have donations from nonprofit partners provided significant support to parks by helping to implement projects and programs, but they have also enabled the Park Service to achieve broader goals, such as addressing deferred maintenance needs. Fourteen of the superintendents in our sample told us that one or more of their partners had supported a project in the last 3 years that addressed deferred maintenance needs in their park. For example, 79 percent of the approximately $4 million in grant funding that Yosemite National Park received from a friends group in 2008 supported 14 deferred maintenance projects, including restoring scenic overlooks, rehabilitating historic structures, and replacing infrastructure such as bridges. Most of the superintendents we spoke with said that many projects would not have been possible without their partners’ support or that projects would have taken longer to complete. In a few cases, superintendents told us that they cannot meet their parks’ basic operating needs with appropriations, so the support they receive from their partners is critical to their ability to provide programs and make needed park improvements. Additionally, most superintendents said support from their partners helped decrease costs. For example, a friends group paid for the design and construction of a heli-rappel tower at Yosemite National Park, so that rangers and other rescue personnel, who conduct about 250 rescues per year, can train and maintain their certifications (see fig. 8). According to the Yosemite Superintendent, this project saves the park from renting helicopter time—at an estimated $1,500 per hour—and would not have been done were it not for the friends group funding. Corporate donations include charitable gifts—from which little to no business benefit is expected in return—as well as gifts that support both park needs and the corporation’s business goals, such as through advertising. For example, a corporation might develop an advertising campaign that raises money for and promotes public engagement with parks, while also achieving its own goals, by appealing to environmentally conscious consumers through its affiliation with the national parks. Sometimes parks receive corporate donations directly; at other times, nonprofit partners accept corporate donations on behalf of individual parks or the Park Service. The Park Service does not track corporate donations on a national level, but we collected information from the parks and nonprofit partners in our sample about the corporate donations they have received in the last 3 years. Of the 25 parks in our sample, 8 reported receiving direct charitable donations from corporations, none of which were tied to advertising. Individual corporate donations varied widely, but no single donation was valued at more than $70,000 (see table 2). These donations supported educational, search-and-rescue, and volunteer programs, as well as special events, maintenance, and resource management. Of the 30 cooperating associations and friends groups in our sample, 15 reported providing their parks over $1 million in annual support, including at least one corporate donation in the last 3 years. Most of these corporate donations were charitable gifts used to support various projects and programs; only three were tied to advertising. A Park Service headquarters official confirmed that charitable donations from corporations were more common than those tied to advertising. In addition to collecting information from parks and partners in our sample, we also reviewed information from the Foundation about the corporate donations it accepts on behalf of the Park Service and how these donations support the agency. Many of the corporate donations received by the Foundation serve a dual purpose—meeting parks’ needs while also supporting corporations’ goals. Generally, the Foundation manages these corporate donations under one of two models. Under the first model—the “Proud Partners of America’s National Parks” program— corporations commit to making certain donations to support Park Service projects and programs. In return, the corporations receive several privileges that help them advance their business goals. Specifically, they are designated as Proud Partners, permitted to affiliate themselves with the Park Service in promotional materials, and granted national marketing exclusivity. To ensure marketing exclusivity, the Park Service agrees to abstain from entering into any other nationwide advertising agreements with companies that sell the same product or service as the Proud Partner. While corporate donations under this model support the Park Service, according to an agency official, they also require the agency to invest considerable resources in managing them and ensuring national marketing exclusivity. A foundation official said that the organization is phasing out this model and now has only two Proud Partners—down from five at the end of 2006. According to an official, the Foundation is interested in and continues to pursue long-term relationships with existing and new corporations but under a new model. In contrast to the proud partner model, this new model includes more limited marketing exclusivity— 12 months, in the case of a Hertz Rental Car “green fleet” promotion (see fig. 9)—and permits an advertising affiliation with the Foundation, rather than the Park Service. Under this arrangement, the Park Service need not invest any resources in managing the relationship or ensuring marketing exclusivity, since the direct relationship links a corporation only with the Foundation. According to a Foundation official, such corporate donations benefit the Park Service through both the funds they provide and information in advertisements, which promotes public engagement with national parks (see figs. 9 and 10). Additionally, the official said, the Foundation understands the concern about commercialization within national parks, and the new model addresses that concern by having corporations affiliate with the Foundation rather than directly with the Park Service. This way, the corporate advertising is distanced from national parks. By supporting projects and programs that would not otherwise be accomplished, partners help enhance visitors’ experiences by offering visitors more than what they might have enjoyed without the partner’s involvement. Besides visible project and program support, partners also provide less-obvious enhancements that ultimately benefit visitors. These enhancements include intangible benefits supplied by cooperating associations; flexibility, efficiencies, and expertise afforded the Park Service by nonprofits as nongovernmental entities; and a meaningful connection to the local community for constituency building. The Park Service derives a substantial benefit from cooperating associations’ running retail outlets at multiple parks and using some model of revenue sharing with the parks where the outlets are located. This relationship allows even small parks to benefit from basic cooperating- association services, such as a bookstore. In addition, cooperating associations believe they offer parks and visitors attributes that for-profit retailers would not, such as site-specific publications and materials that might be unprofitable or not otherwise available, as well as more knowledge and heightened passion about the parks. Cooperating associations can also contribute to the continuity of visitors’ experiences, from Internet trip-planning resources to in-park retail sales, which give visitors an opportunity to take their experiences home to share with others and extend their visit long after they have left the park. In addition, partners afford parks increased flexibility to address unplanned needs, the ability to accomplish projects more efficiently, and expanded expertise. According to several agency and partner officials, because partners are not subject to the federal appropriations cycle or government procurement regulations, they are more nimble than government and can help meet parks’ immediate or unexpected needs, such as buying new computers or a video projector. Some partners also set aside a small amount of money that superintendents are able to use for expenses, such as giving gifts to visiting dignitaries or hosting a thank-you lunch for summer interns, for which they may not be permitted to use federal funds. Similarly, partner resources often go further because partners can earn interest on their money and can complete projects more efficiently—faster and for less money—than government. Several friends groups (6 of the 19 in our sample) have created and manage endowments to support capital improvements, conservation programs, and educational and community programs. When the costs of constructing a new science center at Great Smoky Mountain National Park suddenly increased in response to reconstruction demands after Hurricane Katrina, for example, the park’s partners had sufficient flexibility with their financial resources to cover the additional costs. Partners can also play a role in land acquisitions. Private real estate transactions typically move faster than government transactions, so parks benefit from their partners’ flexibility and resource availability when the partner acquires and preserves land on behalf of the government. The Rocky Mountain Nature Association, for example, has acquired several parcels of land and subsequently donated them to the Park Service. Of particular significance, according to the association’s Executive Director, was a scenic 13-acre parcel that the association quickly purchased upon learning it was for sale, resulting in the expansion of Rocky Mountain National Park’s border and preservation of the land from development by a local resort owner, who was also bidding for the land (see fig. 11). In less than 2 months after the land was posted for sale, the association was able to raise $400,000 and purchase the land. Additionally, it spent $15,000 cleaning up a 75-year-old dump and removing old structures from the site and about $7,000 in property taxes before the Park Service accepted the donation. The association’s Executive Director said that the nonprofit’s ability to be “Johnny-on-the- spot” is one of the most significant ways it is able help the park. Also, nonprofit partners may bring expertise in areas that balance park staff members’ experience and can lead to healthy dialogue, productive debates, and innovative ideas. Such expertise is particularly advantageous in helping the Park Service maintain parks’ relevance to a diverse population of park users and balance the expectations of a technologically sophisticated generation with preservation of the natural environment. Finally, as professionals and members of their communities, partners help parks make meaningful connections with surrounding communities and build supportive constituencies. One way that partners perform community outreach and constituency building is through membership programs, which most of the partners in our sample have. For example, partners often send out newsletters or informational packets telling their members and park gateway communities about the latest park issues. Many partners also have annual reports informing local communities of parks’ various projects and activities and encouraging future involvement. Friends groups, in particular, spend a good deal of time and resources cultivating community relationships to build support for their parks. They encourage donors and communities to become stakeholders in the parks, thereby expanding parks’ support constituencies. The long-term personal relationships they build with community members and key business and political leaders furnish continuity between parks and surrounding communities despite frequent park staff turnover. Furthermore, these groups often serve as parks’ community liaisons and voices through advocacy, such as lobbying elected officials. Six of the 19 friends groups in our sample reported advocacy as one of the functions they perform. The Park Service’s policies and processes for managing donations and related partnerships establish a firm foundation to uphold the agency’s objectives—integrity, impartiality, and accountability—but shortcomings in some of the policies and processes make it difficult to consistently secure these objectives. The agency’s donations and fund-raising policy, as written, includes directives in important areas to fulfill agency objectives, but in practice parks do not always follow these policy requirements. In addition, the Park Service has improved its partnership construction process in response to past accountability concerns, but some gaps remain. These gaps in the partnership construction process, as well as weaknesses in the donations and fund-raising policy, hinder their effectiveness at protecting against risks that may accompany donations. The Park Service’s cooperating association policy works well to guide relations with associations, and the agency’s new procedures for Centennial Challenge projects show promise, but it remains to be seen how well they will work over time. The Park Service’s donations and fund-raising policy requirements address key areas to protect the agency against risk, but their effect is diminished because parks and partners do not always follow them; ambiguities in the policy create challenges for parks and partners attempting to follow it; and the agency lacks a systematic, comprehensive approach for monitoring conformance. To ensure the integrity and appropriateness of donations and fund-raising activities, the agency’s donations and fund-raising policy includes provisions designed to protect against risks of undue donor influence, excessive future costs for parks, and potential commercialization. These provisions address donations made directly to parks or to Park Service programs, as well as donations made to partners, such as friends groups, for the benefit of parks or programs. As shown in table 3, the policy requires parks and partners to establish written agreements and plans, among other things, to advance the following objectives: ensure donations are used to meet park needs, identify any potential conflicts of interest relating to prospective donors, consider future costs that would result from donor-supported projects, ensure accountability for donations received, recognize donors appropriately, and keep parks free of advertising and commercialism. The donations and fund-raising policy sets forth the Park Service Director’s delegation of authority to regional officials to accept donations under $1 million and to approve most fund-raising agreements with a goal of less than $1 million. Donations of $1 million or more and fund-raising agreements with a goal of $1 million or more, or involving national or international solicitations, must be approved by the Director. For all donations made directly to parks, agency officials must ensure that the donation meets a legitimate need of the Park Service, would not require the commitment of unplanned funding, and does not reflect an attempt by the donor to influence agency decisions or receive special treatment. In addition, the donations and fund-raising policy describes appropriate and inappropriate ways to recognize donors. For example, donors’ names may be listed on a visitor center wall, on a Web site, or in a park newspaper but not on bricks, benches, or park furnishings; for corporate donors, recognition may not include marketing slogans under any circumstances. Under corporate campaigns, businesses may donate to parks or partners and promote their association with the Park Service through advertising, but the donations and fund-raising policy states that such advertising or product promotion may not appear inside parks and may not imply that the Park Service endorses a business or product. It further states that the Park Service must review and approve all marketing materials before distribution and that any corporate campaigns identifying the Park Service with alcohol or tobacco products will not be authorized. A written corporate campaign agreement must be in place and reviewed for legal sufficiency by Interior’s Office of the Solicitor. The Park Service does not regulate its fund-raising partners, but when partners such as friends groups raise over $25,000 to support a Park Service project or program, the donations and fund-raising policy generally requires a written agreement—a friends group agreement or a fund-raising agreement—to be in place before the agency accepts the donations. Friends group agreements establish long-term relationships between the Park Service and its partners and can be used to authorize fund-raising for ongoing Park Service needs. In addition, fund-raising agreements must be used when fund-raising activities are intended to raise over $25,000 for a specific project or program, such as a new visitor center or restoration of a historic site. Parks are encouraged to consult with Interior’s regional and Washington solicitors’ offices when drafting these agreements. Further, for all fund-raising efforts requiring a written agreement, the policy requires a fund-raising plan detailing techniques, timing, costs, and other components of a fund-raising strategy. When partners’ fund-raising efforts are expected to garner $1 million or more, or involve national or international solicitations, the policy also requires a feasibility study to assess the likelihood of fund-raising success. The feasibility study evaluates the readiness of the partner to raise the funds, the willingness of prospective donors to support the effort, and any external factors that might affect the probability of success. Parks may request a waiver of this policy requirement, and according to the policy, headquarters officials determine whether to grant the waiver, depending on the partner’s experience in similar fund-raising efforts and the park’s experience in executing the type of project proposed. The policy goes further to explicitly recognize that each park and partner is unique, that one size does not fit all, and that flexibility is needed in how to relate to fund-raising partners having varying degrees of experience. The donations and fund-raising policy as currently written reflects improvements the Park Service has made in recent years to address past concerns about the policy and to better protect against risks that may accompany donations and related partnerships. In 2006, the agency issued a revised version of the policy with more-stringent requirements than in preceding versions. For example, this version required—rather than encouraged—feasibility studies and donor recognition plans; set limits on which officials could accept direct donations (including corporate donations) instead of broadly granting authority to multiple officials in headquarters, regional offices, and at parks; and included additional requirements and a formal process for partnership construction projects. At the same time, the Park Service issued a reference guide with detailed guidelines and tools for park managers, such as templates for required agreements. Although these changes provided better safeguards against risk than existed earlier, they had the added repercussion of demanding more staff time and expertise to interpret more-complex policy and meet additional requirements. Partly to address this effect, the agency updated its policy in 2008, making changes to bring it in line with revised Interior policies and to streamline the process—such as increasing the dollar threshold for a written fund- raising agreement from $2,500 to $25,000 and eliminating the formal review of donations from state and local governments. In addition, officials in headquarters and in the Washington Solicitors’ Office worked together to draft several model agreements and related documents intended to expedite approval and invest fewer resources in the process. These model agreements have been in draft for about 3 years, however, and still have not been finalized, although parks have been using the drafts as guides since July 2008. Officials in the Solicitor’s Office said they are using this time to pilot and refine the agreements to make sure they capture a wide variety of regularly occurring circumstances. Also, some of the model agreements that involve relatively greater risks to the Park Service and its partners—such as a construction agreement—must be reviewed at higher levels in the Solicitor’s Office. While the donations and fund-raising policy requirements address areas essential to achieving agency objectives and minimizing risks, their strength is reduced because in practice parks and partners do not always conform to the policy requirements, and headquarters sometimes waives them (see table 4). At parks in our sample, shortfalls in conformance occurred for two primary reasons: park officials did not understand the requirement, or the documents required by the policy were in draft but not finalized, even though partners had already begun fund-raising in many cases. For example, of the 20 fund-raising agreements required at the parks in our sample, 8 were complete, with another 8 in draft. The remaining 4 required agreements were omitted—even though partners had already begun fund- raising—because park officials did not understand the policy requirement or the agreements had expired. For example, one park official working on a $35,000 project believed the agreement was required only for higher-cost projects; another park had not completed the documents because the park and partner were still developing a strategy for the project and the Superintendent believed the project posed little risk to the agency; and at a third park, the campaign was authorized in an agreement that had expired. Several of the fund-raising agreements in our sample that were still in draft were not complete because solicitors’ offices had not yet approved them. According to officials in the Washington Solicitor’s Office, the most common reasons for delays in approving these agreements were that the project was large and complex; facts had changed or raised new issues that had not been addressed before; or parks and partners had not thought through all the details of the project and partnership, such as how to pay for future operations and maintenance costs for a new facility. Agency and department officials expressed concern about delays in approving agreements and said regional solicitors’ offices lacked sufficient personnel and expertise in partnerships and philanthropy, further contributing to delays. The Park Service also waived policy requirements in some cases, as allowed by the donations and fund-raising policy. Of the 14 required feasibility studies at parks in our sample, 7 were complete, and the requirement was waived in another 5 cases. For example, the Director waived the requirement for a project to establish an $11 million endowment to support educational programs at Rocky Mountain National Park, explaining in an approval memo that the waiver was justified because the partner organization had extensive fund-raising experience, the project did not involve construction, and it included components with independent utility. Consequently, the campaign presented a very low risk to the agency. The feasibility study requirement was also waived for a campaign to raise $3 million at Grand Teton National Park for construction of an auditorium addition to a visitor center. In this case, however, the agency did not document the rationale for waiving the requirement, although the partner organization had written a letter to the park describing its considerable experience with fund-raising, including raising over $10 million for the visitor center. A headquarters official said the agency approved the project without a feasibility study, in part because the park had reduced the project’s scope from its original plan but also because of political pressure. Although the donations and fund-raising policy allows for waivers of the feasibility study requirement and outlines some general factors to consider when granting waivers, the Park Service has no specific criteria or procedures for doing so. In this context, the agency could be vulnerable to political and other pressures. Headquarters officials acknowledged the shortfalls in conformance to the policy and the waivers exempting parks from certain provisions but believed they were justified because of specific circumstances in each case. For example, in several cases, they said the parks and partners in question had considerable experience and a track record of success in similar fund-raising efforts, and allowing them to begin fund-raising without a feasibility study or without a final fund-raising agreement in place did not pose a significant risk to the Park Service. While this approach is logical, it does not address the underlying issue—a disparity between the uniform rigor of the policy’s requirements as written and the varied level of risk to the agency in different situations. In some low-risk situations, the Park Service’s and partners’ investment of resources to conform to the policy appears to be excessive relative to the level of risk to the agency. Agency officials at several parks told us that agreements had been in draft for over a year and consumed extensive Park Service and partner resources but were still not final, even though they considered the projects to be relatively low risk. For example, officials at Golden Gate National Recreation Area and its partner, the Golden Gate National Parks Conservancy, have been through about 18 revisions of a fund-raising agreement over nearly 4 years and still do not have a final version. Numerous people—including Park Service officials in the park, regional office, and headquarters; conservancy staff and lawyers; regional and Washington office solicitors; and others—have invested considerable time in negotiating, drafting, reviewing, and revising the agreement, which does not warrant this sizable investment of resources for several reasons, according to agency officials. The conservancy has a long history of raising tens of millions of dollars for the park and has already raised over $30 million for this campaign. The park and its Superintendent similarly have decades of experience with partnerships, philanthropy, and working with the conservancy. Further, the fund-raising agreement has built-in safeguards to protect the Park Service against excessive risk. For example, the campaign, which is for a long-term “trails forever” project, is designed to raise funds to repair or build individual trail segments one or two at a time and includes a provision guaranteeing that no work shall begin until all the funds have been raised for a given segment, so the Park Service is not at risk of absorbing unplanned costs. In fact, several trail segments have already been completed, even though the fund-raising agreement is still in draft. Superintendents we interviewed also expressed concern about the policy’s failure to differentiate between parks and partners with considerable fund- raising experience and those without. Ten of the 25 superintendents we interviewed said they faced challenges related to this issue. For example, several of these respondents said the donations and fund-raising policy is overly restrictive for proven partners with strong records of accountability, and policy requirements such as feasibility studies—which can cost tens of thousands of dollars—should be more flexible for parks and partners with established track records of success. On the other hand, some of the same respondents said that for newer or less-experienced parks and partners, the policy is appropriate. Compounding the challenges caused by the disparity between the donations and fund-raising policy’s requirements and the level of risk to the agency, and further compromising the effectiveness of the requirements, were challenges caused by a lack of clarity in the policy. For example, the policy allows some fund-raising to be authorized in friends group agreements, but it is not clear when a separate fund-raising agreement is required. In our sample of 25 parks, fund-raising was broadly authorized in at least seven friends group agreements. Under these agreements, partner organizations raised funds for projects costing as much as $3 million without having to prepare a fund-raising plan, record donor review procedures, or conduct feasibility studies. The parks and partners in these cases were generally experienced in large fund-raising efforts, had well-established partnerships and track records of success, and consequently probably posed little risk to the Park Service. Nevertheless, there is no assurance that all parks and partners operating with only a friends group agreement—and the projects they choose to support—would be low risk for the agency. In higher-risk cases, without the additional safeguards afforded through fund-raising agreements and other requirements, the Park Service could be vulnerable to partners’ exercising undue influence or failing to raise the funds they commit to raising, among other things. But the policy neither differentiates between higher- and lower-risk cases, nor clarifies when the additional safeguards must be in place for parks where fund-raising is authorized under a friends group agreement. Further, the donations and fund-raising policy is ambiguous about whether or when documents that the policy requires must be revised if circumstances change. Some parks and partners we talked with set out to reach a certain fund-raising goal, then increased the goal substantially without revising the required documents. For example, one friends group, along with its partner park, originally planned to raise under $1 million and met the associated policy requirements but then increased its target to well over the $1 million threshold—ultimately raising about $1.7 million— without taking additional steps to meet the requirements for higher-cost projects. In another example, a friends group originally planned to raise about $52 million to build a new visitor center and restore the site where the old one had been. Accordingly, the park and partner completed a feasibility study, fund-raising agreement, and other required documents. Over time, however, the cost of the visitor center rose to over $100 million, so the friends group not only raised these funds and constructed the visitor center but also—8 years after the original agreement was signed— began raising an additional $6 million for restoration of the old site without preparing any new agreements. Executive directors of several partner organizations told us that increasing the target was common in fund-raising efforts, and it was important for the Park Service’s policy to be flexible enough to adapt to changing circumstances. Without parameters, however, such flexibility can lead to policy violations. In another ambiguous area of the policy, two parks in our sample had begun fund-raising efforts with their partners but had not yet completed the documentation required by the policy because the efforts were in the “quiet phase”—a period when fund-raisers assess the feasibility of the effort, clarify the project’s scope, estimate its cost, and develop a fund- raising strategy. Consequently, they did not yet have the necessary information to complete the documents. But the donations and fund- raising policy, as written, is unclear about whether such a head start is allowable. Headquarters officials said that as they interpreted the policy, partners should not begin any fund-raising until the agreements are complete. Headquarters officials were generally aware of these ambiguities in the donations and fund-raising policy and said that such flexibility is important to accommodate the unique circumstances of individual parks and partnerships. They said they made case-by-case decisions when interpreting and applying the policy requirements, considering the totality of circumstances in each case. While the decisions about parks in our sample appear to be justified, this ad hoc approach does have disadvantages. For example, the approach makes it more difficult for parks and partners to anticipate how their cases will be assessed and which policy requirements they need to follow, leaving their decisions more vulnerable to outside influences. In an internal review, Park Service officials found that the donations and fund-raising policy contains many ambiguities, and it can be difficult to get clear answers to questions about how to interpret the policy, but parks tend to move ahead with projects and decisions anyway, responding to local pressures in the absence of clear guidance. In addition, reviewing individual cases creates a sizable workload for headquarters officials—diverting their attention from other issues, according to agency officials—and such a workload could contribute to delays in finalizing required documents. Several partners we talked to said the slow pace of the Park Service relative to the private sector contributed to difficulties because many donors expect to see the results of their gifts within 12 to 24 months, whereas some Park Service projects do not even have final versions of the required documents within that period. According to agency and friends group respondents, these delays create disincentives for donors to give to the Park Service rather than to an organization that can show results more quickly. Further compromising the effectiveness of its donations and fund-raising policy, the Park Service uses an ad hoc approach to monitoring conformance—rather than a nationwide, systematic process for doing so—and consequently, the agency lacks assurance that all parks and partners are meeting the applicable policy requirements. Officials in the Partnership Office said they usually know about conformance to the policy for projects requiring the Director’s approval, because they review the required documents that parks submit for these projects. Without a systematic process for tracking the information, however, they may not always know about conformance. For example, one park’s draft fund- raising agreement calls for the partner to report any donations of $1 million or more to the Park Service for review and approval, but the partner organization said it did not report a $5 million donation, even though it recognized the donor on its Web site as a “featured sponsor.” Officials in the Partnership Office said they knew about the donation but did not vet it because the regional office told them this donation would be used for a portion of the project on the partner’s private land, rather than the portion on adjacent Park Service property. When we asked several times for an accounting of which donations were used for each portion of the project, however, neither the park nor the partner organization provided one, so we could not verify how the donations were used or whether they met the policy’s vetting requirement, and it is not clear how the Park Service verified this information. Also, while headquarters officials may know about conformance in many cases, institutional knowledge about parks’ conformance may be lost as current staff retire or change jobs, and without a more systematic way of tracking projects needing headquarters-level review, it would be difficult for new staff to ensure that parks and partners are meeting all of the applicable policy requirements. Moreover, projects that do not require the Director’s approval under the donations and fund-raising policy are generally approved by regional directors, but none of the agency’s seven regions have systematic processes for monitoring conformance to this policy either. One regional partnership coordinator said he has many other duties and is not closely involved with donations and fund-raising activities at parks in his region. In the Northeast and Pacific West regions, partnership coordinators said they communicated frequently with parks about donations, related partnerships, and agency policy requirements but relied on parks to contact them for assistance, rather than actively monitoring parks’ activities and conformance to policies. They use this reactive approach partly because they do not supervise superintendents, who report to regional directors. Some regional coordinators advocated more active and comprehensive regional oversight of parks—including regularly soliciting information from parks and using a tracking system to monitor their conformance to policy requirements and to anticipate when parks may need assistance. Without a system to ensure that parks and partners meet the requirements, the agency may accept unnecessary risks. For example, one partnership coordinator expressed concern over an agreement that a park had negotiated and signed without involving the regional office; consequently, this agreement had never been reviewed to ensure that necessary legal mechanisms were in place to protect the Park Service. In another agreement negotiated without involving the regional office, according to agency officials, a park worked with a nearby city that agreed to construct facilities on Park Service land for $10 million and pay the facilities’ long- term operations and maintenance costs. After the facilities were built, however, a new mayor was elected, and the city no longer wanted to pay the operations and maintenance costs, according to the park’s Superintendent. The original agreement expired after 1 year, and the Superintendent (who arrived after the agreement had been signed) is now faced with determining how to cover the estimated $80,000 in annual operations costs. Given the park’s strained budget, the park will likely have to take staff from other park programs and operate the facilities at minimal staffing levels, according to the Superintendent. According to agency officials, had the region been involved earlier, this situation might have been prevented or mitigated—for example, by improving communication and transparency with the city and using an agreement with a longer term or exploring possible legal mechanisms that would have enabled the city to collect fees for the facility. In some cases where regional officials have learned of difficulties at parks, they have been able to help improve conditions. For example, according to a regional official, a newly formed friends group at one park offered to raise about $12 million for a new visitor center and arranged for pro bono work on the design. By the time the regional office learned about this initiative, however, the design was already complete, and it was considerably larger than the park needed, according to the official. In addition, the official said it became clear that the friends group was not experienced enough to raise $12 million. After consulting with regional officials, the park and friends group were able to negotiate a more appropriate agreement, and the group is now raising several hundred thousand dollars to help pay for new exhibits at the park, according to the regional official. In 2005 the Park Service implemented a step-by-step process for negotiating, reviewing, and approving partnership construction projects, to address concerns among Members of Congress about the accountability of expensive projects constructed through partnerships. Specifically, some Members of Congress were concerned about projects in which partners fell short of meeting fund-raising targets and pursued congressional funding, often outside the Park Service’s normal process for setting priorities for projects; public expectations were developed without appropriate communication between the Park Service, the partner, and Congress; and the Park Service was at risk of absorbing additional operations and maintenance costs even if no federal funds were used in construction. Projects that go through the partnership construction process are subject to all the applicable requirements in the agency’s policy on donations and fund-raising, as well as a set of policy requirements that every Park Service construction project over $500,000 must meet, such as being identified as a priority at the park, regional, and headquarters levels. The process is organized into three phases (see fig. 12). First, during the project definition phase, parks and partners must sign a memorandum, stating their intent to work together on a construction project, and define the project’s size, function, and estimated cost, including long-term operations and maintenance costs. A review board evaluates the project to ensure its need is justified, its scope and size are appropriate, and the design is cost- effective. Policy also requires that projects over $5 million be submitted to Congress for review and concurrence. Second, during the agreement phase, the park and partner draft a fund-raising agreement, fund-raising plan, and donor recognition plan, while the partner arranges for a feasibility study to be done and begins identifying potential donors. The required documents are reviewed and approved at the regional and headquarters levels and, for projects over $5 million, reviewed again for concurrence from Congress. Finally, in the development phase, the partner may publicly launch the fund-raising campaign. During this phase, the park refines its project plans, which must be approved once more by the review board. When all the funds have been raised, the park can begin contracting and construction. In 2007, Interior’s Office of Inspector General issued a report on the partnership construction process, calling the newly implemented process a positive step but making several recommendations for improvement. The agency has made progress on some but not all of these recommendations (see table 5). The Park Service has taken steps to streamline and expand training on the partnership construction process. To streamline its review and approval process, the agency drafted standard agreement templates, simplified its method for obtaining congressional concurrence when required by policy, and delegated more decisions to regions. Under the revised process, the agency will include partnership construction projects in its annual budget submission to Congress, so Congress will see all the proposals at once, rather than one at a time. Not only will this practice expedite the process, but it will also enable Congress to see how partnership projects fit into the agency’s broader priorities for its construction program. Also, the revised process calls for projects under $5 million that are entirely partner funded to be approved by regional directors, rather than the Park Service Director, thus reducing the workload in headquarters, as well as any associated delays. In addition, the Park Service expanded training on the partnership construction process and related topics, providing satellite training to hundreds of agency employees; developing and presenting training during standard superintendent-training sessions; and holding sessions at conferences for partner organizations, among other things. In addition, although the agency has not taken action to ensure that all project proposals include accurate estimates of operations and maintenance costs, it does require that they include an explanation for how parks will cover any increases in such costs. For all Park Service construction projects, parks are required to estimate operations and maintenance costs in a project review form submitted to the review board, but the Inspector General’s report found that they did not always do so, and even when they did, the estimates were not always accurate. According to a headquarters official, the Park Service has not taken steps to respond to this finding because it already has procedures in place for ensuring that these estimates are included and accurate, and it has been focused on revising its partnership construction process. Since 2005, parks’ proposed plans for covering any increases in such costs have also been considered in the review and approval of projects and documented in headquarters approval memos. The language in the approval memos is general, however, and not always supported with written documentation. For example, of the 18 approval memos issued for partnership construction projects since 2005, 9 include plans for a partner to pay at least a portion of the costs, sometimes as part of an ongoing arrangement or using proceeds from an existing endowment and other times through a new arrangement, such as raising funds to establish an endowment. The Park Service does not require parks to establish written agreements when partners agree to pay all or a portion of operations and maintenance costs associated with a construction project. As early as 2004, Park Service officials found that parks commonly relied on informal understandings when partners agreed to pay a portion of operations and maintenance costs. In an internal report, they said, “For projects where organizations other than the Park Service are expected to contribute to the operational costs of a facility, such arrangements are frequently on an informal basis without specific commitments as part of a written agreement.” The agency still does not require such agreements to be in writing. As a result, the agency puts itself at risk of absorbing operations and maintenance costs if an unwritten agreement breaks down, as is demonstrated by the following example. In 2008 Grand Teton National Park entered into an agreement with the Grand Teton National Park Foundation to raise about $3 million for an auditorium addition to a visitor center. Park officials believed that, because of an oral agreement with a former Superintendent, the foundation would pay the facility’s operations and maintenance costs, and the project was approved on the condition that the Park Service would bear no new costs. Subsequently, the foundation proposed a design change—adding a wall-sized window— which, according to an agency official, increased construction costs to $4.6 million and drove up projected operations and maintenance costs primarily because of expensive technical requirements for audiovisual equipment associated with the window. The park agreed to the design change, and the foundation agreed to raise the additional funds needed for construction. The foundation’s President does not believe she or the board agreed to pay the operations and maintenance costs, however, and said they prefer not to because doing so is not part of their mission. They consider such costs to be the government’s responsibility and their role to be supporting exceptional projects and programs that enhance the park, according to the foundation’s President. Nevertheless, they want to help and have agreed to continue talking with the park and exploring possible alternatives to cover the costs, such as renting the auditorium to generate revenue. The issue is still unresolved, but the Superintendent said that before construction begins, she intends to resolve clearly in writing how the additional costs will be covered—and the foundation supports the idea. In general, the Superintendent said the Park Service should require such a written agreement for construction projects, detailing the expected operations and maintenance costs, which portions each party will pay for, and a contingency plan describing what will be done if the expenses cannot be covered as planned. Regarding the Inspector General’s final two recommendations, the agency has neither established a universe of partnership construction projects, nor completed a tracking system for the projects. A headquarters official told us the agency has criteria defining such a universe, but the criteria are not documented so they are not being implemented consistently. According to the official, the agency plans to issue guidance about which projects must go through the partnership construction process but it has not yet done so because headquarters officials have recently been focused on revising the process and did not want to issue new guidance until the revisions were approved and final. Until the Park Service defines a clear universe of projects, it will be difficult to track projects’ status and monitor whether they are meeting policy requirements, including the requirement to estimate operations and maintenance costs. The Park Service began developing a computer tracking system for partnership construction projects in 2005, but it is not complete. Nor is it clear which projects belong in the system and which ones do not. According to agency officials, several projects that are going through the process are not in the system. Some were not added because the agency was making the transition to a new version of the system and wanted to wait until the transition was complete, while others were left out because there is no clear universe of projects. Currently, headquarters officials enter information for partnership construction projects over $1 million, since these projects come through headquarters for review, but lower-cost projects are not included, even though all partnership construction projects over $500,000 are supposed to go through the process. Also, the Park Service has not decided at what point a project should be removed from the system, according to agency officials. One project completed in 2005 and two others completed in 2007 are still in the system, even though nothing is left to track. And Centennial Challenge construction projects were omitted from the system—even though they must meet the same policy requirements—because the system could not be implemented quickly enough. Agency officials said they plan to expand the tracking system beyond construction projects to all partnership projects that require a fund-raising agreement, including Centennial Challenge projects, but they do not expect to reach this goal until around October 2010. The Park Service has made progress toward developing a donations and fund-raising policy and a partnership construction process that protect the agency against risks in many areas and address accountability concerns raised by Congress and others. Still, gaps remain, leaving the agency vulnerable to risks in some situations. To better ensure that parks follow the policy’s requirements while also reducing the agency’s investment of resources, some Park Service officials have suggested a certification process in which newer, less-experienced parks and partners would need to go through specific steps to develop experience and a track record. Initially, parks would have to follow a more-rigorous set of policy requirements, and regions would provide more assistance and oversight. For parks and partners that met certain criteria—such as demonstrating fund-raising success at various levels and financial accountability—the regional office could certify them to follow a modified set of policy requirements. Regional officials might evaluate the certified parks and partners periodically but invest more of their time with higher-risk, less- experienced parks and partners, according to the officials. Toward the same end, some parks and partners have designed partnership arrangements that enable them to refrain from fulfilling the same policy requirements numerous times in a single year. For example, in a general friends group agreement authorizing the Yellowstone Park Foundation to raise funds, a formal priority-setting and project selection process is documented, thereby ensuring that donations are used to meet park needs (and protecting the Park Service against the potential for a partner to exercise undue influence), without preparation of individual fund-raising agreements for the many projects and programs supported each year. Great Smoky Mountains and Yosemite national parks achieve the same effect by following a grant proposal process each year in which they identify needs and submit proposals to their partners, and the partners approve some proposals for funding. Currently, the Park Service allows these arrangements through case-by-case interpretations of its donations and fund-raising policy. But to more effectively and efficiently protect against risks, the agency could finalize and implement its model friends group agreement—which routinely authorizes general fund-raising—and clarify criteria for when additional documents must be completed in higher- and lower-risk cases. As the agency continues to build on its improvements to the donations and fund-raising policy and the partnership construction process, it could benefit from clearly delineating the risks it aims to protect against, potential indicators of those risks, and factors that temper the risks (see table 6). In many cases, the agency has used this logic when making case- by-case determinations about applying policy requirements. Currently the Park Service lacks a comprehensive framework for methodically applying policy requirements and processes to whole categories of projects rather than individual cases. It also lacks an approach that could clarify ambiguities and increase predictability for parks and partners following the policies. In contrast to the donations and fund-raising policy and the partnership construction process, the Park Service’s cooperating association policy created few challenges for parks and partners we talked to. The policy governs relationships between the agency and the associations, which generally elicit few risks for the agency. According to the policy, the associations must be tax-exempt organizations that support the Park Service’s educational, scientific, historical, and interpretive activities. They must have a signed standard agreement to operate bookstores in parks, and the goods and services sold in the stores must support the purposes of the associations’ mission. In addition, associations must submit several documents to the agency each year, including a standard report of revenues, expenses, and donations to the Park Service and a narrative description of annual accomplishments (see table 7). The 14 cooperating associations working with the parks in our sample had all met these policy requirements for the preceding year, and headquarters officials did not know of cases in which these requirements had not been met. To ensure that parks and associations are meeting the policy requirements, regional and headquarters officials monitor their activities and maintain copies of the standard agreements. In addition, to prepare the agency’s own annual cooperating association report, the Cooperating Association Coordinator in headquarters collects and reviews all other documents required each year. Although few cooperating association representatives we spoke with expressed concerns with the policy, those who did commented that the policy has been in a protracted and continuing revision process, which creates uncertainty about what to expect. Also, a headquarters official said challenges sometimes arise at parks because superintendents have only limited authority in their partnerships with associations, since cooperating association agreements are signed by regional directors or the Park Service Director, but day-to-day relations are between superintendents and associations. According to agency officials, they decided to delay issuing a new version of the policy while they evaluated this and other issues raised by the associations and agency leadership about the future role of cooperating associations in the Park Service. To manage the $24.6 million appropriated for the Centennial Challenge program in 2008, as well as matching donations, the Park Service established a Centennial Office, appointed a Chief to manage the program, and developed eligibility criteria for projects. To be eligible for Centennial Challenge funding, projects had to align with one of the program’s five goals: Stewardship: lead America in preserving and restoring treasured Environmental leadership: demonstrate environmental leadership to the Recreational experience: offer superior recreational experiences where visitors explore and enjoy nature and the outdoors, culture, and history Education: foster exceptional learning opportunities connecting people, especially young people, to parks Professional excellence: achieve management and partnership excellence to match the magnificence of the treasures entrusted to its care In addition, parks had to show that their partners were prepared to match at least 100 percent of the federal contribution (with cash or in-kind donations) and that the funds could be obligated and the project under way within the fiscal year. In August 2007 the Park Service announced a list of 201 projects eligible for Centennial Challenge funding. By April 2008 the project proposals had gone through six reviews, and the list was narrowed to 110 projects approved for funding. Meanwhile, agency officials developed a business plan for the Centennial Challenge, which was also adopted in April 2008. The business plan defines roles and responsibilities for the many offices involved, the selection process for 2008 projects, requirements that must be met for various types of projects, and a strategy to meet the increased need for training that may accompany the program’s launch. Once the final 110 projects were approved, parks still had to meet several policy requirements described in the business plan before Centennial Challenge funds were released to them. For example, for each project, parks had to have a partnership agreement or letter outlining the responsibilities of each party, as well as a budget and a project plan (see table 8). The Centennial Office, in consultation with the Solicitor’s Office, developed model partnership agreements and a model donation letter to guide parks and partners in preparing the documents and to expedite approval. When Park Service financial and contracting officials verified that the documents required by the program were in place and regional officials verified that the donated funds had been deposited, funds were released to parks, and they began implementing the projects. During implementation, parks were required to enter periodic progress reports into a centrally accessible computer system, and upon completion, they were required to enter final reports. To ensure that all program requirements were met for each project, the Centennial Office recorded the information on a checklist it maintained in each project file. Eleven of our 25 sample parks had a total of 20 Centennial Challenge projects approved in 2008 and completed all the required documents for them. Nevertheless, they identified several difficulties in the first year’s implementation of the program. The most common challenge that superintendents in our sample cited was the process’s administrative burden, followed by unclear procedures, uncertainty about future funding, and the late timing of federal funds. Specifically, superintendents said the project review and approval process required considerable effort and changed multiple times, and the rationale for approving or rejecting a project was not always transparent. The uncertainty about future years’ funding made it difficult to plan ahead, and some park officials expressed concern about the sustainability of programs started with Centennial Challenge funds. In addition, many parks did not receive the federal portion of the funds until June or July 2008—and some parks scarcely received the funds before the end of the fiscal year, which was the deadline the Park Service Director imposed for obligating all of the funds. This timing was particularly difficult for projects that involved hiring staff because parks did not want to hire people and lay them off only a month or two later. One park reported getting permission from headquarters to extend the staff needed for the project beyond the end of the fiscal year. Many friends groups and cooperating associations commented on the substantial potential for the Centennial Challenge program, but they expressed concerns as well. One Executive Director said, “We love the vision,” but cautioned that without a good system of execution, the vision might not be realized. Like superintendents, friends groups and cooperating associations identified some of the main difficulties with the program to be the administrative burden, unclear procedures, and the late timing of federal funds. Another Executive Director said, “We’ll think long and hard about whether to apply for Centennial Challenge funding in the future,” explaining that at some point, the program’s administrative cost and burden outweighed its benefits. In addition, several friends groups and cooperating associations commented that the program could be more inclusive of smaller parks with less-experienced partner organizations. Both parks and partner organizations also acknowledged that certain challenges resulted from circumstances beyond the Park Service’s control and that because 2008 was the first year of the Centennial Challenge program, some stumbling blocks were to be expected. On the other hand, several respondents cautioned that these challenges could be magnified in future years because many 2008 Centennial Challenge projects were already “in the pipeline,” so partners had already raised funds for them and parks had completed planning documents, which may not be true in future years. One year is generally not long enough to plan a project, start and finish a fund-raising campaign, and implement the project, according to respondents. Furthermore, some Park Service officials said, if Centennial Challenge funding increases in future years—as the agency has requested—the Park Service will need to increase its capacity to manage the greater volume of federal funds, donations, and required documents. Recognizing that parks had concerns and challenges in the first year of the program, the Centennial Office solicited suggestions from them and adjusted the program for 2009. For example, the office plans to add information to its Centennial Challenge Web site, such as transparent project selection criteria, clear roles and responsibilities for national and regional Centennial Challenge staff, and standard procedures for valuing in-kind donations. To avoid duplicate solicitor reviews of agreements and contracts, regional solicitors will review the documents in their respective regions. They also plan to develop and provide training on preparing the agreements and contracts required for the program. And to track projects’ conformance to applicable program requirements, they will develop online spreadsheets accessible to parks, regions, and headquarters. As it begins its second year, the Centennial Challenge program shows promise in helping to achieve Park Service goals while also incorporating accountability provisions and safeguards against risks, but it remains to be seen how well the program will work over time. The Park Service could enhance its management of donations and related partnerships by taking several steps. By using a more strategic approach, the agency could more efficiently and effectively meet its goals. And by further refining its information on donations, it could support such an approach while also enhancing its accountability. Also, by increasing employees’ knowledge and skills in working with nonprofit and philanthropic partners, the agency could improve partner relations and better protect itself against the risks that may accompany donations. Even as the potential for a dramatic expansion of donations increases with the Centennial Challenge program, the Park Service has no long-range vision for philanthropy and related partnerships and no plans for how to achieve such a vision. In part, this lack of a strategic vision stems from the Park Service Partnership Office’s focus on responding to concerns among Members of Congress about its management of donations and related partnerships—for example by revising its donations and fund-raising policy and implementing a partnership construction process. Further, the Partnership Office devotes considerable resources to shepherding individual projects through the policy requirements, making case-by-case decisions to interpret policy, and providing technical advice to parks and partners on the projects. While these are worthy activities, they have left little time and resources for thinking strategically about the desired role of donations and related partnerships in the Park Service—now and in the future. Meanwhile, indications have been growing that such strategic thinking is needed now. For example, recent events at several parks have contributed to a climate of uncertainty and insecurity for cooperating associations in the Park Service. In particular, in 2006 Gettysburg National Military Park terminated the agreement with its cooperating association, Eastern National, choosing instead to allow its friends group, the Gettysburg Foundation, to oversee the bookstore arrangement in a new visitor center. Accordingly, the foundation solicited proposals from bookstore operators in an open competition (and Eastern National submitted a proposal along with several others), but the foundation ultimately rejected Eastern National in favor of a for-profit company that offered a higher rate of return to the foundation. Because Gettysburg was one of Eastern National’s most profitable locations—typically generating about $3 million in sales annually—the loss had an effect on more than 130 parks that Eastern National supports. The association decreased its annual contributions to these parks as a result of Gettysburg’s withdrawal, according to a representative. The loss also hurt Eastern National, raising concerns among other cooperating associations about whether the Park Service will open bookstore operations more often to competitive bidding in the future and prompting broader questions about the future role of cooperating associations in the Park Service. Partly because of these concerns, a group of over 30 cooperating associations wrote a letter to the Director in 2007, requesting that cooperating associations be aligned under the Partnership Office, where activities related to friends groups and fund-raising are managed, instead of the office overseeing interpretation. They said that “misunderstandings about the National Park Service’s goals for national park cooperating associations are becoming a source of friction between cooperating associations, the National Park Service, and other park partners”; they believed that under the Partnership Office, they would be better informed about and engaged in issues critical to their support of the Park Service. The Park Service decided to retain the program within the office overseeing interpretation but established a steering committee to examine the concerns raised by the cooperating associations, as well as some raised by Park Service staff. The steering committee is one of many new offices, councils, committees, and positions the Park Service has created to help manage donations and related partnerships in recent years, but no focused effort has aimed to coordinate the entities or think holistically about donations and partnerships in the Park Service. Some members of these councils and committees, as well as other agency officials, have spoken out about the need for strategic thinking. According to a regional reference manual, the agency’s approach to partnerships is primarily reactive. As a result, partnership efforts are not necessarily fulfilling the agency’s greatest needs. To remedy this problem, the manual calls for the Park Service to focus attention on the issue and systematically develop a clear approach to partnerships. Superintendents we interviewed—including some that had served on partnership committees and councils—reinforced and expanded on this notion. For example, one said the Partnership Office is understaffed and cannot provide leadership because it is too busy reviewing individual fund-raising projects; the role of the Partnership Office should be setting broad policy, aggregating national reports, and performing other high-level activities. Another superintendent said that while significant potential exists for expanding the role of philanthropy in the Park Service, the agency has not yet developed a mature construct to realize that potential. Several superintendents questioned the rationale for managing friends groups and cooperating associations out of separate offices and for creating a Centennial Office apart from the Partnership Office. One said that while it was shrewd to create a position for someone to think separately about the Centennial Initiative, it was unnecessary and excessive to create a separate set of procedures for Centennial Challenge projects. Although the multiple committees, councils, and offices are generally focused on relatively narrow issue areas, some of them have begun to address broader strategic issues related to the future of donations and partnerships. For example, both the Park Service and Interior have explicitly endorsed partnerships as a way to leverage strained budgets and engage the public. Toward this end, the Park Service established a partnership council to formulate a vision, direction, and framework for an agencywide partnership investment and delivery program. The council’s vision statement describes a model in which the agency’s “leadership and employees have embraced the use of partnerships as a primary way of doing business and accomplishing its core mission,” and its organization empowers “parks, programs, regional offices, and service centers to take individual initiative in efficiently and creatively fulfilling the mission of the organization.” Also, the cooperating association steering committee has worked to clarify the Park Service’s priorities and expectations for cooperating associations over the long term, and the Centennial Office has developed a business plan for the Centennial Challenge fund, which outlines a strategy for the program. Building on these efforts, we believe, the Park Service could benefit from clarifying what its specific goals are for partnerships involving donations and philanthropy, what steps the agency will take to support these goals, and how the various elements will fit together. For example, through strategic planning, the Park Service could work with its partners to consider questions such as whether the agency wants to encourage more donations in the future, whether it is appropriate to use donations to support core operations, and whether it wants more parks to have friends groups. Once the agency—in collaboration with its partners—has answered some questions like these, it could resolve questions about what resources and actions are needed to achieve the desired vision. Doing so could enhance the agency’s effectiveness and efficiency—for example, by ensuring that people with key partnership skills are positioned where they are needed, when they are needed—and could better position Congress and the agency to make sound decisions about allocating resources and planning for the future. The Park Service is further constrained in its ability to pursue a strategic approach for donations and related partnerships because it has limited information on donations. Because the Park Service receives some donations in the form of funds—for example, when visitors drop cash into donations boxes, when corporations send checks to parks, or when friends groups and cooperating associations provide funds to parks—and other donations in the form of goods and services—such as when corporations donate lumber, when cooperating associations publish books, or when friends groups construct new trails for parks—it has multiple systems for tracking information on donations. As summarized in table 9, the agency has a separate set of procedures for tracking donations data in five overlapping categories: funds received in Park Service donations accounts, donations received under the Centennial Challenge program, support provided by cooperating associations, support provided by friends groups, and support provided by the Foundation. For donated funds deposited into Park Service accounts, the agency reliably tracks information on the amount received annually by each park and reports the total amount received agencywide in its budget justification. The Park Service does not, however, centrally track or report how the donations or donors’ identities were used, although individual parks we spoke with frequently maintain this information in files or spreadsheets. For donations received under the Centennial Challenge program in 2008, the agency tracked and reported data on the amount of cash and the value of in-kind donations received, the specific projects and programs supported, the parks receiving the donations, and which of the program’s five goals were supported by each donation. In addition, the Park Service collected narrative descriptions for each supported project or program and included some of these along with photographs in its year-end progress report. For donations provided by friends groups, tracking the data is more difficult because the groups often spend money on behalf of the Park Service, and the agency has no record of the expense. For example, to support a trail maintenance project, a friends group might donate services, such as organizing a group of volunteers and overseeing the work, and spend money for supplies and salaries, but the park would not typically have a record of the total value of the goods and services it received (even though several parks we talked to were well aware of such donations). Regional offices and headquarters know less than parks do about the specific donations that friends groups make to parks because no Park Service record is kept of in-kind or cash donations received from these groups. Although the agency tracks data on cash donations, there is no way to centrally determine what portion comes from friends groups because the data do not include the donors’ identities. To estimate the extent of support friends groups provide, in 2006 the Park Service began gathering information from publicly accessible Internal Revenue Service (IRS) forms submitted by the groups, but this information is incomplete, not up-to-date, and based on inconsistent determinations of support. The information is incomplete for several reasons. First, the Partnership Office’s method for identifying all its friends groups is to solicit the information from regional offices. The regions, however, may not always provide complete and accurate data, and because the Park Service defines friends groups broadly, regions have different opinions about which groups to include. Once the Partnership Office has a list of friends groups, agency officials collect available IRS forms for the groups from publicly accessible Web sites such as GuideStar, where the forms are posted along with other information about the organizations in an effort to increase transparency to the public. Because only organizations with gross receipts over $25,000 are required to file this form, some friends groups do not need to file it. The Park Service estimated that for 2006, only 27 percent of its estimated 186 friends groups met the threshold requiring the form. Also, even for those groups required to file the form, the Web site does not always post the forms. In such cases, agency officials follow up directly with the group to get the information, but this approach is not always successful. In addition, the information is not up-to-date, because the forms are not generally available on the Web site until more than a year after the filing year, and once they are available, it takes time for agency officials to collect missing data and compile the information into a report. For example, in April 2008 the agency reported information from the friends groups’ 2006 tax year. The information from IRS forms is also based on inconsistent determinations of support. On the IRS forms, friends groups report the amount of funds they spend annually in support of program services, or their missions, which are typically centered on supporting a park or a number of parks. For example, one friends group’s mission is “to engage public support for the park and enhance public use and enjoyment of the park.” When reporting program services expenditures, organizations make subjective decisions about what to include, such as what portion of salaries and benefits to count as furthering the organization’s mission, and consequently, they do not always use the same approach. Park Service officials acknowledged these weaknesses in the data but said that collecting and reporting information that gives some indication of support provided by friends groups is an improvement over collecting no information centrally, which was the agency’s practice before 2006. To estimate the extent of support provided by cooperating associations, the Park Service requires associations to fill out a government form with data including gross sales revenue; cost of goods sold; net profits; sources of income other than sales; and cash and in-kind donations to each federal agency the association supports, in categories such as interpretation, research, and free publications. In addition, associations must provide financial documents and narrative reports on their annual accomplishments. Agency officials use information from the required documents to produce an annual report with nationwide and, in some cases, association-specific information on the following: revenues in categories such as sales and membership income; expenses in categories such as program service operating expenses and direct donations to parks; financial aid provided to the Park Service in categories such as interpretation, free publications, and research; and narrative descriptions and pictures illustrating examples of the support provided by cooperating associations. Because the information on cooperating associations’ support to the Park Service is collected annually directly from cooperating associations, it is more complete and up-to-date than that collected for friends groups from the Web site. Like the friends group information, however, it relies on the numbers from IRS forms, which are subjectively determined on the basis of an expansive concept of support. Therefore, the information on cooperating associations should still be understood as an indicator of support, rather than a precise accounting of the value of donations. Also, cooperating associations are not required to report information on the support they provide to individual parks; instead, they report their support to the Park Service overall. This means that the Park Service currently does not know how much each park receives from associations that partner with multiple parks, such as Eastern National, which partners with more than 130 parks and provided $12.4 million in support to those parks in 2007, according to the annual report. The Park Service is considering requiring this information in the future. Like cooperating associations, the Foundation provides information directly to the Park Service, so agency officials do not have to collect it from a Web site, but the information has several limitations. Unlike the agency’s data on associations and friends groups, the information from the Foundation has come from various sources in the past 3 years, partly because the Foundation is not required to file the IRS 990 form. For 2 years, the Park Service collected information from the Foundation’s annual reports, but in the third year, the Foundation did not produce an annual report, so the Park Service obtained the data through a conversation with the Chief Financial Officer and from a presentation made by the Foundation. The source of this information is unclear and does not match numbers in the financial statement the Foundation submits annually to the Park Service. When asked, Park Service officials said they too wondered what the number was based on but had not been able to get a clear answer from the Foundation. The Park Service’s information on support provided by the Foundation is further limited because the agency does not systematically track how the Foundation’s donations were used or which parks and programs received the donations, although an agency official said he meets frequently with Foundation staff and is familiar with their activities. The Park Service acknowledges that its estimates of support provided by partner organizations are not precise measures of the value received, but agency officials believe that the costs of developing precise, reliable data would outweigh the benefits to the agency, especially because they believe the total value of such donations to be relatively small. It would be costly because it would take considerable time for staff to collect the data, enter it into a system, and verify its accuracy. And new databases require long- term maintenance, so the costs would continue into the future. It would be particularly costly to collect information on donations from partner organizations because the information originates with multiple, dispersed, independent organizations that the Park Service does not have authority over. And the donations are received by multiple divisions within parks. For example, the maintenance division might receive a donated car or trail repair services, the interpretive division might receive published brochures or front-desk support, and the resource management division might receive wildlife photos or assistance removing invasive plants. Also, the Park Service appreciates the support it receives from its partners and, according to agency officials, is reluctant to impose onerous and costly data-reporting requirements on them. More importantly, even if the agency invested the necessary resources in managing the data and asked friends groups, cooperating associations, and the Foundation to provide more-precise valuations of their donated funds, goods, and services, it is not clear for several reasons that the data would be reliable. First, it would be difficult to ensure that all partner organizations—especially newly established or small organizations— followed a consistent method to produce accurate and complete data. Also, according to agency officials, it would be difficult for the Park Service to clearly define a universe of donating partners and donations. For example, the agency would have to decide whether the following nonprofit partners and their contributions should be included in such a universe: The Teton Science School in Wyoming provides interpretive and educational services to visitors at Grand Teton National Park through an environmental education center located inside the park. Yosemite Renaissance is a nonprofit organization in California supporting art in Yosemite National Park. The organization puts on an annual juried art show in the park for 3 months and then tours around the state for a year. The organization receives about $15,000 from the county, but the Park Service does not provide any financial support in return for the service, according to agency officials. The Cuyahoga Valley Scenic Railroad in Ohio spends about $2.8 million annually to operate a train service on Park Service tracks and offer educational and recreational train rides for the park. The Park Service owns and maintains the tracks and infrastructure and supplies about $200,000 to subsidize the nonprofit operation. The Bay Area Discovery Museum in California has raised about $25 million to restore Park Service buildings where it now operates a children’s museum at Golden Gate National Recreation Area, consistent with the park’s mission. Golden Gate has similar arrangements with a number of other park partners. Finally, to develop reliable, accurate data, the Park Service would also have to ensure that all in-kind donations of goods and services were valued using a consistent methodology. Yet some donated goods—such as early settlers’ wagon wheel spokes or some antique eating utensils—have very little monetary value and could cost more to appraise than they are worth, despite their significant educational or historic preservation value to parks. Other donations, such as wildlife art, historic photographs, or equipment used by pioneering rock climbers, have difficult-to-quantify value. If the Park Service required that such donations be appraised, donors might choose to make their donations elsewhere. And donated services can be just as difficult to value. For example, the Park Service or its partners would have to determine what portion of salaries to count for friends groups and cooperating associations that provide services such as answering visitor questions, staffing visitor center desks, raising awareness about parks with their local communities, or managing projects and programs in parks. At some parks, students or professors conduct research that benefits the Park Service, and lawyers, businesspeople, or consultants furnish professional services for no fee. Not only do many Park Service officials believe that the costs of collecting precise data on donations would be high, some of them also believe that the benefits would be minimal at best. At the park level, several superintendents told us they did not see a use for a database with precise values. They were generally aware of the donations their parks received and said they could always ask their partners for more specific information if needed. At the headquarters level, officials in the Partnership Office said they rarely use the information they develop on estimated indicators of support, generally only to respond to occasional congressional inquiries. An official in the budget office said the volume of donations does not warrant the effort, and such information would not affect the agency’s allocation of resources. He noted, however, that if the magnitude of donations increased significantly—for example if the Centennial Challenge program grew—the information might be warranted. On the other hand, some superintendents told us they believed that notable benefits would come from collecting better data on donations, and the benefits would outweigh the costs. For example, one superintendent said it has become more apparent in recent years why the information is important, noting that currently some donations—and their associated benefits—are not reported anywhere. And several agency officials said it would not be too burdensome to track in-kind donations if an existing system could be used rather than creating a new one. Some parks have already begun to collect more information on donations. For example, a partnership coordinator at Cuyahoga Valley National Park recently began using a tracking form to collect information from the park’s division chiefs on cash and in-kind donations they receive, including a description of the donation, its value or estimated value, the donation’s purpose, donor category (such as individual, corporation, or nonprofit organization), and donor’s name. The park initially started the tracking effort to meet a requirement in an earlier version of the Park Service’s donations and fund- raising policy, but the requirement was subsequently eliminated. Nevertheless, park officials intend to keep tracking the information because they said it provides useful information left out of the financial system’s data on cash donations, and the superintendent uses the data when talking with partners and the public about the value of philanthropy to the Park Service. While it may be impractical to collect precise quantitative information on all donations, some refinements to the current approach—such as requiring parks to collect information from their friends groups—could improve estimates and, consequently, the Park Service’s accountability and transparency. Moreover, improving information for some high-risk categories of donations may warrant the costs. For example, under the Centennial Challenge program, the requirement that donations match or exceed the federal contribution calls for heightened controls and justifies a greater investment of resources to track the data. Likewise, given the heightened level of risk associated with corporate donations, the agency might benefit from closer data tracking and monitoring. Equipped with refined information on donations and a strategic approach, the Park Service would be well positioned for its approaching centennial anniversary, and Congress could make informed decisions about allocating resources. Park Service employees and partner organizations identified challenges with understanding each other’s cultures, policies, and constraints and said they lack sufficient skills in these areas, which they believe are critical for successful partnerships. Although the Park Service and its nonprofit partners share a common interest in enhancing parks and programs, they have distinctly different cultures and frameworks, motivations, and needs. For example, nonprofit organizations are incorporated under state law and must meet applicable state requirements. As tax-exempt organizations, they must also comply with relevant IRS requirements. They have their own policies, and are accountable to their boards of directors, any donors or members, and the public. Partner organizations generally said they want to feel appreciated and respected; be involved in decision making; and be responsive to donors’ interests, for example by showing results quickly and ensuring that their gifts are used as intended. For its part, the Park Service has numerous policies and regulations, and specific processes that it must follow. Many agency officials we interviewed noted the importance of following these processes and protecting the agency against excessive risk, as well as the value of encouraging support from partners that can enhance limited park resources. Partly because of the required processes, the agency tends to operate more slowly than the private sector, according to agency officials and partners. In addition, Park Service superintendents and staff sometimes rotate as often as every 2 or 3 years as they advance in their careers. In recognition of these challenges, and to help identify training needs, the Park Service contracted with Clemson University to study agency employees’ knowledge, skills, abilities, and attitudes related to partnerships. Researchers surveyed employees, asking them to rate the importance of, and their preparedness in, a number of Park Service competencies related to partnerships. They issued a report in 2007, identifying gaps where respondents reported feeling ill prepared relative to the importance of a given competency. The largest gap they found was in employees’ ability to collaborate with philanthropic and grant-making entities to leverage funds toward achieving Park Service goals, followed by their ability to ensure that all partnership construction projects meet agency requirements and their knowledge of the partnership construction process. Also among the top 25 percent of identified gaps was knowledge of the concepts, policies, and practices related to donations and fund- raising partnerships in the Park Service. Results from our own interviews are consistent with these findings. When asked what factors contribute to difficulties between partner organizations and the Park Service, friends groups and cooperating associations most often cited culture differences and related limitations in capacity. Similarly, superintendents most often cited greater capacity when asked what improvements could be made to the agency’s management of donations. For example, several partner organizations said Park Service officials do not always understand retail business and sometimes expect a greater portion of revenues to be returned to the park or inadvertently make decisions that can result in lower revenues. Others said park officials sometimes focused too much on their financial contributions without appreciating other, less tangible forms of support they provided. And a number of partner organizations said it was sometimes difficult to understand Park Service culture, with its bureaucracy, chain of command, protocols, policies, and procedures. Several superintendents said it was challenging to ensure that their partners understood agency policies and procedures and had realistic expectations. Some said they needed more skills and expertise in building partnerships, and others said they needed greater capacity to think strategically about how to increase partnerships and donations and to more actively seek out partners. In a 2004 Park Service review of its partnership projects, a team found that agency personnel needed training in building and maintaining successful relationships to enable them to deal more effectively with partners and partnership projects. The team said the training should include skills in collaboration; forming relationships; consensus building; looking for win- win solutions; negotiating; and how to work with strong, well-connected partners without compromising the agency’s integrity. Further, in 2007 a departmentwide team for facilitating the partnership process concluded that partnership training and capacity building were severely undervalued in Interior. In particular, the team emphasized that a key component of capacity building is hiring and training additional contracting officials and solicitors who understand how to operate within the scope of the law with partners. Toward this end, the team recommended that Interior provide additional training for contracting officers and solicitors. Also, it concluded that both regional solicitors’ and contracting offices lack sufficient personnel to work on partnership activities, cautioning that the Centennial Challenge will place significant additional workload on these offices; the team recommended hiring applicants with skill sets directly relevant to partnering activities. To increase employees’ knowledge, skills, and capacity related to partnerships, fund-raising, and nonprofit organizations, the Park Service has initiated efforts on several levels. In headquarters, the agency’s Partnership Office has developed and provided additional training to Park Service employees and partners on its donations and fund-raising policy, the partnership construction process, and partnering with cooperating associations. The latter category includes sessions on tangible and intangible support provided by associations, their structure and governance, business practices, and how to work together, for example. The agency also established a partnership council to discuss concerns, suggest and test new ideas, and make recommendations on partnership issues, and it created a partnership Web site with guidance, tools, case studies, and other information. Some regions and parks have also taken steps to increase capacity. The intermountain region recently held two multiday workshops, bringing together superintendents and executive directors of partner organizations to discuss topics such as what the Park Service and partners can do to benefit each other, strategies to resolve conflicts, and training needs for parks and partners. Demonstrating its desire to bridge the two cultures, the region also hired a full-time partnership coordinator from the Association of Partners for Public Lands, a nonprofit association of cooperating associations and friends groups. In the Pacific West region, agency officials established a partnership advisory committee—largely made up of superintendents with partnership experience—to provide technical assistance to parks and partners. The group surveys parks in the region annually to identify their needs and schedules custom-tailored consultations throughout the year to provide assistance and build capacity in the region. For example, in 2007, the group consulted with 10 parks and their partners, on themes including building a friends group, increasing board capacity for fund-raising, cultivating a partnership culture, writing fund-raising agreements, and building earned-income capacity. In addition, parks have initiated their own efforts to increase capacity. For example, Cuyahoga Valley National Park created a position for a full-time partnership coordinator, Minute Man National Historic Park hosted a training workshop put on by the Association of Partners for Public Lands for parks and partners in the Northeast region, and Valley Forge National Historic Park arranged for the National Parks Conservation Association to conduct a study identifying best practices in friends groups and national parks. While these efforts represent progress, more could be done. The 2007 Clemson University study, the departmentwide partnership team’s 2007 recommendations, and our 2008 interview results all confirm that agency officials and partners still face significant challenges working across culture differences and would benefit from increased knowledge and skills in this area. Not only would such increased capacity result in more- successful partnerships in the near term, but it could also reduce vulnerabilities arising when employees lack the requisite knowledge and skills to protect the agency against risks that may be associated with accepting donations. For decades, donations and related partnerships have provided vast benefits to the Park Service, and philanthropy holds great potential for supporting the national parks in future generations. Yet along with benefits come risks. Faced with the difficult task of weighing the benefits against the risks, the Park Service has taken strides in the right direction, although it has not yet achieved an optimal balance. Over time, the agency has issued ever more complex policies and procedures intended to shield itself from possible risks, but the outcome may be counterproductive. Confronted with numerous and sometimes ambiguous directives, parks interpret the policy inconsistently, and regions and headquarters apply the policy on an ad hoc basis, reviewing only the portion of projects that comes to their attention. The result is inconsistent conformance and an agency exposed to the very risks the policies are designed to protect against. The challenge lies in finding equilibrium: that mix where policy requirements are thorough and their enforcement unyielding when risks are serious—as with partnership construction projects and related operations and maintenance costs—and where requirements are less demanding when risks are not serious, so as to provide sufficient safeguards while smoothing the way for the Park Service to continue enjoying the wide-ranging benefits of donations. But even flawless policies may not be enough to manage donations to the Park Service effectively, especially with the potential for a dramatic expansion in donations under the Centennial Challenge. The Park Service will also need to turn away from its reactive stance toward a forward- thinking one and develop a comprehensive vision for philanthropy and related partnerships, with a master plan to guide its course in achieving the vision. To inform such a plan, as well as to provide accountability and transparency, the agency will need to continue improving its data on donations, while regularly assessing the costs against the benefits of implementing such improvements. With improved information and a strategic plan, the Park Service will be better positioned to recognize trends early and to make needed programmatic and management changes in areas such as policy, staffing, and training. And finally, it is clear that although the Park Service has taken steps to identify critical skills and knowledge needed for successful partnerships with nonprofit and fund- raising organizations—and has provided additional training in some cases—the agency needs to do more to foster an environment where such skills are consistently cultivated and rewarded. We are making seven recommendations to the Secretary of the Interior. To more effectively uphold the Park Service’s integrity, impartiality, and accountability while promoting positive partnerships, we recommend that the Secretary direct the Park Service Director to take the following three actions: Tailor the Park Service’s donations and fund-raising policy requirements to be commensurate with the level of risk to the agency; for example, allow parks and partners that meet certain conditions to follow a modified process. Develop a systematic approach to oversight, including a comprehensive method for monitoring whether parks and partners are following policy requirements on all partnership projects that call for fund-raising agreements—for example, through completion and expansion of the database used for partnership construction projects—and delegation of oversight responsibilities on the basis of risk level to the Park Service. Ensure that all partnership construction projects contain estimates of operations and maintenance costs and, when partners agree to pay all or a portion of such costs, require that written agreements be executed. To increase transparency and efficiency, we also recommend that the Secretary direct the Solicitor to work with the Park Service Director to expedite finalization of the draft model agreements related to donations and fund-raising. In addition, to better position Congress and the agency to make informed decisions and plan for the future, we recommend that the Secretary direct the Park Service Director to take the following two actions: In collaboration with representatives of friends groups, cooperating associations, and the National Park Foundation, develop a strategic plan that defines the agency’s vision for donations and related partnerships; sets short- and long-term management goals; delineates desired roles and responsibilities for agency offices and employees involved in managing donations and partnerships, so as to maximize efficient allocation of resources; and identifies steps to take in the short and long terms to achieve agency goals. Refine data collection procedures to improve estimates of support provided by friends groups and work with Congress to identify any additional reporting on donations it needs to be fully informed and to ensure accountability and transparency. Finally, to create and sustain more-effective partnerships with organizations that make donations, we recommend that the Secretary direct the Park Service Director to improve Park Service employees’ knowledge, skills, and experience about fund-raising and partnerships with nonprofit organizations—and encourage employees to improve nonprofits’ understanding of the Park Service—through targeted training, resource allocation, recruiting, and promotion practices. We provided the Secretary of the Interior with a draft of this report for review and comment. Interior generally agreed with our findings and concurred with six of our seven recommendations; it did not concur, however, with our recommendation that the Park Service develop a strategic plan that defines the agency’s short- and long-term goals for managing donations and related partnerships. In addition, although Interior said it generally concurred with our recommendation that the Park Service tailor its donations and fund-raising policy requirements to be commensurate with risk, and described relevant steps the agency has taken and intends to take, we believe these steps fall short of meeting the intent of our recommendation. Interior’s written comments are reproduced in appendix III. Regarding our recommendation that the Park Service develop a strategic plan, Interior commented that (1) the role of partnerships in helping accomplish Park Service goals is “woven through and supported by” the agency’s policies, including its 2006 Management Policies and its donations and fund-raising policy; (2) the agency cannot identify specific monetary goals for donations because it is not authorized to solicit them and some factors, such as donor interests and the state of the economy, are beyond the agency’s control; and (3) the agency already does strategic planning on a case-by-case basis with individual partners, such as the Foundation. Nevertheless, we continue to believe that the Park Service would benefit from an agencywide strategic plan that clarifies its short- and long-term vision for the future role of donations and related partnerships, and defines goals and objectives to achieve that vision. First, neither the agency’s Management Policies nor its donations and fund-raising policy sets out such a plan—or any plans—or describes a vision or goals for the role of donations and related partnerships in the Park Service. Rather, the Management Policies embrace partnerships as a way to help accomplish the agency’s mission and planning as a critical tool in decision making, call for managers to identify and accomplish measurable long-term and annual goals, and provide guidance on how and under what conditions parks should develop strategic and other plans. Thus we believe that, contrary to serving as a substitute for a strategic plan, this guidance supports our recommendation. The donations and fund-raising policy—which provides guidance for employees’ conduct in relation to donation activities and fund-raising campaigns—does not serve as a substitute for a strategic plan either. Second, we agree that the Park Service should not set monetary goals for donations because, as Interior asserted, it has no control over certain factors and is not authorized to solicit donations to achieve those goals. But in our view, this does not prevent the agency from crafting a vision for the desired role of donations and related partnerships, setting specific management goals toward that end, or identifying actions needed to reach the goals. To clarify this point, we revised our recommendation to specify that goals in the strategic plan should be related to management. And third, we commend the Park Service for working to help the Foundation develop its strategic plan and for working with partners on park-specific plans, but we do not believe the Foundation’s plan can substitute for a Park Service plan or that park-level plans can substitute for the much-needed agencywide plan that we are recommending. In response to our recommendation that the Park Service tailor its donations and fund-raising policy requirements to be commensurate with risk, Interior generally concurred, but said that for three reasons, it does not support modifying agency requirements. First, Interior explained that, in an effort to minimize the time needed to secure approval for a project, the Park Service has recently taken steps to speed the approval process for two categories of projects: partnership construction projects and certain projects with a fund-raising goal between $1 million and $5 million. While these actions may be warranted, they do not align policy requirements with risk level—as our recommendation calls for—because the categories apply uniformly to low- and high-risk projects. Second, Interior said, the current provision allowing for waivers of some requirements enables the Park Service to apply its policies comprehensively and uniformly, maintain accountability, and minimize risks. We are not convinced, however, that a policy under which officials use their judgment to make case-by-case decisions about granting waivers achieves these objectives. And, as described in this report, our findings suggest otherwise. We found that parks and partners do not always conform to the donations and fund-raising policy, indicating that the policy is not being applied comprehensively across all the national parks. We found ambiguities in the policy that led to inconsistent, not uniform, interpretation and application of the policy. In addition, we found that the agency lacks a systematic approach for monitoring conformance to the policy, and does not always record key decisions in writing, raising questions about the agency’s accountability in this area. And we do not believe the agency will be doing as much as it can to minimize risks until it takes action to ensure more consistent conformance to the policy. Finally, Interior asserted that only three waivers have been justified, suggesting that its policy does not need modification. Yet as we state in our report, we found seven instances, at just 25 of the agency’s 391 parks, where waivers were granted in the last 3 years. Further, these include waivers for 5 of the 14 required feasibility studies in our sample, indicating that over one-third of these required studies in our sample were waived. Instead of modifying Park Service policy requirements, Interior said the agency would provide additional information to parks on the criteria headquarters uses to decide whether to grant a waiver and that headquarters would document all the waivers it grants so it can establish a record to use in determining whether the policy needs to be modified. While we support the Park Service in taking these actions, we do not believe they fulfill the intent of our recommendation, and we continue to believe the agency could benefit from tailoring its donations and fund-raising policy requirements to be commensurate with risk. Because of our report’s discussion of, and potential impact on, partner organizations, we also sought and received oral comments on the draft report from the Association of Partners for Public Lands, the Friends Alliance, and the National Park Foundation. All three organizations agreed with our findings and recommendations. In addition, they all emphasized the importance of the recommendation on strategic planning and commented that it would be essential for partners to be involved in such a process if it is to be successful. We agree that partners need to play a role in this process, as we stated in our report. We modified our recommendation to explicitly convey this point. Both the agency and the partner organizations also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to interested congressional committees, the Secretary of the Interior, the Director of the National Park Service, and other interested parties. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. We were asked to determine (1) how donated funds, goods, and services and related partnerships have supported the National Park Service (Park Service); (2) the policies and processes the agency uses to manage donations and related partnerships and how well they are working; and (3) what, if anything, could enhance the agency’s management of donations and related partnerships. To address these objectives, we reviewed applicable laws, policies, and processes; agency data on cash donations received; and information from the Park Service and partner organizations on noncash donations provided by partner organizations. We also interviewed Department of the Interior (Interior) and Park Service officials, as well as representatives of partner organizations and others, at the national, regional, and park levels. At the park level, we obtained information from a nongeneralizable sample of superintendents and other Park Service officials, and from representatives of the affiliated cooperating associations and friends groups, at 25 of the 391 parks (see table 10). To obtain the information, we used a Web-based structured interview protocol, in person for 9 parks and by telephone for the other 16 parks. To develop our Web-based structured interviews, we first met with headquarters and regional Park Service officials, representatives of national associations of friends groups and cooperating associations, and park superintendents and friends group and cooperating association executive directors from several parks to learn about donations and related partnerships. In particular, we obtained information about fund- raising, the Centennial Challenge, agency policies and procedures, challenges related to the agency’s management of donations, and relevant data tracking. We used this information to develop a draft structured interview, which we shared with headquarters officials and partner organizations, and made revisions to it in response to their suggestions. To minimize nonsampling error that can introduce unwanted variability into the results (for example, differences in how a particular question is interpreted), we pretested the interview with four parks and their associated friends groups and cooperating associations. (Pretests were conducted in person for two parks and by phone for the other two parks.) Through our pretest process, we asked questions to ensure that the (1) interview questions were clear and unambiguous, (2) terms we used were precise, (3) interview did not place an undue burden on those completing it, and (4) interview was independent and unbiased. On the basis of feedback from the pretests, we modified the questions as appropriate. We selected two samples of parks—one sample for site visits and another for telephone interviews. For site visits, we selected a purposeful sample of 9 parks that reflected geographic diversity and emphasized parks with high levels of donation activity, because we believed they would have the most practical experience with Park Service policies and procedures on donations and fund-raising and would be more likely to encounter the potential risks associated with accepting donations. For telephone interviews, we selected another 16 parks, mainly using a stratified random sample. Specifically, we randomly selected up to 3 parks per region including 1 with high (over $10,000) and 2 with low (less than $10,000) maximum annual donations for 2004 through 2006 from friends groups and cooperating associations. From among the 3 randomly selected parks in each region, we generally chose 2 to interview, on the basis of factors such as presence or absence of cooperating associations and friends groups, visitation rates, and type of park. (In the Alaska region, we selected only 1 park because none of its parks were in the high donation category, and in the Southeast region, we selected an additional park outside of the random sample because we did not visit any of its parks and we wanted to ensure sufficient coverage of potential regional issues.) We also selected 2 additional parks that were outside of the random sample and had recently started or ended relationships with friends group because we wanted to ensure our interviews were applicable to parks in such situations; these parks were among those we contacted for pretesting. To develop the data for drawing our sample, we used information from the Park Service and the Association of Partners for Public Lands (APPL) on donations from friends groups and cooperating associations, park visitation rates, and park type for all 391 parks. We subjected these data to electronic and logic testing and followed up with Park Service and APPL officials regarding questions. After these verification and testing efforts, we considered the data sufficiently reliable as a source for our sample selections. In total, we completed structured interviews with 25 parks plus 11 cooperating associations, 16 friends groups, and 3 organizations that served both roles. To analyze the narrative responses to some of the structured interview questions, we used the Web-based system to perform content analyses of select open-ended responses. To develop statistics on agreement among the answers, two reviewers collaboratively developed content categories based on interview responses to each question. Subsequently, they independently assessed and coded each interview response into those categories. Intercoder reliability (agreement) statistics were electronically generated in the coding process. We resolved coding disagreements through reviewer discussion; agreement on all categories was 90 percent or above. In addition, we conducted statistical software analyses of the closed-ended responses. To determine how donations and related partnerships have benefited parks, we analyzed interview responses and documents we collected from the respondents, reviewed agency and partner reports describing accomplishments, and visited some projects to view them in person. We also obtained and analyzed cash donation data from the Park Service’s financial system. To assess the reliability of this information and learn about the agency’s related internal controls, we interviewed staff responsible for compiling and reporting the data in the Park Service’s Office of the Comptroller and at the park locations we visited, and we reviewed an external audit of the data. To determine what policies and processes the Park Service uses to manage donations and related partnerships and how well they are working, we reviewed pertinent Interior and Park Service policies and procedures and interviewed agency officials to better understand how they interpret and apply them; obtained documents required by the policies and assessed parks’ conformance to the policy requirements over the last 3 years; reviewed relevant agency and Inspector General reports; and interviewed headquarters, regional, and park officials and partner organizations about related challenges. To determine what could enhance the agency’s management of donations and related partnerships, we analyzed interview responses to questions about challenges and potential improvements; reviewed relevant Interior and Park Service reports and a Clemson University study on agency employees’ knowledge, skills, abilities, and attitudes related to partnerships; and interviewed agency and partner financial officers to understand how they tracked and reported information on donations. We also obtained information on fund-raising best practices and state and Internal Revenue Service policies applicable to nonprofit organizations, interviewed officials at a university and its associated foundation to understand how donations were managed there, and attended two nationwide meetings of friends groups and cooperating associations— including training sessions on topics such as the Park Service donations and fund-raising policy and the basics of fund-raising. We conducted this performance audit from December 2007 through June 2009, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. 16 U.S.C. § 1. Establishes the National Park Service and the basic mission of the agency: “to conserve the scenery and the natural and historic objects and the wild life therein and to provide for the enjoyment of same in such manner and by such means as will leave them unimpaired for the enjoyment of future generations.” 16 U.S.C. § 1a-2(g). Authorizes the Secretary of the Interior to enter into contracts, including cooperative arrangements, with respect to conducting living exhibits and interpretive demonstrations. 16 U.S.C. § 1b(5). Authorizes the Secretary of the Interior to provide, on a reimbursable basis, supplies and equipment to persons that render services or perform functions that facilitate or supplement the activities of the Park Service. 16 U.S.C. § 1g. Authorizes the Park Service to enter into cooperative agreements that involve the transfer of Park Service appropriated funds to state, local and tribal governments; other public entities; educational institutions; and private nonprofit organizations for the public purpose of carrying out National Park Service programs pursuant to 31 U.S.C. § 6305. 16 U.S.C. § 3. Authorizes the Secretary of the Interior to issue rules and regulations for use and management of park areas. 16 U.S.C. § 6. Authorizes the Secretary of the Interior to accept donations of lands, other property, and money for the purposes of the National Park System. 16 U.S.C. § 17j-2(e). Authorizes the use of Park Service appropriations for the services of field employees in cooperation with nonprofit scientific and historical societies engaged in educational work in the parks. 16 U.S.C. § 18f. Authorizes the Secretary of the Interior to accept donations and bequests of money or other personal property and to use and administer these for the purposes of increasing the public benefits from museums within the National Park System. 16 U.S.C. § 19e. Establishes the National Park Foundation, a charitable and nonprofit corporation, to accept and administer gifts of real and personal property for the benefit of, or in connection with, the National Park Service, its activities, or its services. 16 U.S.C. § 19jj-4. Authorizes the Secretary of the Interior to accept donations of money or services to meet expected, immediate, or ongoing response costs concerning destruction, loss, or injury to park system resources. 16 U.S.C. § 462(e). Authorizes the Park Service to enter into contracts and cooperative agreements with associations and others to protect, preserve, maintain, or operate any historic or archaeologic building, site, object, or property in the National Park System. 16 U.S.C. § 464(a). Authorizes the Secretary of the Interior, in administering historic sites, buildings, and objects of national significance, to cooperate with and seek and accept the assistance of any federal, state, or municipal department or agency; any educational or scientific institution; or any patriotic association or individual. 31 U.S.C. § 6305. Authorizes federal agencies to use cooperative agreements when (1) the principal purpose is to transfer a thing of value to the recipient to carry out a public purpose and (2) substantial involvement is expected between the agency and the recipient when carrying out the activity contemplated in the agreement. In addition to the individual named above, David P. Bixler, Assistant Director; Kevin Bray; Ellen W. Chu; Chase Cook; Christine Feehan; Richard Johnson; Jamie Meuwissen; Tony Padilla; and Rebecca Shea made key contributions to this report. Michael Brostek, Mae Liles, Kim Raheb, and Tom Short also made important contributions to the report. | The National Park Service (Park Service) in the Department of the Interior (Interior) annually receives hundreds of millions of dollars in donated funds, goods, and services to support its 391 parks and other sites. But concerns have been raised about potential accompanying risks, such as undue donor influence, new long-term maintenance costs, or commercialization of parks. To address these concerns, the Park Service has developed and refined policies for managing donations, but questions remain about the agency's ability to do so effectively. GAO was asked to examine (1) how donations and related partnerships have supported the Park Service, (2) the policies and processes the agency uses to manage donations and how well they are working, and (3) what the agency could do to enhance its management of donations and related partnerships. GAO reviewed applicable legal and policy documents, interviewed Interior and Park Service officials and partner organizations, and visited selected national parks. Donations from individuals, nonprofit organizations, corporations, and others have provided significant support to park projects and programs, and related partnerships have amplified the value of those donations with countless other benefits. The collective value of these donations is substantial--including over $500 million since 1986 at a single park and over $100 million for six recent construction projects, for example--but their total worth is difficult to quantify, in part because of the numerous and often indirect ways in which parks receive donations. Donations support park programs and projects, such as interpretation and education, new construction, repair of facilities, and cultural resource management and protection. Park partners also provide other benefits that go beyond dollar values or a simple tally of projects. These benefits include enabling projects and programs that would not otherwise have been possible, accomplishing projects more quickly, and expanding parks' connections with their communities. The Park Service's donations and fund-raising policy includes directives in key areas to protect the agency against risks, but their effectiveness is diminished because parks do not always follow these program requirements, and the agency has no systematic process to monitor conformance. Agency officials acknowledged some cases of nonconformance but believed they were justified because they involved parks and partners with long track records of success and therefore did not pose significant risks to the agency. While reasonable, this justification indicates that the policy's requirements (and the resource investment needed to meet them) are not always commensurate with the level of risk to the agency. The Park Service has made improvements to its partnership construction process to address past accountability concerns, but remaining gaps leave the agency exposed to risks in some situations, such as when operations and maintenance costs increase for new construction. To enhance management of donations and related partnerships, GAO believes the Park Service could take a more strategic approach, further refine its information on donations, and increase employees' knowledge and skills for working with nonprofit and philanthropic partners. The agency could benefit from a long-range vision of the desired role of donations and related partnerships, but despite growing indications of the need for one, the Park Service has neither a strategic vision nor a plan for how to achieve it. Also, by enhancing its information on donations, which is currently limited, the agency could better support such a strategic approach. For various reasons, agencywide information on donations from some of its partners is incomplete, out of date, and based on inconsistent determinations of support. Finally, by improving its employees' skills in understanding the culture, policies, and constraints of nonprofit and philanthropic partners, the agency could better manage the risks that accompany donations. Park Service employees and partners say they face challenges and are not sufficiently skilled in this area, although they believe the skills are critical. |
When used for personal identification, biometric technologies measure and analyze human physiological and behavioral characteristics. Identifying a person’s physiological characteristics is based on direct measurement of a part of the body—fingertips, hand geometry, facial geometry, and eye retinas and irises. The corresponding biometric technologies are fingerprint recognition, hand geometry, and facial, retina, and iris recognition. Identifying behavioral characteristics is based on data derived from actions, such as speech and signature, the corresponding biometrics being speaker recognition and signature recognition. Biometrics can theoretically be very effective personal identifiers because the characteristics they measure are thought to be distinct to each person. Unlike conventional identification methods that use something you have, such as an identification card to gain access to a building, or something you know, such as a password to log on to a computer system, these characteristics are integral to something you are. Because they are tightly bound to an individual, they are more reliable, cannot be forgotten, and are less easily lost, stolen, or guessed. Biometric technologies vary in complexity, capabilities, and performance, but all share several elements. Biometric identification systems are essentially pattern recognition systems. They use acquisition devices such as cameras and scanning devices to capture images, recordings, or measurements of an individual’s characteristics and computer hardware and software to extract, encode, store, and compare these characteristics. Because the process is automated, biometric decision-making is generally very fast, in most cases taking only a few seconds in real time. Depending on the application, biometric systems can be used in one of two modes: verification or identification. Verification—also called authentication—is used to verify a person’s identity—that is, to authenticate that individuals are who they say they are. Identification is used to establish a person’s identity—that is, to determine who a person is. Although biometric technologies measure different characteristics in substantially different ways, all biometric systems involve similar processes that can be divided into two distinct stages: enrollment and verification or identification. In enrollment, a biometric system is trained to identify a specific person. The person first provides an identifier, such as an identity card. The biometric is linked to the identity specified on the identification document. He or she then presents the biometric (e.g., fingertips, hand, or iris) to an acquisition device. The distinctive features are located and one or more samples are extracted, encoded, and stored as a reference template for future comparisons. Depending on the technology, the biometric sample may be collected as an image, a recording, or a record of related dynamic measurements. How biometric systems extract features and encode and store information in the template is based on the system vendor’s proprietary algorithms. Template size varies depending on the vendor and the technology. Templates can be stored remotely in a central database or within a biometric reader device itself; their small size also allows for storage on smart cards or tokens. Minute changes in positioning, distance, pressure, environment, and other factors influence the generation of a template, making each template likely to be unique, each time an individual’s biometric data are captured and a new template is generated. Consequently, depending on the biometric system, a person may need to present biometric data several times in order to enroll. Either the reference template may then represent an amalgam of the captured data or several enrollment templates may be stored. The quality of the template or templates is critical in the overall success of the biometric application. Because biometric features can change over time, people may have to reenroll to update their reference template. Some technologies can update the reference template during matching operations. The enrollment process also depends on the quality of the identifier the enrollee presents. The reference template is linked to the identity specified on the identification document. If the identification document does not specify the individual’s true identity, the reference template will be linked to a false identity. In verification systems, the step after enrollment is to verify that a person is who he or she claims to be (i.e., the person who enrolled). After the individual provides whatever identifier he or she enrolled with, the biometric is presented, which the biometric system captures, generating a trial template that is based on the vendor’s algorithm. The system then compares the trial biometric template with this person’s reference template, which was stored in the system during enrollment, to determine whether the individual’s trial and stored templates match (see figure 1). Verification is often referred to as 1:1 (one-to-one) matching. Verification systems can contain databases ranging from dozens to millions of enrolled templates but are always predicated on matching an individual’s presented biometric against his or her reference template. Nearly all verification systems can render a match–no-match decision in less than a second. A system that requires employees to authenticate their claimed identities before granting them access to secure buildings or to computers is a verification application. In identification systems, the step after enrollment is to identify who the person is. Unlike verification systems, no identifier need be provided. To find a match, instead of locating and comparing the person’s reference template against his or her presented biometric, the trial template is compared against the stored reference templates of all individuals enrolled in the system (see figure 2). Identification systems are referred to as 1:N (one-to-N, or one-to-many) matching because an individual’s biometric is compared against multiple biometric templates in the system’s database. There are two types of identification systems: positive and negative. Positive identification systems are designed to ensure that an individual’s biometric is enrolled in the database. The anticipated result of a search is a match. A typical positive identification system controls access to a secure building or secure computer by checking anyone who seeks access against a database of enrolled employees. The goal is to determine whether a person seeking access can be identified as having been enrolled in the system. Negative identification systems are designed to ensure that a person’s biometric information is not present in a database. The anticipated result of a search is a nonmatch. Comparing a person’s biometric information against a database of all who are registered in a public benefits program, for example, can ensure that this person is not “double dipping” by using fraudulent documentation to register under multiple identities. Another type of negative identification system is a surveillance system that uses a watch list. Such systems are designed to identify people on the watch list and alert authorities for appropriate action. For all other people, the system is to check that they are not on the watch list and allow them normal passage. The people whose biometrics are in the database in these systems may not have provided them voluntarily. For instance, for a surveillance system, the biometrics may be faces captured from mug shots provided by a law enforcement agency. No match is ever perfect in either a verification or an identification system, because every time a biometric is captured, the template is likely to be unique. Therefore, biometric systems can be configured to make a match or no-match decision, based on a predefined number, referred to as a threshold, that establishes the acceptable degree of similarity between the trial template and the enrolled reference template. After the comparison, a score representing the degree of similarity is generated, and this score is compared to the threshold to make a match or no-match decision. Depending on the setting of the threshold in identification systems, sometimes several reference templates can be considered matches to the trial template, with the better scores corresponding to better matches. Retina Recognition Signature Recognition Speaker Recognition Facial recognition technology identifies people by analyzing features of the face not easily altered—the upper outlines of the eye sockets, the areas around the cheekbones, and the sides of the mouth. The technology is typically used to compare a live facial scan to a stored template, but it can also be used in comparing static images such as digitized passport photographs. Facial recognition can be used in both verification and identification systems. In addition, because facial images can be captured from video cameras, facial recognition is the only biometric that can be used for surveillance purposes. Fingerprint recognition is one of the best known and most widely used biometric technologies. Automated systems have been commercially available since the early 1970s, and at the time of our study, we found there were more than 75 fingerprint recognition technology companies. Until recently, fingerprint recognition was used primarily in law enforcement applications. Fingerprint recognition technology extracts features from impressions made by the distinct ridges on the fingertips. The fingerprints can be either flat or rolled. A flat print captures only an impression of the central area between the fingertip and the first knuckle; a rolled print captures ridges on both sides of the finger. An image of the fingerprint is captured by a scanner, enhanced, and converted into a template. Scanner technologies can be optical, silicon, or ultrasound technologies. Ultrasound, while potentially the most accurate, has not been demonstrated in widespread use. Last year, we found that optical scanners were the most commonly used. During enhancement, “noise” caused by such things as dirt, cuts, scars, and creases or dry, wet, or worn fingerprints is reduced, and the definition of the ridges is enhanced. Approximately 80 percent of vendors base their algorithms on the extraction of minutiae points relating to breaks in the ridges of the fingertips. Other algorithms are based on extracting ridge patterns. Hand geometry systems have been in use for almost 30 years for access control to facilities ranging from nuclear power plants to day care centers. Hand geometry technology takes 96 measurements of the hand, including the width, height, and length of the fingers; distances between joints; and shapes of the knuckles. Hand geometry systems use an optical camera and light-emitting diodes with mirrors and reflectors to capture two orthogonal two-dimensional images of the back and sides of the hand. Although the basic shape of an individual’s hand remains relatively stable over his or her lifetime, natural and environmental factors can cause slight changes. Iris recognition technology is based on the distinctly colored ring surrounding the pupil of the eye. Made from elastic connective tissue, the iris is a very rich source of biometric data, having approximately 266 distinctive characteristics. These include the trabecular meshwork, a tissue that gives the appearance of dividing the iris radially, with striations, rings, furrows, a corona, and freckles. Iris recognition technology uses about 173 of these distinctive characteristics. Formed during the 8th month of gestation, these characteristics reportedly remain stable throughout a person’s lifetime, except in cases of injury. Iris recognition can be used in both verification and identification systems. Iris recognition systems use a small, high-quality camera to capture a black and white, high-resolution image of the iris. The systems then define the boundaries of the iris, establish a coordinate system over the iris, and define the zones for analysis within the coordinate system. Retina recognition technology captures and analyzes the patterns of blood vessels on the thin nerve on the back of the eyeball that processes light entering through the pupil. Retinal patterns are highly distinctive traits. Every eye has its own totally unique pattern of blood vessels; even the eyes of identical twins are distinct. Although each pattern normally remains stable over a person’s lifetime, it can be affected by disease such as glaucoma, diabetes, high blood pressure, and autoimmune deficiency syndrome. The fact that the retina is small, internal, and difficult to measure makes capturing its image more difficult than most biometric technologies. An individual must position the eye very close to the lens of the retina-scan device, gaze directly into the lens, and remain perfectly still while focusing on a revolving light while a small camera scans the retina through the pupil. Any movement can interfere with the process and can require restarting. Enrollment can easily take more than a minute. Signature recognition authenticates identity by measuring handwritten signatures. The signature is treated as a series of movements that contain unique biometric data, such as personal rhythm, acceleration, and pressure flow. Unlike electronic signature capture, which treats the signature as a graphic image, signature recognition technology measures how the signature is signed. In a signature recognition system, a person signs his or her name on a digitized graphics tablet or personal digital assistant. The system analyzes signature dynamics such as speed, relative speed, stroke order, stroke count, and pressure. The technology can also track each person’s natural signature fluctuations over time. The signature dynamics information is encrypted and compressed into a template. Differences in how different people’s voices sound result from a combination of physiological differences in the shape of vocal tracts and learned speaking habits. Speaker recognition technology uses these differences to discriminate between speakers. During enrollment, speaker recognition systems capture samples of a person’s speech by having him or her speak some predetermined information into a microphone a number of times. This information, known as a passphrase, can be a piece of information such as a name, birth month, birth city, or favorite color or a sequence of numbers. Text independent systems are also available that recognize a speaker without using a predefined phrase. This phrase is converted from analog to digital format, and the distinctive vocal characteristics, such as pitch, cadence, and tone, are extracted, and a speaker model is established. A template is then generated and stored for future comparisons. Speaker recognition can be used to verify a person’s claimed identity or to identify a particular person. It is often used where voice is the only available biometric identifier, such as telephone and call centers. Biometrics is a very young technology, having only recently reached the point at which basic matching performance can be acceptably deployed. It is necessary to analyze several metrics to determine the strengths and weaknesses of each technology and vendor for a given application. The three key performance metrics are false match rate (FMR), false nonmatch rate (FNMR), and failure to enroll rate (FTER). A false match occurs when a system incorrectly matches an identity, and FMR is the probability of individuals being wrongly matched. In verification and positive identification systems, unauthorized people can be granted access to facilities or resources as the result of incorrect matches. In a negative identification system, the result of a false match may be to deny access. For example, if a new applicant to a public benefits program is falsely matched with a person previously enrolled in that program under another identity, the applicant may be denied access to benefits. A false nonmatch occurs when a system rejects a valid identity, and FNMR is the probability of valid individuals being wrongly not matched. In verification and positive identification systems, people can be denied access to some facility or resource as the result of a system’s failure to make a correct match. In negative identification systems, the result of a false nonmatch may be that a person is granted access to resources to which she should be denied. For example, if a person who has enrolled in a public benefits program under another identity is not correctly matched, she will succeed in gaining fraudulent access to benefits. False matches may occur because there is a high degree of similarity between two individuals’ characteristics. False nonmatches occur because there is not a sufficiently strong similarity between an individual’s enrollment and trial templates, which could be caused by any number of conditions. For example, an individual’s biometric data may have changed as a result of aging or injury. If biometric systems were perfect, both error rates would be zero. However, because biometric systems cannot identify individuals with 100 percent accuracy, a trade-off exists between the two. False match and nonmatch rates are inversely related; they must therefore always be assessed in tandem, and acceptable risk levels must be balanced with the disadvantages of inconvenience. For example, in access control, perfect security would require denying access to everyone. Conversely, granting access to everyone would result in denying access to no one. Obviously, neither extreme is reasonable, and biometric systems must operate somewhere between the two. For most applications, how much risk one is willing to tolerate is the overriding factor, which translates into determining the acceptable FMR. The greater the risk entailed by a false match, the lower the tolerable FMR. For example, an application that controlled access to a secure area would require that the FMR be set low, which would result in a high FNMR. However, an application that controlled access to a bank’s ATM might have to sacrifice some degree of security and set a higher FMR (and hence a lower FNMR) to avoid the risk of irritating legitimate customers by wrongly rejecting them. As figure 3 shows, selecting a lower FMR increases the FNMR. Perfect security would require setting the FMR to 0, in which case the FNMR would be 1. At the other extreme, setting the FNMR to 0 would result in an FMR of 1. Vendors often use equal error rate (EER), an additional metric derived from FMR and FNMR, to describe the accuracy of their biometric systems. EER refers to the point at which FMR equals FNMR. Setting a system’s threshold at its EER will result in the probability that a person is falsely matched equaling the probability that a person is falsely not matched. However, this statistic tends to oversimplify the balance between FMR and FNMR, because in few real-world applications is the need for security identical to the need for convenience. FTER is a biometric system’s third critical accuracy metric. FTER measures the probability that a person will be unable to enroll. Failure to enroll (FTE) may stem from an insufficiently distinctive biometric sample or from a system design that makes it difficult to provide consistent biometric data. The fingerprints of people who work extensively at manual labor are often too worn to be captured. A high percentage of people are unable to enroll in retina recognition systems because of the precision such systems require. People who are mute cannot use voice systems, and people lacking fingers or hands from congenital disease, surgery, or injury cannot use fingerprint or hand geometry systems. Although between 1 and 3 percent of the general public does not have the body part required for using any one biometric system, they are normally not counted in a system’s FTER. Because biometric systems based solely on a single biometric may not always meet performance requirements, the development of systems that integrate two or more biometrics is emerging as a trend. Multiple biometrics could be two types of biometrics, such as combining facial and iris recognition. Multiple biometrics could also involve multiple instances of a single biometric, such as 1, 2, or 10 fingerprints, 2 hands, and 2 eyes. One prototype system integrates fingerprint and facial recognition technologies to improve identification. A commercially available system combines face, lip movement, and speaker recognition to control access to physical structures and small office computer networks. Depending on the application, both systems can operate for either verification or identification. Experimental results have demonstrated that the identities established by systems that use more than one biometric could be more reliable, be applied to large target populations, and improve response time. Biometrics have been used in several federal applications including access control to facilities and computers, criminal identification, and border security. In the last 2 years, laws have been passed that will require a more extensive use of biometric technologies in the federal government. Biometric systems have long been used to complement or replace badges and keys in controlling access to entire facilities or specific areas within a facility. The entrances to more than half the nuclear power plants in the United States employ biometric hand geometry systems. Figure 4 illustrates the use of fingerprint recognition for physical access. As noted in our technology assessment, recent reductions in the price of biometric hardware have spurred logical access control applications. Fingerprint, iris, and speaker recognition are replacing passwords to authenticate individuals accessing computers and networks. The Office of Legislative Counsel of the U.S. House of Representatives, for example, is using an iris recognition system to protect confidential files and working documents. Other federal agencies, including the Department of Defense, Department of Energy, and Department of Justice, as well as the intelligence community, are adopting similar technologies. The Department of Homeland Security’s Transportation Security Administration (TSA) is working to establish a systemwide common credential to be used across all transportation modes for all personnel requiring unescorted physical and/or logical access to secure areas of the national transportation system, such as airports, seaports, and railroad terminals. Called the Transportation Worker Identification Credential (TWIC), the program was developed in response to recent laws and will include the use of smart cards and biometrics to provide a positive match of a credential to a person for 10-15 million transportation workers across the United States. Fingerprint identification has been used in law enforcement over the past 100 years and has become the de facto international standard for positively identifying individuals. The Federal Bureau of Investigation (FBI) has been using fingerprint identification since 1928. The first fingerprint recognition systems were used in law enforcement about 4 decades ago. The FBI’s Integrated Automated Fingerprint Identification System (IAFIS) is an automated 10-fingerprint matching system that stores rolled fingerprints. The more than 40 million records in its criminal master file are connected electronically with all 50 states and some federal agencies. IAFIS was designed to handle a large volume of fingerprint checks against a large database of fingerprints. Last year, we found that IAFIS processes, on average, approximately 48,000 fingerprints per day and has processed as many as 82,000 in a single day. IAFIS’s target response time for criminal fingerprints submitted electronically is 2 hours; for civilian fingerprint background checks, 24 hours. The Immigration and Naturalization Service (INS) began developing the Automated Biometric Fingerprint Identification System (IDENT) around 1990 to identify illegal aliens who are repeatedly apprehended trying to enter the United States illegally. INS’s goal was to enroll virtually all apprehended aliens. IDENT can also identify aliens who have outstanding warrants or who have been deported. When such aliens are apprehended, a photograph and two index fingerprints are captured electronically and queried against three databases (see figure 5). IDENT has over 4.5 million entries. A fingerprint query of IDENT normally takes about 2 minutes. IDENT is also being used as a part of the National Security Entry-Exit Registration System (NSEERS) that was implemented last year. INS Passenger Accelerated Service System (INSPASS), a pilot program in place since 1993, has more than 45,000 frequent fliers enrolled at nine airports, and has admitted more than 300,000 travelers. It is open to citizens of the United States, Canada, Bermuda, and visa waiver program countries who travel to the United States on business three or more times a year. INSPASS permits frequent travelers to circumvent customs procedures and immigration lines. To participate, users undergo a background screening and registration. Once enrolled, they can present their biometric at an airport kiosk for comparison against a template stored in a central database. In a joint INS and State Department effort to comply with the Illegal Immigration Reform and Immigrant Responsibility Act of 1996, every border crossing card issued after April 1, 1998, contains a biometric identifier and is machine-readable. The cards, also called laser visas, allow Mexican citizens to enter the United States for the purpose of business or pleasure without being issued further documentation and stay for 72 hours or less, going no farther than 25 miles from the border. Consular staff in Mexico photograph applicants and take prints of the two index fingers and then electronically forward applicants’ data to INS. Both State and INS conduct checks on each applicant, and the fingerprints are compared with prints of previously enrolled individuals to ensure that the applicant is not applying for multiple cards under different names. The cards store a holder’s identifying information along with a digital image of his or her picture and the minutiae of the two index fingerprints. As of May 2002, State had issued more than 5 million cards. The Department of State has been running pilots of facial recognition technology at 23 overseas consular posts for several years. As a visa applicant’s information is entered into the local system at the posts and replicated in State’s Consular Consolidated Database (CCD), the applicant’s photograph is compared with the photographs of previous applicants stored in CCD to prevent fraudulent attempts to obtain visas. Some photographs are also being compared to a watch list. Laws passed in the last 2 years require a more extensive use of biometrics for border control. The Attorney General and the Secretary of State jointly, through the National Institute of Standards and Technology (NIST) are to develop a technology standard, including biometric identifier standards. When developed, this standard is to be used to verify the identity of persons applying for a U.S. visa for the purpose of conducting a background check, confirming identity, and ensuring that a person has not received a visa under a different name. By October 26, 2004, the Departments of State and Justice are to issue to aliens only machine- readable, tamper-resistant visas and other travel and entry documents that use biometric identifiers. At the same time, Justice is to install at all ports of entry equipment and software that allow the biometric comparison and authentication of all U.S. visas and other travel and entry documents issued to aliens and machine-readable passports. The Department of Homeland Security is developing the United States Visitor and Immigrant Status Indication Technology (US-VISIT) system to address this requirement. While biometric technology is currently available and used in a variety of applications, questions remain regarding the technical and operational effectiveness of biometric technologies in large-scale applications. We have found that a risk management approach can help define the need and use for biometrics for security. In addition, a decision to use biometrics should consider the costs and benefits of such a system and its potential effect on convenience and privacy. The approach to good security is fundamentally similar, regardless of the assets being protected, whether information systems security, building security, or homeland security. As we have previously reported, these principles can be reduced to five basic steps that help to determine responses to five essential questions (see figure 6). What Am I Protecting? The first step in risk management is to identify assets that must be protected and the impact of their potential loss. Who Are My Adversaries? The second step is to identify and characterize the threat to these assets. The intent and capability of an adversary are the principal criteria for establishing the degree of threat to these assets. Step three involves identifying and characterizing vulnerabilities that would allow identified threats to be realized. In other words, what weaknesses can allow a security breach? What Are My Priorities? In the fourth step, risk must be assessed and priorities determined for protecting assets. Risk assessment examines the potential for the loss or damage to an asset. Risk levels are established by assessing the impact of the loss or damage, threats to the asset, and vulnerabilities. What Can I Do? The final step is to identify countermeasures to reduce of eliminate risks. In doing so, the advantages and benefits of these countermeasures must also be weighed against their disadvantages and costs. Countermeasures identified through the risk management process support the three integral concepts of a holistic security program: protection, detection, and reaction. Protection provides countermeasures such as policies, procedures, and technical controls to defend against attacks on the assets being protected. Detection monitors for potential breakdowns in protective mechanisms that could result in security breaches. Reaction, which requires human involvement, responds to detected breaches to thwart attacks before damage can be done. Because absolute protection is impossible to achieve, a security program that does not incorporate detection and reaction is incomplete. Biometrics can support the protection component of a security program. It is important to realize that deploying them will not automatically eliminate all security risks. Technology is not a solution in isolation. Effective security also entails having a well-trained staff to follow and enforce policies and procedures. Weaknesses in the security process or failures by people to operate the technology or implement the security process can diminish the effectiveness of technology. Furthermore, there is a need for the security process to account for limitations in technology. Biometrics can help ensure that people can only enroll into a security system once and to ensure that a person presenting himself before the security system is the same person that enrolled into the system. However, biometrics cannot necessarily link a person to his or her true identity. While biometrics would make it more difficult for people to establish multiple identities, if the one identity a person claimed were not his or her true identity, then the person would be linked to the false identity in the biometric system. The quality of the identifier presented during the enrollment process is key to the integrity of a biometrics system. Procedures for exception processing would also need to be carefully planned. As we described, not all people can enroll in a biometrics system. Similarly, false matches and false nonmatches will also sometimes occur. Procedures need to be developed to handle these situations. Exception processing that is not as good as biometric-based primary processing could be exploited as a security hole. A decision to use biometrics in a security solution should also consider the benefits and costs of the system and the potential effects on convenience and privacy. Best practices for information technology investment dictate that prior to making any significant project investment, the benefit and cost information of the system should be analyzed and assessed in detail. A business case should be developed that identifies the organizational needs for the project and a clear statement of high-level system goals should be developed. The high-level goals should address the system’s expected outcomes such as the binding of a biometric feature to an identity or the identification of undesirable individuals on a watch list. Certain performance parameters should also be specified such as the time required to verify a person’s identity or the maximum population that the system must handle. Once the system parameters are developed, a cost estimate can be developed. Not only must the costs of the technology be considered, but also the costs of the effects on people and processes. Both initial costs and recurring costs need to be estimated. Initial costs need to account for the engineering efforts to design, develop, test, and implement the system; training of personnel; hardware and software costs; network infrastructure improvements; and additional facilities required to enroll people into the biometric system. Recurring cost elements include program management costs, hardware and software maintenance, hardware replacement costs, training of personnel, additional personnel to enroll or verify the identities of people in the biometric system, and possibly the issuance of token cards for the storage of biometrics. Weighed against these costs are the security benefits that accrue from the system. Analyzing this cost-benefit trade-off is crucial when choosing specific biometrics-based solutions. The consequences of performance issues—for example, accuracy problems, and their effect on processes and people—are also important in selecting a biometrics solution. The Privacy Act of 1974 limits federal agencies’ collection, use, and disclosure of personal information, such as fingerprints and photographs. Accordingly, the Privacy Act generally covers federal agency use of personal biometric information. However, the act includes exemptions for law enforcement and national security purposes. Representatives of civil liberties groups and privacy experts have expressed concerns regarding (1) the adequacy of protections for security, data sharing, identity theft, and other identified uses of biometric data and (2) secondary uses and “function creep.” These concerns relate to the adequacy of protections under current law for large-scale data handling in a biometric system. Besides information security, concern was voiced about an absence of clear criteria for governing data sharing. The broad exemptions of the Privacy Act, for example, provide no guidance on the extent of the appropriate uses law enforcement may make of biometric information. Because there is no general agreement on the appropriate balance of security and privacy to build into a system using biometrics, further policy decisions are required. The range of unresolved policy issues suggests that questions surrounding the use of biometric technology center as much on management policies as on technical issues. Finally, consideration must be given to the convenience and ease of using biometrics and their effect on the ability of the agency to complete its mission. For example, some people find biometric technologies difficult, if not impossible, to use. Still others resist biometrics because they believe them to be intrusive, inherently offensive, or just uncomfortable to use. Lack of cooperation or even resistance to using biometrics can affect a system’s performance and widespread adoption. Furthermore, if the processes to use biometrics are lengthy or erroneous, they could negatively affect the ability of the assets being protected to operate and fulfill its mission. For example, last year, we found that there are significant challenges in using biometrics for border security. The use of biometric technologies could potentially impact the length of the inspection process. Any lengthening in the process of obtaining travel documents or entering the United States could affect travelers significantly. Delays inconvenience travelers and could result in fewer visits to the United States or lost business to the nation. Further studies could help determine whether the increased security from biometrics could result in fewer visits to the United States or lost business to the nation, potentially adversely affecting the American economy and, in particular, the border communities. These communities depend on trade with Canada and Mexico, which totaled $653 billion in 2000. In conclusion, biometric technologies are available today that can be used in security systems to help protect assets. However, it is important to bear in mind that effective security cannot be achieved by relying on technology alone. Technology and people must work together as part of an overall security process. As we have pointed out, weaknesses in any of these areas diminishes the effectiveness of the security process. We have found that three key considerations need to be addressed before a decision is made to design, develop, and implement biometrics into a security system: 1. Decisions must be made on how the technology will be used. 2. A detailed cost-benefit analysis must be conducted to determine that the benefits gained from a system outweigh the costs. 3. A trade-off analysis must be conducted between the increased security, which the use of biometrics would provide, and the effect on areas such as privacy and convenience. Security concerns need to be balanced with practical cost and operational considerations as well as political and economic interests. A risk management approach can help federal agencies identify and address security concerns. As federal agencies consider the development of security systems with biometrics, they need to define what the high-level goals of this system would be and develop the concept of operations that will embody the people, process, and technologies required to achieve these goals. With these answers, the proper role of biometric technologies in security can be determined. If these details are not resolved, the estimated cost and performance of the resulting system will be at risk. Mr. Chairman, this concludes my statement. I would be pleased to answer any questions that you or members of the subcommittee may have. For further information, please contact Keith Rhodes at (202)-512-6412 or Richard Hung at (202)-512-8073. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | One of the primary functions of any security system is the control of people into or out of protected areas, such as physical buildings, information systems, and our national border. Technologies called biometrics can automate the identification of people by one or more of their distinct physical or behavioral characteristics. The term biometrics covers a wide range of technologies that can be used to verify identity by measuring and analyzing human characteristics--relying on attributes of the individual instead of things the individual may have or know. In the last 2 years, laws have been passed that will require a more extensive use of biometric technologies in the federal government. Last year, GAO conducted a technology assessment on the use of biometrics for border security. GAO was asked to testify about the issues that it raised in the report, the use of biometrics in the federal government, and the current state of the technology. Biometric technologies are available today that can be used in security systems to help protect assets. Biometric technologies vary in complexity, capabilities, and performance and can be used to verify or establish a person's identity. Leading biometric technologies include facial recognition, fingerprint recognition, hand geometry, iris recognition, retina recognition, signature recognition, and speaker recognition. Biometric technologies have been used in federal applications such as access control, criminal identification, and border security. However, it is important to bear in mind that effective security cannot be achieved by relying on technology alone. Technology and people must work together as part of an overall security process. Weaknesses in any of these areas diminishes the effectiveness of the security process. The security process needs to account for limitations in biometric technology. For example, some people cannot enroll in a biometrics system. Similarly, errors sometimes occur during matching operations. Procedures need to be developed to handle these situations. Exception processing that is not as good as biometric-based primary processing could also be exploited as a security hole. We have found that three key considerations need to be addressed before a decision is made to design, develop, and implement biometrics into a security system: (1) decisions must be made on how the technology will be used; (2) a detailed cost-benefit analysis must be conducted to determine that the benefits gained from a system outweigh the costs; and (3) a trade-off analysis must be conducted between the increased security, which the use of biometrics would provide, and the effect on areas such as privacy and convenience. Security concerns need to be balanced with practical cost and operational considerations as well as political and economic interests. A risk management approach can help federal agencies identify and address security concerns. As federal agencies consider the development of security systems with biometrics, they need to define what the high-level goals of this system will be and develop the concept of operations that will embody the people, process, and technologies required to achieve these goals. With these answers, the proper role of biometric technologies in security can be determined. If these details are not resolved, the estimated cost and performance of the resulting system will be at risk. |
State annually receives over $400 million in appropriated funds for buying and maintaining buildings abroad. It also has legislative authority to sell its real estate and use the proceeds to buy or improve other real estate and furnishings without further congressional approval. State’s Office of Foreign Buildings Operations (FBO) is responsible for establishing and overseeing policies and procedures for State’s real property, including approving the disposition of excess, underutilized, or uneconomical properties. These responsibilities are carried out in cooperation with the embassies. From 1990 to 1995, State made real estate sales totaling $133 million, including $48.8 million from the forced sale of property and property rights in Singapore because of road construction. If you exclude the Singapore transaction in 1991, sales averaged less than $4 million annually from 1990 to 1993. Real property sales increased to $16 million in 1994 and $53 million in 1995, but a significant amount of property has yet to be sold from FBO’s list of properties available for disposal. Both FBO’s October 1994 list and a second list submitted to the Office of Management and Budget in 1995 had about 100 properties listed for sale. Properties on the 1994 list were valued at $250 million. One year later, FBO added high-value properties in Manila, Singapore, Paris, and Bangkok to its list, bringing the total value of properties available for sale to $474 million. About one-third of the properties on the 1995 list were estimated to sell for $1 million or more and accounted for over 90 percent of the anticipated revenue. (See app. I for the list of properties.) In addition, State holds other property that it could potentially sell that was not on these lists. These properties are worth millions of dollars and include properties that have been retained at closed posts, including Zanzibar, Tanzania, and Alexandria, Egypt; properties that are vacant, unneeded, or unsuitable for the purposes for which they were acquired, including some in Dakar, Senegal, and Rabat, Morocco; and high-value properties that are oversized or not needed in Hamilton, Bermuda; Buenos Aires, Argentina; Prague, Czech Republic; and Budapest, Hungary. In addition, several of these unsold properties continue to incur high operation and maintenance costs. For example, in 1993, the embassy in Buenos Aires reported operating costs on the above property had doubled to almost $500,000 and major maintenance costs had risen to about $1 million. (See apps. II through IV for a detailed discussion of the above properties.) State has no systematic process to identify excess properties and to dispose of them. The Foreign Affairs Manual (6 FAM 782.1) requires each post to periodically identify and report on properties that are (1) excess to post requirements, (2) not being fully utilized, or (3) uneconomical to retain. However, embassies are not required to annually certify that they complied with 6 FAM 782.1. Further, FBO officials could provide no evidence embassies submitted excess property reports pursuant to this provision. As the single real property manager for nonmilitary U.S. government property overseas, FBO has authority to dispose of properties that become surplus, underutilized, or uneconomical (6 FAM 713.1) and to determine the use of sales proceeds (1 FAM 215). In practice, FBO does not normally proceed with a sale unless the embassy agrees, and it tries to reach agreements with the embassies on the sale of property and the use of sales proceeds. According to FBO officials, property, such as that on the October 1994 list, is identified for sale by the embassies, FBO officials, State’s Inspector General, and ad hoc requests to the embassies by FBO. However, embassies lack incentives to identify, report on, and sell excess or underutilized property unless they can use the proceeds for their own needs. Further, when embassies sell property, it creates additional work for them. FBO officials’ contend that the totality of such actions constitutes a system for identifying real estate that should be sold. We do not believe that these actions constitute an organized system for identifying these properties. Our review showed that embassies have held unneeded property for years without an intended purpose, and in some cases, they do not know why the property was ever bought. For example, a lot in Burma, purchased in 1948 for an unknown purpose, is being used to store shipping containers. In some cases, the embassies and FBO disagree on selling identified property. We found several cases where embassies and FBO have had protracted and costly disagreements regarding the use or sale of property and use of potential sales proceeds. In Brasilia, Brazil, the embassy and FBO had a standoff for over 2-1/2 years over whether (1) to sell vacant lots, which were bought in the early 1960s, and use the proceeds to renovate a 29-unit apartment building or (2) to sell an apartment building and other property and use the proceeds to build residences on the vacant lots. The embassy emphasized that the apartment building is in an extremely poor location. Also, according to FBO officials, the lots are located in the best parts of Brasilia, and there is a stigma attached to living in apartments in Brasilia. FBO indicated that it was cheaper to renovate the apartment building than to build private residences on the vacant lots. Further, legal restrictions prohibit the embassy from constructing apartments on the vacant land. During the time of this dispute, the embassy spent $580,000 annually to lease housing while the 29 apartments remained vacant. (See app. V.) An FBO policy specifies that unresolved disputes will be submitted to the Assistant Secretary for Administration for further review and discussion with senior State management. However, disputes sometimes drag on for years. Of the cases that we reviewed, the Assistant Secretary was involved only in the Brasilia housing dispute, and then only after the dispute had been ongoing for 2-1/2 years. We believe there should be a standard procedure whereby the embassies and FBO, at least annually, formally present their positions to another authority. This would help mitigate the conflicting interests of the State organizations involved and the difficulties they have sometimes in expeditiously reaching an agreement on the sale of property and the use of proceeds. It could also help alleviate the inherent reluctance to forward matters to a higher level for decision. FBO has not developed a procedure for routinely using sales proceeds to meet prioritized worldwide requirements. As an incentive for embassies to agree to a sale, FBO normally gives embassies that sell property first consideration when determining the use of sales proceeds. These uses are usually not justified in the annual congressional budget. FBO evaluates the legitimacy and economic soundness of each proposal, but it does not routinely weigh the proposal against the needs of other embassies. We did find a few cases where FBO worked with the embassies to identify uses for the proceeds, rather than redirect the proceeds to other countries with greater need. For example, after the consulate in Lyon, France, closed in June 1992, the consul residence was sold in April 1995 for $613,000. In May 1992, the embassy in Paris requested to use the sales proceeds. Initially, FBO indicated that the proceeds should be made available for use in other countries, but the embassy objected, and FBO has been working with the embassy since 1994 to identify ways to use the proceeds in-country. For any sales proceeds that will not be used in the country where the sale occurred, FBO’s policy is to use them to buy property in countries with high lease costs. According to FBO officials, they have developed a list of countries where leasehold costs are high, expected to rise, and offer optimum investment opportunities. Even though this appears to be a move in the right direction, FBO did not provide us with its plan for using proceeds to meet this objective. FBO officials maintain that they need the flexibility to use the proceeds for other purposes. In contrast to FBO’s case-by-case approach to the use of sales proceeds, FBO determines critical construction and maintenance needs at posts and establishes funding priorities for the use of appropriated funds. For example, all posts are evaluated against established criteria in preparation for the 5-year budget. Furthermore, embassies’ annual requests for maintenance funds for special projects are weighted and ranked against requests from all other posts, and those with the highest rankings are generally funded. FBO officials said they cannot use the same approach for sales proceeds because the sales process is uncertain and they need flexibility in using the funds. Our review showed that through fiscal year 1991, State estimated the potential sales proceeds and included them as offsets to its appropriation requests. According to FBO, it does not do this now because of the long time required for developing budget estimates, the volatile nature of overseas real estate markets, and the complexities of marketing high-value properties. Even though State has the authority to retain proceeds from real estate sales, and sales proceeds are uncertain, FBO and embassies are using proceeds for real property purposes not justified and funded through the regular appropriation process. This ad hoc process essentially creates an off-budget fund. According to FBO documents, of the $16.3 million in fiscal year 1994 sales, $6.3 million, or about 39 percent of the proceeds, were designated for use in the country where the sales occurred. About $2 million of the $6.3 million were to be used for replacement property and $4.3 million for other kinds of construction. Of the remaining 61 percent, 35 percent was made available for use in other countries, and 26 percent had no specific use designated. Although State subsequently reports to the Congress on the use of sales proceeds, the reliability of the information is questionable because proceeds are commingled with appropriated funds and expenditures from sales proceeds cannot be distinguished from other funds. Consequently, FBO attributes the use of sales proceeds to certain projects. FBO officials are considering the feasibility of separately accounting for sales proceeds to better manage and program them. The current process State uses to identify and sell unneeded real estate has not been effective, mainly because of parochial interests among various parties. As a result, State has a large inventory of excess real estate. In light of (1) the revenues that could be earned from the sales of high value property, (2) the cost to the U.S. government to maintain excess properties, and (3) the likely increase in excess properties that will result from announced post closings, we recommend that the Secretary of State establish an independent panel to make recommendations regarding the sale of excess real estate to reduce the current inventory of property. In establishing this panel, the Secretary should consider appointing representatives from the Office of the Inspector General and the Bureau of Finance and Management Policy as well as private sector representatives with overseas real estate experience. Including these representatives could help ensure that the panel’s actions reflect the financial needs of the Department of State and the interests of the taxpayer. Further, to provide a routine process for expeditiously resolving disagreements between FBO and the embassies, we recommend that the Secretary require FBO and the embassies to report annually to the Under Secretary for Management on all properties identified as excess where FBO and the embassies have not agreed on whether to retain or sell such properties. As part of the process, the Secretary should require the embassies to certify annually that they have (1) reviewed their property holdings to identify properties that are excess to embassy requirements, not being fully utilized, or uneconomical to retain and (2) reported any excess property to FBO. We also recommend that the Secretary of State include estimated receipts from real estate sales in the annual congressional budget request; establish a formal process for approving and documenting the use of sales proceeds and require that their use for other than justified replacement property be weighed against critically analyzed worldwide requirements; and improve the internal financial controls to better document and account for the receipts and expenditures of sales proceeds and provide a sound basis for reporting to the Congress on the receipt and use of sales proceeds. Creating a separate account for sales proceeds should be the first step. In commenting on a draft of this report, State agreed with the thrust of the report’s findings, and said it had taken action to manage its real estate holdings. However, State did not directly address our recommendations. As we noted throughout the report, State’s actions to date are steps in the right direction. Despite these improvements, State still does not have an efficient system for identifying and disposing of excess real estate. State’s lack of standard operating procedures to fully document the real estate review and decision-making process and account for and report on the use of funds are weaknesses that must be addressed. We believe that our recommendations will help correct these deficiencies. State indicated that it is in the process of selling some of the properties listed in appendixes II through V; however, it continues to rationalize its retention of other properties without providing evidence that it considered budget realities in doing so. We believe that the tenor of State’s comments reenforce our position that an independent panel is needed to decide what real estate should be sold based on consideration of all pertinent factors. Finally, based on State’s comments, we requested further information on properties in Hamilton and Bermuda. In our view, State’s backup data provided additional grounds upon which to question retaining the properties. The Department of State’s comments, along with our analysis, are included in their entirety in appendix VI. Because the Department of State has not indicated support for our recommendations intended to better identify and dispose of excess property, and account for sales proceeds, the Congress may wish to direct State to take action to implement them. We conducted our work primarily at the headquarters of State’s FBO. We interviewed State personnel and reviewed the files relating to real estate for selected countries. We used reports by State’s Inspector General as a base for selecting a number of the cases we reviewed. Complete information on all the cases we reviewed was not available at State headquarters, making it difficult to substantiate certain facts. Also, FBO officials would not give us access to some files for locations where there were ongoing considerations to sell property. We believe that these limitations have not materially affected our conclusions and recommendations, but they may have affected our ability to review other problem cases. We conducted our work from October 1994 to February 1996 in accordance with generally accepted government auditing standards. We are sending copies of this report to other interested congressional committees, the Secretary of State, and the Director of the Office of Management and Budget. We also will make copies available to others on request. Please contact me at (202) 512-4128 if you or your staff have any questions concerning this report. The major contributors to this report are listed in appendix VII. Bahuio Amb. R&R Residence (continued) State holds and maintains some properties where posts have been closed. Other properties are being marketed. Nineteen additional closures are planned for 1996 as cost-saving measures. It does not seem prudent to close posts as cost-saving measures and then continue to hold and maintain post property at government expense. In Zanzibar, the consulate was closed in 1979, but rather than selling the consul general residence, the embassy in Tanzania kept the property and has used it predominantly for recreational purposes and occasionally for official purposes. In 1987, the house was renovated at a cost of $108,000. In 1991, the State Inspector General recommended that the embassy make a recommendation to the State Department regarding the residence’s disposition. According to the Inspector General, the embassy spent $20,000 in 1990 for maintenance and personnel costs and used it 137 nights for official and personal use. The Inspector General report indicated that the island of Zanzibar has several adequate hotels that could be used by travelers. It also questioned the likelihood that the United States would reopen a post in Zanzibar and therefore need such a residence. The embassy suggested in 1991 that the residence be retained for at least 3 more years in anticipation of higher property values. Meanwhile, the embassy undertook what it termed a “modest” property refurbishment to enhance the residence’s value and its utility to U.S. personnel on official travel in Zanzibar. According to Office of Foreign Buildings Operations (FBO), $23,000 was allotted in 1992 to enhance the value of the property. In early 1995, the Inspector General again visited Zanzibar. According to Inspector General officials, maintenance and salaries relating to the residence were $32,000 in 1994. The residence was used 122 nights for recreation and 36 nights for representational purposes. In Alexandria, Egypt, the consulate general was closed in 1993; however, State officials retained the consulate general residence, with an estimated value of over $1 million, in hope that the post would be reopened. State officials attempted to justify its retention on economic grounds, such as using it as a residence for a U.S. Information Agency representative. The Inspector General questioned such retention as an “apparent lack of concern for the financial loss being incurred by the U.S. government.” State officials then said that when the ambassador used the residence, State would save $20,000 in lodging costs and that the spacious residence is ideal for representational and trade promotion events. In Tangier, Morocco, in September 1988, State approved closing of the consulate, but State retained the consulate compound, which contained a principal officer residence and an office building. The estimated value of these facilities is greater than $2 million. Voice of America has been using some of the facilities. In 1990, the embassy raised the issue of selling the facilities, but actions to sell the property have evolved slowly. For example, in July 1992, the embassy submitted its third request to FBO for guidance. In January 1993, the embassy informed FBO that its repeated requests over the preceding 9 months for funds to cover the cost of appraisals had not been answered. It also requested $50,000 to provide custodial services for these surplus properties. An FBO official told us that both FBO and the embassy have now informally acknowledged the need to sell the facilities, and listed them on the October 1994 potential sales list, but they have not made a formal decision to do so. In September 1993, FBO requested all posts to provide information on vacant or underutilized land. In response, embassies reported a number of vacant properties. Some of these properties were acquired for purposes that never materialized and have been held for a number of years. They could be candidates for possible sale. Because the information available to us in Washington is sketchy, we cannot fully evaluate whether these properties should be sold. However, if they are retained, the reasons for their retention should be weighed against an analysis of their potential disposal value. The following property was not being used: In Shanghai, China, State owns 2.6 acres of vacant land having an estimated value of $4 million. State is trying to obtain China’s concurrence on the use of this property. In Rabat, Morocco, State paid $435,000 for an 8-acre lot in 1988 for an embassy and ambassador residence. The King of Morocco has used the lot for an orange grove since its purchase. There are no current plans to build on the property. The embassy also owns a residence, acquired in 1972, that the security officer will no longer clear for occupancy. In February 1994, the Inspector General reported that State should develop a plan to dispose of its excess property in Morocco. In May 1994, the embassy reported that it had six properties that were no longer needed and should be sold, not including the 8-acre lot. In June 1995, however, the embassy indicated that it was willing to sell only two of the properties. In Colombo, Sri Lanka, State owns property, which was bought in 1984 to expand the chancery. A warehouse is now being constructed on the property. State also owned a lot acquired in 1948 for residential use, which was worth several hundred thousand dollars. This lot was sold recently to pay for the warehouse. In Dakar, Senegal, State acquired a 3-acre site in 1989 for an ambassador residence. There are no definitive plans to build the residence. In Islamabad, Pakistan, State owns a vacant lot next to the chancery, which the embassy wants to keep for future residential use, but no plans exist. In the meantime, it provides perimeter security. The following property was being used for parking and other purposes: In Seoul, Korea, State owns 3.7 acres, acquired in 1990, that is worth millions of dollars. It is currently being used for parking. State is trying to work out a property deal with the Korean government, involving this and other property. In Port of Spain, Trinidad, State owns 0.14 acres bought in 1987 for an office annex. The office annex was never built, and the embassy has used the lot for parking. In Praia, Cape Verde, State acquired a lot in 1981 to construct an ambassador residence. The residence was not built, and the lot has been used as a tennis court. State also purchased a residence in 1985 for Marine guards, but the guard detachment was never assigned to the post. The embassy was willing to sell the residence, but only if it could use the proceeds. The lot is on FBO’s October 1994 sales list, but the residence is not. In Rangoon, Burma, State owns a 2.4-acre lot, purchased in 1948 for an unknown purpose. The embassy uses the lot for storing shipping containers. According to an FBO official, FBO and the embassy are considering the lot for a warehouse, but construction money has not been authorized for the project. The following property was not vacant, but was being leased to others or not fully utilized: In Dusseldorf, Germany, State owns an office building that it is not using. In fact, State is leasing it to an architectural firm. The embassy acknowledged that it is willing to sell the building, but a formal decision to sell has not been made. A State official said that the building will be sold when the lease expires in 1997. In Kinshasa, Zaire, State owns a lot that was intended for residential units. However, the embassy in Zaire has downsized and existing residential units are being sold. The lot is currently being leased to a private company for a satellite dish. There is no planned use for another 24.7 acres originally intended for a transmitter site. State has been postponing the sale of these properties pending the sale of the residential properties under better market conditions. The following property is held under long-term leases:In Doha, Qatar, State holds two long-term lease properties as future ambassador residence and embassy sites. There are no current plans to build these facilities. In Manama, Bahrain, State has two long-term lease properties that are used for parking and storage. The embassy wants to build a warehouse on one lot and continue to use the other one for parking. However, the warehouse has not qualified for funding during the screening process for use of appropriated funds. Although the embassy indicates that these lots were originally acquired for parking, they may not be optimally used if one can be given up for a warehouse. State owns several high-value properties that are unique because of their size, yet have a questionable use. These properties are retained for various reasons, such as historical or political significance or a desire for better market conditions. In Hamilton, Bermuda, State owns an expensive-to-maintain residence, known as Chelston, for the consul general. In April 1994, the post estimated that the property was worth over $12 million. An FBO survey in February 1993 disclosed that the residence needed $240,000 in major repairs. The main house is nearly 10,000 square feet and is situated on a 14-acre estate with a beach house. State’s Inspector General has repeatedly recommended selling the property. In a September 1993 report, it stated that “at a time of continual budget constraints, the Department cannot afford the luxury of maintaining this ostentatious piece of property.” Annual operational and maintenance costs for this one residence are over $100,000. Post officials were instrumental in getting President Bush to intervene against selling the property in 1991. According to FBO officials, the Bermuda government opposes the sale of the property. In Buenos Aires, Argentina, State has maintained a 43,000-square foot mansion as an ambassador residence since 1929. Estimates of its value vary widely and range up to $20 million. Annual operating costs are about $500,000. The issue of selling the property dates back more than 20 years. As far back as 1969, we recommended disposing of the residence and replacing it with a more appropriate house. The embassy has historically opposed selling the residence, indicating that it stands as a symbol of the U.S. presence in Argentina. Argentine officials have also opposed selling the property. After a delegation of congressional and State officials visited Argentina in December 1993, State announced that it would retain and restore the residence. In September 1995, the Inspector General reported that the ambassador has enlisted the local American business community to donate funds for gradually renovating the furnishings and interior. Further, State funding of $5 million to $6 million will be required to repair the house and equipment, and operating costs will require additional funding. According to the Inspector General, “The residence will continue to represent a major expense which the inspectors doubt can be justified indefinitely if budgets continue to shrink.” In Prague, Czech Republic, State owns a 42,800-square foot ambassador residence valued at several million dollars, which it has retained for over 2 years after a decision was made to sell it, waiting for an undefined market improvement. In Budapest, Hungary, State owns a house and property, with an estimated value of over $1 million, which is used for occasional representational functions, recreational purposes, and Marine security guard housing. This property, known as the VAR, is stated to have historical significance to Hungary. Some facilities were reportedly built in 1687. In 1990, the State Inspector General reported that this facility was grossly underutilized. State officials indicated that the most logical holder of the property would be the Hungarian government because of the property’s historical significance. They further indicated that a possible solution would be to trade the property for other property that the embassy now leases. A major difficulty in disposing of overseas properties is the frequent disagreements between the embassies and FBO over whether to sell properties and how to use the proceeds. These disagreements have been protracted and costly. In Brasilia, Brazil, the embassy and FBO had a standoff for over 2-1/2 years over whether (1) to sell vacant lots, which were bought in the early 1960s, and use the proceeds to renovate a 29-unit apartment building or (2) to sell an apartment building and other property and use the proceeds to build residences on the vacant lots. The embassy emphasized that the apartment building is in an extremely poor location. Also, according to FBO officials, the lots are located in the best parts of Brasilia, and there is a stigma attached to living in apartments in Brasilia. FBO indicated that it was cheaper to renovate the apartment building than to build private residences on the vacant lots. Further, legal restrictions prohibit the embassy from building apartments on the vacant land. During the time of this dispute, the embassy spent $580,000 annually to lease housing while the 29 apartments remained vacant. In Calcutta, India, an FBO study recommended in 1991 that the embassy sell a 9-unit apartment building. However, the embassy wanted to sell a 6-unit apartment building rather than the 9-unit building. The 9-unit building was worth several million dollars more than the 6-unit building. According to FBO information, both buildings were underutilized and could have been sold except that the limited post staff did not want to handle the sale of both units at the same time. In 1993, when FBO agreed to the sale of the 6-unit building, only two residents occupied the 9-unit building. The 9-unit building was recently sold for $7.7 million. By selling the less valuable property first FBO did not have the use of several million dollars for over 2 years. In 1990, the Inspector General reported that State should review the need for all State-owned property in Budapest and dispose of sites that were not needed. FBO did an asset management study and recommended selling four vacant properties. These unused properties are additional to the underutilized VAR property discussed in appendix IV. FBO and the embassy could not agree on which properties would be sold or how the prospective sales proceeds would be used. As of May 1995, only one property was being marketed. The embassy indicated that it was willing to sell two other vacant properties but not until the one currently being marketed was sold. An FBO official indicated that the embassy was unwilling to sell all the properties before it had agreement from FBO that it could use the proceeds. The fourth property is a site that was purchased in 1989 for $1.1 million for construction of a new office building. There are no plans to construct the office building, but FBO and the embassy cannot agree upon the sale of the site because the embassy wants to build residences on the site. In Kathmandu, Nepal, the embassy has retained excess property, estimated to be worth several million dollars, for over 5 years after the Inspector General recommended that the embassy develop a long-term plan to consolidate embassy activities and sell excess property. It took years for the embassy and FBO to reach agreement on consolidating embassy activities and selling the excess property. A decision, in principle, to sell the property was made in May 1995. In Stockholm, Sweden, over 6 years elapsed between the embassy’s request to sell two apartments valued about $175,000 and the decision to sell the property. During this period the embassy and FBO could not agree on how the proceeds would be used. The following are GAO’s comments on the Department of State’s letter dated January 26, 1996. 1. We recognized State’s actions to improve the management of its real estate function in previous reviews. This progress was the key reason for the removal of property and maintenance management from both GAO’s and the Office of Management and Budget’s high risk lists. At the same time, we noted that State needed to take further action.2. State did not provide evidence during our review that it had established a vigorous program to identify excess and underutilized properties throughout the world for possible sale. As indicated in the report, State’s actions consisted of unrelated and uncoordinated actions by the embassies, FBO officials, State’s Inspector General, and ad hoc requests to the embassies by FBO. Consequently, embassies have held unneeded property for years without an intended purpose. 3. State does not routinely weigh proposed uses of sales proceeds at an embassy against the needs of other embassies, such as it does for certain uses of its appropriated funds. State also did not provide for our review full information on its ranking of posts for reducing leasehold costs because, as indicated in the report, State officials maintain that they need the flexibility to use sales proceeds for other purposes. 4. State’s consensus mode of operation and the asserted effects on diplomatic relations of selling real estate, in our view, are at the heart of State’s difficulties in selling excess or underutilized real estate. That is why we believe that an independent view should be brought to bear on these difficult decisions to ensure that all pertinent factors are objectively weighed. In the cases that we reviewed, it was not evident that disagreements between the Department officials and the embassies were timely referred to higher management levels and decisions expeditiously made. 5. We noted the uncertainties in offsetting anticipated real estate proceeds against State’s budget request. However, State essentially treats sales proceeds as an off-budget fund that it uses for items additional to those in the budget. For example, under the current procedures, State would use the $53 million in fiscal year 1995 sales proceeds for real estate matters not justified in the budget. 6. We requested additional information from State on the Hamilton property to substantiate its assertion that it was a gift from the Bermuda government and that the Bermudian government was opposed to the sale. The information provided indicated that the property was originally owned by a U.S. citizen. Upon his death, the trustees passed ownership of the property to the Internal Revenue Service in payment of back taxes and State, through discussions with the Bermudian government, acquired the property. State was unable to provide documentation from the Bermudian government opposing the sale. State, however, provided a September 1994 embassy cable generated after a luncheon meeting with Bermuda’s Premier where he expressed opposition to the sale. The cable goes on to say that with the Premier’s approval, the property could be sold only to a Bermudian, but would likely generate less than its current value. The fact remains that sale of the property would allow State to reallocate millions of dollars in sales proceeds, and eliminate the annual maintenance cost of $100,000, as well as the costs of major repairs. 7. The decision to retain the property in Buenos Aires dates back to 1993. Given the high value of the property, and today’s environment of downsizing and fiscal restraint, it would be worth revisiting. 8. The files contained no information on what it cost to maintain the property in Budapest. State should strongly consider giving this historical property to the Hungarian government. 9. State commented that the property in Zanzibar could be sold were it not for the political considerations. The independent panel we recommended would weigh the political factors against the current cost of renovating and maintaining this recreational property. 10. State did not provide documentation supporting the frequency of the ambassador’s visits to Alexandria. According to the documentation provided, the house, occupied by a representative of the U.S. Information Agency, was used to host 14 mostly academic and cultural events in 1995. The July 4th party was the only event listed as given by the ambassador. The other events listed did not specifically state whether or not the ambassador was in attendance. 11. We deleted the Stuttgart example based on State’s comments. Jess Ford Diana Glod Roy Hutchens Frederick Barrett Edward Kennedy Olivia Parker The first copy of each GAO report and testimony is free. Additional copies are $2 each. 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A recorded menu will provide information on how to obtain these lists. | GAO reviewed the Department of State's excess or underused overseas real estate, focusing on: (1) property that potentially could be sold to provide funds for other real estate needs; (2) State's problems in determining which properties to sell; and (3) how State uses proceeds from real estate sales. GAO found that: (1) from 1990 to 1995, State sold $133 million in real estate, which was a small part of its total excess or underused property; (2) State does not have a standard process for identifying and selling excess or underused real estate; (3) in practice, excess or underused property is not identified or sold without the assistance of an embassy; (4) the use of the funds from property sales is the only incentive that the embassies have to identify and sell excess or underused real estate; (5) State does not ensure that the profits from the sale of property go to its most urgent real estate needs worldwide; and (6) the proceeds from the sale of property are generally allowed to be used by the corresponding embassy. |
becquerels. materials decays over time at various rates. The term “half-life” is used to indicate the period during which the radioactivity decreases by half as a result of decay. Usually, radioactive material with high radioactivity is placed in a sealed container to prevent leakage of the material itself. Because of the varied characteristics of the radioactive material—physical structure (metal, ceramic, or powder), activity level, half-life, and type of radiation emitted, some materials pose a greater risk to people, property, and the environment than others. According to IAEA, the level of protection provided to users of the radioactive material should be commensurate with the safety and security risks that it presents if improperly used. For example, radioactive materials used for certain diagnostic purposes have low levels of activity and do not present a significant safety or security risk. However, powerful sealed sources, such as those used in radiotherapy (cancer treatment) that use cobalt-60, cesium-137, or iridium-192, could pose a greater threat to the public and the environment and would also pose a potentially more significant security risk, particularly if acquired to produce a dirty bomb. The small size, portability, and potential value of sealed sources make them vulnerable to misuse, improper disposal, and theft. According to IAEA, illicit trafficking in or smuggling of nuclear material, including sealed sources, has increased worldwide in recent years: IAEA reported 272 cases of illicit trafficking in these sources from 1993 to the end of 2002. (See app. IV for more information about illicit trafficking incidents.) While no dirty bombs have been detonated, in the mid-1990s Chechen separatists placed a canister containing cesium-137 in a Moscow park. Although the device was not detonated and no radioactive material was dispersed, the incident demonstrated that terrorists have the capability and willingness to use sealed sources as weapons of terror. U.S. and international experts have noted that some accidents involving sealed sources can provide a measure of understanding of what the possible impacts of a dirty bomb might be. In 1987, an accident involving a cesium-137 sealed source in Brazil killed four people, injured many more, and caused about $36 million in damages to the local economy. This accident had such an enormous psychological impact on the local population that the atomic symbol was added to the region’s flag as a lasting reminder of the accident’s consequences. Appendix V contains more information about worldwide accidents involving sealed sources. The precise number of sealed sources that is in use worldwide is unknown because many countries do not systematically account for them. The lack of a full accounting of sealed sources makes it equally difficult to determine the number that has been lost, stolen, or abandoned—referred to as “orphan sources.” Orphan sources, which are estimated to number in the thousands worldwide, are considered by U.S. and international officials to pose significant health, safety, and security risks because they are outside of regulatory control. According to U.S. and international safety and security experts, one of the most urgent problems is locating and securing orphan sources in the former Soviet Union because they pose a significant security risk. The number of sealed sources in use worldwide is unknown, but some estimates are available. According to IAEA, millions of sealed radioactive sources have been distributed worldwide over the past 50 years. Approximately 2 million licensed sealed sources are in use in the United States, according to the NRC. In addition, according to the European Commission, approximately 500,000 sealed sources have been supplied to operators in the 15 member states of the European Union, of which about 110,000 are currently in use. The European Commission also estimated in 1999 that approximately 840,000 sealed sources exist in Russia, although Russian officials believe the total number is significantly higher. The 49 countries that responded to our survey reported a total of about 7.8 million sealed sources that are in use within their countries. These sealed sources are used in various applications, such as industrial radiography and therapeutic medicine. Table 1 summarizes the responses received from the countries surveyed regarding the number of sealed sources in use and their major applications. Several factors contribute to the lack of comprehensive information about the number of sealed sources worldwide. According to IAEA, many countries do not maintain accurate or complete inventories of sealed sources in use or registries of users of sources. In response to our survey, 28 of the 49 countries said they had an inventory of sealed sources. In addition, 17 countries said they were in the process of developing an inventory. However, several countries that reported they had inventories indicated that the number of sources was estimated rather than actual. A few countries, including a European nation, indicated that they did not have the resources necessary to develop a national registry of sources and users. An additional factor contributing to countries’ limited or incomplete inventories is that sealed sources have been imported and exported by distributors and governments without consistent monitoring or tracking by the suppliers, the recipients of the sources, or the appropriate regulatory authority. Appendix VI provides information on the major producers of sealed sources worldwide. The Chairman of NRC noted in March 2003 that international commerce in these sources is extensive and that existing controls on imports and exports are minimal. For example, most U.S.-origin sealed sources are exported under a general license. This means that in most instances, sealed sources are exported without NRC knowing the type, amount, or activity level of the sources, or their destination. (See app. VII for more information about NRC’s export regulations.) Sealed sources have also been distributed worldwide by a variety of means other than commercial trade without adequate monitoring and oversight. As a result, the sealed sources have not always been properly accounted for and accurately inventoried. For example, sealed sources have been (1) distributed by corporations working in developing countries without formal clearance from or approval by the recipient country’s regulatory authority, (2) donated by medical practitioners and nonprofit organizations, and (3) provided through international technical cooperation programs. IAEA has reported that international corporations—such as oil companies—have brought sealed sources used in oil exploration into developing countries. In some cases, there was no competent authority in the country to register or license the sealed sources, and existing national rules were regarded as too complicated or difficult for the corporations to follow. One African country reported in response to our survey that its inventory of sealed sources was incomplete because foreign construction companies had not notified the country’s regulatory authority when it imported sealed sources. According to IAEA, medical practitioners have brought sealed sources into developing countries for the purpose of establishing health clinics and hospitals and a number of sources were not properly accounted for. IAEA reported that hospitals in many developed countries donated large amounts of surplus radium-226 to hospitals in developing countries in the 1960s. One African country responding to our survey noted that according to old records, radium had been imported into the country but could not be located. Nonprofit organizations have also provided medical equipment using sealed sources to foreign countries. For example, the American International Health Alliance, operating under a series of cooperative agreements with USAID and DOE, has donated medical supplies, pharmaceuticals, and equipment, including those containing sealed sources, to countries in the former Soviet Union and Central and Eastern Europe since 1992. According to an official from the American International Health Alliance, DOD also donated medical equipment containing sealed sources from field facilities to several countries in the former Soviet Union under the auspices of Operation Provide Hope. Since 1992, over 500 airlift deliveries by DOD to Armenia, Azerbaijan, Belarus, Georgia, Kazakhstan, Ukraine, and Uzbekistan occurred, but the exact number of sealed source devices donated is unknown. IAEA has supplied sealed sources to many countries through its technical cooperation program. In 1991, IAEA estimated that it had provided many developing countries with 565 sources since 1957. IAEA officials told us that IAEA had provided developing member states with over 1,000 devices containing sealed sources since 1996. Most of these sealed sources are not considered a security risk by IAEA because of their low radioactivity. However, officials did note that about 125 of the 1,000 devices contained sources that could pose security risks if acquired by terrorists. These include (1) teletherapy machines with cobalt-60 sources of activity between 5,000 and 7,000 curies, (2) brachytherapy machines with cesium- 137 sources of activity between 0.5 and 1 curie and iridium-192 sources of 10 curies, (3) irradiators with cobalt-60 sources with activity in the range of 12,000 to 200,000 curies, and (4) calibrators with activity around 4,000 curies. IAEA officials said that they were uncertain, however, the extent to which the sealed sources have been included in countries’ inventories. While it is the responsibility of each country—and not IAEA—to maintain accurate inventories of the sources, IAEA has encouraged many of its member states to establish and/or strengthen their radiation and waste safety infrastructures via the model project program. In addition, IAEA policy does not allow for the approval of any technical cooperation projects involving the use of significant sealed sources unless the member state in question has, among other things, an effective regulatory framework that includes a system of notification, authorization, and control of sealed sources together with an inventory of sources. IAEA’s model project program is discussed on pages 22 and 23 of this report. DOE has provided countries with sealed sources under the Atoms for Peace Program. According to a March 2002 DOE Inspector General report, Accounting for Sealed Sources of Nuclear Material Provided to Foreign Countries, DOE could not fully account for sealed sources loaned to foreign countries and no longer maintained an accounting and tracking system for sealed sources. The report noted that DOE and its predecessor agencies provided 33 countries, including Iran, Pakistan, India, Malaysia, and Vietnam, with 536 sealed sources, which contained plutonium, from the 1950s through the 1970s. Initially, these materials were loaned to foreign facilities, and the U.S. government maintained ownership. However, in the 1960s, the U.S. government began transferring ownership through direct sale or donation, but it still retained title to much of the sealed sources provided to foreign entities. The report concluded that (1) the oversight of sealed sources was inadequate and that inaccurate inventory records limit DOE’s ability to protect nuclear materials from loss, theft, or other diversion, and (2) DOE should work with IAEA to establish adequate regulatory oversight of sealed sources in foreign countries. In its response to the report, DOE stated that it is not the current policy of the U.S. government to track sealed sources once they are in the control of foreign entities and that to track loaned sealed sources would require a change in policy and international agreements. Because many countries cannot account for their sealed sources, there is limited information on the number of sealed sources that are lost, stolen, or abandoned—referred to as “orphan sources.” According to the Director General of IAEA, orphan sources are a widespread phenomenon, and 34 of the 49 countries responding to our survey indicated that orphan sources pose problems in their country. In the European Union, up to 70 sealed sources are lost among its member states annually. According to NRC, about 250 sealed sources or devices are lost or stolen in the United States annually, but the majority of the sources have been recovered. NRC said that the European Union does not report sources as being lost unless they are at a certain activity level that exceeds the NRC threshold for tracking purposes. As a result, NRC typically reports a greater number of lost sealed sources than the European Union does. The problem of orphan sources is most significant in the countries of the former Soviet Union, where the collapse of the centralized Soviet government structure over a decade ago led to a loss of records and regulatory oversight over sealed sources. According to Russia’s nuclear regulatory agency, Gosatomnadzor, 51 sealed sources were reported lost in 2002 and 245 were lost in 2000. No information was made available to us for 2001. In the Republic of Georgia, over 280 orphan sources have been recovered since the mid-1990s. Survey respondents reported that 612 sources had been lost or stolen since 1995. Of the 612 reported orphan sources, 254 had not yet been recovered. Table 2 summarizes the number of lost, stolen, and recovered sources reported. Thirty-five of the 49 countries we surveyed indicated that they had an organized process to search for orphan sources, and several of these countries listed one or more organizations that are responsible for removing the sources once they have been found. However, the remaining 14 countries, spread across different regions, reported that they did not have a similar process to search for orphaned sources. Four of the 14 countries were located in Africa. Six countries indicated that there were disincentives to finding orphaned sources. In particular, they noted that an individual who reports finding a source might be held responsible for paying for its disposal. Russian officials told us that facilities possessing sealed sources that are no longer used are responsible for disposal costs. The disposal fees are very high and, as a result, the users are reluctant to notify authorities about them and frequently opt to dispose of them illegally. According to U.S. and international safety and security experts, among the most urgent problems are the security risks posed by the approximately 1,000 radioisotope thermoelectric generators located in the former Soviet Union. These generators were designed to provide electric power and are ideally suited for remote locations to power navigational facilities, such as lighthouses, radio beacons, and meteorological stations. Each has activity levels ranging from 40,000 to 150,000 curies of strontium-90—similar to the amount of strontium-90 released from the Chernobyl accident in 1986. These generators pose a security risk because they may not be adequately protected or secured. An international effort was initiated about 2 years ago to recover and secure these generators in remote locations in the Republic of Georgia. Although the exact number of generators in Georgia is unknown, IAEA and Georgian officials told us that at least six generators have been recovered. We met with the Russian organization that developed the radioisotope thermoelectric generators—the Russian National Technical Physics and Automation Research Institute. Institute officials told us that the generators pose a serious security and safety threat and should all be taken out of service. They noted that the units have a design service life of 10 to 15 years and that no repair or maintenance has been done on any of these units since 1991. However, Russian Ministry of Atomic Energy (MINATOM) officials said that the generators are technically sound and should not be completely removed from service without adequate replacement power. MINATOM officials said they are considering extending the life of the generators in order to keep them in service significantly longer than originally planned. Table 3 shows the estimated number of radioisotope thermoelectric generators located in the countries of the former Soviet Union. There have been numerous attempts to steal the sealed sources from these generators. For example, in recent years there have been six attempts to disassemble the generators in Kazakhstan and a number of similar events in Georgia and Russia. Some of the strontium-90 sealed sources from the generators have been found in residential areas. In a few instances, people who have stolen the sealed sources have used them for heating and cooking, and officials have speculated that the metal shielding might have been used to make bullets. In 2001, three woodsmen in Georgia who found the strontium-90 sealed source from an abandoned and dismantled generator used it as a heat source and suffered severe radiation burns. IAEA and DOE officials told us that other devices containing sealed sources, such as seed irradiators that were used in the former Soviet Union, pose significant security risks. Seed irradiators were mounted on trucks and used to irradiate seeds in order to kill fungus and inhibit germination. According to IAEA and DOE, each irradiator has activity levels of over 1,000 curies of cesium-137 in powdery form (cesium chloride). IAEA’s Director of the Division of Radiation and Waste Safety told us that no one knows the total number of orphan sources or their location in the former Soviet Union. IAEA is continuously obtaining new information about previously unknown devices using sealed sources. This makes it extremely difficult for the agency to develop strategies to locate and recover these sources in a systematic way. The Director also told us that the problem of orphan sources is not unique to the former Soviet Union and that similar problems exist in other parts of the world. All of the countries responding to our survey said they have established legislative or regulatory controls over sealed sources. However, U.S. and international nuclear safety and security experts told us that controls placed on radioactive sources vary greatly between countries and focus primarily on protecting public health and safety and not on securing sealed sources from theft or destructive use. According to IAEA, as many as 110 countries worldwide do not have adequate controls over sealed sources and the agency has established a program to help 88 countries upgrade their regulatory infrastructures. All of the countries that responded to our survey reported that they have established legislative or regulatory controls over sealed sources. The countries that responded to our survey identified various controls over sealed sources, including (1) licensing and inspection; (2) tracking the import and export of sources; (3) maintaining national registries of sources’ users; (4) maintaining national inventories of sources; (5) searching for and recovering lost, stolen, or abandoned sources; (6) securing sources; and (7) regulating their safe transport. According to IAEA, controls over sealed sources are based on countries’ development of a framework of laws and regulations. Twenty-five of the 49 countries reported that they had established a strong legislative framework to control sealed sources and most of these same countries indicated that they had a strong regulatory framework as well. Several countries characterized their legislative or regulatory framework as weak. The countries that reported having a strong legislative or regulatory framework were spread across many regions, including the former Soviet Union, Europe, Africa, and the South Pacific. Countries reporting that they had weak or nonexistent regulatory frameworks were located primarily in the former Soviet Union, the Middle East, Europe, Africa, and South America. Countries reported using various guidelines to develop their laws or regulations that serve as the basis for controls over sealed sources. Forty- four of the 49 countries said they used either one or both IAEA guidelines— (1) the International Basic Safety Standards for Protection against Ionizing Radiation and for the Safety of Radiation Sources and (2) the Code of Conduct on the Safety and Security of Radioactive Sources. Twelve of the countries responding to our survey indicated that they base their regulatory controls, in part, on European Union regulations. European Commission officials told us that efforts are under way to strengthen controls over sealed sources, including harmonizing measures among member states for the recovery of orphan sources. These efforts began prior to September 11, 2001, in response to accidents where orphan sources were melted with scrap metal, resulting in significant economic damages. In 2002, the commission adopted a proposed directive to improve controls over sealed sources that emit large amounts of radiation. The proposal urges that necessary measures be taken to protect public health from orphan source exposure. More recently, a commission committee proposed that users of radioactive sources in the European Union be charged a refundable deposit before acquiring sealed sources. All of the countries responding to our survey identified one or more organizations responsible for regulating sealed sources. Forty-five of the 49 countries reported that regulatory organizations inspect facilities where sealed sources are stored or in use. Regarding enforcement, three countries failed to list any actions that inspectors could take to ensure compliance with laws and regulations. Many of the countries identified more than one enforcement mechanism available, including levying fines, suspending or terminating licenses, and closing a facility. Enforcement mechanisms, however, are not always used. Representatives from one European country—that did not respond to our survey but discussed these matters with us—told us that imposed fines tend to be so low that many users of sealed sources may find it cheaper to pay the fines rather than comply with the regulations. All of the countries responding to our survey reported that users of sealed sources are required to secure radioactive materials in their possession. In addition, 39 of the respondents reported that they had facilities to store disused sources. However, only 18 countries indicated that they have a facility to permanently dispose of the sealed sources. Those countries that did not have any storage facilities were primarily located in Africa. Representatives from four former Soviet Union countries told us that the absence of secure storage poses a serious security problem, and an official from the Republic of Georgia told us that a well-protected centralized storage facility was urgently needed. All but four of the countries responding to our survey said they had regulations covering the safe transport of sealed sources. The countries that did not have such regulations were located in Africa, South America, and the Middle East. Although Russia did not respond to our survey, Russian officials told us that they were concerned about moving sealed sources safely and securely. They said that sources that were no longer being used are moved great distances by trucks and are vulnerable to theft because the operators of the vehicles must stop to rest or lose communications owing to the remoteness of the locations where they are traveling. Nuclear safety and security experts from the Departments of Energy, State, and Defense; NRC; IAEA; and the European Commission told us that controls placed on sealed sources vary greatly between countries and have focused primarily on protecting public health and safety and not on securing the sources from potential terrorists threats. According to IAEA, as many as 110 countries worldwide lack the regulatory infrastructure to adequately protect or control sealed sources. Many of these countries are considered less developed and are confronted with social, political, and economic problems that divert attention from imposing controls on the many thousands of radioactive sources used in hospitals, research facilities, industries, or universities. In many cases, these countries’ regulatory organizations have a limited number of trained personnel. In the absence of regulatory controls, radioactive sources have been inadequately protected or secured; little or no attention has been paid to export or import controls of sources; and there has been a lack of basic record keeping. IAEA’s Director of the Division of Radiation and Waste Safety told us that many countries also lack the commitment or political will to exercise controls over sealed sources. In March 2003 over 700 delegates from more than 120 countries met in Vienna, Austria, to participate in an international conference on the security of radioactive sources. The conference, sponsored by the governments of the United States and the Russian Federation, emphasized that all users of sealed sources share a responsibility for managing them in a safe and secure manner and that the manufacturers of sources and regulators have important roles to play. The conference also noted that high-risk radioactive sources that are not under secure and regulated control, including orphan sources, raise serious security and safety concerns. U.S. and international experts are in the process of developing a systematic approach to identifying the highest-risk sources. In 2000 IAEA established a categorization of sealed sources to, among other things, determine the level of oversight that should be applied to the safety and security of a particular type of source. In response to growing concerns about sealed sources being used as a terror weapon, IAEA has revised the categorization. The categorization, which is still in draft, provides a relative numerical ranking of sealed sources and practices for which they are used. Appendix VIII provides more information about the conference, and appendix IX contains additional details about IAEA’s revised categorization of sources. In 1994 IAEA established a model project program to enhance countries’ regulatory infrastructure. This program is available to any IAEA member state upon request. (See app. X for a list of countries participating in the program.) The program has expanded and includes 88 countries. As of December 2002, IAEA had spent $27.7 million to help these countries. Each country’s progress is measured through five milestones, including the establishment of a regulatory framework. The five milestones are (1) the establishment of a regulatory framework, (2) the establishment of occupational exposure control, (3) the establishment of medical exposure control, (4) the establishment of public exposure control, and (5) the establishment of emergency preparedness and response capabilities. without adequate controls. These officials are concerned that without appropriate regulatory oversight, sources in these countries pose a particularly serious threat because they are not adequately protected. Officials from the Department of State, IAEA, and the European Commission told us that France has implemented a system for controlling sealed sources that could serve as a model for other countries, including many developing nations. France’s system requires distributors of sealed sources to assume financial responsibility for recovering and disposing of these sources at the end of their 10-year life. According to French officials, this system has significantly reduced the number of orphan sources. France’s system for controlling sources is discussed in more detail in appendix XI. DOE has the primary U.S. government responsibility for helping other countries strengthen controls over sealed sources. Since fiscal year 2002, DOE has received $36.9 million to, among other things, secure sources at several large nuclear waste repositories in Russia and other countries of the former Soviet Union. Other U.S. federal agencies, including the Departments of Defense and State, and NRC have efforts under way to help countries strengthen controls over sealed sources as well. DOE’s initial efforts to secure sealed sources have lacked adequate planning and coordination, and the majority of program expenditures have been in the United States. According to DOE officials, efforts are under way to improve the management of the program, including the development of a plan and better coordination with other agencies. DOE is leading U.S. government efforts to help other countries strengthen controls over sealed sources. DOE’s effort is part of the overall U.S. national strategy to reduce the risk that terrorist groups could use these materials in a dirty bomb attack against the United States. A congressional report instructs DOE to use a portion of its fiscal year 2002 supplemental appropriation to address the threat posed by dirty bombs. In response to the congressional requirement, the National Nuclear Security Administration’s Office of International Material Protection and Cooperation established the Radiological Threat Reduction program in January 2002, budgeting $20.6 million for the program in fiscal year 2002, and received an additional $16.3 million appropriation in fiscal year 2003. The program is expected to receive an additional $22 million in supplemental appropriations in fiscal year 2003, including $5 million to secure nuclear material in Iraq. Initially, DOE evaluated the threat to national security from radioactive materials and determined that sealed sources pose a greater threat than other radioactive materials, such as radioactive waste and nuclear fuel, because of their availability; radioactivity; and other physical characteristics, such as half-life. DOE did further studies of the dirty bomb threat, including (1) narrowing the list of sealed sources that are a high priority because of their characteristics and availability, (2) analyzing possible scenarios in which a radiological dispersion device could be used, and (3) determining what the economic consequences of a dirty bomb attack in the United States would be. The former assistant deputy administrator of the Office of International Material Protection and Cooperation told us that it would be impossible to secure all sealed sources but that by determining which sources pose the greatest risk, DOE could prioritize its efforts. DOE has focused on securing sealed sources in the countries of the former Soviet Union because DOE officials have determined that is where the greatest number of vulnerable sealed sources is located. In April 2002 the Radiological Threat Reduction program initiated its first security upgrade project at the Moscow Radon, a regional facility involved with collecting, transporting, processing, and disposing of sealed sources and low- and intermediate-level radioactive waste. There are 35 Radon facilities in the former Soviet Union, but the Moscow Radon is by far the largest and collects almost 80 percent of the institutional, industrial, and medical radioactive wastes in Russia from almost 2,000 enterprises in the city of Moscow, the Moscow region, and nine neighboring regions. During our visit to the Moscow Radon in October 2002, Radon officials showed us the building for which most of the DOE-funded upgrades are planned. (See fig. 4.) Planned upgrades at the site include surveillance cameras, motion detectors, vehicles, building upgrades, and a security facility where guards can monitor the building where most high-activity sources are stored. Although there have been no known attempts at theft of materials at the site, Radon officials told us that upgrades are needed because existing security is inadequate. The program has also secured sealed sources in Uzbekistan and the Republic of Georgia. In Uzbekistan, DOE has funded security upgrades at research and irradiation facilities and the construction of a national repository for sealed sources, and plans to fund increased physical security upgrades at a dozen regional cancer treatment facilities. In the Republic of Georgia, DOE funded security upgrades at a facility where radioisotope thermoelectric generators and other high-activity sealed sources are stored. Upgrades in both countries included bricking up windows; reinforcing doors; improving or replacing roofs; upgrading storage vaults; installing motion detectors and alarm systems; and other low-cost, “low-tech” measures. Figure 5 shows an example of the security upgrades funded by DOE. In June 2002 DOE launched two additional efforts—a bilateral initiative with MINATOM to secure sealed sources at Russian facilities identified by MINATOM, and a Tripartite Initiative with MINATOM and IAEA. The objective of the Tripartite Initiative is to improve the security of sealed sources in former Soviet states by developing inventories of sealed sources, locating the sealed sources, recovering the sealed sources, storing recovered sealed sources in a secure manner, and disposing of the sources. Ultimately, DOE hopes that Russia will play a key role in recovering sealed sources in other former Soviet states because many of these sealed sources were manufactured in and distributed from Russia. In July 2002 MINATOM provided DOE with a number of priority projects for funding in Russia. These projects included recovering and securing radioisotope thermoelectric generators, and recovering orphan sources at 45 sites in Russia. According to DOE, the sites will be prioritized according to the type and activity level of the radioactive material present. DOE has completed site assessments at four Radon sites in Russia. Upgrades at these facilities are expected to be completed by the end of fiscal year 2004. A key criterion for deciding if the site requires upgrades is an inventory of the sealed sources stored there—if the inventory includes sealed sources that DOE has determined to be high risk, security upgrades will be implemented. Under the Tripartite Initiative, 19 additional Radon sites in other former Soviet states will be assessed. These Radon sites are located in Armenia, Azerbaijan, Belarus, Estonia, Georgia, Kazakhstan, Latvia, Lithuania, Moldova, Tajikistan, Turkmenistan, Ukraine, and Uzbekistan. DOE also plans to perform site assessments and security upgrades at medical, industrial, and research facilities throughout the former Soviet Union, similar to those done in Uzbekistan and Georgia. DOE, IAEA, and MINATOM officials visited Moldova in the fall of 2002 to conduct a physical security evaluation, implement the upgrades at the Moldova Radon, and identify other sites where further work is needed to improve security. DOE and IAEA officials conducted a similar trip to Tajikistan in December 2002. Work in both countries is expected to be complete in the summer of 2003, and DOE plans to initiate projects in Ukraine, Kazakhstan, the Baltics, and possibly Armenia, Azerbaijan, and Kyrgyzstan in fiscal year 2003. In March 2003 the Secretary of Energy announced a new initiative to broaden the Tripartite Initiative to other countries needing assistance to secure high-risk vulnerable sources. The emphasis of the expanded initiative will be on developing countries outside of the former Soviet Union. As part of this expanded effort, DOE expects to initiate work in Serbia and Indonesia this year. Finally, DOE also has a program designed to strengthen other countries’ controls over sealed sources managed by the Office of International Nuclear Safety within the National Nuclear Security Administration. The office is working with IAEA, other international organizations, NRC, and the State Department to develop a management program for sealed sources. The purpose of this program is to protect the health and safety of the public and people who work with sealed sources by developing literature and training programs. The program also contributed assistance for the international effort to recover orphan sources in the Republic of Georgia, including providing technical assistance, detection and personnel protection equipment, training, and software. In Armenia, this program is providing training, equipment, and other technical assistance to enhance the safety and security of sealed sources. As of September 30, 2002, DOE had spent about $330,000 for these activities. DOD, through its Cooperative Threat Reduction program, is helping Kazakhstan to inventory, secure, and dispose of about 2,000 sealed sources, primarily cesium-137 and cobalt-60, from an out-of-service industrial facility, and identify other facilities with sealed sources. The manager of the program told us that although sealed sources are not traditionally considered to be weapons of mass destruction, DOD undertook this project because the Kazakhstan government asked for assistance and the quantity and types of sealed sources posed a security threat. The program began in fiscal year 2001, prior to the establishment of DOE’s program to secure sealed sources, and DOD does not expect to engage in any further projects to secure sources in the former Soviet Union countries. The $1.7 million project is expected to be completed by the end of fiscal year 2003. The State Department is also funding various projects to strengthen controls. For example, State provided IAEA with $1 million in fiscal year 2002 to support the agency’s projects related to the safety and security of radioactive sources. Additionally, State allocated $120,000 in fiscal year 2002 from the Nonproliferation and Disarmament Fund for a pilot project to develop and improve radiation safety programs in developing countries, including controls over sealed sources. The project was initially developed by the Health Physics Society and proposed by State’s Office of the Senior Coordinator for Nuclear Safety. Health Physics Society members volunteer their time, and State Department funding is used for travel, per diem, the cost of shipping donated equipment to the host countries, and evaluation of the project—about $3,000 spent to date. Four countries—Costa Rica, Ecuador, Jamaica, and Panama—were chosen for the pilot; however, work has been initiated in only two countries. The project was recently reactivated after a suspension of several months because of State Department concerns about program management, security, and liability issues. The State Department has also contracted with Sandia National Laboratory for a $100,000 study to assess the current laws and procedures governing intercountry transfers of sealed sources. Specifically, the study is looking at six countries that are either major exporters or importers of sealed sources and will provide information on, among other things, the number of sources that is imported and exported, and whether exporters are required to verify whether the countries they are exporting to have controls in place to ensure the safety and security of sealed sources. In addition, NRC has a program to strengthen controls that focuses on Armenia. NRC has spent $62,000 in Freedom Support Act funds transferred from USAID to assist Armenia. Initially, NRC will help Armenia develop a registry of sealed sources, including identifying the information required; develop the database; and help Armenia gather, assess, develop, and verify existing data on sources. Currently, Armenian regulations on sealed sources and other radioactive materials are spread across different ministries and departments, and many have not been changed since the fall of the Soviet Union. NRC plans to assist Armenia with reviewing existing regulations and developing consolidated regulations on, among other things, licensing and inspections of radioactive sources, which will apply governmentwide and meet international standards. In addition, NRC provided Russia and Ukraine with guidance and training on the licensing and regulation of sealed sources in the mid-1990s. NRC has also started working with Canada and Mexico to share information about controls over sealed sources in each country and improve cross-border controls and has provided cost-free experts to help IAEA update its Categorization of Radioactive Sources and Code of Conduct. Finally, DOE and State are providing funds to support IAEA efforts to strengthen controls over sealed sources. DOE and State have pledged a total of $8.2 million—67 percent of the total $12.2 million pledged—to IAEA’s Nuclear Security Fund. This fund was established after the terrorist attacks of September 11, 2001, in conjunction with IAEA’s action plan to improve nuclear security worldwide. The State Department has directed $1 million of its contribution specifically toward activities to improve the controls over sealed sources, and DOE’s $3 million contribution is entirely directed to these efforts. Planned activities to improve the security of sealed sources in member states include, among other things, enhancing ongoing activities to improve controls of sealed sources; developing standards, guidelines, and recommendations on the security of radioactive sources; establishing security standards for the transport of radioactive material; and locating and securing orphan sources. Table 4 summarizes the amounts that the Departments of Energy, State, and Defense, and NRC have received, obligated, and spent to help other countries strengthen their controls over sealed sources as of January 31, 2003. DOE is in the process of developing a plan to guide its efforts to help other countries secure sealed sources. According to DOE officials, initial attempts to develop a plan were stopped in May 2002 because the former administrator of the Office of International Material Protection and Cooperation felt that the program needed to show tangible results quickly. In the absence of a plan, DOE officials told us that the program has modeled its work in Russia on previous DOE projects to secure fissile materials in Russia through its Material Protection, Control, and Accounting program. The director of the program told us that while the initial approach to securing sealed sources in Russia—focusing on improving physical security at Radon sites—was a good idea, it hindered DOE from setting priorities among other sites in Russia. He further noted that the program is now focusing on improving the security of the most vulnerable high-risk sources first. DOE officials told us that they recognize that the development of a plan is essential. DOE’s draft plan has established short- and long-term program elements, including consolidating and securing dangerous materials in vulnerable locations; leveraging critical partnerships, such as continuing to work with IAEA on key efforts such as the model projects program and the code of conduct; and continuing to help countries detect smuggled radioactive materials through its Second Line of Defense program. In addition to the plan, DOE officials said they are also developing a more detailed action plan; radioactivity thresholds for vulnerable high-risk radioactive materials; and guidelines for describing the actions that should be taken by DOE when sources are found to exceed those radioactivity thresholds. As part of its overall effort, DOE officials told us that more detailed planning and analysis will be needed to, among other things, (1) determine which countries present the greatest security risk and most urgently require assistance, (2) identify future funding requirements, and (3) develop performance measures to gauge program success. Despite these recent initiatives to improve program planning, officials from Gosatomnadzor, the Russian agency responsible for regulating sealed sources in use at almost 8,000 facilities in Russia, told us that beyond an initial meeting, DOE had not consulted with them in the selection or prioritization of sites for physical security upgrades. In particular, Gosatomnadzor officials were surprised that DOE was focusing so much attention on improving security at the Radon facilities in Russia where they believed the probability that sealed sources will be stolen is low. They said that it would be preferable to begin securing sealed sources from other vulnerable sites near Moscow, for example, out-of-service irradiation and research facilities. A systematic approach is required to assess needs, identify priorities, and develop a comprehensive approach to securing sealed sources. In their view, DOE’s initial approach had the potential to be superficial. DOE officials told us that they are now working more closely with Gosatomnadzor. In a March 31, 2003, letter from DOE’s Acting Deputy Assistant Secretary for International Material Protection and Cooperation to Gosatomnadzor’s First Deputy Chairman, the DOE official noted the need for regulatory oversight of the Russian radiological industry and suggested that a proposal be formulated jointly with NRC to work cooperatively in this area. DOE is also seeking to improve planning and coordination of the Tripartite Initiative. According to an IAEA official, DOE coordinated its efforts with IAEA and Russia on the Moldova visit that contributed to a successful start of the Tripartite Initiative. The participants jointly developed and implemented a common approach for securing some vulnerable sealed sources, and arrangements were made to construct a facility to store these sources. However, the IAEA official told us that the Tajikistan assessment was not well coordinated. He noted that DOE was not flexible in scheduling the preliminary assessment visit and that Russia did not participate in the visit. Because of the timing of the visit, IAEA’s representative to the Tripartite Initiative was unable to participate in the visit, however, an official from IAEA’s Department of Technical Cooperation did accompany the DOE team. DOE officials told us that they were unable to make changes to their existing itinerary because they would have incurred significant delays if travel dates were changed due to country clearance restrictions for U.S. government travel in Tajikistan. Furthermore, they noted that because of the different roles that DOE, MINATOM, and IAEA play under the Tripartite Initiative, it is not necessary that representatives of each organization be present on each visit. As currently envisioned, the Russian and IAEA participants will act as an advance team, gathering information about which sealed sources exist in a given country and their current level of vulnerability. Subsequently, the U.S. team will visit the country and negotiate contracts to improve security at the vulnerable sites. IAEA’s official also told us that, overall, the Tripartite Initiative has not been well planned. Initial efforts have been ad-hoc, and a more systematic approach is needed as the program continues. He said that improved planning is essential particularly because the Tripartite Initiative will be used as a model to guide future efforts as the program expands worldwide. DOE officials agreed that improved coordination is needed. DOE, MINATOM, and IAEA are working to finalize a “Terms of Reference” document that defines the objectives, scope, roles, operational framework, and procedures to be followed for implementing projects under the Initiative. Furthermore, preliminary schedules for missions to several countries have been jointly developed through August 2003. Department of State and NRC officials told us that DOE has not fully coordinated its efforts with their agencies, although they noted that efforts were recently under way to improve coordination. These officials told us that DOE needs their input to ensure that a comprehensive governmentwide strategy is taken to, among other things, leverage program resources, maximize available expertise, avoid possible duplication of effort, and help ensure long-term success. DOE has not systematically undertaken the kind of comprehensive planning that would foster better coordination with the other agencies and could also lead to better coordination with other countries’ nuclear organizations. For example, DOE did not adequately consult NRC or State when developing the Radiological Threat Reduction program or developing the Tripartite Initiative with MINATOM and IAEA. Officials from NRC and the State Department expressed interest in sharing information and working with DOE to plan and execute the Radiological Threat Reduction program, but told us that there had been limited information sharing between agencies. Both NRC and the State Department have extensive experience in nuclear regulatory and safety-related issues in the former Soviet Union. NRC has received approximately $50 million from fiscal year 1991 through fiscal year 2002 to support regulatory strengthening efforts in the countries of central and eastern Europe and the former Soviet Union. These efforts have included training other countries’ regulators in all aspects of licensing and inspection procedures, advising on how to establish a legal basis for nuclear regulations, and developing a control and accounting system for nuclear materials. The State Department’s Office of the Senior Coordinator for Nuclear Safety, which was established about 10 years ago, provides overall policy guidance for efforts to improve the safety of Soviet-designed nuclear power reactors. Since then, the office’s mandate has expanded to include the safety of other foreign civilian nuclear facilities, including research reactors and waste facilities. In addition, State Department officials said that more recently, State has been leading U.S. negotiations to revise IAEA’s Code of Conduct and leading consultations within the U.S. government with large exporters of sealed sources to strengthen export controls on international transfers of them. Several officials also told us that DOE was focusing too narrowly on rapid physical security upgrades and not taking into account long-term needs to develop better regulatory infrastructures in host countries. These officials also said that a coordinated, targeted effort to identify and secure the most vulnerable and high-risk sealed sources could eliminate the greatest risks, and that developing regulatory frameworks in host countries would significantly improve the safety and security of sealed sources. DOE noted that part of the program’s strategy is to support IAEA initiatives to leverage resources of member states to improve the security of sealed sources in their countries. They are hoping to build on the work IAEA has done in this area, particularly on the development of regulatory infrastructure. DOE budgeted $20.6 million for the Radiological Threat Reduction program in fiscal year 2002 and received an additional $16.3 million in fiscal year 2003. DOE had spent about $8.9 million of the total $36.9 million received as of January 31, 2003, including $3 million transferred to IAEA’s Nuclear Security Fund. Of the remaining $5.9 million in expenditures, 93 percent was spent in the United States by DOE’s national laboratories for labor, travel, equipment, and overhead. Only $407,900 had been spent by the national laboratories in the countries receiving assistance. Table 5 shows expenditures by the laboratories by component of cost as of January 31, 2003. DOE officials cited several reasons why only a small percentage of the funds allocated to the program since fiscal year 2002 had been spent as of January 31, 2003, including the following: The new program required significant start-up effort to assess the threat posed by sealed sources, determine the potential impacts from the detonation of a dirty bomb, and categorize and prioritize the types of sources that pose the greatest security risk. Difficulties and other unforeseen delays are frequently associated with doing work in the former Soviet Union. For example, the Russian Ministry of Construction, which maintains the Radon sites in Russia, raised concerns, after work had already started, that it had to authorize any work performed at those sites. Consequently, work was stopped at the Radon sites for several months. Initially, this Ministry had not been consulted by DOE and MINATOM in discussions about performing work at the Radon sites. It took DOE a significant amount of time to establish appropriate contacts in the countries of the former Soviet Union where DOE plans to provide assistance. While DOE has a long history of working with Russia to secure fissile materials through its Material Protection, Control, and Accounting program, DOE was required to identify and work with a different set of organizations responsible for regulating sealed sources. DOE officials told us that expenditures in countries of the former Soviet Union and other regions of the world are expected to increase as the program evolves. According to DOE, as the program matures security upgrades will be followed by comprehensive and costly consolidation and disposition activities, all of which will take place in foreign countries. DOE has requested an additional $36 million for the program in fiscal year 2004. The director of the program said that the amount requested was an estimate based on anticipated future funding requirements. He expects that the funds will be allocated for, among other things, continued work in Russia, including securing large numbers of radioisotope thermoelectric generators, additional contributions to IAEA’s Nuclear Security Fund, and expanded efforts to secure sources in countries outside of the former Soviet Union. The director also noted that plans to secure sources in other parts of the world are still being developed and that DOE wants to ensure that it has a sound basis for determining which countries to select for assistance. The attacks that occurred in September 2001 widened the array of potential scenarios and challenges that U.S. decision makers must confront concerning terrorist threats. Sealed sources containing radioactive material, which have many beneficial industrial, medical, and research applications, must now be considered possible terrorist weapons. These sealed sources are in virtually every country of the world and are often inadequately secured or accounted for. The central question is, What can the United States and the world community do to confront this problem, given the likely vast and unknown number of sources that exist and continue to be manufactured and distributed globally? DOE appears to be well suited to help countries secure sealed sources because of its long history in securing weapons grade material in the former Soviet Union. Further, DOE’s efforts to develop a plan to guide its efforts is a step in the right direction. However, additional planning and detailed analyses will be needed to, among other things, systematically identify and prioritize countries that require assistance, establish realistic time frames and resources necessary to accomplish these tasks, and develop meaningful performance measurements. The elements of such a plan assumed greater importance in light of the Secretary of Energy’s recent announcement that DOE’s program will expand beyond the countries of the former Soviet Union. For this reason alone, it is imperative that a comprehensive plan be established and implemented before significant amounts of appropriated funds are spent to improve international controls over sealed sources. Regarding program expenditures, we agree with DOE’s objective to maximize program resources in the recipient countries. To date, the national laboratories have spent the majority of the program funds in United States and we believe that this trend needs to be reversed as the program evolves. We would expect that in the future, a markedly smaller percentage of program funds will be directed toward the national laboratories and the greatest percentage will go to the countries that need the assistance to strengthen controls over sealed sources. We share the views of Department of State and NRC officials who expressed their concerns that DOE was not adequately coordinating its efforts with the other agencies. The Department of State and NRC have a long history of working on international nuclear safety issues, and their expertise and insights would be valuable, we believe, in crafting an overall governmentwide plan for strengthening controls over sealed sources. In particular, NRC has experience in working closely with many countries of the former Soviet Union to develop and strengthen national regulatory infrastructures. Clearly, any long-term plan requires that countries have a competent regulatory authority that can place appropriate levels of controls on sealed sources. We recommend that the Secretary of Energy (working with the Administrator of the National Nuclear Security Administration): Develop a comprehensive program plan for helping other countries secure sealed sources that includes (1) a unified set of program goals and priorities, including a well-defined plan for meeting these goals in the countries to be included; (2) program cost estimates; (3) time frames for effectively spending program funds; (4) performance measures; (5) ways to sustain upgrades to the facilities and equipment financed, including cost estimates; and (6) an exit strategy for each country, including a plan for transferring responsibilities to the host country for building and equipment maintenance. The plan should be flexible and updated periodically to ensure that long-term efforts are sustainable. Take the lead in developing a comprehensive governmentwide plan to strengthen controls over other countries’ sealed sources. The plan should be developed in conjunction with the Secretaries of State, Defense, and Homeland Security, and the Chairman of NRC. In addition, this plan should be coordinated with the International Atomic Energy Agency to avoid overlap or duplication of effort. Strengthen efforts to increase program expenditures in the countries requiring the assistance. We provided the Departments of Energy, State, and Defense, and the Nuclear Regulatory Commission with draft copies of this report for their review and comment. We also provided IAEA with pertinent sections of the report for review. DOD had no comments on the draft report. DOE’s, State’s, and NRC’s written comments are presented as appendixes XII, XIII, and XIV, respectively. The three agencies and IAEA also provided technical comments, which we incorporated into the report as appropriate. DOE’s National Nuclear Security Administration agreed with our recommendations that the program needs strengthening and noted that the Secretary and the Administrator are actively involved with the international community to address the security of other countries’ sealed sources. However, DOE disagreed with our finding that it had not coordinated its efforts with NRC and the Department of State to ensure that a governmentwide strategy is established. Further, DOE believes that it is important to place the report’s findings in context since the program is in its startup phase. Regarding DOE’s point about coordination, we had been told several times during the course of our review by NRC and State Department officials that DOE had not systematically included these agencies in the development of a comprehensive strategy to strengthen other countries’ controls over sealed sources. In fact, we raised this issue with DOE program officials during our review and these officials acknowledged that DOE needed to do a better job in coordinating its program with other U.S. agencies. Although NRC and State Department officials told us that coordination has improved recently, they endorsed the need for the development of a governmentwide strategy to ensure that they fully participate in future U.S. efforts. Regarding DOE’s concern about putting the report’s findings in context, we noted in the draft report that the program required a significant start-up effort to, among other things, assess the threat posed by sealed sources, determine the potential impacts from the detonation of a dirty bomb, and prioritize the types of sources that pose the greatest threat. State agreed with the facts presented in our report and noted that a comprehensive approach to controlling sources will require a concerted diplomatic effort that should be combined with the technical expertise possessed by DOE in recovering and securing sealed sources in other countries. State said that it possesses a unique perspective that is crucial to the success of the program and hoped that we would clarify our recommendation to delineate between DOE’s technical programmatic responsibilities and State’s overall diplomatic role in guiding international strategies for securing radiation sources. Regarding State’s point, we acknowledge State’s responsibility to develop and implement international strategies on behalf of the U.S. government. However, we believe, as noted in the report, that DOE is well suited to help other countries secure sealed sources because of its long history in securing weapons grade material in the former Soviet Union and that it should take the lead in developing a comprehensive plan to strengthen controls of other countries’ sealed sources. NRC made several points. First, NRC believed that our report should have focused more attention on high-risk radioactive sources rather than on radioactive sources of all types. NRC stated that the vast majority of radioactive sources in use in the United States and abroad are not useful to a terrorist and that it has been working with DOE and IAEA to finalize IAEA’s revised Code of Conduct on Safety and Security of Radioactive Sources and the revised Categorization of Sources. In addition, NRC noted that only a few of the radioactive sources that are lost or stolen in the United States are high-risk and that a majority of the sources reported lost or stolen involve small or short-lived sources which are not useful as a radiological dispersion device. Second, NRC identified various efforts that it has undertaken to improve the security of high-risk sources in the United States. Third, NRC pointed out that we should consider including the Department of Homeland Security in our recommendation that calls for the development of a governmentwide plan to help other countries secure sealed sources. Regarding NRC’s comments, one of the objectives of our report was to specifically determine the number of sealed sources worldwide, and we believe that it is important to develop information, to the extent possible, regarding the number of all sealed radioactive sources that are in use. In fact, IAEA has placed great emphasis, particularly among developing countries, on the importance of developing and maintaining inventories of sources for safety and security purposes. As we noted in our report, current IAEA policy does not allow for the approval of any Technical Co- operation project involving the use of significant radiation sources, unless the member state in question, among other things, complies with the requirements to maintain an effective regulatory framework that includes an inventory of sources. While we agree with NRC that the highest-risk sources present the greatest concern as desirable material for a “dirty bomb,” other sealed radioactive sources could also be used as a terrorist weapon. No one can say with certainty what the psychological, social, or economic costs of a dirty bomb—regardless of the radioactive material used to construct it—would be. In addition, it is important to note that work by NRC, IAEA, and others to characterize sources is still ongoing. Regarding NRC’s comments about its activities to increase the security of the highest-risk sources, we will address these matters in our forthcoming report on U.S. efforts to strengthen controls over sealed sources in the United States. Finally, during the course of our review, no agency we met with was aware of or told us of a role being played by the Department of Homeland Security in securing sealed sources in other countries. However, we agree with NRC that it makes sense to coordinate the development of a governmentwide plan for this activity with the Department of Homeland Security and we have revised our recommendation to include the department. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after the date of this letter. We will send copies of this report to the Secretary of Energy; the Administrator, National Nuclear Security Administration; the Secretary of State; the Secretary of Defense; the Secretary of the Department of Homeland Security; the Chairman, Nuclear Regulatory Commission; the Director, Office of Management and Budget; and interested congressional committees. We will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions concerning this report, I can be reached at 202-512-3841 or [email protected]. Major contributors to this report are included in appendix XV. To answer our objectives related to (1) number of sealed sources worldwide and how many sources are lost, stolen, or abandoned and (2) the legislative and regulatory controls that countries that possess sealed sources use, we distributed a questionnaire to 127 member countries of the International Atomic Energy Agency (IAEA), including 3 countries whose IAEA membership had been approved but had not yet taken effect at the time of our survey. We did not, however, survey all IAEA member states. Specifically, we did not distribute questionnaires to Afghanistan, Cuba, Iran, Iraq, Ivory Coast, Libya, Sudan, Syria, and the Holy See. The State Department recommended that we not correspond with the first eight countries listed. We determined from discussions with IAEA that the Holy See did not have any sealed sources. We did not include the United States because it is being treated separately in another GAO report. IAEA provided us with a list of the appropriate contacts for most of the countries we planned to survey. These officials were primarily from member countries’ regulatory authorities. We pretested the survey with the U.S. Nuclear Regulatory Commission (NRC) and with representatives from Brazil, Poland, the United Kingdom, Uganda, and Uzbekistan. After revising the survey to reflect the comments of these officials, we distributed it in December 2002 via E-mail and fax, and through countries’ embassies in Washington, D.C., and Vienna, Austria, where IAEA is located. As a follow-up for nonrespondents, we also distributed questionnaires directly to many countries’ representatives who were attending an international conference in Vienna, Austria, on the security of radioactive sources. We also sent out periodic reminders to the countries from January through March 2003 requesting their assistance to complete the survey in a timely fashion. We received responses from 49 IAEA member states (39 percent), including countries from Asia, North and South America, the former Soviet Union, Europe, the Middle East, and Africa. According to IAEA officials, the response rate was consistent with the rate it achieves when it sends out similar types of questionnaires to member states. In addition we were told by IAEA officials and others that there is an inherent difficulty associated with trying to obtain these types of data from countries owing to the sensitive nature of some of the questions and countries’ concerns about ensuring the confidentiality of their responses. Our survey results were used without attempting to project the information to the universe of IAEA members. We did not assume that nonrespondent countries would have had similar answers to our survey. Regarding the matter of confidentiality, we notified the countries that the results from the survey would be reported in aggregate and that individual responses would not be disclosed. We supplemented the results obtained from the survey with interviews with officials from several countries, including Brazil, France, Kazakhstan, the Republic of Georgia, Russia, the United Kingdom, and Uzbekistan to learn more about how they regulate and control sealed sources. We also met with officials from IAEA and the European Commission to obtain their views on the security problems and challenges associated with sealed sources. In addition, we also interviewed and obtained pertinent documents from officials of several U.S. government agencies, including the Departments of Defense, Energy, and State, and NRC. We attended two DOE-sponsored conferences related to the security of sealed sources. The first conference, held in London, United Kingdom, during September-October 2002, focused on international approaches to nuclear and radiological security. The second conference, which was held in Vienna, Austria, in March 2003, focused on the security of radioactive sources and was attended by representatives from more than 120 countries. To determine what assistance has been provided by the United States to other countries to strengthen their controls over sealed sources, we obtained budget, obligation, and expenditure data from the four agencies providing assistance—the Departments of Energy, State, and Defense, and NRC. To assess how well the programs were being implemented, we interviewed program officials from each agency and reviewed pertinent documents, including agency plans as available. We also obtained information about these programs through interviews with representatives of IAEA and officials from some of the countries receiving U.S. assistance. Finally, we visited Russia to obtain a first-hand look at a waste facility that contains sealed sources. Specifically, we traveled to the Moscow Radon site at Sergiyev Posad, located about 90 kilometers from Moscow. While in Russia we also interviewed officials from the Ministry of Atomic Energy, the Ministry of Health, the Kurchatov Institute, Gosatomnadzor (Russia’s nuclear regulatory organization), the Russian Academy of Sciences, and the Russian National Technical Physics and Automation Research Institute. We performed our review from May 2002 through May 2003 in accordance with generally accepted government auditing standards. This appendix presents a copy of the survey sent to 127 IAEA member countries and the results of that survey. Table 6 lists all of the countries that we sent surveys to and identifies whether or not they completed the survey when this report was being written. This appendix provides information about the illicit trafficking in, or smuggling of, radioactive material over the past decade and focuses primarily on 17 incidents involving sealed radioactive sources. There is sketchy—and sometimes contradictory—information about many of these cases for a number of reasons, including (1) many trafficking incidents are never detected by authorities; (2) some may be known but not reported because the country does not participate in IAEA’s Illicit Trafficking Database program; (3) details about these incidents may be considered sensitive by the countries where they occur; and (4) until recently, trafficking of radioactive materials was not considered by U.S. and international nonproliferation experts to be as great a concern as the trafficking of weapons-grade nuclear material. IAEA is encouraging countries to provide more details about all trafficking incidents involving radioactive materials so that better information can be developed and more accurate assessments and analysis can be performed. Since the early 1990s, there have been numerous reports of illicit trafficking in, or smuggling of, radioactive material worldwide, including sealed sources. According to IAEA, sealed sources, such as cesium-137, cobalt-60, strontium-90, and iridium-192 are considered to pose the greatest security risk. In 1993, IAEA established a database to record incidents involving illicit trafficking in nuclear and radioactive materials. Seventy countries, or about one-half of IAEA’s member states, currently participate in the database. As of December 31, 2002, IAEA listed 272 confirmed incidents involving the illicit trafficking of radioactive materials, including sealed sources. According to IAEA, a confirmed incident is one in which the information has been verified to IAEA through official points of contact from the reporting country. Of the 272 confirmed illicit trafficking incidents reported by IAEA, there were 179 incidents with potentially high risk sealed sources that pose the greatest security risks. More than two- thirds of the 179 incidents involving these sources occurred after 1997. Figure 6 depicts the frequency of reported international trafficking incidents involving sealed sources since 1993. Figure 7 provides information on types of sealed sources and other radioactive materials involved in international trafficking incidents. Several observations can be made based on the incidents involving the illicit trafficking of sealed sources. The majority of the incidents involved deliberate intent to illegally acquire, smuggle, or sell radioactive material. Several other incidents reported, however, do not reflect criminal intent but have resulted from, among other things, the inadvertent transportation of contaminated scrap metal. The unregulated scrap metal industry throughout the former Soviet Union and Eastern Europe poses potential security and safety risks nonetheless because many radioactive sources are stolen for the metal shielding, leaving the source exposed and potentially very dangerous. Since the mid-1990s, the trafficking of radioactive materials has generally increased. The increase in illicit trafficking cases may be due, in part, to the increased reporting of these incidents by countries and/or improved radiation detection systems placed at countries’ border crossings. From 1993 through 1998, trafficking incidents involving radioactive material were primarily reported in Russia, Germany, and Estonia. In the past few years, there appears to have been an increase in trafficking through Ukraine, Bulgaria, and Romania. According to the illicit trafficking incidents reported by IAEA, high-risk sealed sources are more likely to be trafficked than weapons-grade fissile material, such as highly-enriched uranium. This is because such sources have numerous beneficial applications and are not as tightly controlled as fissile materials. IAEA and DOE officials told us that the actual number of trafficking cases involving sealed sources is larger than what is currently being reported because many trafficking incidents are never detected by authorities and many countries are not always willing to share sensitive trafficking information. Another factor that affects the number of confirmed cases reported is the credibility of the information. According to DOE, a significant amount of time and expertise is required to assess a particular incident before it can be deemed credible. Despite difficulties in drawing conclusions from illicit trafficking data, the threat posed by illicit trafficking is a real and growing problem. The Director of IAEA’s Office of Nuclear Security also told us that every reported case should be taken seriously. Furthermore, she noted that countries need to report their smuggling incidents more systematically so that better assessments can be performed. Table 7 provides information about 17 significant cases of illicit trafficking identified by IAEA and others since 1993. A brief discussion of each case follows the table. This incident involved two men who worked as assistants to an “engine” driver at a mineral fertilizer plant, which is located in Khohtla-Jarve, Estonia. The two men stole a device containing 2.8 grams of cesium-137 and were arrested. According to available information, the suspects intended to sell the cesium to an unspecified buyer. In July 1993, German police recovered an unidentified amount of strontium-90 that had been transported from Ukraine. The material, which was packed in small containers, was found by police from information provided by Ukrainian security services. Reportedly, the containers were discovered in three plastic bags after Ukrainian police had told the German police where to find them. Police in Kiev, Ukraine, arrested 17 people in connection with the operation. In September 1994, following a 5-day undercover operation, Bulgarian authorities arrested six Bulgarians and confiscated 19 containers of radioactive substances, including plutonium, cesium-137, strontium-90, plutonium-beryllium sources, and thallium-204 that had been stolen from the Izotop Enterprise near the capital, Sofia. According to available information, the theft was made possible by poor security at the laboratory. In October 1994, Romanian authorities arrested three Moldovans, two Jordanians, and two Romanians for trying to sell 7 kilograms of strontium in a lead pipe. One suspect, a former military officer, had smuggled the strontium to Moldova. The material was then passed to intermediaries in the Romanian province of Transylvania, where it was offered to the Jordanians for $400,000. In July 1995, Estonian security police arrested two Estonians who had radium-226 in their car. According to available information, it was thought that the radium was smuggled into Estonia via middlemen in St. Petersburg, Russia, indicating that more people were probably involved. In November 1995, acting on a tip, Russian television reporters discovered a 32-kilogram container, containing cesium-137 and wrapped with explosives, in a Moscow park. According to available information, Chechen separatists were responsible for this incident and had reportedly obtained the radioactive material from either cancer-treatment equipment or an instrument calibration device used in flaw detection equipment. The Chechens threatened to detonate the device if Russia decided to resume combat operations in the region. In October 1998, a radiation health specialist at a German company that consults on reactor safety was arrested by customs police at Kiev airport in possession of a container of radioactive material from Chernobyl. According to available information, a Russian scientist asked the health specialist to take a metal container holding a small amount of radioactive material out of the country for analysis. Russian officials were unsure of the exact type of material involved, but suspected it contained cesium, strontium, and zirconium. In July 1999 Russian law enforcement officials arrested two men who attempted to sell 5 grams of californium-252. One of those arrested, a technician from Murmansk, was approached by a criminal group who enlisted his help to procure californium-252. The technician, who was responsible for removing spent nuclear components from a nuclear- powered icebreaker, smuggled the radioactive material off the icebreaker. Along with an accomplice, the technician packed the californium-252 into a container filled with paraffin, which they placed within a canister of water. After the initial offer from the criminal group fell through, the technician and his accomplice traveled to St. Petersburg in search of another buyer, where they were arrested. In a joint operation, the Istanbul Organized Crime and Arms Smuggling Office and the National Intelligence Organization arrested five people, one of whom was from the Republic of Georgia, as they tried to sell cesium-137 to policemen acting as buyers in Istanbul in August 1999. The cesium, which was in two separate steel tubes and weighed 49 grams, was smuggled into Turkey from an unknown location. In September 1999, a Russian citizen was arrested after police officers discovered that he was carrying two containers of strontium-90. The material was discovered on the suspect during a document check by Ukrainian police. It is believed that the suspect was taking the radioactive materials from Russia to Western Europe. The suspect was in possession of a number of forged documents, including a forged diplomatic identification card. Volgograd, Russia, 1999 In August 1999, Russian security police recovered six containers of cesium- 137, which were stolen from a Volgograd oil refinery in May 1998. Earlier efforts to locate the stolen containers, including the establishment of checkpoints with radiation monitors on local roads, had proven fruitless. According to reports, the thieves had hidden the stolen cesium containers to avoid this police dragnet and hoped to sell the material after the search for it had finally been abandoned. Donetsk, Ukraine, 2000 In February 2000, A Ukrainian law enforcement unit confiscated 27 containers of strontium-90. Five individuals were reportedly involved in the illegal trafficking of this material. The group allegedly tried to contact foreign buyers, who were in fact members of the law enforcement unit. The radioactive material was reportedly stolen from a military unit deployed in the region and was stored in an apartment. Reports stated that the individuals were attempting to sell the 27 containers for $168,000. In March 2000, Uzbekistan customs officers seized an Iranian-registered truck on the Kazakhstan-Uzbekistan border about 20 kilometers from Tashkent, the capital of Uzbekistan, after discovering it contained highly radioactive material. Kazakhstan customs officials had cleared the truck and issued a certificate indicating that it had passed radiation screening. Uzbekistan officials determined that the level of gamma radiation emitted by the cargo was 100 times over the acceptable level. Uzbekistan customs officials then returned the truck to their Kazakhstani counterparts. The destination listed on the truck’s manifest was Quetta, Pakistan, and some reports speculated that the incident involved efforts to smuggle radioactive material intended for use by terrorist groups to build a radiological weapon. In December 2000, five suspects were arrested while trying to sell 1 kilogram of radioactive material (strontium, plutonium, and cobalt), to undercover police officers posing as prospective buyers of radioactive material. The suspects included a former officer of an antiorganized crime police unit in Moldova and four Romanians who were bodyguards in charge of protecting the shipments and who were responsible for organizing the sale of the materials. In January 2001, Greek law enforcement officials uncovered several hundred metal “wafers” of commercially available alpha-emitting ionization sources, containing a total of 3 grams of plutonium and americium. The cache was found buried in a forest 12 kilometers from Thessalonki. The sources were believed to be smuggled from Eastern Europe, and there was speculation about organized criminal involvement in the smuggling of these sources. An investigation was launched, but to date, there have been no publicly released results. In January 2002, police in Minsk, Belarus, arrested two persons in connection with an attempt to sell four sealed sources of strontium-90 that one of the suspects had been storing in his apartment. One of the suspects had stolen the sources 4 years earlier during his military service, and the other was arrested while trying to sell them. In May 2002, Bulgarian authorities seized 101 plutonium sources and an americium-beryllium source from a vehicle near Veliko Tarnova. The sources were detected when police officers stopped a taxi with four individuals during a routine inspection. Thirty-nine of the plutonium sources had certificates indicating that they had been manufactured in 1990 by Izotop-Moscow and had been ordered for a ferryboat station in Varna. Because the 10-year guaranteed service life of the sources had expired, it is possible that the sources were diverted after they had been removed from service for disposal. According to IAEA and the World Health Organization, there have been more than 100 accidents involving sealed sources over the past 50 years. Many of these accidents have been small and resulted in few injuries. The actual number of accidents worldwide is unknown because many countries do not report or record such events. This appendix describes 10 accidents that occurred since the early 1980s. Although these accidents were not the result of malevolent actions, they are useful in gaining a better understanding of the potential consequences following the loss of control of sealed sources. We have included, to the extent that it was available, information on the economic impacts of the accidents. The costs associated with lost equipment, damage to property, and the disposal of radioactive waste can be very significant. The cost components associated with radiological accidents include medical treatment of exposed individuals; radiation surveillance, including searching for lost sealed sources and decontamination and dismantling of contaminated buildings and loss of production capacity; radioactive waste management and disposal; monetary compensation to individuals who received excessive doses of rebuilding or possible relocation costs; and effects on international trade. Nonmonetary impacts may include: loss of public confidence and credibility in the government, and public questions about all uses of ionizing radiation. Table 8 provides information about 10 significant cases of accidents identified by IAEA and the World Health Organization since 1983. A brief discussion of each case follows the table. A teletherapy unit containing a cobalt-60 source was purchased and imported by a Mexican hospital without compliance with existing import requirements. After the unit was stored for 6 years in a warehouse, its scrap value attracted the attention of a maintenance technician. The technician dismantled the unit and removed the cylinder containing the sources and other metal parts. He then loaded them into a pickup truck, drove to a junkyard, and sold the parts as scrap. Before arriving at the junkyard, he ruptured the sealed cobalt source, dispersing about 6,000 tiny pellets of cobalt-60 in the truck bed. When cranes moved the ruptured cylinder, the cobalt-60 pellets were spread over the junkyard and mixed with other metal materials. Consequently, pellets and pellet fragments were transferred to vehicles used for transporting the scrap to various foundries. The technician’s pickup truck remained parked on the street for 40 days and was then moved to another street, where it remained for an additional 10 days. An unknown number of people passed by the truck each day and children used it as a play area. It was later discovered that contaminated scrap metal from the junkyard had been used to manufacture reinforcing rods and metal table bases. A truck transporting contaminated rods passed near a DOE national laboratory, where radiation detectors indicated the presence of radioactivity. Two days later, the authorities ascertained the origin of the contaminated rods. U.S. and Mexican officials spent an estimated $34 million to track, recover, and secure these radioactive products. An extensive investigation showed that 30,000 tables and 6,000 tons of reinforcing rods had been made from the contaminated material. In addition, 814 buildings were partly or completely demolished because the radioactivity in the reinforcing rods resulted in higher-than-acceptable levels of radiation. The accident exposed 4,000 people to radiation, and 80 people received significant doses. Table 9 provides a breakdown of the estimated costs associated with the accident. In 1984, iridium-192 sources were being used to radiograph welds in a fossil-fuel power plant under construction. One of these sources dropped to the ground from a radiography camera, where a passerby picked it up and took it home. The source was lost from March to June 1984 and, as a result, eight persons died from overexposure to radiation. In addition, three others suffered severe injuries from overexposure that required hospitalization. It was initially assumed that the deaths were from poisoning. Only after the last family member died was it suspected that the deaths might have been caused by radiation. A private radiography institute moved to new premises and left behind a cesium-137 teletherapy unit without notifying the licensing authority. Because the building was partially demolished, the teletherapy unit was unsecured. Two people entered the building and removed the source assembly. They dismantled the source assembly at home and ruptured the sealed source. After the sealed source was ruptured, remnants of the source assembly were sold for scrap to a junkyard owner. He noticed that the material had a blue glow in the dark. Over a period of days, friends and relatives came to witness the phenomenon. Fragments of the source, the size of rice grains, were distributed to several families. Five days later, a number of persons started to show gastrointestinal distress. Because the sealed source contained cesium chloride, which is highly soluble and easily dispersed, there was considerable contamination of the environment, resulting in external irradiation and internal contamination of several persons. Some individuals suffered very high internal and external contamination because of the way they had handled the cesium chloride powder, such as rubbing it on their skin, eating with contaminated hands, and handling various objects. Consequently, four people died within 4 weeks of being hospitalized. In total, 249 people were contaminated, and 112,000 people were screened for contamination. The environment was also severely contaminated. Eighty-five houses were significantly contaminated, and 41 of these had to be evacuated. The decontamination process required the demolition of seven residences and various other buildings and generated 3,500 cubic meters of radioactive waste. The accident had a great psychological impact on the whole region. Many people feared contamination, irradiation, and incurable diseases. Over 8,000 persons requested monitoring for contamination in order to obtain certificates stating that they were not contaminated. These were needed because operators of commercial airplanes and buses refused to allow people from the region to board and hotels refused to register them. The social and psychological impact of the accident was so great that an outlying region to Goiania, where the waste repository was established, has incorporated the trifoil symbol of radioactivity into the region’s flag. Economically, there was discrimination against products from Goiania, resulting in a 20 percent decrease in the sales of cattle, grains, and other agricultural products from the region. Tourism decreased virtually to zero and the gross domestic product for the region decreased by 15 percent. It took 5 years for the gross domestic product to return to preaccident levels. In total, the direct and indirect costs for emergency response and remedial action are estimated to be $36 million. In October 1994 a sealed source that was discovered in scrap metal was recovered and transferred to a radioactive waste repository under the supervision of the national government. Three brothers entered the repository without authorization and removed a metal container enclosing a cesium-137 source and the source fell out of the container. One of the men placed the source in his pocket and took it home. The source remained in the house for 27 days, resulting in the overexposure of five individuals, including one fatality. The sealed source was thought to be part of a gamma irradiator, but none had ever been used or registered in Estonia. According to available information, it is possible that the source was brought into Estonia from the Russian Federation with miscellaneous scrap metals for export to Western Europe. At a combined cycle fossil fuel power plant in Iran, radiography equipment with an iridium-192 sealed source was used to examine welds from a boiler. At the end of the radiographer’s shift, the source became detached from its drive cable and fell to the floor unnoticed. Later, a worker moving thermal insulation materials around the plant noticed a shiny, pencil-sized metal object in a trench and put it in his pocket. The source was in his chest pocket for approximately two hours, resulting in a high radiation dose. As a result of this exposure, the worker had abnormal redness of the skin, severe bone marrow depression, and an unusually extended radiation injury requiring plastic surgery. Eleven border frontier guards became ill owing to exposure from multiple radioactive sources, including 12 cesium-137 sources, one cobalt-60 source, and 200 radium-226 sources. These sources were abandoned when the military site was transferred from the Soviet Union to the Republic of Georgia. All individuals suffered from skin ulcerations and chronic radiation sickness. No deaths were associated with this accident. In May 1998, a cesium-137 source was accidentally melted at a stainless steel factory. As a result of the periodic maintenance and cleaning of the filter system at the factory, the dust was removed, and much of it was sent to two different factories several hundred kilometers from the factory. The dust was contaminated with cesium-137, and about 400 people were monitored for contamination. Measurements of a large number of water, air, and soil samples were obtained from nearby towns and at locations several hundred kilometers away. Traces of cesium-137 were found but considered negligible. In countries outside of Spain, the environmental impact was minimal. The economic consequences of the accident, including temporary suspension of factory operations, decontamination operations, and management of the resulting radioactive waste, were estimated to be over $25 million. In February 1999 an iridium-192 source fell out of a radiography camera being used at a hydroelectric power plant. Later that day, a welder picked up the iridium-192 source and placed it in the right back pocket of his trousers. For the next several hours, the welder continued his work and later took a minibus home with 15 other people onboard. Once home, the welder’s wife fed their 18-month-old child while she was sitting on the welder’s trousers, and two other children were 2-3 meters from the iridium source for approximately 2 hours. The welder received extensive radiation burns that required the amputation of his right leg. The wife suffered lesions on her lower back after her brief exposure to the sealed source. No radiation effects were reported for the children. A company in Bangkok, Thailand, possessed several teletherapy devices containing cobalt-60 without authorization from the Thailand Office of Atomic Energy for Peace. The teletherapy device was originally installed at a hospital in Bangkok, Thailand, in 1969. In 1981, a new source was installed, and the hospital received no further maintenance from the manufacturer of the teletherapy unit and source. When the teletherapy unit was removed from service in 1994, the maintenance contractor had gone bankrupt and the manufacturer was no longer producing cobalt-60 units. As a result, the hospital was left with the disused source to manage and control. Since the hospital did not have sufficient storage space, it sold the device and source to a new supplier without the authorization of the regulatory authority. In 1999 the new supplier was notified that its lease of the warehouse was to be terminated and relocated the device to a parking lot that was owned by its parent company. In the autumn of 1999, the company relocated the teletherapy devices to an unsecured storage location without the authorization of the national regulatory authority. In late January 2000, several individuals obtained access to the unsecured storage location and partially disassembled the teletherapy device. The individuals took the unit to a residence and attempted to disassemble it further. In early February 2000, two individuals took the disassembled device to a junkyard in Samut Prakarn, Thailand, to segregate component metals and sell them separately as scrap. While a junkyard worker was disassembling the device, the cobalt-60 source fell out of its housing unobserved by the junkyard workers or the individuals. By the middle of February 2000, several of the people involved, including the finders of the source and junkyard workers, had begun to feel ill and sought medical assistance. Physicians at the hospital suspected the possibility of radiation exposure and reported their suspicions to the regulatory authority. Altogether, 10 people received high doses of radiation from the source. Three of those people, all workers at the junkyard, died within 2 months of their exposure. In December 2001 three woodsmen found two heat-emanating metallic containers near their campsite in a forest near the village of Lja in western Georgia. This village is in the Abkhazia region of the Caucasus. This region is subject to political unrest and has sought its independence from the Republic of Georgia. As a result, during the past decade, the region has been largely inaccessible to Georgian and international authorities. The woodsmen involved in the accident used the containers as a heat source and experienced nausea, vomiting, and dizziness within hours of exposure to the containers. At a local hospital in Tbilisi, Georgia, the woodsmen were diagnosed with radiation sickness and severe radiation burns, and at least two of the three were in serious condition. In February 2002, an IAEA-sponsored search and recovery team found the containers and discovered that each one was previously used in Soviet-era radioisotope thermoelectric generators. This appendix provides information about the major producers and distributors of radioactive material used to manufacture sealed sources. Six countries are the major suppliers of the radioactive material: Argentina, Belgium, Canada, the Netherlands, Russia, and South Africa. Canada is the largest exporter of radioactive material and has provided over half of all radioactive material used in medical applications worldwide. Table 10 lists the major producers and distributors of radioactive material used to manufacture sealed sources. In most cases, the Nuclear Regulatory Commission grants a general license for the export of sealed sources to all countries containing byproduct material except certain proscribed countries: Cuba, Iran, Iraq, Libya, North Korea, and Sudan. Byproduct material is (1) any radioactive material (except special nuclear material) yielded in, or made radioactive by, exposure to the radiation incident to the process of producing or using special nuclear material (as in a reactor) and (2) the tailings, or wastes produced by the extraction or concentration of uranium or thorium from ore. According to NRC, limited quantities of sealed sources can also be exported under a general license to “restricted” countries: Afghanistan, Andorra, Angola, Burma, Djibouti, India, Israel, Oman, Pakistan, and Syria. A general license, provided by regulation, grants authority to a person for certain activities, in this case, the export of sealed sources, and is effective without filing an application with NRC or the issuance of a licensing document to the person or organization exporting the sealed source. NRC has placed most sealed sources for export under a general license for several reasons, including the following: (1) subject to NRC or Agreement State oversight, the United States is responsible only for ensuring the safe use and control of radioactive materials used to manufacture sealed sources within U.S. territory; (2) foreign countries have the sovereign responsibility for ensuring appropriate regulatory controls over radioactive material, including such material imported from other countries; and (3) control over radioactive material would not be enhanced by requiring specific licenses for material exported from the United States. A specific license would not ensure that the exported materials would be subject to controls and regulatory oversight in a foreign country because the license does not ensure that the recipient country has adequate regulatory controls over the material that is exported from the United States. Under a specific license, the export request must be reviewed and approved by NRC in consultation with other appropriate agencies, including the Departments of Commerce, State, Defense, and Energy. NRC officials told us that they are required only to maintain a database of exports of sealed sources that are issued under a specific license and certain other exports of concern, such as americium-241 and neptunium- 237. The United States, as a nuclear weapon state, has agreed to report all exports of americium and neptunium to IAEA. With regard to shipments of sealed sources, NRC officials told us that the Department of Homeland Security’s Bureau of Customs and Border Protection maintains a database of all transactions, identified by tariff number, including those including sealed sources that are exported under a general license. However, these officials also said that it would be very difficult for the Bureau of Customs and Border Protection to track these specific shipments of sealed sources because the information on manifests is general in nature. NRC officials told us that they were not aware of any sealed sources that were exported under a general license from the United States that have been used for malicious purposes. They noted that there have been thousands of such exports, most of which involve material in forms or quantities that pose minimal safety or health risks if properly used and controlled. However, there have been a few cases where lax local regulatory oversight over high-risk materials resulted in instances where sealed sources were eventually lost or improperly disposed of, resulting in harmful exposure to individuals. Specific licenses are required to export radioactive material in waste and tritium for recovery and recycling purposes. This is because a final NRC rule (59 F.R. 48994), effective November 10, 1994, revoked the general license for bulk tritium and alpha-emitting radionuclides having an alpha half-life of 10 days or greater but less than 200 years to conform NRC’s regulations to the export control guidelines of the Nuclear Suppliers’ Group for nuclear-related, dual-use items. Tritium and reactor-produced alpha-emitting radionuclides are two commodities on the Nuclear Suppliers’ Groups dual-use list whose exports are regulated by NRC. In addition, tritium and alpha-emitting radionucliedes are controlled by the Nuclear Suppliers’ Group because of their potential application in the production of weapons of mass destruction. Another final rule on the import and export of radioactive material (60 F.R. 37556), effective August 21, 1995, established specific licensing requirements for the import and export of radioactive material in the form of waste coming into or leaving the United States to conform with NRC’s regulations to the guidelines of the IAEA Code of Practice on the International Transboundary Movement of Radioactive Waste. In view of increased post-September 11 terrorism concerns, NRC is considering changes to its general license provisions to improve controls over exports. Possible changes include (1) ensuring that the exporter confirm that the customer in the foreign country is authorized by the recipient country to possess the material; (2) requiring prior notification to NRC for risk-significant shipments; and (3) as appropriate, providing national or international source registries with data for risk-significant shipments. Changes under consideration are expected to be implemented in fiscal year 2004 by orders with compensatory measures and in fiscal years 2004-2005 by a rule change as part of a broader NRC plan to improve controls over the imports and exports of sealed sources. Other possible and more restrictive controls for exports include a requirement for a specific export license for high-risk material such as high-activity cobalt-60 sources or imposing a specific prohibition on such exports to countries that do not have acceptable sealed source security, control, and accountability requirements. The United States is coordinating these efforts with other countries that export sealed sources to ensure consistent, adequate controls. In addition, in conjunction with the change of the national threat level to “orange” in March 2003, NRC issued a security advisory to licensees concerning certain quantities of certain high- risk sources, which included exports and imports. This appendix provides information concerning several key findings and recommendations from the international conference on the security of radioactive sources held in Vienna, Austria, in March 2003. The conference was sponsored by the governments of the United States and the Russian Federation and hosted by the government of Austria. It was organized by IAEA in cooperation with the European Commission, the World Customs Organization, the International Criminal Police Organization, and the European Police Office. Over 700 delegates from more than 120 countries attended the conference. The conference produced key findings in the following areas: (1) identifying, searching for, recovering, and securing high-risk radioactive sources; (2) strengthening long-term control over radioactive sources; (3) interdicting illicit trafficking; (4) planning the response to radiological emergencies arising from the malevolent use of radioactive sources; and (5) recognizing the role of the media/public education, communication, and outreach. Regarding identifying and searching for sources, the conference encouraged countries to develop and implement national action plans, on the basis of their own specific conditions, for locating, searching for, recovering, and securing high-risk radioactive sources; accelerate the establishment of a coherent and transparent scheme for the categorization of radioactive sources in order to provide for the safety and security of sources; and assist other countries, as appropriate, in identifying, searching for, recovering, and securing high-risk sources. Concerning strengthening long-term control over radioactive sources, the conference encouraged countries to formulate and implement national plans for the management of sources throughout their life cycle; develop, to the extent practical, standards for the design of sealed sources and associated devices that are less suitable for malevolent use (e.g., alternative technologies and less-dispersible forms of high-risk sources); and establish arrangements for the safe and secure disposal of disused high- risk sources, including the development of disposal facilities. Regarding illicit trafficking, the conference recognized the need for greater international efforts to detect and interdict the illicit trafficking of high-risk sources and to take appropriate enforcement actions. In support of this objective, the conference encouraged countries to further develop and strengthen measures to detect, interdict, and respond to the illicit trafficking of high-risk radioactive sources; deploy and widely use technologies for detecting high-risk radioactive sources, with emphasis on ensuring the sustainability of monitoring and detection equipment; undertake further research on and development of detection technologies for use at borders and elsewhere; enhance cooperation between government agencies responsible for preventing, detecting, and responding to illicit trafficking incidents, especially in the fields of information sharing, communications, and training; pool resources through, for example, the sharing of monitoring and detection equipment on common borders; and continue support for and development of IAEA’s illicit trafficking database. The conference recommended that countries develop comprehensive plans to prepare for and respond to radiological emergencies involving radioactive sources. In support of this recommendation, the conference encouraged countries to, among other things, enhance current national and international response arrangements, taking into account the need to respond both proactively and reactively to the new scenarios presented by the possibility of the malevolent use of high-risk radioactive sources and consider establishing mechanisms to facilitate effective coordination in the event of a radiological emergency. Finally, the conference recognized that the public’s understanding of the nature and consequences of radiological emergencies will largely determine how the public reacts to such emergencies. As a result, the conference encouraged countries to conduct public outreach and awareness programs to foster a better understanding of radiological threats and the appropriate response in the event of a radiological emergency in order to minimize social and economic disruption; educate the public regarding the nature of radioactivity, the consequences of the malevolent uses of high-risk radioactive sources, and the procedures for mitigating those consequences in order to reduce the psychological impact of radiological terrorism; strengthen their education and training programs as a means to promote confidence building within the public; and assume greater responsibility for gaining the trust of the media and informing them about the potential threat of radiological terrorism to help ensure that the media will communicate information accurately in a nonsensational manner to avoid fueling public fear and panic. The purpose of IAEA’s Categorization of Radioactive Sources is to provide a fundamental and internationally harmonized basis for risk-informed decision making. The draft document provides a categorization for radioactive sources used in industry, medicine, agriculture, research, and education. The principles of the categorization can be equally applied to radioactive sources, such as radioisotope thermoelectric generators that may be under military control. The categorization does not apply to radiation-generating devices such as X-ray machines and particle accelerators, although it may be applied to radioactive sources produced by, or used as, target material in such devices. The revised categorization divides sources into five categories, according to their potential to cause harmful health effects, should the source not be managed safely and securely. The categories are defined as follows: Category 1 sources are considered extremely dangerous. If not safely managed safely, the radioactive material would likely cause permanent injury to a person who handled it or were otherwise in contact with it for more than a few minutes. It would probably be fatal to be close to this amount of unshielded material for a period of a few minutes to an hour. Furthermore, the amount of radioactive material, if dispersed by fire or explosion, could possibly—but would be unlikely to— permanently injure persons in the immediate vicinity or be life threatening to them. There would be little or no risk of immediate heath effects to persons beyond a few hundred meters. It would be highly unlikely for a category 1 source to contaminate a public water supply to dangerous levels, even if the radioactive material were highly soluble in water. Category 2 sources are also considered personally dangerous. If not safely managed or securely protected, the radioactive material could cause permanent injury to a person who handled it or were otherwise in contact with it for a short time (minutes to hours). It could possibly be fatal to be close to this amount of unshielded radioactive material for a period of hours to days. The amount of radioactive material, if dispersed by fire or explosion, could possibly—but would be very unlikely to—permanently injure or be life threatening to persons in the immediate vicinity. It would be virtually impossible for a category 2 source to contaminate a public water supply to dangerous levels, even if the radioactive material were highly soluble in water. Category 3 sources are also considered to be dangerous. If not safely managed or securely protected, the radioactive material could cause permanent injury to a person who handled it or were otherwise in contact with it, for some hours. It could possibly—although it is unlikely—be fatal to be in close contact to this amount of unshielded radioactive material for a period of days to weeks. The amount of radioactive material, if dispersed by fire or explosion, could possibly— but is extremely unlikely to—permanently injure or be life threatening to persons in the immediate vicinity. It would be virtually impossible for a category 3 source to contaminate a public water supply to dangerous levels, even if the radioactive material were highly soluble in water. Category 4 sources are unlikely to be dangerous. It is very unlikely that anyone would be permanently injured by this amount of radioactive material. This amount of radioactive material, if dispersed by fire or explosion, could not permanently injure persons. Category 5 sources are not considered dangerous. No one could be permanently injured by this amount of radioactive material. Furthermore, this amount of radioactive material, if dispersed by fire or explosion, could not permanently injure persons. IAEA has developed a list on the basis of practices (such as irradiators, industrial radiography, and teletherapy) as part of its relative ranking of sealed sources. Examples of the most dangerous (category 1) include radioisotope thermoelectric generators, sterilization and food preservation facilities containing cobalt-60 or cesium-137, and medical equipment containing cobalt-60. The least dangerous (category 5) include low-dose- rate brachytherapy devices and lightning detectors containing americium- 241. Table 11 provides a list of the countries participating in IAEA’s model project program and the year they joined the program. French officials told us that their system for controlling sealed sources has several key components, including stringent controls on the licensing and tracking of the sources. Distributors of devices containing sealed sources must be authorized to market such devices and must send monthly accounts of the movement of sources to the French government agency responsible for regulating sealed sources. End users must have a license covering each site where the sources are used, and the maximum duration of a license is 5 years. For items such as smoke detectors, the end user is not required to have a license, but the distributor must be licensed. Approximately 30,000 sources in use in France are tracked by the government, and there are nearly 5,000 licensees. This number does not include very small sources like iodine grains used for medical purposes (there are about 80,000 such sources) and smoke detectors (for 400,000 buildings), which are exempt from licensing requirements for end users. Sealed sources are subject to an annual inspection, and the end user pays for the inspections. The fee is a function of the number of sealed sources owned by the licensee. The inspection is designed to confirm that the sealed sources are properly accounted for, adequately secured, and safely used. In order to renew a license, the licensing agency must be provided with documentation of the annual inspections. If the end user is not inspected, it is subject to fines and may also be fined if the inspection shows that it is not adequately protecting devices containing sealed sources. Fines are based on health and safety infractions—not security violations—and the fines can be as high as about $15,000. France has also established a system to control orphan sources that has three main components. End users are required to remove any source from service not more than 10 years after it was purchased. The company supplying the source to the end user is required to include disposal costs within the purchase price. All other companies in the supply chain agree contractually to take back the source after 10 years. guarantee is made either through an annual fee paid to an association of source distributors or by providing France’s national waste management agency with a deposit. The association represents 99 percent of all distributors of devices containing sealed sources in France. About 50 distributors are members of the association. Typically, the distributor makes an initial deposit of about $1,000 and then pays an annual fee on the basis of the total activity of sources it has distributed, the technology that the sealed sources are used for, and the value of the source. French officials responsible for administering the system told us that, initially, distributors did not like it because of the excessive amount of paper work involved. However, companies now see the value of the system. Distributors also have the option of contracting with France’s radioactive waste management agency for disposal of the sources if they do not want to join the association. Typically, the smaller distributors who choose this option do so because they may only supply one or two sources per year and do not want to share the risk of joining the larger association, where costs are spread among many distributors. Distributors who choose this option are required to deposit funds with the agency to guarantee that disposal costs will be covered. The deposit ranges from about $1,000 to several thousand dollars. When a source is returned, the agency returns the deposit (less an administrative fee) to the distributor. According to French officials, only 1 percent of the distributors of sources in France use this option because they believe it is more expensive than belonging to the association, which spreads the financial risk among all of its members. In addition, the cost determined by the waste management agency is based on the entire cost of disposal and takes into account inflation and other economic factors. To date, the waste management agency has not had to use the fund to dispose of any disused sealed sources. The agency has always been able to locate a source’s manufacturer to take back the source or find another manufacturer willing to accept it. According to French officials, when the system was first put into place, it posed a difficulty for distributors, who had to pass the cost of the financial guarantee to the end user. However, now that the system has been in place for many years, the additional costs are accepted, and users are pleased not to have to deal with disposing of the sources on their own. We were told that the process works well and has contributed to the reduction in the number of lost, stolen, or abandoned sealed sources. Currently, about one sealed source per year is orphaned in France. In addition to the individual named above, Kerry Dugan Hawranek, Preston S. Heard, Glen Levis, Judy K. Pagano, Terry L. Richardson, and Rebecca Shea also made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to GAO Mailing Lists” under “Order GAO Products” heading. | Sealed radioactive sources, radioactive material encapsulated in stainless steel or other metal, are used worldwide in medicine, industry, and research. These sealed sources pose a threat to national security because terrorists could use them to make "dirty bombs." GAO was asked to determine (1) the number of sealed sources worldwide and how many have been reported lost, stolen, or abandoned; (2) the controls, both legislative and regulatory, used by countries that possess sealed sources; and (3) the assistance provided by the Department of Energy (DOE) and other U.S. federal agencies to strengthen other countries' control over sealed sources and the extent to which these efforts are believed to be effectively implemented. The precise number of sealed sources in use is unknown because many countries do not systematically account for them. However, nearly 10 million sealed sources exist in the United States and the 49 countries responding to a GAO survey. There is also limited information about the number of sealed sources that have been lost, stolen, or abandoned, but it is estimated to be in the thousands worldwide. Many of the most vulnerable sealed sources that could pose a security risk are located in the countries of the former Soviet Union. All of the 49 countries that responded to GAO's survey reported that they have established legislative or regulatory controls over sealed sources. However, nuclear safety and security experts from DOE, the Departments of State and Defense, the Nuclear Regulatory Commission (NRC), the International Atomic Energy Agency, and the European Commission told GAO that countries' controls over sealed sources vary greatly and are weakest among less developed countries. In fiscal year 2002, DOE established a program focusing on improving the security of sealed sources in the former Soviet Union and has started to fund security upgrades in Russia and other former Soviet countries. The Departments of Defense and State and NRC also have programs to help countries strengthen controls over sealed sources. DOE plans to expand its program to other countries and regions in 2003 and is developing a plan to guide its efforts. However, the department has not fully coordinated its efforts with NRC and the Department of State to ensure that a government-wide strategy is established. In addition, as of January 2003, the majority of DOE's program expenditures totaling $8.9 million were spent by DOE's national laboratories in the United States. |
The overall goal of U.S. public diplomacy efforts is to understand, inform, engage, and influence the attitudes and behavior of global audiences in ways that support the United States’ strategic interests. U.S. public diplomacy efforts are implemented by several entities, including State, DOD, USAID, and BBG, and function under the broad guidance of the White House and the National Security Council. Funding is concentrated in State and BBG, which together received approximately $1.2 billion for public diplomacy in fiscal year 2005. USAID and DOD have relatively small public diplomacy budgets. State’s public diplomacy operations are guided by the Under Secretary for Public Diplomacy and Public Affairs, who oversees the Bureaus of Educational and Cultural Affairs, International Information Programs, and Public Affairs. The department’s regional and functional bureaus also contain public diplomacy offices, which report to the relevant assistant secretary. The Under Secretary has direct authority over the three public diplomacy bureaus but does not have line authority over public diplomacy operations in other regional or functional bureaus. In overseas missions, Foreign Service public diplomacy officers (including Public Affairs, Cultural Affairs, Information, Information Resources, and Regional English Language officers) operate under the authority of the chief of mission and report to their regional bureau managers in Washington, D.C. In fiscal year 2005, State dedicated $597 million to pubic diplomacy and public affairs. According to the department’s performance plan, its investment in public diplomacy and public affairs continues to increase, particularly for efforts targeting audiences in the Middle East. Exchange programs received the majority of fiscal year 2005 funding, $356 million, which was a 12.4 percent increase over fiscal year 2004. These programs include international visitors, citizen exchanges, the Fulbright academic exchange program, and English-language teaching. State’s information programs received roughly $68 million in fiscal year 2005 to fund programs such as the U.S. speakers program, mission Web sites, and American Corners, which are centers that provide information about the United States, hosted in local institutions and staffed by local employees. The remaining public diplomacy funds go to State’s regional bureaus to pay for the salaries of locally engaged staff overseas, among other purposes. Appendix III provides a summary of selected programs managed by each bureau along with a description of staff positions. USAID, DOD, and BBG also support the U.S. government’s communication efforts in the field. USAID reports that it has established an overseas network of more than one hundred Development Outreach and Communications officers, who work with Public Affairs officers to promote America’s assistance story. DOD has also become involved in public diplomacy and is developing a strategy for “military support for public diplomacy” to identify ways it can effectively support State’s operations. For example, DOD Military Information Support Teams have been dispatched to selected posts, at the request of the Ambassador, to assist with outreach efforts. Finally, U.S. international broadcasting, led by the BBG, is a major contributor to the United States’ efforts to communicate directly with foreign audiences. Between fiscal years 2004 and 2006, the BBG expects to spend nearly $240 million on its Middle East Broadcasting Network, which includes Alhurra satellite television network and the Arabic-language Radio Sawa. According to State’s Bureau of Educational and Cultural Affairs, the Muslim world is composed of 58 countries and territories with significant Muslim populations, many of which are members of the Organization of the Islamic Conference. These countries have a combined population of more than 1.5 billion and are located in Africa, Asia, and Europe (see app. II). Figure 1 shows their locations. State’s public diplomacy investment in these 58 countries and territories has increased in recent years. According to department data, State provided funds for 179 speakers to travel to these countries in fiscal year 2005, up from 157 in fiscal year 2004. Additionally, the department funded nearly 5,800 exchange participants from these countries in fiscal year 2005, up from about 5,100 in fiscal year 2004. The department spent nearly $115 million on exchange and information programs in these countries in fiscal year 2005. State devotes significant public diplomacy program and staffing resources to regions with large Muslim populations. Beginning in 2002, State introduced three key initiatives focused on reaching younger and broader Muslim audiences to supplement the standard exchange and information programs used by most embassies; these initiatives have been largely terminated or suspended. Nevertheless, posts in the Muslim world continue to generally employ the same exchange, cultural, and information programs used throughout the world. In fiscal year 2006, the Under Secretary for Public Diplomacy and Public Affairs introduced several new initiatives designed to help officers in the field improve their advocacy of U.S. foreign policy and enhance their ability to quickly respond to breaking news stories, while other initiatives, some of which are specific to Muslim audiences, are still in development. In our 2003 report on public diplomacy, we reported that the department had increased its overall spending on public diplomacy since the terrorist attacks of September 11, with the largest relative increases going to regions with large Muslim populations. Specifically, we noted that while State’s Bureau of European and Eurasian Affairs received the largest overall share of overseas public diplomacy resources, the largest percentage increases in such resources occurred in regions with significant Muslim populations. As table 1 shows, this pattern has continued over the past 3 years, with total spending on overseas public diplomacy increasing 21 percent between fiscal years 2004 and 2006. The Bureau of European and Eurasian Affairs continues to receive the largest overall share of overseas public diplomacy resources, with the largest percentage increases in resources going to regions with countries with large Muslim populations including South Asia (39 percent), East Asia and Pacific (28 percent), and the Near East (25 percent). Table 1 provides data on public diplomacy funding and staffing for each of State’s regional bureaus. The table also shows the number of countries with significant Muslim populations in each region, according to State’s Bureau of Educational and Cultural Affairs, along with the population of these countries. In our 2003 report, we noted that authorized officer positions overseas had significantly expanded, with the most notable increases occurring in State’s Near East (27 percent increase) and South Asia (15 percent increase) bureaus. However, current data show that staff numbers have stayed largely the same over the past 3 years with increases of 3 percent or less. In January 2006, Secretary Rice announced plans to reposition officers as part of her transformational diplomacy initiative. State officials said that the department will initially reposition approximately 75 Foreign Service officers this year from posts in Europe and Washington, D.C., to India, China, and Latin America, as well as to the Muslim world. According to these officials, over one-third of the positions that will be relocated are public diplomacy positions. State has developed three programs specifically designed to reach Muslim audiences: the Shared Values media campaign, the Arabic-language Hi magazine, and the youth-oriented Partnerships for Learning exchange strategy. These initiatives have been largely suspended or terminated, but State continues to focus many of its exchange programs on younger audiences. In 2002, State launched the Shared Values Initiative to highlight the common values and beliefs shared by Muslims and Americans, demonstrate that America is not at war with Islam, and stimulate dialogue between the United States and the Muslim world. The initiative, which cost about $15 million, centered on a paid television campaign, which was developed by a private sector advertising firm and attempted to illustrate the daily lives of Muslim Americans. This multimedia campaign also included a booklet on Muslim life in America, speaker tours, an interactive Web site to promote dialogue between Muslims in the United States and abroad, and other information programs. The initial phase of the Shared Values Initiative was aired in six languages in Pakistan, Indonesia, Malaysia, and Kuwait, as well as on pan-Arab media. State estimates that 288 million people were exposed to these messages, but television stations in several countries, including Egypt and Lebanon, refused to air the programs for political and other reasons. In 2003, the report by the Advisory Group on Public Diplomacy for the Arab and Muslim World, commonly referred to as the Djerejian report, credited the campaign for having a solid research basis but criticized it for taking far longer to develop than similar private sector advertising campaigns. The report also noted that some embassies were reluctant to promote the ads. A department analysis of foreign reaction to the Shared Values Initiative concluded that media outlets in many countries found the campaign to be propaganda and unlikely to succeed as long as U.S. foreign policy remained unchanged. While some posts continue to host events on Muslim life in America, the Shared Values Initiative’s centerpiece television campaign aired only for the holy month of Ramadan in the winter of 2002-03 and was subsequently discontinued. Additionally, the interactive Web site, “Open Dialogue,” is no longer in operation. Following the demise of the Shared Values Initiative, State launched the Arabic-language Hi magazine in July 2003 with an annual budget of $4.5 million. Designed to highlight American culture, values, and lifestyles, Hi was directed at Arab youth in the Middle East and North Africa and was expected to influence Arab youth to have a more positive perception of the United States. Hi was produced by a private sector magazine firm, and State estimated its circulation to be about 50,000 in the Arab world. One official in Egypt, however, said that of the 2,500 copies the embassy distributed monthly to newsstands in Cairo, often as many as 2,000 copies were returned unsold (see fig. 2). State officials in Washington noted that, as a matter of practice, these copies were subsequently redistributed to public institutions in Egypt, such as schools and libraries. According to embassy officials, they were unable to sell many copies of Hi because it was so new and relatively expensive. In December 2005, State suspended publication of Hi magazine pending the results of an internal evaluation, which was prompted by concerns over the magazine’s cost, reach, and impact, according to State officials. State expects this evaluation to be completed by May 2006. According to one official, an initial assessment of the magazine found that most readers access Hi via its Web sites, which remain in operation. In 2002, State’s Bureau of Educational and Cultural Affairs developed an exchange initiative specifically for youth from Muslim communities called Partnerships for Learning, which provided an organizing theme to help guide the department’s exchange investments. Designed to reach a “younger, broader, deeper” audience in the Muslim world, one senior State official called Partnerships for Learning, “the heart of our extensive engagement with the Arab and Muslim world.” According to a senior State official, the Partnerships for Learning program was terminated as an organizing theme in late 2005 with the appointment of the latest Under Secretary for Public Diplomacy and Public Affairs. Nevertheless, department officials said that its exchange programs will continue to focus on younger audiences. These officials stated that the department is exploring other program models to engage the greatest number of undergraduate students while increasing cost effectiveness. Similarly, State told us that the Partnerships for Learning concept continues to infuse almost all of its citizen exchange programs. Between 2002 and 2005, the department estimates that nearly $150 million was spent on exchanges supporting the Partnerships for Learning theme. This figure includes new programs developed to implement this theme and funds spent on existing exchange programs that targeted a younger, more diverse, and less elite audience in the Muslim world. The two major new programs developed by the department were the Youth Exchange and Study (YES) program and the Partnerships for Learning Undergraduate Studies (PLUS) program. Between 2003 and 2005, the YES program provided scholarships to more than 600 high school students from the Muslim world to study in the United States. Similarly, since 2004 the PLUS program has brought more than 170 students from the Middle East, North Africa, and South Asia to the United States for 2 years of academic study at an American college or university. The YES and PLUS programs, with a combined budget of $25 million, remain active in fiscal year 2006. The department has not yet conducted a formal evaluation of the YES and PLUS programs. Officials at the three posts we visited—Nigeria, Pakistan, and Egypt—said that they use a broad range of programs available to them, similar to the mix of programs used throughout the world, including information, exchange, and cultural programs. Table 2 provides a breakdown of selected activities at each post. In addition to these programs, these officials said that they spend a significant amount of time on news and crisis management, such as responding to media inquiries and coordinating media events. In Pakistan, for example, we observed the acting public affairs officer coordinate media events related to the Secretary of State’s visit and arrange interviews for the Ambassador regarding U.S. relief efforts in the wake of the October 2005 South Asian earthquake. Academic and professional exchanges were an important public diplomacy tool at each post we visited. In fiscal year 2005, State obligated more than $12 million for such exchanges in these countries. All of the posts we visited had an active Fulbright exchange program, managed by the embassy in Nigeria and by binational commissions in Pakistan and Egypt. In Nigeria, the embassy has participated in the Partnerships for Learning- YES program since 2003 and has sent about 35 Nigerian high school students and their teachers to study in Iowa through this program. According to the Public Affairs officer in Nigeria, the embassy has shifted resources to assure that 50 percent of exchange participants are Muslim, reflecting their overall proportion of Nigeria’s population. Additionally, the Public Affairs officer in Islamabad is working to develop a database of Pakistani exchange alumni to enable the embassy to maintain better contact with this audience. Posts have also made use of information programs such as speakers, magazines, information resource centers, and, to a limited extent, American Corners. Data from State’s Bureau of International Information Programs show that the bureau funded 5 speakers in Nigeria, 18 in Pakistan, and 7 in Egypt in fiscal year 2005. These speakers discussed topics such as the 2004 U.S. presidential election, Muslim life and religious tolerance in America, and U.S. foreign policy. In addition, these posts take advantage of “target of opportunity” speakers—American experts who already happen to be in the region. Each post we visited also distributes a U.S.-funded magazine in local languages, such as the Hausa Magama in Nigeria and the Urdu Khabr-o-Nazar in Pakistan. Further, these posts operate small reference libraries within the embassy compound, known as Information Resource Centers. According to officials in Egypt, the embassy’s resource center receives more than 1,000 visitors per month, on average, while security concerns in Pakistan have limited the numbers of visitors to its center. Additionally, the embassy in Nigeria has established 10 American Corners, with plans to open more in the near future. While there are no American Corners in Egypt or Pakistan, embassy officials in those countries told us they are currently seeking local partners to host such a facility. Finally, other agencies have played a limited role in supporting the mission’s overall public diplomacy efforts in the countries we visited. USAID has hired Development Outreach and Communication officers in Nigeria and Egypt and was in the process of hiring an officer in Pakistan in October 2005. DOD has sent two Military Information Support Teams to Nigeria to help publicize the department’s humanitarian assistance programs in the country. In addition, U.S. broadcasting reaches audiences in Nigeria and Pakistan through Voice of America’s (VOA) Hausa, English, and Urdu services, and the Arabic Radio Sawa and Alhurra satellite television network reach some audiences in Egypt. Finally, in November 2005, VOA announced the launch of a new half-hour television program in Urdu to be broadcast on GEO-TV, a commercial station in Pakistan. During the past 6 months, State has launched a number of initiatives designed to broadly improve its ability to explain U.S. foreign policy decisions and respond to breaking news both within and outside the Muslim world. These initiatives, created in Washington, D.C., impact field operations to the extent that Ambassadors and other spokespersons at posts will be better positioned to advocate U.S. foreign policy decisions and actions and effectively react to developing news stories. These initiatives include the following: A Rapid Response Unit established in the Bureau of Public Affairs to produce a daily report on stories driving news around the world and give the U.S. position on those issues. This report is distributed to U.S. cabinet and subcabinet officials, Ambassadors, public affairs officers, regional combatant commands, and others. “Echo Chamber” messages to provide U.S. Ambassadors and others with clear guidance so they are better able to advocate U.S. policy on major news stories and policy issues. These policy-level statements are posted to State’s internal Web site and can be broadly accessed by post staff around the world. These statements are also made available to VOA’s policy office for use in crafting editorials reflecting the views of the U.S. government. Establishing a regional public diplomacy hub in Dubai, a key media market, this summer. The hub, which will operate out of commercial office space to facilitate public access, will be staffed with two to three spokespersons whose full-time job will be to appear on regional media outlets, with a focus on television given its broad reach, to advocate U.S. policies. According to State officials, a regional center is needed since embassy public affairs staff focus on bilateral issues and no one in the department is specifically responsible for transregional media operations. In addition to these initiatives, several other efforts are under way. These efforts include empowering the American Muslim community to speak out for the United States, creating an Office of Public/Private Partnerships to stimulate private sector involvement, and developing enhanced technology to expand the use of new communication venues in order to better reach target audiences. Our review of mission performance plans for the countries we visited found that they lacked key strategic planning elements recognized by GAO and the private sector as vital to effectively communicating with target audiences. Among the missing elements are core messages and themes, target audience segmentation and analysis, details on program strategies and tactics, in-depth research and evaluation to inform strategic communication decisions, and a fully developed communication plan to tie everything together. In 2005, State established a strategic framework for U.S. public diplomacy efforts; however, these early efforts lack guidance from Washington to the field on strategies and tactics. In addition, posts are not required to develop in-depth analysis to better inform and support their program decisions or country-specific communication plans to help inform and guide their implementation efforts. GAO and other groups, including the Defense Science Board, have suggested that State adopt a strategic approach to public diplomacy by modeling and adapting private sector communication practices to suit its purposes (see app. IV). Key best practices identified in GAO’s September 2003 report are shown in figure 3. Based on our review of mission performance plans and on fieldwork in Nigeria, Pakistan, and Egypt, we found that posts’ public diplomacy programming generally lacked these important elements of strategic communications planning. In particular, posts lacked a clear theme or message and specific target audiences were generally not identified. Posts also failed to develop detailed strategies and tactics to direct available public diplomacy programs and tools toward clear, measurable objectives in the most efficient manner possible. Further, research and evaluation efforts to inform all facets of strategic communications are limited by the relatively small budget in Washington, D.C., allocated to such efforts and a general lack of expertise in the field with regard to commissioning and conducting such studies. Finally, posts lack detailed, country-level communication plans to tie everything together. These findings are reinforced by a worldwide review of fiscal year 2007 mission performance plans conducted by State’s Bureau of Resource Management in 2005. In particular, State determined that post efforts were generally not directed at specific target audiences, lacked specific and reasonable communication objectives and strategies, and often failed to provide outcome and impact measures of program success. Private sector communication best practices suggest the need for a core message or theme, which can be developed on a worldwide, regional, or country-by-country basis, and should be consistently applied to and woven through all program activities and events. The posts we visited did not have a core message or theme to direct their communication efforts. We found that post efforts focused on general program goals established in Washington, D.C., which are found in the mission performance plans. For public diplomacy, these goals are promoting mutual understanding, advancing American values, and influencing international public opinion. According to State officials, these goals can be interpreted in many different ways and have limited practical utility for developing a targeted communication strategy. As one senior embassy official in Nigeria noted, these goals are “amorphous” in nature and “hard to quantify” in practice. Specifically, posts noted the following communication goals in their fiscal year 2006 mission performance plans: Nigeria—Influencing International Public Opinion: Nigeria’s fiscal year 2006 mission performance plan simply states that the post intends to move the opinions of Northern Nigerians to mirror those of the rest of the Nigerian population, which is largely supportive of U.S. values and principles. Pakistan—Promoting Mutual Understanding: Pakistan’s mission performance plan states that the post will seek to enhance the image of the United States in Pakistan and increase the depth of understanding among Pakistanis of how American society, culture, and values shape the objectives behind and reasons for U.S. policies towards Pakistan. Egypt—Advancing American Values: Egypt’s mission performance plan notes that the post will use information activities, exchanges, and local information programming to bolster awareness among Egyptians of values shared with Americans and increase Egyptian public understanding of American society. The Deputy Chief of Mission in Pakistan told us that, while specific messages have been developed at post, there are in fact too many competing messages (such as the United States is a great place to live, the United States is a great place to visit, American cultural diversity and democracy are good things), and the post needed to do a better job of defining and clarifying its message. A senior embassy official in Nigeria echoed this point by stating that his post needed a core message that could be coordinated across State, USAID, DOD, and other supporting agencies. Private sector best practices suggest that analyzing target markets in depth and segmenting these markets are critical to developing effective information campaigns. The posts we visited generally had not used these practices to help refine and focus their communication efforts. In its worldwide review, State’s Resource Management Bureau found that some posts had done a poor job of answering the basic question of whether to direct their communication efforts at a mass audience or opinion leaders. The reviewers concluded that posts should focus on opinion leaders in the 130 less developed countries with poor communications infrastructure (many countries with significant Muslim populations fall in this group), while posts in roughly 40 other countries with adequate communications infrastructures should focus on reaching the general public. As a first step, the reviewers recommended that posts in the former group undertake an inventory of opinion leaders they wished to influence. This “key influencers analysis” could be segmented into various groups such as youth; women; opinion and editorial writers; professors; and ethnic, religious, and business leaders, who could serve as message multipliers. In 2004, Washington sought to supplement mission performance planning activities by asking posts worldwide to prepare an analysis of key influencers. According to senior officials in Washington, D.C., only about one-half of posts worldwide ever submitted the requested analysis. Among the posts we visited, only Nigeria was able to produce a copy of an influence analysis, which we found to be rudimentary in nature and not fully responsive to the guidance provided by Washington, D.C. The posts we visited generally neither focused on important subcategories such as urban versus rural, men versus women, and religious versus nonreligious, nor did they segment based on the level or intensity of opposition (ranging from “soft” to “hard”) toward the United States. However, posts have attempted to reach a “younger, broader, and deeper” audience through exchange programs such as YES, which targets high school students. Also, some efforts are under way to target exchange program alumni, locals who have studied in or visited the United States, and expatriates living in the United States who could serve as goodwill ambassadors for the United States. In contrast to post practices, we noted that the British Council, which maintains a presence in all three countries we visited, relies on a four tier audience system, which is used worldwide to target their outreach efforts. Also, the Defense Science Board has reported that target audiences in the Muslim world can be divided into five categories, ranging from hard opposition to hard support. Their report notes that identifying audiences that are “winnable” in terms of increased public support is critical to successful strategic communication and requires borrowing from campaign and private sector methodologies and conducting political-style attitudinal research and identifying the highest priority support groups that can most likely be influenced. The private sector uses sophisticated strategies to integrate complex communication efforts involving multiple players. Our review of mission performance plans revealed that only limited attention had been given to developing detailed public diplomacy strategies and tactics to guide their implementation of an array of public diplomacy programs and tools. While such strategies can include message amplification tactics or the use of third-party spokespersons to increase the credibility of delivered messages, the mission performance plans we reviewed were noteworthy for their brevity and lack of detail on such strategies. For example, the Nigerian post’s goal paper on public diplomacy and public affairs runs just over two pages. These two pages serve as the road map for implementing the post’s public diplomacy efforts, which involve several agencies, assorted programs and projects, and substantial program funds. The plan devotes one sentence to describe its strategy to achieve its performance goal and three sentences to describe the tactics that will be used to implement the strategy. On occasion, the strategies and tactics outlined in mission performance plans were or will be supplemented by additional planning efforts. In Pakistan, we noted that the Public Affairs officer had drafted a summary level plan to guide the efforts of the public affairs section. In Egypt, the Public Affairs officer told us that the Chief of Mission has directed his section to develop an “Islamic strategy” for Egypt to include details on working with religious leaders, integrating English language teaching efforts, working with local universities, and so on. In its review, State’s Resource Management Bureau also found that posts had generally not developed meaningful strategies and tactics that would lead to quantifiable results. The reviewers suggested that posts adopt a more rigorous and measurable outreach strategy focused on opinion leaders in countries where a mass audience cannot easily be reached. As defined earlier, the first step entails identifying the opinion leaders the post would like to influence. Second, posts should identify a “critical mass” of opinion leaders who must be reached and influenced in order to have a significant impact on the target audience. Third, posts should develop programs and initiatives designed to reach these specific individuals, with the goal of persuading and motivating opinion leaders to spread the message. The reviewers suggested that exchange programs could be reinforced with targeted strategic information programs. Public Affairs officers were briefed on these findings in 2005, and mission performance plan guidance has been updated to incorporate most of these recommended elements. Private sector best practices highlight the value of a research driven approach to designing, implementing, evaluating, and fine-tuning strategic communications efforts. Given the relatively small budgets devoted to research and evaluation efforts, posts had access to a limited amount of information to help guide their strategic communication activities. Valuable research can include such topics as: (1) audience attitudes and beliefs; (2) root causes driving negative sentiments and beliefs; (3) country- specific social, economic, political, and military environments; (4) local media and communication options; and (5) diagnosis of deeper performance issues and possible program fixes. Because the posts we visited did not have the budgets or required expertise to conduct this type of research or program evaluation on their own, they relied on the Bureau of Intelligence and Research and evaluation staff in Washington, D.C., to conduct such studies for them. However, only a limited range of research and evaluation data is available to posts. Most of this data is not tailored to a specific country and it was unclear whether available research and evaluation results are incorporated in post planning and evaluation activities. Available research and evaluations products include the following: Broad public opinion polling data: Conducted by State’s Bureau of Intelligence and Research, these polls document that local populations, to a significant degree, hold negative views toward the United States. Such polls serve a valuable role in identifying the depth of the public perception problem but are of limited utility in diagnosing the source of the problem or the specific impact that U.S. public diplomacy efforts have had on alleviating such negative perceptions. Root cause polling data: In particular, State’s Bureau of Intelligence and Research released an opinion analysis in March 2003 based on a series of surveys examining the root causes of anti-American sentiments in 10 Muslim-majority countries (Jordan, Saudi Arabia, Egypt, Turkey, Nigeria, Pakistan, Bangladesh, Uzbekistan, Malaysia, and Indonesia). Significantly, the 2003 analysis notes that “the belief that the U.S. is hostile toward Muslim countries was the single largest component of anti-American sentiments in all 10 countries, outweighing even the publics’ view of how the United States treats their own country.” This type of insight can provide the basis for identifying and developing a core message or theme—one of the key private sector best practices discussed earlier. Our roundtable of nongovernment Muslim experts noted that this view is grounded in Muslim concerns over U.S. foreign policies and actions in the Muslim world. All of our panelists agreed that U.S. foreign policy is the major root cause behind anti-American sentiments among Muslim populations and that this point needs to be better researched, absorbed, and acted upon by government officials. According to our panelists, these core issues include the Arab/Israeli conflict, the war in Iraq, U.S. support for antidemocratic regimes in the region, perceptions of U.S. imperialism, and U.S. support for globalization, which is viewed as hurting Muslims. Program evaluations: While State has traditionally focused its evaluation activities on exchanges, the department has established an evaluation schedule that includes ongoing assessments of key public diplomacy programs and initiatives, including the English ACCESS Microscholarship program, Hi magazine, American Corners, and a contract with the Performance Institute to examine State’s performance measurement framework for public diplomacy. Planned evaluations include media training and outreach and the U.S. speakers programs. These evaluations are conducted by staff in the Bureau of Educational and Cultural Affairs, the Bureau of International Information Programs, and the Office of Policy, Planning, and Resources in the Under Secretary’s office. Additionally, other forms of research are not being fully utilized. In particular, the Central Intelligence Agency sponsored a series of public diplomacy planning papers in 2005 for six countries of strategic national interest to the United States (China, Egypt, France, Indonesia, Nigeria, and Venezuela). These papers included detailed country profiles and issue analyses, recommended public diplomacy strategies for each country, and served as the focus of two conferences that sought to promote dialogue among academic and agency experts regarding how to improve and refine U.S. public diplomacy efforts in each country. However, we found that State officials in both Egypt and Nigeria were not familiar with this exercise or the papers produced for their host countries. Private sector best practices suggest that a detailed, country-specific communication plan serves to pull together the complex data and analysis required for a feasible plan of action that can be monitored and improved as needed based on performance feedback. However, none of the posts we visited had such a detailed communication plan. Prior to 1999, when public diplomacy efforts were managed by the former U.S. Information Agency (USIA), detailed communication plans were developed on a country-by- country basis. These plans included details on core messages and themes, target audiences, and research on key opinion leaders, audience attitudes, and the local media environment. With the integration of the USIA into State in 1999, these country plans were eliminated, leaving the mission performance plans as the focal point for such information. As suggested by several post officials, the country plans prepared by USIA were superior to the mission performance planning process since they focused on public diplomacy (a program driven function that is distinct from the policy focus predominant in other department operations) and provided a detailed road map to guide program implementation efforts. In marked contrast to State, we noted that USAID’s new Development Outreach and Communications officers are developing country-level communication plans. These plans are based on guidance prepared by public affairs staff in Washington, D.C., pertaining to roles and responsibilities, coordination requirements, communication tips and techniques, and the development of a long-term communication strategy. This guidance notes that “having a thoughtful communication strategy that is understood by the key leadership of the Mission is integral to communicating most effectively.” The guidance suggests that a good communication strategy should adequately describe the Mission’s public relations goals, should be linked to a specific time frame and resource request, and should identify the Mission’s communication strengths and weaknesses, key themes and messages, priority audiences, and the best means to reach them. Most importantly, the messages must be repeated over and over again to ensure that they are heard. In 2005, the Under Secretary established a strategic framework for U.S. public diplomacy efforts, which includes three priority goals: (1) support the President’s Freedom Agenda with a positive image of hope; (2) isolate and marginalize extremists; and (3) promote understanding regarding shared values and common interests between Americans and peoples of different countries, cultures, and faiths. The Under Secretary noted she intends to achieve these goals using five tactics—engagement, exchanges, education, empowerment, and evaluation—and by using various public diplomacy programs and other means. This framework represents a noteworthy start; however, the department has not yet developed written guidance that provides details on how the Under Secretary’s new strategic framework should be implemented in the field. Our past reports have detailed the difficulties the White House and the department have encountered in developing any type of written communication strategy. In our 2003 report and again in our 2005 report, we noted several attempts by State and the National Security Council to develop a communication strategy for the interagency community. In 2004, the National Security Council and the department created the Muslim World Outreach Policy Coordinating Committee to develop an interagency strategy to marginalize extremists. The committee collected information from embassies around the world to help develop a draft outreach strategy, but it was ultimately not released to posts pending further guidance from the new Under Secretary. On April 8, 2006, the President established a new Policy Coordinating Committee on Public Diplomacy and Strategic Communication. This committee, to be led by the Under Secretary, is intended to coordinate interagency activities. According to department officials, one of the committee’s tasks will be to issue a formal interagency public diplomacy strategy. It is not clear how long this effort will take or when a strategy will be developed. While the department has not yet issued guidance on how to implement the strategic framework established by the Under Secretary, officials in Washington acknowledged the need to improve message delivery at the post level and have begun to implement a more rigorous approach to program planning and evaluation. Based on prior reports by GAO and others, the department has begun to institute a “culture of measurement,” which should significantly impact the rigor and sophistication of its strategic planning and evaluation efforts. Beginning 2 years ago, the department sought to establish this culture through a variety of means, including the creation of an Office of Policy, Planning, and Resources within the office of the Under Secretary; the creation of a Public Diplomacy Evaluation Council to share best practices; the creation of a unified office of program evaluations; and the development of an expanded evaluation schedule, which places a new emphasis on assessing the department’s strategic information programs. The department also plans to institutionalize the use of the “logic model” approach endorsed by GAO and others, which could have a significant impact on the department’s program design, implementation, and evaluation efforts. The logic model calls for program managers to define their key inputs, activities, outputs, outcomes, and impact. The head of the Public Diplomacy Evaluation Council has briefed field staff on the logic model using the illustration in figure 4. The logic model will be implemented via a performance measurement framework contract led by the Performance Institute. Implementation details, guidance, training, and so on will be developed by the Performance Institute in coordination with key State stakeholders. Major elements of the model should be in place by September 2006, with full implementation expected by the 2009 mission performance plan cycle. In January 2006, the department issued guidance on preparing mission performance plans that embodies its desire to increase the rigor and sophistication of post strategic planning and evaluation efforts. Issued for the fiscal year 2008 planning cycle, this guidance calls for more strategic thinking and planning than was required in the past, noting that “there are increased expectations for measurement and specificity in planning for public diplomacy and this leads to requests for more sophisticated information from the field.” The guidance calls for identification of specific target audiences, key themes and messages, detailed strategies and tactics, and performance outcomes that can be measured with a reasonable degree of precision and clearly demonstrate the ultimate impact of U.S. public diplomacy efforts. If fully implemented, this guidance should begin to address the shortcomings we found in mission performance plans in Nigeria, Pakistan, and Egypt. However, such guidance will not be implemented for another 2 years, raising significant concerns about what the department intends to do now to address strategic planning shortfalls. While Washington’s guidance is designed to significantly improve the strategic decisions summarized in mission performance plans, it does not require that missions prepare in-depth analyses to better inform and support their strategic program decisions. Such analyses include country- situation papers, in-depth audience research, media analyses to understand how people receive information and who the key media providers are, and details on how related agency programs and planning efforts should be integrated to achieve common communication objectives. Finally, this guidance does not require that missions develop a separate communication plan to incorporate Washington and post-conducted analyses and planned strategies and tactics. The lack of a country-level communication plan increases the risk that planning will remain largely conceptual and fall short in terms of effectiveness at the tactical level. Also, country-level communication plans could be prepared and updated as needed, apart from the mission performance planning cycle, particularly as the new guidance for mission performance plans will not take effect until fiscal year 2008. Public diplomacy officers struggle to balance security with public access and outreach to local populations. The public diplomacy corps in the field faces several human capital challenges, such as the lack of a sufficient number of officers, lack of staff time, shortened tours of duty, and limited language proficiency. While State has taken steps to address these challenges, it is too early to assess the effectiveness of some of these efforts, and officers at the three posts we visited told us that many of these issues remain unresolved. In addition, State lacks an effective means to share embassy best practices that could help address some of these challenges. Security concerns have limited embassy outreach efforts and public access, forcing public diplomacy officers to strike a balance between safety and mission. Shortly after the terrorist attacks of September 11, then- Secretary of State Colin Powell stated, “Safety is one of our top priorities… but it can’t be at the expense of the mission.” While posts around the world have faced increased threats, security concerns are particularly acute at many posts in countries with significant Muslim populations. As figure 5 illustrates, the threat level for terrorism is rated as “critical” or “high” in 80 percent of posts in the Muslim world, compared with 34 percent of posts elsewhere. Security and budgetary concerns have led to the closure of publicly accessible facilities around the world, such as American Centers and Libraries. According to one State official, in 1990 the majority of posts had such publicly accessible facilities; now, however, few do. In Pakistan, for example, all of the American Centers have closed for security reasons, with the last such facility, in Islamabad, closed in February 2005. These same concerns have prevented the establishment of a U.S. presence elsewhere. Officials in Nigeria said they would like to open a facility in the north of the country to serve the region’s 70 million predominantly Muslim inhabitants, but security and budgetary concerns prevent them from doing so—one senior embassy official in Nigeria said that nothing they can do from the capital, Abuja, would be as effective as having a permanent presence in the north. As a result, embassies have had to find other venues for public diplomacy programs, and some activities have been moved onto embassy compounds. Other public diplomacy programs have had to limit their publicity to reduce the risk of becoming a target. A recent joint USAID-State report concluded that “security concerns often require a ‘low profile’ approach during events, programs or other situations, which, in happier times, would have been able to generate considerable good will for the United States.” This constraint is particularly acute in Pakistan, where the embassy has had to reduce certain speaker and exchange programs. For example, an official in Peshawar, Pakistan, said that consulate staff handpicked students for a 9/11 Commission Report reading group because the consulate could not widely publicize the program. While several officials in Pakistan described the reading group as a success, its reach was limited due to security concerns. Furthermore, precautions designed to improve the security of American facilities have had the ancillary effect of sending the message that the United States is unapproachable and distrustful, according to State officials. Concrete barriers and armed escorts contribute to this perception, as do requirements restricting visitors’ use of cell phones and pagers within the embassy. According to one official in Pakistan, visitors to the embassy’s Information Resource Center have fallen to as few as one per day because many visitors feel humiliated by the embassy’s rigorous security procedures. In Egypt, one of the ambassador’s priorities is remodeling the embassy in order to make it more inviting to visitors. State has responded to security concerns and the loss of publicly accessible facilities through a variety of initiatives, including American Corners, which are centers that provide information about the United States, hosted in local institutions and staffed by local employees. According to State data, there are currently approximately 300 American Corners throughout the world, including more than 90 in the Muslim world, with another 75 planned (more than 40 of which will be in the Muslim world). Several recent studies on public diplomacy have recommended the expansion of the American Corners program, but its effectiveness has not been evaluated. While one State official told us that American Corners are the best solution given the current security environment, others have described them as public diplomacy “on the cheap.” The American Corner we visited in Nigeria was confined to a single small room housing a limited reference library and a small selection of donated books (see fig. 6); at a meeting with a focus group of Nigerians in Abuja who had participated in U.S. sponsored exchanges, no one present was familiar with the American Corner. Other posts we visited have had difficulty finding hosts for American Corners, as local institutions fear becoming terrorist targets. Information Resource Centers, small reference libraries for limited audiences created to replace some of the functions of American Centers’ open libraries, most of which have closed, are another attempt to balance security and access. State’s Bureau of International Information Programs operates more than 170 such centers worldwide. Because they are located within the embassy compound, however, public access to these facilities is often limited. For example, in Abuja, the center is open only to students and other specific demographic groups, and access is granted by appointment only; officials in Islamabad reported similar restrictions. The head of the center in Abuja said that accessibility was one of his primary challenges. State has also made departmentwide efforts to expand public outreach beyond external facilities, and individual posts are devising creative solutions to this challenge. In Nigeria, several embassy staff, including the Ambassador, often travel together to cities lacking a permanent American presence; according to embassy officials, these “embassy on the road” tours typically last 3 or 4 days and can involve dozens of individuals. Additionally, in Pakistan we observed an embassy-funded American Discovery Center, a small kiosk providing information on America, placed in a local school. There are over 180 such kiosks in schools across Pakistan, although one embassy official remarked that as many as half of these schools have restricted access to the kiosk for a variety of reasons. Addressing concerns over the United States’ decreased outreach capabilities, Secretary Rice recently announced plans to deploy more diplomats in areas with a limited U.S. presence by increasing the number of American Presence Posts. There are currently 8 such posts, which are staffed by one Foreign Service officer and are intended to extend the U.S. diplomatic presence beyond foreign capitals and reach out to “emerging communities of change.” We visited one such post in Alexandria, Egypt, which contained a publicly accessible reading room, offered free computer access, and hosted frequent cultural events. One advantage of the American Presence Posts over American Corners, according to the principal officer in Alexandria, was that the post was able to maintain control over the facility. Another means of reaching large audiences in high-threat posts while minimizing security concerns is through international broadcasting. However, in a 2003 survey conducted by GAO, almost 30 percent of public diplomacy officers in the field said that transmission strength was ineffective in helping to achieve public diplomacy goals in their country. Officials we spoke with in Pakistan and Egypt said this challenge still exists, suggesting that poor signal strength for U.S. broadcasts in their host countries limits the impact of broadcasting. The administration’s fiscal year 2007 budget request includes a request to increase U.S. broadcasting to countries in the Muslim world while reducing broadcasts elsewhere, particularly in Europe and Eurasia. Insufficient numbers of public diplomacy staff and staff time hinder outreach efforts at posts in the Muslim world. Additionally, tours of duty tend to be shorter in the Muslim world than elsewhere, which negatively impacts continuity at a post, as well as the ability to cultivate personal relationships. Further, we found that public diplomacy officers at many posts cannot communicate effectively with local populations in local languages, hampering overall U.S. public diplomacy efforts. To address these challenges, State has taken several steps, both at the department and post level, highlighted by the Secretary’s transformational diplomacy initiative, but it is too early to evaluate the effectiveness of this initiative. While several recent reports on public diplomacy have recommended an increase in spending on U.S. public diplomacy programs, several embassy officials told us that, with current staffing levels, they do not have the capacity to effectively utilize increased funds. According to State data, the department had established 834 public diplomacy positions overseas in 2005, but 124, or roughly 15 percent, were vacant. Compounding this challenge is the loss of public diplomacy officers to temporary duty in Iraq, which, according to one State official, has drawn down field officers even further. Staffing shortages may also limit the amount of training public diplomacy officers receive. According to the U.S. Advisory Commission on Public Diplomacy, “the need to fill a post quickly often prevents public diplomacy officers from receiving their full training.” In addition, public diplomacy officers at post are burdened with administrative tasks and thus have less time to conduct public diplomacy outreach activities than previously. One senior State official said that administrative duties, such as budget, personnel, and internal reporting, compete with officers’ public diplomacy responsibilities. Another official in Egypt told us that there was rarely enough time to strategize, plan, or evaluate her programs. In addition, State officials in Washington acknowledged that additional requirements for posts to improve strategic planning and evaluation of their public diplomacy programs would need to be accompanied by additional staff with relevant expertise. Staffing challenges in public affairs sections at posts in the Muslim world are exacerbated by shorter tours of duty and fewer officers bidding on public diplomacy positions than in the non-Muslim world. According to data provided by State, the average tour length at posts in the Muslim world is 2.1 years, compared with 2.7 years in the non-Muslim world. Figure 7 shows the average tour length by region. Furthermore, as a result of the security concerns mentioned above, tours at many posts in the Muslim world are for only 1 year, without family members. Of State’s 20 so-called unaccompanied posts, 15 are in the Muslim world. Shorter tours contribute to insufficient language skills and limit officers’ ability to cultivate personal relationships, which, according to a senior public diplomacy officer, are vital to understanding Arabs and Muslims. Another senior State official, noting the prevalence of one-year tours in the Muslim world, told us that Public Affairs officers who have shorter tours tend to produce less effective work than officers with longer tours. In Pakistan, we were told that the Public Affairs officer views himself as a “management consultant,” in part because of his short tour in Islamabad. Furthermore, the department’s Inspector General observed that the rapid turnover of American officers in Pakistan was a major constraint to public diplomacy activities in the country. In addition, public diplomacy positions in the Muslim world have received fewer bids than public diplomacy positions elsewhere. An analysis of data from State’s summer 2005 posting cycle shows that public diplomacy positions in the Muslim world received fewer than half the average number of bids of non-Muslim posts—averaging 3.7 bids per position at posts in the Muslim world, compared with 8.9 bids per position elsewhere. As a result of the lower number of bids for public diplomacy positions in the Muslim world, it has been harder to fill these positions. Many public diplomacy officers in the Muslim world do not meet the language requirements established for their positions by State. According to data provided by State, in countries with significant Muslim populations, 30 percent of language-designated public diplomacy positions are filled by officers without the requisite proficiency in those languages, compared with 24 percent elsewhere. In Arabic language posts, about 36 percent of language-designated public diplomacy positions are filled by staff unable to speak Arabic at the designated level. In addition, State officials told us that there are even fewer officers who are willing or able to speak on television or engage in public debate in Arabic. The Information Officer in Cairo stated that his office does not have enough Arabic speakers to engage the Egyptian media effectively. Figure 8 shows the percentage of public diplomacy positions in the Muslim world staffed by officers meeting language requirements. As a result, many public diplomacy officers in the Muslim world cannot communicate as well with local audiences as their position requires. According to the Djerejian report, “The ability to speak, write, and read a foreign language is one of the recognized prerequisites of effective communications. Foreign Service officers who are fluent in Arabic immediately convey a sense of respect for and interest in the people to whom they speak, and fluency prevents the distortion of translation.” State’s Assistant Secretary for Educational and Cultural Affairs has said that communicating in other languages is a public diplomacy challenge and that encouraging Americans to speak foreign languages is a priority for public diplomacy. State has recently made several efforts to address its human capital challenges; in particular, following the Secretary of State’s comment that public diplomacy is the job of the entire embassy, officials in Washington have encouraged posts to expand their embassy employee speaker programs. By increasing the number of American officers speaking to foreign audiences, posts have attempted to compensate for the loss of public diplomacy staff and the diminished amount of time public diplomacy officers have available for outreach. We observed these efforts in Abuja, Islamabad, and Peshawar, where the embassies have developed mission speaker bureaus, which are lists of embassy staff willing to speak to local audiences on a variety of topics related to America. In Egypt, however, the department’s Inspector General noted that non-public diplomacy officers rarely engage in public outreach, missing a valuable opportunity to further increase understanding of U.S. policies, culture, and values. The Secretary of State also recently proposed changes in staff incentives as part of her call for transformational diplomacy. New requirements for career advancement would include service in at least one hardship post, fluency in two or more languages, and expertise in two or more regions. In addition, the Secretary has announced plans to reposition staff in all career tracks, starting in summer 2006, from posts in Europe and Washington, D.C., to India, China, and Latin America, as well as to the Muslim world. It is too early to evaluate the impact of these efforts. Recognizing a persistent national foreign language deficit, in January 2006 President Bush announced plans for a National Security Language Initiative to further strengthen national security by developing foreign language skills. The President’s original request for this initiative was $114 million in fiscal year 2007, split between State, DOD, the Department of Education, and the Director of National Intelligence—State’s share of this funding is about $27 million, according to department officials. State’s efforts will focus on critical languages spoken in the Muslim world, such as Arabic, Farsi, Turkish, and Urdu, among others. Under this initiative, State will provide opportunities for U.S. high school students, undergraduates, and graduate students to study these and other languages abroad and will strengthen foreign language teaching in the United States through exchanges and professional development. State has also established a facility in Tunis for advanced Arabic language instruction, including courses to train staff to appear on Arabic-language television and radio. While individual posts have devised innovative approaches to overcome the challenges their public diplomacy programs face, State generally lacks a systematic, comprehensive means of communicating these practices and transferring knowledge and experience across posts. For example, in Nigeria, we noted the embassy practice of taking a team, headed by the Ambassador, on coordinated outreach efforts to key cities in the country where the United States currently lacks a diplomatic presence. The Deputy Chief of Mission noted frustration with the post’s inability to share this and other practices with posts that might benefit from lessons learned in Nigeria. Existing means of sharing best practices among public diplomacy officers tend to be regional in scope, ad hoc in nature, or underutilized in practice. These mechanisms include annual Public Affairs officer conferences in each region, anecdotal submissions in State’s RESULTS database, and weekly newsletters issued by regional public diplomacy offices. While some officers stated that the regional Public Affairs officer conferences were helpful for sharing these practices, one official noted that no formal reports were generated at these conferences and that there has only been one global conference. The department maintains a database of public diplomacy program results, which is based on anecdotes submitted by officers in the field following speaker, exchange, or other public diplomacy programs. While it is a potential tool for retaining institutional memory at State, some State officials said that anecdotes were not systematically entered into the database. Others suggested that this database be modified to enable officers to flag best practices to make them easier to locate in the future. In March 2006, State officials told us that the Under Secretary’s office was working on a Web-based system for officers in the field and in Washington, D.C., to share ideas and expected this system to be operational within the next month. A strengthened, institutionalized system for sharing best practices could improve the retention of institutional memory at State. However, given the constraints on public diplomacy officers’ time, any means of sharing best practices should not create an additional reporting burden on officers in the field. Furthermore, whichever method State chooses to communicate best practices, it should ensure that the practices are not self-submitted but rather reviewed by a third party for appropriateness. In recent years, State has shifted public diplomacy resources to the Muslim world, but three of its new initiatives specifically designed to reach Muslim audiences have been short-lived. Lacking specifically targeted programs, posts in Muslim-majority countries continue to use the same information and exchange programs available to posts throughout the world. GAO and others have suggested the adoption of private sector best practices as a means to improve the department’s communication efforts in Washington and at the post level. These practices call for the use of central messages or themes, target audience segmentation and analysis, in-depth audience research and evaluation, and the preparation of detailed communication plans to pull these various elements together. Communication efforts at the posts we visited generally lacked these strategic elements. State has taken several steps to address this problem, including the development of a strategic framework with goals and tactics, the creation of a transformational diplomacy initiative to implement some of these best practices, and the issuance of updated guidance to improve fiscal year 2008 mission performance plans. These are all positive steps. However, Washington still lacks written guidance to implement the strategic framework developed by the current Under Secretary. In addition, posts have not prepared in-depth analyses or detailed communication plans to support their strategic communication decisions. Compounding this lack of strategic planning and evaluation are challenges related to staffing and security at posts in the Muslim world. State currently lacks a systematic mechanism for sharing best practices, which could help address some of these challenges. To improve the delivery of public diplomacy messages to Muslim audiences around the world, we recommend that the Secretary of State direct the Under Secretary of State for Public Diplomacy and Public Affairs to take the following two actions: To increase the sophistication and effectiveness of U.S. outreach efforts, develop written guidance detailing how the department intends to implement its public diplomacy goals as they apply to the Muslim world and incorporates the strategic communication best practices discussed in this report. This guidance should be developed in consultation with the White House, affected government agencies, and outside experts who have a practical knowledge of what is needed to translate private sector best practices into practical steps which can be taken in the field. To accompany this guidance, we recommend that State develop a sample country-level communication plan that posts can tailor to local conditions. To meet the challenges facing public diplomacy officers in the field, including the need to balance security with outreach and short tours of duty at certain posts, strengthen existing systems of sharing best practices in order to more systematically transfer knowledge among embassies around the world. The State Department provided written comments on a draft of this report (see app. V). State concurred with the report’s findings and conclusions. State also indicated that it has begun to address the recommendations contained in this report. State said it is developing an integrated strategic plan that includes elements of private sector best practices. State also said it is developing a sample country-level communication plan and constructing a Web-based system for conveying best practices. State did not indicate when the strategic plan or sample country-level communication plans will be completed. We modified our findings regarding State’s exchange programs, noting their continued focus on younger audiences. In addition, State provided technical comments, which have been incorporated throughout the report where appropriate. We are sending copies of this report to other interested Members of Congress and the Secretary of State. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-4128 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VI. To determine what public diplomacy resources and programs the State Department (State) has directed to the Muslim world, we reviewed State budget requests, annual performance and accountability reports, and other documents. We also interviewed officials from State’s Office of the Under Secretary for Public Diplomacy and Public Affairs; the Office of Policy, Planning, and Resources; the Bureaus of Educational and Cultural Affairs, International Information Programs, and Public Affairs; the Bureau of Resource Management; and regional bureaus. We also observed training classes for new public diplomacy officers at State’s Foreign Service Institute. We obtained and analyzed documents on public diplomacy budgets and program descriptions from these offices and bureaus. To assess the reliability of State’s data, we reviewed documentation related to the data sources and discussed the data with knowledgeable State officials. We determined the data were sufficiently reliable for the purposes of this report. We also compared data on the populations of countries in the Muslim world from the United Nations, World Bank, and CIA World Factbook, and found them sufficiently reliable for the purposes of this report. We based our definition of the Muslim world on State’s Bureau of Educational and Cultural Affairs’ list of 58 countries and territories with significant Muslim populations. These countries are spread across the Middle East, Asia, Africa, and Europe, and have a combined population of more than 1.5 billion people. Appendix II lists these countries. To assess whether posts adopted a strategic approach to implementing public diplomacy, we reviewed Washington-produced mission performance planning guidance prepared by the Office of Policy, Planning, and Resources (located within the Office of the Under Secretary for Public Diplomacy and Public Affairs), the results of a fiscal year 2005 review of mission performance plans conducted by the Bureau of Resource Management, public opinion polling results prepared by the Bureau of Intelligence and Research, and related strategic planning and evaluation documents prepared by the Bureau of Educational and Cultural Affairs and the Bureau of International Information Programs. In Egypt, Nigeria, and Pakistan, we reviewed fiscal year 2005 mission performance plans and related strategic planning and evaluation documentation, and, to discuss the scope and adequacy of each post’s strategic planning and evaluation efforts, also met with a wide range of embassy officials including the Ambassador or Deputy Chief of Mission, public affairs section staff, political and economic officers, regional affairs officers, and U.S. Agency for International Development (USAID) and Department of Defense (DOD) officials. To discuss a range of strategic planning, research, and evaluation issues in Washington, we met with representatives from the Office of Policy, Planning, and Resources; the Bureau of Resource Management; the Bureau of Intelligence and Research; the Bureau of Educational and Cultural Affairs; and the Bureau of International Information Programs. We also discussed private sector communication best practices with a representative from Business for Diplomatic Action. To identify the challenges facing U.S. public diplomacy efforts in the Muslim world and what State has done to address these challenges, we reviewed recent studies and reports on public diplomacy. In addition: We met with officials from State’s Office of the Under Secretary for Public Diplomacy and Public Affairs, and the Office of Policy, Planning, and Resources; the Bureaus of Educational and Cultural Affairs, International Information Programs, and Public Affairs; and regional bureaus in Washington, D.C. We met with U.S. embassy officers and foreign government, academic, and nongovernmental organization representatives in Nigeria, Pakistan, and Egypt to learn about and observe challenges facing public diplomacy efforts at posts abroad. We also spoke with U.S. embassy officials in Indonesia and Turkey by telephone. We selected these countries based on their strategic importance to the United States, their proportion of the total population of the Muslim world, their geographic distribution, and their mix of public diplomacy programs. We analyzed State data on staffing, language requirements, bids for public diplomacy positions, and threat ratings from 2005. To assess the reliability of these data, we surveyed agency officials responsible for collecting and analyzing these data. We determined the data to be sufficiently reliable for the purposes of this report. In September 2005, we convened a roundtable of Muslim experts in Washington, D.C., to discuss program challenges and potential solutions. Participants included experts in public opinion and public affairs, foreign journalists, and representatives from think tanks and academia. We did not review covert strategic communications efforts managed by DOD or the intelligence community. We limited our review of USAID to the agency’s efforts to communicate its assistance efforts and did not review the assistance efforts themselves. We limited our review of DOD to its support of State’s public diplomacy activities. We did not review State-led reform initiatives such as the Middle East Partnership Initiative but focused instead on public diplomacy activities designed to communicate information about the United States to target overseas audiences. For the BBG, we collected funding and program information but did not seek to evaluate the effectiveness of Radio Sawa and the Alhurra satellite network—the BBG’s two primary initiatives aimed at Arab audiences. We are reviewing these broadcast initiatives separately. We performed our work from April 2005 to February 2006 in accordance with generally accepted government auditing standards. 60 (Continued From Previous Page) Public Affairs Officer (PAO): The PAO is the senior public diplomacy adviser in the embassy. He/she coordinates all aspects of mission public affairs ensuring that public diplomacy resources are deployed in support of mission goals. The PAO also supervises the public affairs section including the work of the information/press section and the cultural section. Cultural Affairs Officer (CAO): The CAO manages the embassy’s educational and professional exchange programs, including the Fulbright program. He/she also carries out cultural programs that highlight American society and achievements and administers the speaker program that brings U.S. experts to address targeted audiences in the host country. Information Officer (IO): The IO is the embassy spokesperson and primary point of contact for information about the United States and mission affairs. The IO advises senior management on media relations and public affairs strategies and manages the distribution of information to members of the target audience. Information Resource Officer (IRO): Generally librarians by training, IROs are responsible for embassies’ Information Resource Centers (IRC) and American Corners. They are also responsible for supporting IRC programs and training local IRC staff. There are approximately 20 IROs at missions around the world. Regional English Language Officer (RELO): Worldwide, State has 17 experienced TEFL/TESL professionals, known as RELOs. RELOs help embassies design strategies to support English teaching and work with various partners to organize in teacher training seminars and workshops and offer general guidance. Bureau of Educational and Cultural Affairs Programs Fulbright Program: Flagship U.S. government exchange program for graduate students, professors, researchers, professionals, and secondary level teachers to teach, study, and conduct research. Americans are hosted by schools or universities around the world, and foreign participants by U.S. secondary schools, colleges, or universities. International Visitors (IV): 3-week visits to the United States by rising leaders in diverse fields. IVs travel in groups or as individuals and experience American cultural life and society along with professional interchange with U.S. counterparts. Voluntary Visitors (VV): Programs for foreign nationals already traveling to the United States, including professional appointments and domestic travel support. VVs can partly be funded by an embassy. Office of Citizen Exchanges professional and institutional exchange programs: Exchanges designed to link private sector American expertise and resources with priority institutions to engage youth influencers and promote civil society, democracy, youth leadership, and volunteerism, among other topics. Humphrey Program: Midlevel professionals from developing countries come to the United States for a year of academic study and professional experience. English Language Teaching: Targeted English language programs in specific regions and countries of the world, coordinated with the embassy. Programs include the English ACCESS Microscholarship program, English Language Fellow program, English Language Specialist program, and E-Teacher program. Rhythm Road: Professional jazz and urban music groups who tour countries with limited exposure to American culture, playing concerts and talking about their music and American society. Feature Film Service: Films provided to posts by the Motion Picture Association of America and other organizations for festivals, screenings by Ambassadors, and other programmatic usage by post public affairs sections. Cultural Ambassadors: Utilizes world-renowned American cultural figures to reach out to young people around the globe. Cultural Envoys and Cultural Visitors: Cultural Envoys aims to utilize the talents of average Americans to engage with young people abroad. Cultural Visitors is designed to bring young “idea” leaders in the arts and humanities to the United States for internships. Arts Exchanges in International Issues: An annual grants competition designed to identify American partner organizations to conduct exchange programs in priority countries, utilizing cultural and artistic media and programs to address priority U.S. foreign policy goals. Ambassador’s Fund for Cultural Preservation: Assists less developed countries in preserving their cultural heritage and demonstrates U.S. respect for other cultures. International Partnership Among Museums: An institutional linkage program carried out with the American Association of Museums, selecting American museums to partner with a museum abroad to develop a collaborative program built around a theme. International Cultural Property Protection: Carries out the Convention on Cultural Property Implementation Act, which protects cultural patrimony of signatory nations. National Security Language Initiative: Program activity will include in-country language training for U.S. Fulbright students in Arabic, Turkish, and Indic languages; summer intensive language programs abroad for undergraduate beginning students and intermediate/advanced training for undergraduate and graduate students; expansion of the Fulbright Foreign Language Teaching Assistant Program to bring 300 native speakers of critical languages to teach in U.S. universities and schools; and a new component to the teacher exchange program to assist U.S. teachers of critical need languages to study abroad. Study of the U.S.: Promotes better understanding of the United States through Summer Institutes for foreign university faculty, reference collections, and the Currents in American Scholarship series. EducationUSA: Promotes higher education abroad by supporting overseas advising centers and collaborating with U.S. educational organizations to strengthen international exchange. Bureau of International Information Programs U.S. Speakers: American subject-matter experts travel to a host country to address selected audiences on a range of policy issues and various aspects of American society. American Corners: Public diplomacy outposts in host-country organizations, such as libraries and universities, that provide access to information about the United States through book collections, the Internet, and local programming to the general public. Information Resource Centers: Computer-based knowledge platforms at embassies and consulates that provide information about U.S. policies and American society to targeted sectors of the host-country population. Digital video conferences: Two-way video/phone dialogues between U.S. subject-matter experts and their counterparts in a host country. USINFO: Authoritative, up-to-date Web site providing information on U.S. policy and American issues directed at foreign readers. Available in English and six world languages. Washington File: Daily compilations of news articles and official texts intended for foreign audiences. Available on the USINFO Web site. Electronic Journals: Web-based monthly publications focused on themes supporting mission performance plan goals. Available in several languages, Electronic Journals can be downloaded and printed for local distribution. Infocentral: On-line resource for U.S. government spokespersons and embassy officers who need information on policy issues, access to press clips, and cleared guidance. Mission Web sites: Each embassy maintains its own Web site with links to the State Department and other sources of information about the United States and U.S. policy. Issue Briefs: Background information on policy topics, available at the Infocentral Web site, intended for use only by U.S. officials who need to articulate and explain policy positions. Paper Shows: Exhibitions of 35-40 panels featuring photographic and documentary images and text on significant American personalities, issues, and events. Paper shows are produced in several languages and displayed in museums, libraries, theaters, and other public places worldwide. Bureau of Public Affairs Programs Foreign Press Centers: Support centers for foreign journalists in Washington, D.C., New York, and Los Angeles providing facilitative assistance, interviews with U.S. officials, and information resources. Office of Broadcast Services: Provides television and radio to overseas posts, runs American Embassy Television Network, and assists foreign TV crews making film documentaries in the United States on subjects of interest to the U.S. government. Media reaction: Summary compilations of foreign editorial and op-ed reactions to issues of interest to the United States, available daily on the Web. GAO and other groups have called for a transformation in how U.S. public diplomacy efforts are conducted. One key element of this proposed transformation is the perceived need to adopt and adapt strategic communication best practices from the private sector. GAO suggested in its September 2003 report on State public diplomacy efforts that the department examine private sector public relations efforts and political campaigns’ use of sophisticated strategies to integrate complex communication efforts involving multiple players. GAO’s roundtable with public relations firms from the private sector revealed that the key strategic components of such efforts include establishing the scope and nature of the problem, identifying the target audience, determining the core message, and defining both success and failure. The panel emphasized the importance of synchronizing these activities in a systematic way, so that communication efforts are mutually reinforcing in advancing the campaign’s overall objectives. They noted that without a carefully integrated plan, the various elements are at risk of canceling each other out and possibly damaging the overall campaign. Figure 9 illustrates the steps in the process. Testimony by the President of Business for Diplomatic Action (BDA) provides a suggested strategic road map for the government to follow, building on private sector best practices. BDA suggests that U.S. public diplomacy efforts be redesigned following a five step plan: (1) listen, ask questions, and analyze; (2) participate in foundation building process for a comprehensive communication strategy; (3) introduce a “positioning concept” for the United States in a post-9/11 world; (4) develop a comprehensive communication plan; and (5) put someone in charge. Under step one, BDA notes that “there are knowledge gaps with regard to issues of anti-American sentiment and public diplomacy programming.” Under step two, BDA suggests that a task force of public and private sector parties explore the significance and implications of the research data collected under step one. Under step three, a “positioning concept” for the United States would be developed, capturing a point of view, a promise, and a personality. Step four requires the development of a comprehensive communication plan which can take the form of a multiaudience grid listing existing attitudes, desired attitudes, barriers standing between existing and desired attitudes, and the best means to address and remove these barriers. BDA notes that answers to these questions will vary by target audience (e.g., Muslim parents, Muslim youth, Chinese business leaders, etc.), but all must be translations of the “positioning concept” agreed to in step three. Finally, someone must be in put in charge to ensure that all activities, behaviors, and messages are aligned to the new positioning concept. In its September 2004 report on strategic communications, the Defense Science Board makes a case that borrowing and adapting private sector communication practices is a critical step toward revitalizing U.S. public diplomacy efforts. The report notes that the United States approaches modern warfare with cutting-edge strategies, tactics, and weapons, designed to be effective against modern foes, and constantly updated. By contrast, the report argues, U.S. current strategic communication planning and execution is mired in diplomatic and marketing tactics of yesteryear. The United States has no clearly defined strategic framework, themes, or messages. The report goes on to note that building an effective strategic communication culture that borrows the most effective private sector marketing and political campaign techniques will be at the core of rebuilding and reinventing the way the United States listens, engages, and communicates with the world. The report notes that achieving this goal will involve the following three key steps: As in a successful political campaign, the United States must clearly define what success means in terms of its benefits for all target audiences. All constituents must understand what success means for them in personal terms. A carefully defined set of themes and messages must reinforce targeted audiences’ perceived and personal benefits. The United States must communicate what its vision for the future promises on individual terms, not national or pan-national religious terms. The United States should personalize the benefits of its defined future, for example, personal control, choice and change, personal mobility, meritocracy, and individual rights (in particular, women’s rights). As with most effective private sector and political marketing campaigns, the United States must understand what target populations must be reached and influenced to achieve success. And the United States must understand what it takes to move them. More importantly, it must target audiences that can be moved—pragmatically and strategically picking its target audiences. In addition to the individual named above, Diana Glod, Assistant Director; Michael ten Kate; Robert Ball; Mehrunisa Qayyum; Richard Bakewell; and Joe Carney made significant contributions to this report. Martin de Alteriis, Elaine Vaurio, and Ernie Jackson provided technical assistance. | Public opinion polls have shown continued negative sentiments toward the United States in the Muslim world. Public diplomacy activities--led by the State Department (State)--are designed to counter such sentiments by explaining U.S. foreign policy actions, countering misinformation, and advancing mutual understanding between nations. GAO was asked to examine (1) what public diplomacy resources and programs State has directed to the Muslim world, (2) whether posts have adopted a strategic approach to implementing public diplomacy, and (3) what challenges remain to be addressed. State has increased public diplomacy resources to countries with significant Muslim populations in recent years and launched three major initiatives directed at the Muslim world. Comparing data for fiscal years 2004 and 2006, overseas operations budgets have increased, with the largest percentage increases going to regional bureaus with significant Muslim populations. However, the number of authorized overseas positions in all regional bureaus increased slightly or not at all. As part of the Secretary of State's newly announced transformational diplomacy initiative, the department intends to reposition staff to better align with policy priorities. Since 2002, State has initiated three public diplomacy activities focused on the Muslim world--a media campaign, a youth-oriented magazine, and a group of youth-focused exchange programs--but these initiatives have been largely terminated or suspended. However, several exchange programs continue to target youth in the Muslim world. In addition, posts in the Muslim world use a range of standard programs and tools which the Under Secretary plans to supplement with several new initiatives. GAO's fieldwork revealed that posts' public diplomacy efforts generally lacked important strategic communication elements found in the private sector, which GAO and others have suggested adopting as a means to better communicate with target audiences. These elements include having core messages, segmented target audiences, in-depth research and analysis to monitor and evaluate results, and an integrated communication plan that brings all these elements together. These findings were reinforced by State's own post-level review. State established a new strategic framework for public diplomacy in fiscal year 2006, calling for, among other things, marginalizing extremists and demonstrating respect for Muslim cultures. However, posts have not been given written guidance on how to implement this strategy. Such guidance is a critical first step to developing in-depth communication plans in the field. Posts in the Muslim world face several challenges in implementing their public diplomacy programs, including the need to balance security with public outreach and concerns related to staff numbers and language capabilities. For example, we found that 30 percent of language designated public diplomacy positions in the Muslim world were filled by officers without the requisite language skills. State has begun to address many of these challenges, but it is too early to evaluate the effectiveness of many of these efforts. Further, State lacks a systematic, comprehensive means of sharing best practices in public diplomacy, which could help transfer knowledge and experience across posts. |
The United States maintains more than 250 diplomatic posts, including embassies, consulates, and other diplomatic offices, located around the world. More than 60,000 personnel—U.S. and foreign service nationals— work at these locations. About 50 government agencies and subagencies operate overseas, including the Departments of State, Defense, and Justice; and the U.S. Agency for International Development. Since the 1970s, U.S. diplomatic personnel overseas have been increasingly at risk from terrorist attacks and other acts of violence. In response, the State Department in 1986 began a substantial embassy construction program, known as the Inman program, to protect U.S. personnel and facilities. In 1991, we reported that State was unable to complete as many projects as originally planned due to systemic weaknesses in program management, as well as subsequent funding limitations. This construction program suffered from delays and cost increases due to, among other things, poor program planning, difficulties in acquiring sites, changes in security requirements, and inadequate contractor performance. Following the demise of the Inman program in the early 1990s, the State Department initiated very few new construction projects until the Africa embassy bombings in August 1998 prompted additional funding. In the 1998 bombings, terrorists attacked the U.S. embassies in Nairobi, Kenya, and Dar es Salaam, Tanzania. These large-scale truck bombings killed more than 220 people, including 12 American U.S. government employees and family members, 32 Kenyan national U.S. government employees, and 8 Tanzanian national U.S. government employees. In addition, the bombings injured more than 4,000 Kenyans, Tanzanians, and Americans. Figures 1 and 2 show pictures of the embassy in Tanzania before and after the bombings. Since these embassy bombings, U.S. facilities and personnel have faced continued threats from terrorist and other attacks. Embassy and consulate employees are on the front lines, often serving in dangerous locations, and must rely heavily on the protection provided by the law enforcement and security measures of the foreign country in which they are located. From 1998 through 2002, there were 30 terrorist attacks against overseas posts, personnel, and diplomatic residences. During that same period, overseas posts were forced to evacuate personnel or suspend operations 83 times in response to direct threats or unstable security situations in the host country. (See table 1.) During the first 2 months of 2003, overseas posts authorized the departures of personnel and/or their families a total of 11 times due to security concerns. Before I discuss the results of our work, I want to explain some of State’s security standards and why they are important. State identified five key security standards for overseas diplomatic office facilities to protect them against terrorism and other dangers. First, State believes that office facilities should be at least 100 feet from uncontrolled areas, such as a street where vehicles can pass without first being checked by security officials. Therefore, this distance helps to protect the buildings and occupants against bomb blasts, mob attacks, and other threats. In establishing the setback standard, the State Department determined that at 100 feet, the effects of a bomb blast have diminished to the point where the cost of site acquisition and construction to protect against the remaining blast effects are relatively affordable. State notes that additional setback may not be practical at many locations. Exhibit 1 is a video clip from the State Department showing a test blast from 100 feet away. The second and third standards are strong perimeter walls and anti-ram barriers to ensure that vehicles cannot breach the facility perimeter to get close to the building prior to detonating a bomb. Exhibits 2 and 3 are video clips from the State Department showing the effectiveness of these walls and barriers. The fourth standard requires blast-resistant construction techniques and materials. Among other things, these materials include reinforced concrete and steel construction and blast-resistant windows. Diplomatic Security officials state that flying glass is a primary cause of injuries and deaths in a blast. Coupled with a 100-foot setback, blast-resistant construction provides the best possible protection against a vehicle bomb attack, according to Diplomatic Security officials. Combined, these four standards mitigate the effect of a vehicle bomb attack and prevent the building from suffering catastrophic collapse and complete destruction. State’s fifth security standard is controlled access at the perimeter to the compound. At this control access point, guards can screen personnel and visitors before they enter the embassy compound to verify that they have no weapons and that they should be allowed to enter, and can fully search vehicles before they are permitted to enter the compound. Over the last 4 years, State has accomplished much in improving posts’ security through various security upgrades. These upgrades include the installation of Mylar shatter-resistant window film and forced entry/ballistic-resistant doors; the construction of perimeter security walls and fences, jersey barriers, and compound access controls; and the stationing of additional police and security guards. In June 2002, a bomb attack against the U.S. consulate in Karachi demonstrated the effectiveness of recent security upgrades to the compound. As shown in figure 3, physical damage to the building was minimized by these upgrades. As of September 30, 2002, State had completed security upgrades at 113 posts and had installed Mylar window film barriers and forced entry/ballistic-resistant doors at 242 posts. Further, to address security concerns at some of the buildings without a 100-foot setback, State has secured host government cooperation in either closing adjacent streets and/or posting local police officers as guards to monitor and control surrounding streets. State has also acquired adjacent land at 34 posts to increase setback since the 1998 embassy bombings. For example, State purchased a gas station next to an office annex building in Athens, Greece, and closed the gas station, thus increasing setback and improving security. At all four posts we visited, we observed that recent security upgrades have enhanced security. At three of these posts, local authorities have permitted closing off streets to public traffic in order to protect U.S. facilities. However, Diplomatic Security officials acknowledged that it is not feasible to increase setback by acquiring land and closing off nearby streets at many locations. Furthermore, these officials also told us that security upgrades were partial fixes that did not bring the buildings up to physical security standards. As a result, many buildings and their occupants remain vulnerable to terrorist attacks. Exhibit 4 is a video clip from the State Department that illustrates this vulnerability. It shows the effect of a blast 100 feet away on an office that does not meet the standard for blast-resistant construction. The windows have been treated with Mylar sheeting, a standard upgrade that mitigates the effects of glass shattering in a blast. Although Mylar provides some protection, the non- blast-resistant window construction may allow glass to be forced into the building at a high rate of speed. To assess the security of embassy and consulate facilities, we analyzed State Department data to determine if the primary facilities meet State’s five key standards that I discussed earlier. Figure 4 shows the portion of posts where the primary office building meets or does not meet four of the five security standards: setback, perimeter wall or fence, anti-ram barrier, and compound access control. At the request of Diplomatic Security officials, we will not discuss details on the remaining standard, blast- resistant construction, due to its sensitivity. We can say, however, that facilities completed since the late 1980s are considered to be blast resistant. Figure 5 shows the number of primary facilities that meet one, two, three, four, or five of the physical security standards. For example, it shows that the primary office facility at 81 posts met none of the five standards. Of these, 36 facilities are in locations that the State Department has designated as posing a high or critical threat level. As shown in figure 4, only 28, or 11 percent, of the primary buildings meet the 100-foot setback standard. More than half of the primary buildings have less than 15 feet of setback—these buildings are virtually perched on the street. Figure 6 is an example of a post with limited setback. At the four posts we visited, all of the primary office buildings have limited setback from the street and several annex buildings have no setback. As shown in figure 7, one of these buildings is adjacent to a public gas station, which could exacerbate the effects of a bomb attack. Another building, with little setback, is located next to a main thoroughfare. Consequently, public traffic, including trucks and buses, routinely travels within feet of U.S. government office space. At three of the four posts we visited, the embassy had secured host government cooperation in closing at least one street surrounding the primary office building; however, embassy officials at one location noted that these agreements were temporary and could be revoked at any time. Moreover, the embassies had not been able to close streets running next to all of their facilities, such as office annexes. For example, figure 8 depicts the view from a senior official’s office in an annex building where post officials were unable to close the main thoroughfare that runs directly in front of the building. Perimeter walls or fences and anti-ram barriers are two standards that work together to protect facilities. We found that 120 primary facilities lack an adequate perimeter wall/fence, while 147 lack adequate anti-ram barriers. Diplomatic Security officials explained that in many cases, posts are unable to install these upgrades due to host country limitations, such as their impact on traffic flow, parking, and the operation of adjoining residences and commercial buildings. Diplomatic Security officials stated that perimeter upgrades have been installed at all posts that are able to accommodate them. We also found that 108 posts either lack or have inadequate compound access control, a system of gates, barriers, and guard booths that is used to pre-screen personnel and vehicles before entering the embassy grounds. At one embassy we visited, visa applicants could gain access to the embassy building prior to undergoing proper screening, which would be a serious concern in the case of a terrorist action. Figure 9 depicts an inadequate compound access control booth, which is located within the embassy compound. The Security Officer acknowledged that this was a serious weakness and that visitors were not screened adequately before entering the embassy building. Construction of a new compound access control system is scheduled to begin in May 2003. Figure 10 depicts a newly upgraded compound access control system that facilitates full screening of all vehicles and persons prior to their gaining access to the compound. Ambassadors and security officers at three of the four posts we visited emphasized that in addition to facilities not meeting standards, there were security difficulties associated with the number of office facilities at their post that were spread out around the city. Three of the four posts we visited had more than five locations, and post managers were concerned that this made it extraordinarily difficult and expensive to implement security measures. Officials also stated that dispersion of facilities complicates emergency action planning. We note that frequent travel between dispersed facilities may also pose security risks to personnel because terrorists and criminals can target them while they are in transit. In the construction of new embassy compounds, all U.S. government offices are required to be located on the compound. State Department data show that many buildings are in poor condition. At 133 posts, the primary office building has certain fire/life safety deficiencies. At one post we visited, the fire escape for the 6th floor of the chancery was a chain-link ladder strapped to a heating radiator (fig. 11). OBO fire officials explained that a number of posts were unable to meet fire standards, such as sprinkler systems and proper number of exits, due to the structural limitations of the building. This underscores the Department’s position that many buildings are in a condition that will not allow a security and safety upgrade. Another safety problem is the seismic condition of buildings. Although the State Department does not have data on seismic conditions at all facilities, it acknowledges that embassy and consular employees at some locations may be working in buildings that do not protect against earthquakes. At one of the posts we visited, located in an earthquake region, the consular building has a very poor seismic rating. The State Department has been unable to locate a suitable temporary facility that can house the consular services while the landlord makes seismic improvements to the current building. The landlord has absolved himself from any responsibility in the event of earthquake damage. Maintenance is a serious concern because “essential maintenance and repair requirements have long been unfunded,” according to OBO documents. In May 2002, State estimated that its repair backlog to be about $736 million. For the primary office buildings alone, maintenance needs exceed $316 million, with the primary building at more than one- third of all posts having more than $1 million in maintenance requirements. OBO projects that maintenance costs will increase over time because many of the facilities are so old and antiquated, some dating back to the late 19th and early 20th century. Our visits to four posts provided numerous examples of maintenance problems. All of the posts we visited had buildings with serious maintenance concerns that are common to old and deteriorating buildings, such as sinking foundations, crumbling walls, bursting pipes, and electrical overloads. Although there are no specific criteria to measure the adequacy of office space, OBO has provided posts a questionnaire to help them evaluate space needs. Based on post inputs, OBO’s Long-range Overseas Buildings Plan describes space conditions at posts where it plans a new facility or major rehabilitation. We counted 96 posts mentioned in the plan where OBO described the office space as being crowded or poorly configured. During our post visits, we verified that crowded and poorly configured office space is a problem. This was particularly true in the controlled access areas of the embassies where classified information is stored and processed. Because of the special requirements of these areas, it is generally not feasible to lease additional space as the embassies have done to expand office space for unclassified work. One post had severe overcrowding in its chancery. To cope, the post resorted to creating workspaces under a stairway and in storage areas. One office stacked a printer on top of shelving that can only be accessed with a stepladder in order to make room for another small workstation. This post used trailers located behind the chancery to augment office space. In addition, all of the posts expressed concern that the crowded conditions would get worse because they anticipate staff increases to handle additional responsibilities, such as performing more rigorous screening of visa applicants. Several ambassadors told us that the dispersion of office space in multiple buildings hindered operational efficiency. This is because personnel spend significant amounts of time going from one facility to another to conduct daily business. I will now briefly discuss information technology capabilities at overseas posts, which, along with office facilities, are an important part of diplomatic readiness. State has long been plagued by poor information technology capabilities. In 1999, the Overseas Presence Advisory Panel reported that many posts are equipped with obsolete systems that prevent effective interagency information sharing. The Secretary of State has made a major commitment to modernizing information technology. According to State officials, the department invested $236 million in fiscal year 2002 on key modernization initiatives for overseas posts and plans to spend $262 million over fiscal years 2003 and 2004. State reports that its information technology is in the best shape it has ever been, and embassy personnel at the four posts we visited agreed, noting that they now have improved Internet access and upgraded computer equipment. State is now working to replace its antiquated cable system with the State Messaging and Archive Retrieval Toolset (SMART), a new integrated messaging and retrieval system. We have raised a number of concerns regarding State’s management of information technology programs, and believe that State’s information technology modernization efforts warrant management attention and oversight to ensure that State is following effective management practices. In 2001, we reported that State was not following proven system acquisition and investment practices in attempting to deploy a common overseas knowledge management system. State canceled this initiative because it could not get buy-in from other foreign affairs agencies. In 2001, we reported on State’s information security problems, including weaknesses in access control that place information resources at risk of unauthorized access. As State continues to modernize information technology at overseas posts, it is important that it employs rigorous and disciplined management processes on each of its projects and that it addresses its information security weaknesses. This is particularly important on the SMART system, which State acknowledges is an ambitious effort. The Office of Management and Budget recently reduced funding for the system because of concerns that State was not employing effective management processes. State continues to make security upgrades at some posts, but it is shifting its resources toward replacing existing facilities with new, secure embassy compounds or substantially retrofitting existing, newly acquired, or leased buildings. As shown in figure 12, funding for State’s capital projects has increased from $9.5 million in fiscal year 1998 to a requested $890 million in fiscal year 2004. State is still in the early phase of this multiyear, multibillion-dollar construction program. I will discuss this program briefly and then make several preliminary observations regarding State’s management of this program. Following the 1998 east Africa bombings, State identified about 185 posts needing replacement facilities in order to meet security standards. As of February 10, 2003, State had begun to replace 25 of these posts with new or retrofitted embassy and consulate compounds. From fiscal year 1999 through fiscal year 2003, State has received approximately $2.7 billion for its new construction program. OBO officials estimated that beginning in fiscal year 2004, it will cost an additional $16 billion to replace facilities at the remaining 160 posts. OBO plans to construct these replacement facilities on embassy/consulate compounds that will contain the main office building, all support buildings, and, where necessary, a building for the U.S. Agency for International Development. To help manage this large-scale construction program, OBO developed the Long-range Overseas Buildings Plan, first published in July 2001 and most recently updated in April 2002. The latest version of the plan outlines and prioritizes proposed capital projects over 6 years, from fiscal year 2002 through fiscal year 2007, based on input from State’s Bureau of Diplomatic Security, regional bureaus, and agencies with overseas presence. According to the April 2002 plan, State plans to fund the replacement of facilities at 81 posts at an estimated cost of $7.9 billion from fiscal year 2002 through fiscal year 2007. As shown in figure 13, the majority of these projects are planned for Africa and Europe. OBO plans to release the next update of the Long-range Overseas Buildings Plan by the end of March 2003. Of State’s 25 post replacement projects funded after the 1998 embassy bombings, State has completed the construction of 2 new embassy compounds and major retrofits of 2 newly acquired buildings that will serve as embassies. The remaining 21 projects are currently in the construction process. These consist of 18 new embassy and consulate compounds, 1 consulate compound renovation, and 2 newly acquired buildings undergoing major retrofitting for use as embassies (see fig. 14). State plans to initiate another 7 post replacement projects in fiscal year 2003 and 8 post replacement projects in fiscal year 2004. These projects will be completed in fiscal years 2005 and 2006, respectively, if they adhere to State’s planned 2-year construction schedule. Regarding the four posts we visited, a replacement facility is under construction at one post and fiscal year 2006 funding is scheduled for replacement facilities at two posts. The replacement facility for the fourth post is not currently scheduled; however, post officials told us that a replacement facility at their location would be included in OBO’s March 2003 update of the Long-range Overseas Buildings Plan. Assuming that funding were made available to replace facilities for the three posts in fiscal year 2006, construction would not be completed until about 2009. Ambassadors at two of these posts expressed concern that it would be difficult to wait that long for a solution to their facility needs and that interim measures were needed. We are currently reviewing State’s capacity and performance in implementing its large-scale construction program. Two important questions for program oversight by this and other committees are: (1) Is the construction of embassies and consulates proceeding on time and on budget? (2) Do OBO and its contractors have the capacity to properly manage the program and ensure that funds are used wisely? State is in the early stages of its expanded construction program and, therefore, has not yet established a clear track record that would provide complete answers to these questions. However, we do have several observations based on our ongoing work. First, OBO has made a number of positive changes in its management of capital projects as the construction program has expanded over the past few years. As mentioned earlier, OBO developed the Long-range Overseas Buildings Plan in July 2001, an action we had previously recommended. This plan represents a major improvement in the management of embassy construction because it provides decision makers with an overall sense of proposed project scope and funding needs, and sets performance targets that can be compared with actual performance. Further, in February 2002, OBO leadership convened the Industry Advisory Panel. The panel consists of volunteer industry representatives who meet quarterly to discuss issues related to OBO’s construction program and advise OBO management on industry’s best practices. Moreover, senior OBO management has increased its oversight of ongoing capital and other projects. For example, each month, the OBO Director holds a 2-day Project Performance Review meeting to review the progress and problems of all ongoing OBO projects in detail. In addition, OBO is requiring contract administration training for all senior field staff who are to supervise new embassy and consulate construction. Second, State is taking steps to accelerate the construction process, reduce construction costs, and further enhance physical security conditions of new buildings. For example, OBO has developed a standard embassy design for use in most projects and has moved away from a “design-bid-build” method of contracting toward a “design-build” method. Use of a standard design and design-build contracting has the potential to reduce project costs and the time taken to implement projects. Table 2 provides details of the three standard designs that OBO has developed for small, medium, and large posts. OBO has set a goal of a 2-year design and construction period for its standard embassy design buildings, which, if met, would reduce the amount of time spent in design and construction by almost a year. In addition, OBO and the Bureau of Diplomatic Security are actively seeking to incorporate advanced technologies into the construction program. Exhibit 5, a video clip from the State Department showing the performance of new windows and building materials, indicates that these technologies show promise of providing an even greater level of physical security for personnel operating in new buildings. While OBO has taken positive steps, we do have concerns regarding requirements for staffing levels at locations where OBO is planning to build a new embassy compound. We believe that improvements are needed in how the State Department and other agencies project staffing requirements for new embassies. In April 2003, we will report to the Chairman of the House Government Reform Committee’s Subcommittee on National Security, Emerging Threats, and International Relations that staffing projections for new embassy compounds are developed without a systematic approach or comprehensive assessments of the number and types of staff who would be needed in the future. Without adhering to a systematic process for developing future staffing needs at U.S. embassies and consulates, the U.S. government risks building the wrong-sized facilities, which could lead to security concerns, additional costs, and other work inefficiencies. State’s timeline for completing the replacement of all 160 remaining posts will depend on the amount of funding it receives for the construction program. For fiscal year 2004, State’s Long-range Overseas Buildings Plan called for almost $2 billion to fund the design and/or construction of 19 capital projects; in contrast, the President’s proposed fiscal year 2004 budget requested $890 million for 8 new diplomatic posts. As shown in figure 15, at the proposed fiscal year 2004 rate of replacement, it would take about 20 years to fund and 22 years to complete construction of the estimated 160 remaining posts (assuming a 2-year design and construction period). Figure 15 also shows that this timeline would be shortened if State receives more funds annually. According to an OBO projection, the program to replace the remaining 160 posts could be completed in 12 years if OBO receives $1.4 billion annually for new capital projects. | The 1998 terrorist bombings of the U.S. embassies in Kenya and Tanzania, which killed more than 220 people and injured 4,000, highlighted the compelling need for safe and secure overseas facilities. In November 1999, an independent advisory group, the Overseas Presence Advisory Panel, said that thousands of Americans representing our nation abroad faced an unacceptable level of risk from terrorist attacks and other threats. The panel called for accelerating the process of addressing security risks to provide overseas staff with the safest working environment, consistent with the nation's resources and the demands of their missions. Moreover, the panel concluded that many U.S. overseas facilities were insecure, decrepit, deteriorating, overcrowded, and "shockingly shabby," and it recommended major capital improvements to redress these problems. GAO was asked to (1) assess the current conditions of overseas diplomatic facilities, including security, maintenance, office space, and information technology; and (2) provide some preliminary observations regarding State's efforts to improve facility conditions by replacing existing buildings with new, secure embassy compounds. The State Department has done much over the last 4 years to improve physical security at overseas posts. For example, State has constructed perimeter walls, anti-ram barriers, and access controls at many facilities. However, even with these improvements, most office facilities do not meet security standards. As of December 2002, the primary office building at 232 posts lacked desired security because it did not meet one or more of State's five key current security standards of (1) 100-foot setback between office facilities and uncontrolled areas; (2) perimeter walls and/or fencing; (3) anti-ram barriers; (4) blast-resistant construction techniques and materials; and (5) controlled access at the perimeter of the compound. Only 12 posts have a primary building that meets all five standards. As a result, thousands of U.S. government and foreign national employees may be vulnerable to terrorist attacks. Moreover, many of the primary office buildings at embassies and consulates are in poor condition. In fact, the primary office building at more than half of the posts does not meet certain fire/life safety standards. State estimates that there is a backlog of about $730 million in maintenance at overseas facilities; officials stated that maintenance costs would increase over time because of the age of many buildings. At least 96 posts have reported serious overcrowding. While State continues to fund some security upgrades at embassies and consulates, State is shifting its resources from these upgrades toward constructing new buildings and substantially retrofitting existing, newly acquired, or leased buildings. Funding for these capital projects has increased from $9.5 million in fiscal year 1998 to a requested $890 million in fiscal year 2004. In addition to completing ongoing construction projects, State believes it needs to replace facilities at about 160 posts at an estimated cost of $16 billion. At the proposed fiscal year 2004 rate of funding, it will take more than 20 years to fully fund and build replacement facilities. While GAO has not fully analyzed State's performance in the early stages of this large-scale building program, GAO has observed that State has taken a number of positive steps to improve its program management. Because of the high costs and importance of this program, GAO believes the program merits extensive oversight. |
Foreign students interested in studying in the United States must first be admitted to a school or university before applying for a visa at a U.S. embassy or consulate overseas. DSOs use SEVIS to issue Form I-20s to students, which enable them to apply for nonimmigrant student visas.The Department of State (State) issues nonimmigrant visas to eligible foreign students. The process for determining who will be issued or refused a visa, including F and M visas, contains various steps, including documentation reviews, in-person interviews, collection of applicants’ fingerprints, and cross-references against State’s name check database. F visas are for academic study at 2- and 4-year colleges and universities and other academic institutions. M visas are for nonacademic study at institutions such as vocational and technical schools. Nonimmigrants who wish to work temporarily in the United States typically need to obtain a visa that allows them to work in the United States; F and M visas allow for limited employment authorization and may not be used in place of visa classifications designated for temporary employees. F and M visa holders are not allowed to work in the United States after completing their program of study unless they receive employment authorization through OPT. A visa allows a foreign citizen to travel to a U.S. port of entry and request permission from an officer with DHS’s U.S. Customs and Border Protection (CBP) to enter the United States. However, a visa does not guarantee entry into the country. By interviewing individuals and examining the validity of their required documentation, CBP officers determine whether to admit individuals into the United States. Foreign nationals traveling on student visas are not generally issued specific dates until which they are authorized to remain in the United States, but instead are admitted for what is referred to as duration of status. This means that they may remain in the country so long as they maintain their student status (such as by enrolling full-time in an academic program or being approved for OPT after completing their program of study). USCIS adjudicates, among other things, change-of-status requests from other classes of nonimmigrants in the United States who wish to become F or M students. With regard to OPT, in particular, USCIS is responsible for adjudicating employment authorization requests from the foreign students who have obtained DSOs’ recommendations to participate in OPT. Within ICE, SEVP, in conjunction with DSOs, is responsible for overseeing foreign students approved for OPT and maintaining information on these students in SEVIS. Also within ICE, CTCEU is responsible for (1) investigating foreign students who fail to enroll in or maintain status at their schools, including those foreign students approved for OPT, and (2) conducting criminal investigations of certified schools that do not remain in compliance with regulatory requirements. For example, CTCEU pursues criminal investigations against school officials who have exploited the system by operating sham institutions, which are operated solely to admit foreign nationals into the country without participation in educational programs. CTCEU assigns school and foreign student fraud-related investigations to ICE field offices; the offices can also open their own fraud investigations. According to ICE regulations and policies, OPT is available to eligible foreign students (F and M visa holders) who are enrolled in a college, university, conservatory, seminary, or established vocational or other recognized nonacademic institution, in a program other than English language training. Employment under OPT must be in a job directly related to the foreign student’s major area of study, and foreign students who apply to participate in OPT must have completed at least 1 academic school year or, in the case of M visa holders, their entire course of study. Foreign students on an F visa can temporarily work in the country under one of three types of OPT. First, foreign students may work part-time while they are in school or full-time on school breaks (pre-completion OPT).after completing a program of study (12-month post-completion OPT). Second, foreign students may work full-time for up to 12 months Third, foreign students studying in areas of study related to science, technology, engineering, and mathematics (STEM) are eligible to work full-time for an additional 17 months (17-month STEM extension post- completion OPT). Table 1 shows the three types of OPT and their requirements. As shown in figure 1, foreign students initiate the OPT application process by requesting a recommendation for OPT from their DSOs. The DSO is to ensure that students are eligible for the requested type and length of OPT and that the students are aware of their responsibilities for maintaining status while on OPT. ICE regulations do not require that students have secured employment prior to applying for pre-completion OPT or 12-month post-completion OPT; therefore, an employer name is not required to be entered in SEVIS at the time of the application. Regarding the 17-month STEM extension post-completion OPT, students must have secured employment prior to applying for this extension and must provide the employer’s name to the DSO. Prior to recommending the extension, the DSO must confirm that a student’s degree is a bachelor’s, master’s, or doctoral degree that is in DHS’s STEM- Designated Degree Program list. The DSO makes the recommendation through SEVIS, which updates the student’s Form I-20 to reflect the recommendation. The DSO is to update the student’s SEVIS record with the student’s requested start and end dates of employment, as well as whether the employment will be part- or full-time. In the case of the 17- month post-completion STEM extension OPT, the DSO is to enter and update employer information. After receiving the Form I-20 that notates the DSO’s recommendation for OPT, the foreign student must file a Form I-765, Application for Employment Authorization, with USCIS within 30 days of the date the DSO enters the OPT recommendation into SEVIS and pay the required USCIS adjudicates all nonimmigrants’ applications for application fee.employment authorization by determining whether an applicant has submitted the required information and documentation, such as proof of the student’s financial support, and whether the applicant is eligible. Specifically, USCIS adjudicates the application for OPT employment authorization on the basis of the DSO’s recommendation and other eligibility considerations, such as whether the student can financially support himself or herself while on OPT, and for those students applying for the 17-month STEM post-completion extension, determining whether the employer is registered with E-Verify. Table 2 presents data on OPT- related employment authorization application receipts and related adjudication results (approvals, denials, and revocations) from fiscal years 2008 through 2013. During this period, the data show that USCIS approved 96 percent of the applications for OPT employment authorization. In fiscal year 2013, approximately 123,000 foreign students received approval from USCIS to seek temporary employment through OPT to complement their academic coursework. If USCIS approves the application, it issues the student an Employment Authorization Document, or Form I-766. Employment authorization for pre-completion OPT, 12-month post-completion OPT, and 17-month STEM extension post-completion OPT begins on the student’s requested date or the USCIS-approved date, whichever is later, and ends at the conclusion of the approved period of OPT. SEVP has not identified or assessed risks associated with OPT, such as potential fraud or noncompliance with ICE regulations. Senior SEVP officials told us they consider OPT to be a low-risk employment benefit for foreign students because, in part, they believe foreign students under OPT do not have an incentive to jeopardize their foreign student visa status and future legal status to stay and work in the United States. However, SEVP has not developed a process to determine the extent to which schools that recommend and foreign students approved for OPT may pose risks. Further, CTCEU officials and ICE field agents we interviewed at all seven ICE field offices in our review stated they believe OPT to be at risk for fraud and noncompliance based on their experience investigating these types of cases. Specifically, senior CTCEU officials stated that OPT is at risk for fraud and noncompliance, in part, because it enables eligible foreign students to work in the United States for extended periods of time without obtaining a temporary work visa. In addition, ICE field office agents we interviewed stated that foreign students approved for OPT present a risk for becoming overstays because they are allowed to work and remain in the United States for 12 to 31 months after graduation from school. Also, ICE agents and DSOs we interviewed stated that DSOs face greater challenges in monitoring foreign students in post-completion OPT because the students are no longer attending classes. Moreover, CTCEU officials stated that nonimmigrants are a vulnerable population that can be exploited by illegitimate companies or organizations that lure students to the United States with false promises of high-paying jobs and potential ways to stay in the country. For example, CTCEU officials stated that a recruiter or other third party may offer to help foreign students find OPT work for a fee or percentage of the foreign student’s salary once the student begins work under OPT. Additionally, SEVP’s compliance unit maintains a log of schools identified as potentially out of compliance with ICE regulations. As of September 2013, out of the 133 schools on the log, SEVP had identified 17 schools as potentially noncompliant with ICE regulations related to OPT. Further, CTCEU officials and ICE field agents we interviewed described various cases involving OPT that demonstrate their concerns with the management and oversight of OPT. For example, in a 2012 case, according to an ICE investigator, a school charged students for an OPT recommendation on the Form I-20 and for keeping students in status once they had entered the country, without requiring school attendance. In another case, in 2012, ICE investigators initiated an investigation after they received a complaint about a school’s noncompliance with OPT requirements, such as students not working in their area of study. In particular, ICE investigators found that the DSOs at the school would submit fraudulent Form I-20s to recommend students for OPT; however, the foreign students were not using OPT to work jobs related to their areas of study (e.g., a nursing student working in a pizza parlor), which is not allowed under ICE regulations. In a third case, in 2011, ICE field office investigators initiated an investigation of a school on the basis of information received from CBP that indicated that one of the school’s DSOs was allegedly providing documentation authorizing students to work in jobs not related to their major areas of study. Using information obtained through prior ICE field offices’ investigations of schools’ and students’ noncompliance with ICE regulations and policy requirements, CTCEU officials have identified potential risk indicators specifically associated with OPT and stated they have provided this information to SEVP. Specifically, CTCEU officials stated they provided position papers on multiple occasions from 2011 through 2013 to SEVP officials expressing concerns about risks in SEVP in general and OPT in particular, including recommendations to help mitigate these risks. For example, in a position paper dated April 2013, CTCEU officials recommended to SEVP that DSOs enter the date on which USCIS grants OPT employment authorization in SEVIS to allow ICE and USCIS officials to compare this date with the date of enrollment to identify potential risks of students seeking to commit immigration fraud. Also, in April 2013, CTCEU briefed SEVP’s compliance officials on SEVP- and OPT-related risk indicators. For example, CTCEU officials identified that a certain threshold, or percentage, of a school’s foreign student population approved for OPT may be a potential indicator of fraud involving OPT.According to our analysis of SEVIS data, as of August 2013, of the approximately 2,650 SEVP-certified schools with at least 1 foreign student approved for OPT, the percentage of each school’s registered foreign students approved for OPT met or exceeded the threshold identified by CTCEU at 193 schools. Of the 193 schools, 100 percent of registered foreign students were approved for OPT at 60 schools; most of these schools had 4 or fewer total foreign students, except for 1 school, where the data show that all 35 of the school’s foreign students were approved for OPT. The Deputy Director of SEVP agreed that the percentage of a school’s foreign student population approved for OPT could be an indicator of potential fraud. In November 2013, the Deputy Director of SEVP stated that, in response to the recommendation from our June 2012 report that ICE develop and implement a process to identify and assess risks in SEVP, SEVP has taken initial actions to identify potential risks across SEVP-certified schools by developing a risk scorecard by which to assess schools and preliminary risk indicators to classify SEVP-certified schools by risk category. While these are positive steps taken in response to our June 2012 recommendation, SEVP is in the early stages of developing this risk scorecard and the risk indicators, and these efforts are focused on identifying potential risks to SEVP overall. As part of these efforts, SEVP officials have not identified and assessed potential risks specific to OPT posed by schools and foreign students or determined the extent to which the office will include potential OPT risks as part of their efforts to assess risks SEVP-wide. Senior SEVP officials told us they have not identified and assessed risks specific to OPT because they have not considered OPT to be a high-risk employment benefit; however, SEVP has not developed or implemented a risk management process to determine potential risks in OPT. Furthermore, on the basis of information from ICE field office investigations, CTCEU officials have identified SEVP- and OPT-related risks, but, as of November 2013, senior SEVP officials told us they had not yet incorporated CTCEU’s input, including relevant information from ICE field offices, into their efforts to assess potential SEVP-wide risks because they preferred to develop and implement a process to identify and assess risks in SEVP on their own before coordinating with CTCEU. DHS’s 2010 Policy for Integrated Risk Management and 2011 Risk Management Fundamentals establish DHS’s policy and guidance on risk. They instruct DHS and its components to incorporate a risk management process to their planning and management activities that includes, among other things, identifying the risks associated with goals and objectives, analyzing and assessing the identified risks, and using risk information and analysis to inform decision making. Also, DHS’s Policy for Integrated Risk Management is based on the premise that entities responsible for homeland security can most effectively manage risks by working together, and emphasizes that DHS and its components are to effectively communicate with stakeholders, partners, and customers within and throughout the risk management process. Without identifying and assessing risks in OPT in coordination with CTCEU, SEVP is not well positioned to incorporate a risk management process into its management of OPT. Further, obtaining and assessing risk information from CTCEU and ICE field offices from prior noncompliance and fraud cases involving OPT throughout the development of its process to identify and assess risks in SEVP, to include OPT, could better position SEVP to manage any risks associated with OPT. ICE does not consistently collect information needed to oversee OPT requirements related to the type and timing of foreign students’ employment, as ICE regulations do not specifically require the collection of information on foreign students’ places and dates of employment in SEVIS. Such information could help ICE to better ensure that foreign students are maintaining their legal status in the United States and to identify and assess potential risks to OPT. As indicated in table 3, SEVIS data on foreign students approved for the three types of OPT show that 38 percent of student records (48,642 of 126,796) do not contain an employer name, as of August 2013. Specifically, according to our analysis, the employer’s name is not included in 65 percent and 48 percent of pre- and 12-month post- completion OPT students’ SEVIS records, respectively. Foreign students are not required to have secured a job before seeking pre- and 12-month post-completion OPT, and an employer name is not required of the student at the time of application. Because 17-month STEM extension students are required to have employment prior to application and have ongoing reporting requirements, employer information is more complete, with less than 1 percent of student records missing the employer name. In addition to noting the lack of employers’ names, our analysis of SEVIS data indicates that other information about employers that would be helpful to identify where foreign students are working, such as the physical address that can be used to differentiate between two employers with the same name, is not consistently collected and maintained in SEVIS. For example, of the 62 percent of student records that have the employer’s name populated, approximately 5 percent of those records (3,545 of 78,154) do not include other information on the employer, such as the employer’s address, state, city, and postal code. In addition, for all three types of OPT, ICE regulations and policy do not specifically require students to report to their DSOs when they begin or stop working, and do not require DSOs to enter those corresponding dates into SEVIS. Without information on employers or employment start and end dates, ICE’s ability to oversee requirements for OPT is limited. Job directly related to major area of study. ICE requires DSOs to ensure that a student is eligible prior to recommending OPT, and remains eligible for the duration of OPT, by being employed in a job directly related to his or her major area of study. ICE regulations and policy state that DSOs are responsible for reporting in SEVIS subsequent known changes in a student’s name and address, employer name and address, and known instances of a student’s failure to report to work. Specifically for students seeking the 17-month STEM extension of OPT, SEVP and USCIS require that DSOs enter the students’ employer information in SEVIS prior to recommending OPT, and SEVP requires regular confirmation of such students’ personal and employer information throughout the time of OPT. Although ICE regulations and policy require DSOs to ensure students’ eligibility and to report known changes in students’ employer information, they do not require that students report and DSOs provide students’ initial employer information (name and address, for example) in SEVIS for students pursuing pre- or 12-month post-completion OPT. According to SEVP officials, requiring this initial employer information for pre- and 12-month post-completion could place an additional burden or requirement on DSOs. Thus, SEVP officials stated that their office would prefer to make this type of change through regulation rather than policy. SEVP officials stated that, in general, changing regulatory language has been difficult and time consuming. However, previous regulatory changes that created the 17-month STEM extension, for example, have been implemented and added reporting requirements in SEVIS for employer information for foreign students approved for this extension.percent of all OPT students were approved for the STEM extension and, As of August 2013, approximately 20 according to our analysis of SEVIS data, almost 100 percent of SEVIS records for those students have the employment information as required by regulation for OPT students who have been approved for the STEM extension. ICE regulations and policy require that DSOs ensure that a foreign student is eligible for OPT and assume responsibility for maintaining the student’s SEVIS record for the entire period of authorized OPT. ICE regulations and policy also require all OPT employment to be in a job that is directly related to the foreign student’s area of study. However, ICE has not provided guidance to DSOs to help determine and document whether the student’s job is related to his or her area of study. Requirements for DSOs to collect information on how a job is related to an area of study and guidance on how DSOs should provide such information in SEVIS could help provide ICE with reasonable assurance that foreign students engaged in OPT are working in jobs directly related to their area of study, as required under OPT. In addition to fields for foreign students’ employer name and address, SEVIS has two fields for DSOs to add comments or remarks regarding students’ employment; however, ICE does not require DSOs to provide any information on how DSOs arrived at the determination that students’ jobs relate to their studies in these SEVIS fields. According to SEVP officials and the program’s DSO training materials, DSOs could use these two SEVIS fields to explain how a student’s employment relates to the student’s program of study. According to our analysis of the two fields available in SEVIS for DSOs to enter remarks or comments regarding students’ OPT employment, we found that 27 percent of foreign students’ records (34,454 of 126,796) did not have any information in either field, as shown in table 4. Although information is included in at least one of the employment comment or remark fields for the majority of student records, this information may not be relevant to whether students’ employment is related to their studies. SEVP has not developed or provided guidance for DSOs on how to determine whether a student’s job is related to his or her program of study and has provided limited guidance on how to report this information in SEVIS using the existing fields. Specifically, SEVP’s guidance on OPT recommends that students maintain evidence for how each job is related, including a job description, but is limited in that it does not direct students to report this information to DSOs or DSOs to enter this information into SEVIS. In addition, SEVP’s DSO training materials state that DSOs should use the remarks area in SEVIS to explain how the work relates to the students’ studies. However, the training materials are limited in that they do not detail both SEVIS fields that are available. In addition, the materials do not provide guidance on how DSOs should show that they took steps to help ensure that students’ jobs are related. Federal internal control standards state that federal agencies should, among other things, design and document internal control activities, such as guidance, to help ensure compliance with applicable laws and regulations. SEVP officials stated that determining whether a job is directly related to a program of study is not defined in the regulations and would be too difficult to define in policy because it is a subjective process. Therefore, ICE has not required DSOs to provide this information in SEVIS. Because ICE has not required information on how students’ jobs are related to their studies and SEVP has provided limited guidance on how to provide this information in SEVIS, ICE does not have information needed to oversee OPT even when employer information is included in SEVIS. For example, we examined those student records for which an employer name was included for certain industries in which CTCEU officials were concerned about the potential of students working in unrelated jobs. According to our analysis, we found cases in which the SEVIS record indicated that students may not be complying with ICE’s regulatory requirement.students with degrees in fields such as economics, liberal arts, and psychology were working in food service and the SEVIS record did not include information as to how the employment was related to their field of study. We also found 9 cases in which students with degrees in fields such as computer science, engineering, and international studies were working in retail without an explanation included in the SEVIS record. However, we also found a case in which the student’s SEVIS record indicated that the individual, who had a degree in music, was working for a restaurant, but the employment remark field described the student’s employment as being a member of the restaurant’s house band. Developing and distributing guidance to DSOs with options on how to determine whether a job is related to the foreign student’s area of study and requiring DSOs to provide information in SEVIS to show that they took steps to help ensure that the work is related could help provide ICE with the information it could use to oversee OPT requirements. Specifically, we found 35 cases in which Limits on unemployment. ICE has set forth limits on unemployment in its OPT-related regulations. Specifically, 12-month post-completion OPT students may not exceed 90 days of accrued unemployment during their authorized employment period, and 17-month STEM extension post- completion OPT students may not exceed 120 days of unemployment (which includes any unemployment accrued during the initial 12-month OPT period). These unemployment limits were added to the ICE regulations in April 2008 to clarify that, if a student accumulates too much unemployment while remaining in the country under the OPT employment benefit, the student has violated his or her status. Although ICE policy provides instruction on how a student and DSO may report and record dates of employment or unemployment, ICE regulations and policy do not specifically require foreign students to report to their DSOs when they begin working or DSOs to enter those corresponding dates in SEVIS. Furthermore, SEVP’s policy specifically states that DHS maintains responsibility for determining whether a student has violated his or her status by exceeding the permissible limit on authorized unemployment. Federal internal control standards state that federal agencies should, among other things, design and document internal control activities to help ensure compliance with applicable laws and regulations. The dates on which authorization for employment from USCIS begins and ends are included in students’ SEVIS records; however, ICE does not have a mechanism to capture the date on which a student who was granted authorization actually started working or data on periods when a student is unemployed. According to SEVP officials and 12 DSOs with whom we spoke, it can be difficult for a DSO to maintain contact with students approved for OPT, particularly if a student engaged in post-completion OPT is no longer attending classes at the school and works off-campus for up to more than 2 years in another city or state. However, ICE’s regulations state that when a DSO recommends a student for OPT, the school—which includes its DSOs—assumes the added responsibility for maintaining the SEVIS record of that student for the entire period of authorized OPT. SEVP officials also stated that ICE’s ability to oversee foreign students’ unemployment time using SEVIS may be limited because the system does not systematically capture information from DSOs that may be used to calculate the accumulation of unemployment time. However, SEVP officials stated that SEVIS could be used to identify foreign students on post-completion OPT who have not had an employer listed for more than 90 or 120 days. According to SEVP officials, this mechanism would allow SEVP to track the initial unemployment of a student seeking work after receiving OPT employment authorization. As a result of not having complete data on foreign students’ initial employment dates or any subsequent unemployment dates, SEVP officials stated that they have not fully enforced these regulatory limits on unemployment. Requiring students to report to DSOs, and DSOs to record in SEVIS, students’ initial date of employment and any periods of unemployment could better position ICE to be able to oversee program requirements. Foreign students approved for OPT, especially those approved for the two post-completion types of OPT, are allowed to remain in the United States after the completion of their studies to pursue employment yet remain on a student visa with the understanding that they are complying with OPT requirements. Without consistent information on where students are employed and when students begin employment, ICE is not positioned to oversee these requirements. ICE has not developed mechanisms to consistently monitor whether schools and DSOs recommend OPT for foreign students and whether USCIS authorizes employment for foreign students that is permitted under ICE regulations. ICE requires DSOs to ensure students are eligible for the requested type and time of OPT prior to recommending it. After receiving the DSOs’ recommendation, students apply for and may receive employment authorization with USCIS. Through this process, DSOs and USCIS are to provide information on foreign students’ type and period of OPT in SEVIS. However, ICE does not monitor whether DSOs and foreign students are complying with requirements that students (1) have been in their program of study for at least 1 academic year prior to receiving authorization and (2) complete their OPT within certain time frames established by the type of OPT. One full academic year requirement. As previously mentioned, ICE requires that OPT be authorized only for a student who has been lawfully enrolled on a full-time basis in a SEVP-certified college, university, conservatory, or seminary for 1 full academic year in order to ensure that those seeking OPT employment are primarily in the United States on student visas to pursue their education. However, ICE regulations and policy do not define and SEVP has not provided OPT-specific guidance to DSOs on what constitutes 1 full academic year for SEVP-certified schools. According to SEVP officials, ICE has not developed or provided specific guidance because the various types of programs have different academic schedules and any guidance may not apply universally to all schools. However, SEVP officials stated that they use definitions from the Department of Education when fielding DSOs’ questions on this issue. In November 2013, SEVP drafted and released for comment guidance regarding annual vacations that includes these Department of Education definitions of how much time typically constitutes 1 full academic year. However, this draft guidance does not directly apply to the regulatory requirement of completing 1 full academic year to be eligible for OPT. Because ICE’s OPT-related regulations and policy do not define 1 full academic year for the various types of programs and schedules for SEVP-certified schools, DSOs and USCIS may not be clear as to how the Department of Education’s definitions specifically apply to approving and authorizing employment for foreign students seeking OPT. Therefore, students may be engaging in OPT without having completed the required time in their programs. Our analysis of SEVIS records as of August 2013 indicates that DSOs marked 556 students’ records as not meeting the requirement of having completed 1 full academic year prior to engaging in OPT. Further, according to our analysis of time between the program start date to employment start date for students authorized for OPT, 1,446 additional students have not been enrolled in their program for at least 8 months (what we consider to be 1 academic year based on SEVP officials’ estimates) prior to beginning OPT. On the basis of our two analyses, over 2,000 foreign students approved for OPT may not have met the requirement of having completed 1 full academic year. According to SEVP officials, this requirement applies only once to a foreign student. For instance, if a student was previously in the United States on another visa in which he or she could attend school, the time spent in an educational program would count toward the 1 full academic year requirement. Also, according to SEVP officials, a student may have met the requirement thorough a combination of enrollment in a previous program and his or her current program of study. However, ICE regulations and policy do not specifically list this type of exemption. Furthermore, SEVP’s guidance to DSOs specifically states that there is no exemption to the requirement that a student have been enrolled for 1 full academic year. Furthermore, federal internal control standards state that federal agencies should design and document guidance that would help to ensure compliance with applicable laws and regulations. Developing and providing guidance to DSOs and USCIS on what constitutes 1 full academic year and how to apply this definition to recommending and authorizing OPT could help ICE better ensure that foreign students meet eligibility requirements for OPT. Time frames for post-completion OPT. ICE regulations state that foreign students may be authorized for 12 months of OPT employment, which must be completed within 14 months following the completion of Students engaged in the STEM extension are granted an their program. additional one-time 17-month period of OPT employment, for a total of 29 months of total approved employment. This STEM extension must be applied directly following the end of the initially approved 12-month post- completion OPT and be completed in 31 months following the completion of his or her program. Our analysis of SEVIS student record data as of August 2013 shows that 9 percent of student records have authorized post-completion OPT employment dates that exceed the regulatory limits of total approved OPT and 8 percent of student records will not complete their OPT employment by the regulatory limits of 14 or 31 months, as shown in table 5. Furthermore, our analysis shows 10 percent of students engaged in 17- month STEM extension OPT had work approvals that exceeded the 17 months allowed by ICE regulations and policy, and 10 percent of students would not complete their OPT within 31 months from the end of their program. According to SEVP officials, these extended periods of OPT may be explained by students’ using the cap-gap extension to extend employment authorization through the fiscal year while petitions filed on their behalf for a nonimmigrant employment visa are pending.officials stated that if a foreign student was approved for the cap-gap extension, the student’s SEVIS record should indicate such approval and the employment end date would be adjusted to include the extension. This approval, and subsequent extension, may cause the student’s SEVP employment authorization dates to potentially exceed the 12- or 17-month limits. However, our analysis of the SEVIS records shows that those students, included in table 5, who have periods of employment authorization exceeding regulatory and policy limits for OPT, did not have approval for the cap-gap extension. Although SEVIS shows a student’s current OPT approval, the system does not display students’ past OPT approvals (previous pre-completion, for example) for the purpose of determining if a student has exceeded total limits on accrued work authorization. According to SEVP and USCIS officials, both rely on DSOs to track a student’s total amount of OPT and to recommend the appropriate amount of OPT for students depending on previously accrued OPT so as not to exceed regulatory limits. According to USCIS officials, it may check previous employment authorization applications by searching in CLAIMS or the Central Index System for an individual’s name; however, it relies on DSOs to recommend the allowed Without developing and implementing a mechanism to amount of OPT.monitor available information collected in SEVIS to determine total amounts of approved OPT over the course of students’ duration of stay, ICE does not have reasonable assurance that DSOs are implementing and students are complying with the regulatory limits on accrued employment approval. For example, students who may have engaged in the full amount of allowed OPT may leave the country, reapply to another school at the same education level, enter the country under a new I-20 and SEVIS identification number, enroll in a program for 1 academic year, and apply for OPT with the new program. Foreign students approved for OPT are allowed to work in the United States while maintaining their student visa status in order to supplement their education with practical training with the understanding that these students, and the schools and DSOs that have responsibility for these students, are complying with certain OPT requirements. Federal internal control standards state that agencies should design controls, including policies and procedures, to ensure that ongoing monitoring occurs in the course of normal operations. Developing and implementing a mechanism to monitor available information collected in SEVIS about OPT that DSOs recommend and USCIS authorizes for foreign students could better position ICE to help ensure that foreign students do not exceed regulatory limits on the amount of time students are approved for work. OPT, which is an employment benefit, provides certain eligible foreign students with the opportunity to seek temporary work to gain practical experience in their major areas of study during and after completing an academic program. A foreign student in post-completion OPT, in particular, is not required to leave the United States following graduation and can remain in the United States for the entire post-completion OPT period. Effective oversight of schools that recommend and foreign students who are approved for OPT entails identifying and assessing any potential risks, including opportunities for criminal exploitation, and being in a position to mitigate them. ICE has taken initial actions to identify risks across SEVP-certified schools; however, ICE has not analyzed available information to identify and assess potential risks specific to OPT posed by schools and foreign students. Identifying and assessing OPT-specific risks based on various factors, including risk information from CTCEU, could better position ICE to determine actions to help prevent OPT- related noncompliance and fraud and to address such noncompliance and fraud when they occur. Moreover, ICE could take steps to improve its ability to help ensure that foreign students working under OPT are complying with OPT requirements and thereby maintaining their legal status in the United States. By consistently collecting information in SEVIS that indicates foreign students’ employers, how employment is related to these students’ studies, initial date of employment, and any dates of unemployment, ICE could better position itself to oversee the OPT requirements that foreign students are actively working in areas related to their studies and not exceeding limits on unemployment. Furthermore, by monitoring through analysis other OPT information, ICE could better ensure that schools and DSOs recommend OPT for foreign students and USCIS authorizes employment for foreign students that is permissible under ICE regulations. By collecting the appropriate information in SEVIS and monitoring such information for compliance, ICE may better position itself to determine whether foreign students approved for OPT are maintaining their legal student visa status while supplementing their education with employment directly related to their areas of study in the United States. Moreover, having more complete data in SEVIS on foreign students working under OPT could help strengthen ICE’s efforts to identify and assess potential risks to OPT. To strengthen ICE’s efforts to develop and implement a process to identify and assess risks in SEVP, we recommend that the Director of ICE direct SEVP, in coordination with CTCEU, to identify and assess potential risks in OPT, including obtaining and assessing relevant information from CTCEU and ICE field offices. To better ensure DSOs’ and students’ compliance with OPT requirements, and strengthen efforts to identify and assess potential risks in OPT, we recommend that the Director of ICE direct SEVP to take the following five actions: require that pre-completion and 12-month post-completion OPT students report to DSOs, and DSOs record in SEVIS, students’ employer information, including the employer’s name and address; develop and distribute guidance to DSOs on how to determine whether a job is related to a student’s area of study and require DSOs to provide information in SEVIS to show that they took steps, based on this guidance, to help ensure that the student’s work is related to the area of study; require that students report to DSOs, and DSOs record in SEVIS, students’ initial date of employment and any periods of unemployment; develop and provide guidance to DSOs and USCIS on how much time constitutes 1 full academic year for the purposes of recommending and authorizing OPT; and develop and implement a mechanism to monitor available information in SEVIS to determine if foreign students are accruing more OPT than allowed by ICE regulations. We provided a draft of this report to DHS and the Department of State for their review and comment. DHS provided written comments, which are reproduced in full in appendix II. DHS concurred with our six recommendations and described actions under way or planned to address them. For example, DHS indicated that, as part of ongoing efforts to develop an overall risk management program, SEVP will work with CTCEU in developing factors to identify risks for schools and students associated with OPT. Also, DHS noted that the functionality to track OPT employment information, including the employer’s name and address, dates of employment, and any periods of unemployment, have been incorporated into SEVIS and that the software that includes the required data fields is scheduled to be released in 2014. In addition, DHS indicated that SEVP will issue guidance to assist DSOs in collecting information on students’ employment for reporting in SEVIS and to clarify what periods of enrollment qualify as 1 full academic year. These and other actions noted in DHS’s written comments should help address the intent of our recommendations. DHS also provided technical comments, which were incorporated as appropriate. The Department of State did not have formal comments on our draft report. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until thirty days from the report date. At that time, we will send copies to the Secretaries of Homeland Security and State, and appropriate congressional committees. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-8777 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made significant contributions to this report are listed in appendix III. This report examines the extent to which the Department of Homeland Security (DHS) has (1) identified and assessed risks associated with optional practical training (OPT), and (2) collected information and developed monitoring mechanisms to help ensure students comply with OPT requirements and maintain their legal status in the United States. To determine the extent to which DHS’s Immigration and Customs Enforcement (ICE) has identified and assessed risks in ICE’s Student and Exchange Visitor Program (SEVP) specifically related to OPT, we analyzed program documentation, analyzed data, and interviewed officials from DHS and its relevant components, including U.S. Citizenship and Immigration Services (USCIS) and ICE. In particular, we analyzed ICE and SEVP documentation, such as standard operating procedures, policy statements, and guidance for agency officials and designated school officials (DSO), to determine how ICE’s processes identify and assess risk related to OPT in SEVP. In addition, to evaluate the extent to which ICE has identified and assessed risks related to OPT, we collected and evaluated information on SEVP compliance and watch lists that contain schools that SEVP has identified as potentially noncompliant or fraudulent and previous cases of OPT-related fraud through obtaining and analyzing documents and interviewing investigators from ICE’s Counterterrorism and Compliance Enforcement Unit (CTCEU). Also, we analyzed documentation CTCEU officials provided regarding risks and vulnerabilities they have identified in OPT-related policies, procedures, and regulations during the course of their work. In addition, we analyzed ICE news bulletins from January 2008 to November 2013 to help determine the magnitude of previous cases of fraud and evaluated information provided by CTCEU on criminal investigations related to school or student noncompliance or fraud involving OPT. Moreover, we collected and analyzed Student and Exchange Visitor Information System (SEVIS) data on schools that had at least one foreign student approved for OPT, as of August 2013, to identify examples of schools that pose a potential risk for fraud or noncompliance involving OPT using a risk indicator identified by CTCEU. Also, we interviewed officials from CTCEU and investigators from 7 of ICE’s 26 Homeland Security Investigations (HSI) field offices. Specifically, we conducted telephone interviews with ICE field offices located in Atlanta, Georgia; Boston, Massachusetts; Los Angeles and San Francisco, California; Newark, New Jersey; and New York, New York. We also conducted a telephone interview with an official from the ICE resident agent in charge field office in Charleston, West Virginia, which is under the supervision of the ICE field office in Philadelphia, Pennsylvania. We selected these locations based on the following criteria: (1) CTCEU officials identified the ICE field office as having previous or ongoing experience with school fraud and (2) SEVP identified the ICE field office as currently investigating a school in SEVP’s compliance case log. As we did not select a probability sample of ICE field offices to interview, the results of these interviews cannot be projected to all of ICE’s 26 field offices. While the information we obtained from officials at these locations cannot be generalized, the interviews provided us with the perspectives of ICE officials responsible for conducting school and student fraud investigations, including their views on the management and oversight SEVP has established for schools and students involved in OPT and any challenges ICE field offices have faced in their investigations. We also evaluated the extent to which ICE’s practices were consistent with DHS’s 2010 Policy for Integrated Risk Management and 2011 Risk Management Fundamentals. To determine the extent to which ICE has collected information and developed monitoring mechanisms to help ensure students comply with OPT requirements and maintain their legal status in the United States, we also analyzed program documentation, analyzed data, and interviewed officials from DHS and its components. As part of our effort to evaluate these processes that SEVP uses to manage and oversee students approved for OPT, we reviewed applicable regulations, such as those governing nonimmigrant visa classes and schools recommending students engaging in OPT. policy and guidance documents specifically concerning management and oversight of OPT. We compared these policies with criteria established in regulations, as well as with criteria in Standards for Internal Control in the Federal Government. The regulations governing nonimmigrant classes and OPT are found in 8 C.F.R. pt. 214. existing documentation on the controls in the system and the policies for ensuring data reliability; (2) interviewing agency officials about the data’s sources, the system’s controls, and any quality assurance steps performed after data are entered into the system; and (3) testing the data for missing data, outliers, or obvious errors. We identified several limitations to the data resulting from ICE’s process by which schools’ DSOs are responsible for data entry and updates. SEVIS is used by schools to apply for and receive SEVP certification, as well as for DSOs to keep records of individual students who enter the United States on F and M visas. Although SEVP officials may make edits to a student’s SEVIS record in some cases, all data or information entries on students are the responsibility of DSOs. Therefore, data elements that are not required may be missing or invalidly entered. For example, entries for schools’ physical locations may not be valid U.S. postal addresses. Furthermore, some SEVIS records may be duplicated because of students changing from one type of OPT to another. However, we were able to address this issue with duplicates by removing the record that was less accurate and up to date. While we identified such limitations, we found the data to be sufficiently reliable for providing descriptive information on the population of SEVP-certified schools that have recommended OPT and of foreign students engaged in OPT. We also found the data to be sufficiently reliable for analyzing student records for compliance with certain regulatory and policy requirements. We focused our analysis on several SEVIS fields related to management and oversight of foreign students engaged in OPT: (1) employer name and location, (2) remarks and comments on employment, and (3) dates of program of study and authorized OPT employment. We also analyzed student records for which an employer name was included and belonged in industries such as food service and retail, industries in which CTCEU officials were concerned about the potential of students working in unrelated jobs. We analyzed a sample of 158 student records in which the employer name field indicated the student worked in select food service or retail industries. This is a select sample and is not representative of all records indicating a student is working in the food service or retail industries. We identified this sample by searching the SEVIS data of foreign students authorized to engage in OPT as of August 2013 for employers names with key words such as “restaurant,” “café,” “coffee,” “pizza,” and “burger,” as well as for select retailers. This search returned 207 student records, which we reviewed and subsequently made the determination to exclude 49 records based on the employer name including one of these search terms but belonging to a business outside of the food service or retail industries. For example, we excluded an employer that is a printing company with the word “café” in its name. From the sample of 158, we determined that 44 student records did not include additional employment information in the SEVIS employment comment or employment remark fields that explained how the job was related to the field of study and the records did not indicate a potentially related degree. In addition to document and data collection and analysis, we interviewed SEVP officials to evaluate the extent to which their program has implemented controls related to OPT. We met with senior officials from SEVP, including SEVP’s Deputy Director, and management and staff for the five of seven branches involved in managing OPT—School Certification, Policy, Analysis and Operations Center, Field Representative Program, and Systems Management. We met with officials from CTCEU to understand the criminal enforcement perspective of managing and overseeing OPT. We interviewed USCIS officials to determine the extent to which USCIS has implemented processes for ensuring eligibility of students applying for employment authorization under OPT. In addition, we analyzed USCIS’s Computer-Linked Application Information Management System 3 (CLAIMS) data on OPT adjudication results from fiscal years 2008 to 2013. To assess the reliability of the CLAIMS data on foreign student OPT adjudications, we interviewed agency officials responsible for managing the data about the data’s sources and the system’s controls. We found the data to be sufficiently reliable for providing descriptive information on the number of employment authorization applications and approvals for foreign students engaged in OPT. Furthermore, we interviewed 11 DSOs, and received a written response from 1 DSO, who are employed by schools in Washington, D.C., and surrounding areas on their roles and responsibilities related to foreign students seeking or authorized for OPT and on any challenges in the management and oversight of these foreign students. We selected these officials because, as of July 2013, they composed a group of representatives from SEVP-certified schools of various types and sizes in the Washington, D.C., region that meets regularly with SEVP to discuss matters such as SEVIS and SEVP policy and requirements. As we did not select a probability sample of DSOs to interview, the information we obtained from these school officials cannot be generalized. The interviews provided us with the perspectives of DSOs responsible for overseeing students engaged in OPT. Further, we interviewed officials from NAFSA: Association of International Educators to discuss the organization’s views on OPT, including the involvement of DSOs in OPT. We conducted this performance audit from February 2013 to February 2014, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Rebecca Gambler, (202) 512-8777 or [email protected]. In addition to the contact named above, Kathryn Bernet, Assistant Director; Jennifer Bryant; Frances Cook; Lorraine Ettaro; Cynthia Grant; Kirsten Lauber; Elizabeth Luke; Lara Miklozek; Linda Miller; and Juan Tapia-Videla made significant contributions to this work. | As of November 2013, about 100,000 of the approximately 1 million foreign students in the United States were approved to participate in OPT—an employment benefit that allows foreign students to obtain temporary work in their areas of study during and after completing an academic program. ICE is responsible for certifying schools; monitoring foreign students and schools, including their compliance with OPT requirements; and enforcing immigration laws for those that fail to comply. GAO was asked to review the management of OPT. This report examines the extent to which DHS has (1) identified and assessed risks associated with OPT, and (2) collected information and developed monitoring mechanisms to help ensure students comply with OPT requirements and maintain their legal status. GAO analyzed ICE regulations and policies and data on schools that recommend and foreign students approved for OPT, as of August 2013. GAO interviewed ICE and USCIS officials, including those from 7 of 26 ICE field offices selected based on factors such as OPT-related fraud investigations. Interview results cannot be generalized, but they provided insights about OPT risks. U.S. Immigration and Customs Enforcement (ICE), a component of the Department of Homeland Security (DHS), has not identified or assessed fraud or noncompliance risks posed by schools that recommend and foreign students approved for optional practical training (OPT), in accordance with DHS risk management guidance. ICE's Student and Exchange Visitor Program (SEVP) officials consider OPT to be a low-risk employment benefit for foreign students because, in part, they believe foreign students approved for OPT do not have an incentive to jeopardize their legal status in the United States. However, SEVP has not determined potential risks in OPT. Further, officials from the Counterterrorism and Criminal Exploitation Unit (CTCEU), ICE's investigative unit, and ICE field agents GAO interviewed have identified potential risks involving OPT based on prior and ongoing investigations. For example, ICE field agents identified cases where school officials recommended OPT for foreign students to work outside of their major areas of study, which is not allowed under ICE regulations. In response to a June 2012 GAO recommendation, ICE has taken initial actions to identify risks across SEVP-certified schools but has not identified and assessed OPT risks or determined the extent to which potential OPT risks will be part of its efforts to assess risks SEVP-wide. Further, SEVP has not coordinated with CTCEU, including obtaining and assessing information from CTCEU and ICE field offices regarding OPT risks, as part of its efforts. Identifying and assessing OPT risks, in coordination with CTCEU, could better position SEVP to manage risks in OPT. ICE has not consistently collected the information and developed the monitoring mechanisms needed to help ensure foreign students comply with OPT requirements, thereby maintaining their legal status in the United States. Foreign students can participate in OPT while attending classes and after graduation for up to 12 months; students studying in science, technology, engineering, or mathematics fields may be eligible for an additional 17 months (29 months total). However, ICE does not have complete information on which foreign students approved for OPT are actively working and whether employment is related to their studies, per ICE regulations. For example, GAO's analysis of ICE data on students engaged in all types of OPT indicates that 38 percent (48,642 of 126,796) of student records do not contain an employer's name. Furthermore, the data do not include the date on which students granted authorization began working. ICE does not require that students and school officials report this information. Without these data, ICE cannot determine whether students with employment authorization are working in jobs related to their studies and not exceeding regulatory limits on unemployment. Collecting and monitoring complete information on foreign students approved for OPT would better position ICE to determine whether these students are maintaining legal status in the United States. This is a public version of a For Official Use Only/Law Enforcement Sensitive report that GAO issued in January 2014. Information DHS deemed sensitive has been redacted. GAO recommends that ICE, among other things, identify and assess OPT-related risks and require additional employment information from students and schools. DHS concurred with the recommendations. |
HUD is the principal federal agency responsible for programs dealing with housing and community development and fair housing opportunities. Its missions reflect a broad range of statutory mandates, ranging from making housing affordable by insuring loans for multifamily projects and providing assistance on behalf of about 4.5 million lower-income tenants, to helping revitalize over 4,000 communities through community development programs, to encouraging homeownership by providing mortgage insurance to about 7 million homeowners who might not have been able to qualify for conventional loans. The diversity of HUD’s missions has resulted in a department that is intricately woven into the financial and social framework of the nation and that interacts with a diverse number of constituencies. For example, thousands of public housing authorities (PHA) and many more private housing owners are key players in administering HUD’s public housing and Section 8 rental housing programs and depend on subsidies from the Department to operate. HUD’s programs also operate through other governmental entities, such as state housing finance agencies, nonprofit groups, and state and local governments. In carrying out its missions, HUD is responsible for a significant amount of tax dollars: The discretionary budget outlays for HUD’s programs were estimated to be close to $31.8 billion in fiscal year 1995, over three-quarters of which was for public and assisted housing programs. In addition, HUD is currently one of the nation’s largest financial institutions, with significant commitments, obligations, and exposure: It has management responsibility and potential liability for more than $400 billion of mortgage insurance, an additional $485 billion in outstanding securities, and over $200 billion in prior years’ budget authority for which it has future financial commitments. In February 1995, we reported that HUD’s top management had begun to focus attention on overhauling the Department’s operations to correct its long-standing management deficiencies—an ineffective organizational structure, an insufficient mix of staff with the proper skills, weak internal controls, and inadequate information and financial management systems.The agency had formulated a new management approach and philosophy that included balancing risks with results, had begun implementing a substantial reorganization of field offices, and had initiated a number of other actions that would address the four management deficiencies. Over the past year, HUD has continued many of these efforts, but problems remain. For example, in September 1995, HUD completed its field reorganization, which eliminated 10 regional offices and transferred direct authority for staff and resources to the Assistant Secretaries. In January 1996, HUD announced additional efforts to empower the field office personnel and continue the Secretary’s efforts to implement the “community first” philosophy by streamlining headquarters and reducing headquarters’ staffing by 40 percent over 2 years. Many of the headquarters staff will be transferred to the field to enhance the agency’s efforts to be more responsive to local communities. According to the HUD Inspector General’s (IG) most recent semiannual report, while field staff endorsed the elimination of the regional management layer, they reported that communication and cooperation among the program offices had suffered badly and that the promised empowerment of field staff had not materialized. In the area of internal controls, the Department’s new management control program was fully implemented over the past year, according to HUD officials. This program is intended to tie planning with risk-abatement strategies. Under the program, managers, as they develop annual management plans, are to identify and prioritize the major risks in each of their programs and then describe how these risks will be abated. According to HUD officials, all of the program offices’ fiscal year 1996 annual management plans contained management control elements, including risk-abatement strategies. Despite improvements, internal controls continue to be a problem. On June 30, 1995, outside auditors issued a disclaimer of opinion on HUD’s fiscal year 1994 consolidated financial statements because weaknesses in internal control and “nonconformances” in systems remained uncorrected.HUD’s most serious internal control weaknesses pertain to its approximately $13 billion grant and subsidy payments to public and Indian housing authorities, including $9.5 billion of its operating subsidies and Section 8 rental assistance. The auditors noted that the existing internal controls and financial systems do not provide adequate assurance that the amounts paid under these programs are valid and correctly calculated, considering tenants’ income and contract rents. As a result, HUD lacks sufficient information to ensure that federally subsidized housing units are occupied by needy lower-income families and that those living in such units are paying the correct rents. In 1995, the Department continued to make progress toward its goals of integrating financial systems, but much remains to be done. During the year, HUD implemented its new administrative accounting system and integrated the system for Public, Indian, and Section 8 housing. In addition, all of the program offices have completed Information Strategy Plans, which identify business and information needs. Despite these efforts, as of September 1995, HUD had 88 systems in operation or under development, 60 of which are generally not in compliance with the provisions of Office of Management and Budget (OMB) Circular A-127.HUD’s financial systems continue to be identified as high-risk by OMB. The Department deserves credit for its continued emphasis on addressing its long-standing management deficiencies, including a fundamental restructuring of the agency. However, departmental restructuring is still far from being accomplished. HUD’s challenge will be to continue to sustain its focus and commitment to addressing the agency’s long-standing deficiencies while at the same time downsizing the agency, devolving authority to field offices, and providing greater program flexibility to communities. As HUD and the Congress continue to look at ways to reform the Department, they will face the challenge of finding the proper balance between local flexibility and authority and proper accountability for federal funds. Furthermore, until the Department completes its goal of integrating financial management systems, which remains years away, the lack of good information will plague the Department in many areas and limit its capacity to adequately monitor funds. Substantially restructuring programs and providing greater local flexibility to communities will in all likelihood also require new systems. While HUD has formulated approaches and initiated actions to address its department-wide deficiencies, these plans are far from reaching fruition and problems continue. In addition, we believe that until the agency and the Congress are successful in working through the proposals for a major restructuring of the agency, which include consolidating hundreds of program activities, HUD has only a limited capacity to eliminate the Department-wide deficiencies that led us to designate it as high-risk. Accordingly, we believe that both now and for the foreseeable future, the agency’s programs will be high-risk in terms of their vulnerability to waste, fraud, and abuse. As of September 30, 1995, FHA’s portfolio of insured multifamily loans consisted of 15,785 mortgages with unpaid principal balances of $47.7 billion. About $38.5 billion of the insurance supports more than 14,000 multifamily apartment properties. The remainder of the insurance supports hospitals ($4.9 billion) and nursing homes ($4.3 billion). In addition to mortgage insurance, most of the FHA-insured properties receive some form of direct assistance or subsidy, such as below-market interest rates or Section 8 project-based rental assistance. HUD also provides Section 8 project-based assistance for properties that are not insured by FHA. According to HUD’s data, the Department has 6,391 Section 8 contracts with projects not insured by FHA containing about 375,000 units receiving project-based assistance. The fundamental problems that HUD faces in overseeing the multifamily housing portfolio, which we discussed before this Subcommittee last year, continue. Specifically, for a large proportion of this housing, the government is paying more to house lower-income families than what is needed to provide them decent, affordable housing. The insured multifamily properties also expose the federal government to substantial current and future financial liabilities from default claims. A 1993 study of multifamily rental properties with HUD-insured or HUD-held mortgages found that almost one-fourth of the properties reviewed were “distressed.” Properties were considered distressed if they failed to provide sound housing and lacked the resources to correct deficiencies or if they were likely to fail financially. The reasons for these problems are varied, including design flaws in programs; the Department’s dual role as assistance provider and insurer; and long-standing deficiencies in staffing, data systems, and management controls. Program design flaws have resulted in HUD’s subsidizing rents at many properties that are far above market rents. In particular, this problem occurs under HUD’s Section 8 new construction and substantial rehabilitation programs, in which the Department paid for the initial costs of development by establishing rents above the market levels and continued to raise the rents regularly. HUD’s dual role as assistance provider and insurer has contributed to inadequate enforcement of the Department’s standards for the condition of properties and decisions by the agency to increase subsidies in order to avoid claims stemming from loan defaults. In addition, as noted in our June 1995 report on default prevention, inadequate management has resulted in poor living conditions for families with low incomes in a number of insured multifamily properties and contributed to a large number of past and anticipated defaults on FHA-insured loans. During this past year, HUD has attempted to address these problems through a legislative proposal known as “mark to market.” The proposal was applicable to about 8,500 properties that both have FHA insurance and receive Section 8 project-based assistance. According to HUD’s data, project-based assistance is provided for approximately 700,000 of the 855,000 apartment units covered. The proposal was aimed at ending the interdependence of subsidies and insurance claims, eliminating the excess Section 8 subsidy costs, and improving the physical condition of properties in poor condition—generally older properties with low rents. Under the mark-to-market proposal, Section 8 project-based assistance was to be eliminated or phased out for insured properties as the contracts expire. The proposal applied whether or not the subsidized rents were above the market levels. Residents living in units that receive project-based assistance were then to receive tenant-based assistance. Owners would set the rents at market levels, which in many cases would reduce the rental income and lead to defaults on the FHA-insured mortgages. To address this, HUD proposed reducing the projects’ mortgages if such action was needed for the properties to be able to compete in the commercial marketplace without project-based assistance. HUD’s goal was to replace the FHA-insured loans with ones not insured by FHA. Hearings were held on HUD’s mark-to-market proposal last year, but neither the House nor the Senate acted on the proposal. In the President’s fiscal year 1997 budget, HUD announced several planned revisions to its mark-to-market proposal. Most notably, the Department has indicated that the proposal will initially focus on a smaller segment of the multifamily housing portfolio—those properties with expiring contracts whose current rents are above the market levels. In addition, HUD states that localities will decide whether the housing subsidies should be tenant-based or project-based. The extent to which this proposal will reduce project-based assistance in favor of tenant-based is not clear. During this past year, HUD has also been undertaking a number of initiatives designed to strengthen its ability to manage its multifamily housing portfolio and address outstanding management deficiencies in its staffing, data systems, and management controls. As we reported in June 1995, the initiatives that HUD intended to carry out included (1) using contractors to collect more complete and current information on the physical and financial condition of insured multifamily properties and developing an “early warning system” to more quickly identify troubled properties and (2) deploying Special Workout Assistance Teams (SWAT) to help field offices deal with troubled insured multifamily properties, including the enforcement of HUD’s housing quality standards there. However, progress continues to be slow in implementing these improvements. For example, the early warning system is not yet operational nor is the initiative to contract for periodic physical inspections. The current plans are to contract for these inspections beginning in fiscal year 1997. Also, while the SWAT initiative is regarded by HUD management and HUD’s IG as effectively addressing problems, it is limited in scope and cannot be relied upon to address the Department’s problems across the portfolio. For example, resource limitations preclude expanding this effort as a standard management tool—nor does this effort address the problem of excess subsidy costs. Our recent studies of HUD’s nursing home and hospital programs also identified management deficiencies. We found that HUD does not have data that show how the programs support the Department’s mission. For example, HUD does not collect and analyze information on whom the nursing home program is serving or measure the extent to which the hospital program accomplishes the Department’s goals. In addition, our reports discuss the default risk of these multifamily programs. We found that the accumulation of more than $4 billion of insured hospital projects and the large loan amounts in New York pose risks to the future stability of the program. Furthermore, trends in health care and changes in state and federal health care policies that reduce hospitals’ revenues could threaten the solvency of insured hospitals. We also noted that the nursing home program had recently been expanded to include assisted living facilities for the elderly, which may result in the program’s growth and in potentially riskier loans, especially if HUD is unable to effectively underwrite insurance for the loans and monitor their performance. The financial situation for FHA’s single-family mortgage insurance program is very different than that for its multifamily program. The economic net worth of FHA’s single-family Mutual Mortgage Insurance Fund (Fund) continued to improve in fiscal year 1994. We estimate under our conservative baseline scenario that the Fund’s economic net worth was $6.1 billion, as of September 30, 1994. At that time, the Fund had capital resources of about $10.7 billion, which were sufficient to cover the $4.6 billion in expenses that we estimate the Fund will incur in excess of the anticipated revenues over the life of the loans outstanding at that time. The remaining $6.1 billion is the Fund’s economic net worth, or capital—an improvement of about $8.8 billion from the lowest level reached by the Fund at the end of fiscal year 1990. Legislative and other changes to FHA’s single-family mortgage insurance program have helped restore the Fund’s financial health, but favorable prevailing and forecasted economic conditions were primarily responsible for this improvement. Our estimate of the Fund’s economic net worth represents a capital reserve ratio of 2.02 percent of the Fund’s $305 billion in amortized insurance-in-force. Consequently, we estimate that the Fund surpassed the legislative target for reserves (a 2-percent capital ratio by Nov. 2000) during fiscal year 1994. One area in which the Congress could make changes that would have a positive effect on the Fund’s financial health is in HUD’s mortgage assignment program. The assignment program, created in 1959, is intended to help mortgagors who have defaulted on HUD-insured loans to avoid foreclosure and retain their homes by providing these mortgagors with financial relief by reducing or suspending their mortgage payments for up to 36 months until they can resume making payments. Our recent review of FHA’s assignment program revealed that the program operates at a high cost to the Fund and has not been very successful helping borrowers avoid foreclosure in the long run. We estimated that about 52 percent of the borrowers who entered the program since fiscal year 1989 will eventually lose their homes through foreclosure. We forecast that the remaining borrowers (48 percent) will pay off their loans following the sale or refinancing of their homes, often after remaining in the program for long periods of time. The costs incurred by HUD to achieve this result exceed the costs that would have been incurred if all assigned loans had gone immediately to foreclosure without assignment. We estimated that, for borrowers accepted into the assignment program since fiscal year 1989, FHA will incur losses of about $1.5 billion more than would be incurred in the absence of the program. While FHA borrowers’ premiums pay for these costs, not the U.S. Treasury, the program’s costs make it more difficult for the Fund to maintain financial self-sufficiency. We reported that the Congress may wish to consider alternatives to reduce the additional losses incurred by the program. The alternatives we suggested focused on making changes to the program. Legislation is now pending that would eliminate the current program and replace it with an alternative that will, according to the Congressional Budget Office (CBO), result in an estimated savings of $2.8 billion over 7 years. The nation’s 3,300 PHAs do not all have severe management problems nor do they share the same problems. Much of the public housing stock is in good condition and provides adequate housing for most of the over 3 million low-income residents. However, some PHAs we have visited are deeply troubled in many dimensions. These housing authorities’ problems include an unmet need for capital improvements, physical deterioration of the housing stock, high vacancy rates, and high concentrations of poor and unemployed people. Moreover, before 1995, HUD’s limited oversight of the most troubled housing authorities had allowed some authorities to provide substandard services to their residents for years. Some of our ongoing work deals directly with several of these interrelated problems that can lead to serious management and budget considerations for HUD. Housing authorities are caught in a very difficult position. At a time when they need larger operating subsidies to replace declining rent revenues, they also face appropriation realities brought on by the need to balance the federal budget and meet the needs of other low-income housing programs. Declining rent revenue is a direct result of targeting housing assistance to those with very low incomes. For instance, incomes of residents in public housing have dropped nearly half—from 33 percent of the area median in 1981 to about 17 percent today—thereby decreasing the availability of rental income to offset operating costs. In addition, the average vacancy rate increased from 5.8 percent in 1984 to 8 percent in 1995, further reducing the rental income available to PHAs. Making it more difficult to make ends meet, annual appropriations have not covered PHAs’ operating subsidy needs for several years. The pending fiscal year 1996 appropriations bill that was vetoed by the President would have provided only 89.7 percent of their operating needs. In a survey of 21 judgmentally selected housing authorities, we found that one of the first responses to insufficient operating funds is to reduce spending on maintenance. This compounds PHAs’ problems by perpetuating the cycle of decreased maintenance, increased vacancies, and decreased rental income. Can this cycle be broken? We believe that provisions in pending legislation, various proposals from HUD, and other programs could act together to alleviate some of the pressures on housing authorities. Both the proposed legislation and HUD’s latest transformation plan, known as “Blueprint II,” would foster admitting and retaining a higher proportion of working families and thus raising the total rental income. However, policymakers need to recognize that in some cities, this policy change could cause some people with very low incomes to wait longer to receive housing assistance. We believe that these legislative and regulatory changes will help maintain PHAs’ financial health. However, HUD and the Congress need the cooperation of the public housing authority industry. Many housing authorities have told us that the current system is too cumbersome and is detrimental to promoting their fiscal health. Like organizations in the private sector, we believe PHAs are realizing that they must take the initiative and seek out management practices that can improve performance and efficiency. We are currently finding that many PHAs are initiating innovative practices to cut costs and increase revenues. These practices include privatization, consolidation, and partnerships. We will report later in the year on the use and applicability of these practices for all PHAs. We have concluded in the past that HUD’s program for assisting troubled housing authorities should take a more active role in addressing their performance. We also reported last year that HUD had made limited use of its legal authority to declare troubled housing authorities in breach of their contracts with the Department. Moreover, the overall results of HUD’s focused technical assistance program that targeted the large, troubled authorities have been inconsistent. During the past year, 4 troubled authorities have come off the original list of 17, and 4 others have made substantial improvements in their performance scores. However, the other nine authorities—accounting for over 70 percent of all housing units managed by troubled authorities—have not shown appreciable improvement. Furthermore, the performance of four of the nine declined this past year, despite HUD’s intervention and technical assistance. HUD appears to be taking a more active role in this area. In addition to having some success with several large housing authorities, three times in the last 10 months—in Chicago, New Orleans, and San Francisco—HUD has made use of its authority to either declare an authority in breach of its contract or to take control upon the resignation of the authority’s board of commissioners. However, taking over troubled housing authorities has not come without a price. HUD’s top policymakers in public housing are simultaneously engaged in the everyday problems of managing HUD and overseeing several problem housing authorities. For example, HUD’s Acting Assistant Secretary for Public and Indian Housing functions as the New Orleans Housing Authority’s Board of Commissioners and leads HUD’s takeover team in San Francisco. Approximately 11 local and headquarters HUD staff are at the New Orleans Housing Authority, and a similar staff will be placed at the San Francisco Housing Authority. In addition, the potential for other emergency takeovers looms in the future as reduced funding puts pressure on public housing managers to do more with less. Additional takeovers will considerably strain HUD’s already-stretched management team at a time when a major reform of low-income housing may also require its attention. Last year, when we appeared before this Subcommittee, we discussed a CBO report that detailed how the number of assisted families almost doubled from 1977 through 1994, rising from about 2.4 million to about 4.7 million. According to CBO, the annual real outlays (in 1994 dollars) more than tripled during this period, rising from about $6.6 billion to about $22 billion. Difficult budget choices persist, most notably for renewing assistance under HUD’s Section 8 programs. According to HUD’s recently released plan to continue its reinvention, over the next 7 years the Department will face a significant challenge to its budget as Section 8 contracts providing affordable housing to hundreds of thousands of families expire and require renewal. HUD estimates that while outlays will remain relatively flat, the needed budget authority will balloon from $2 billion in fiscal year 1995 to $20 billion in fiscal year 2002 (assuming 1-year renewals). HUD notes that while contract renewals do not contribute significantly to the budget deficit, the demand for ever-increasing levels of budget authority cannot be met at a time of extremely tight fiscal constraints unless fundamental policy and procedural changes are made. HUD’s plan states that, to date, decisionmakers have met this challenge, in part by shortening the terms of contract renewals from 5 years in the early 1990s to 4 years in fiscal year 1994, 3 years in 1995, and now 2 years in 1996. Shorter terms substantially reduce the amount of budget authority needed to renew a Section 8 contract. However, HUD concluded that even shortening contract renewal terms to 1 year may not be sufficient to cover the budget authority needs resulting from the cascade of expiring contracts in the next half decade. HUD noted that a very real danger exists for its budget allocation to be sharply reduced because of the deep reductions in the discretionary budget caps that are now under consideration. If these reductions occur, according to HUD, the budget authority available for the Department’s other discretionary programs, such as community development block grants, programs for the homeless, and public housing, could be drastically reduced or even eliminated. We agree that these large figures present difficult choices for policymakers who must consider competing needs. These choices become even more difficult because they come at a time when, according to HUD, the “worst case” needs for housing have not been met for a record 5.3 million households. HUD’s serious management and budget problems have greatly hampered its ability to carry out its wide-ranging responsibilities. Both houses of Congress and HUD have proposed major but different reforms, including the ultimate reform—the complete dismantling of HUD. With the high stakes involved—the tens of billions of dollars that HUD spends each year, the millions of vulnerable families (including millions of households that do not receive assistance from HUD because of budget constraints), and the overwhelming needs of distressed communities—it is not unexpected that deciding the future direction of housing and community development policy and of HUD will take some time. Balancing business, budget, and social goals is a Herculean task. Legislation to reform HUD has been introduced in both houses of Congress. HUD has continued to refine its vision for a reformed agency through successive versions of its “blueprint.” What is needed now is for the Congress and the administration to agree on the future direction of housing and community development policy. This agreement should weigh the inherent trade-offs involved in understanding the magnitude of the needs of poor families and individuals, communities, first-time home buyers, and others that HUD currently serves; deciding who it is that federal housing and community development policy will serve and the priority of competing needs; deciding the mechanisms for delivering services (e.g., block grants) to meet those needs, and the federal, state, and local roles in service delivery; and determining how much to spend. Mr. Chairman, this concludes our prepared remarks. We will be pleased to respond to any questions that you and other Members of the Subcommittee may have. We in GAO look forward to working with the Congress to help address the issues before it. FHA Hospital Mortgage Insurance Program: Health Care Trends and Portfolio Concentration Could Affect Program Stability (GAO/HEHS-96-29, Feb. 27, 1996). Homeownership: Mixed Results and High Costs Raise Concerns About HUD’s Mortgage Assignment Program (GAO/RCED-96-2, Oct. 18, 1995). Multifamily Housing: Issues and Options to Consider in Revising HUD’s Low-Income Housing Preservation Program (GAO/T-RCED-96-29, Oct. 17, 1995). Housing and Urban Development: Public and Assisted Housing Reform (GAO/T-RCED-96-25, Oct. 13, 1995). Housing and Urban Development: Public and Assisted Housing Reform (GAO/T-RCED-96-22, Oct. 13, 1995). Block Grants: Issues in Designing Accountability Provisions (GAO/AIMD-95-226, Sept. 1, 1995). HUD Management: Greater Oversight Needed of FHA’s Nursing Home Insurance Program (GAO/RCED-95-214, Aug. 25, 1995). Property Disposition: Information on HUD’s Acquisition and Disposition of Single-Family Properties (GAO/RCED-95-144FS, July 24, 1995). Housing and Urban Development: HUD’s Reinvention Blueprint Raises Budget Issues and Opportunities (GAO/T-RCED-95-196, July 13, 1995). Public Housing: Converting to Housing Certificates Raises Major Questions About Cost (GAO/RCED-95-195, June 20, 1995). Purpose of, Funding for, and Views on Certain HUD Programs (GAO/RCED-95-189R, June 20, 1995). Multifamily Housing: HUD’s Mark-to-Market Proposal (GAO/T-RCED-95-230, June 15, 1995). Multifamily Housing: HUD’s Proposal to Restructure Its Portfolio (GAO/T-RCED-95-226, June 13, 1995). Government Restructuring: Identifying Potential Duplication in Federal Missions and Approaches (GAO/T-AIMD-95-161, June 7, 1995). HUD Management: FHA’s Multifamily Loan Loss Reserves and Default Prevention Efforts (GAO/RCED/AIMD-95-100, June 5, 1995). Program Consolidation: Budgetary Implications and Other Issues (GAO/T-AIMD-95-145, May 23, 1995). Government Reorganization: Issues and Principles (GAO/T-GGD/AIMD-95-166, May 17, 1995). Multifamily Housing: Better Direction and Oversight by HUD Needed for Properties Sold With Rent Restrictions (GAO/RCED-95-72, Mar. 22, 1995). Housing and Urban Development: Reform and Reinvention Issues (GAO/T-RCED-95-129, Mar. 14, 1995). Housing and Urban Development: Reforms at HUD and Issues for Its Future (GAO/T-RCED-95-108, Feb. 22, 1995). Housing and Urban Development: Reinvention and Budget Issues (GAO/T-RCED-95-112, Feb. 22, 1995). High-Risk Series: Department of Housing and Urban Development (GAO/HR-95-11, Feb. 1995). Housing and Urban Development: Major Management and Budget Issues (GAO/T-RCED-95-86, Jan. 19, 1995, and GAO/T-RCED-95-89, Jan. 24, 1995). Reengineering Organizations: Results of a GAO Symposium (GAO/NSIAD-95-34, Dec. 13, 1994). Federally Assisted Housing: Expanding HUD’s Options for Dealing With Physically Distressed Properties (GAO/T-RCED-95-38, Oct. 6, 1994). Rural Development: Patchwork of Federal Programs Needs to Be Reappraised (GAO/RCED-94-165, July 28, 1994). Federally Assisted Housing: Condition of Some Properties Receiving Section 8 Project-Based Assistance Is Below Housing Quality Standards (GAO/T-RCED-94-273, July 26, 1994, and Video, GAO/RCED-94-01VR). Public Housing: Information on Backlogged Modernization Funds (GAO/RCED-94-217FS, July 15, 1994). Homelessness: McKinney Act Programs Provide Assistance but Are Not Designed to Be the Solution (GAO/RCED-94-37, May 31, 1994). Section 8 Rental Housing: Merging Assistance Programs Has Benefits but Raises Implementation Issues (GAO/RCED-94-85, May 27, 1994). Lead-Based Paint Poisoning: Children in Section 8 Tenant-Based Housing Are Not Adequately Protected (GAO/RCED-94-137, May 13, 1994). HUD Information Resources: Strategic Focus and Improved Management Controls Needed (GAO/AIMD-94-34, Apr. 14, 1994). Multifamily Housing: Status of HUD’s Multifamily Loan Portfolios (GAO/RCED-94-173FS, Apr. 12, 1994). Housing Finance: Expanding Capital for Affordable Multifamily Housing (GAO/RCED-94-3, Oct. 27, 1993). Government National Mortgage Association: Greater Staffing Flexibility Needed to Improve Management (GAO/RCED-93-100, June 30, 1993). Multifamily Housing: Impediments to Disposition of Properties Owned by the Department of Housing and Urban Development (GAO/T-RCED-93-37, May 12, 1993). HUD Reforms: Progress Made Since the HUD Scandals but Much Work Remains (GAO/RCED-92-46, Jan. 31, 1992). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed management and budget problems facing the Department of Housing and Urban Development (HUD). GAO noted that: (1) weak internal controls, an ineffective organizational structure, an insufficient staff skill mix, and inadequate information and financial management systems have hampered HUD ability to carry out its mission and led to GAO designating HUD as a high-risk area in January 1994; (2) despite some progress in curing management deficiencies, problems persist and, as a result, will likely continue to make HUD vulnerable to waste, fraud, and abuse; (3) HUD and Congress must try to reduce excessive housing subsidies, address the physical inadequacies of insured multifamily properties, maintain the single-family insurance fund's financial health, address public housing's social, management, and budget problems, and contain the costs of renewing housing subsidy contracts for lower-income families; (4) Congress and HUD also need to reexamine and reach consensus on housing and community development policy; and (5) HUD downsizing will likely affect its ability to limit financial exposure, carry out its mission, and correct Department-wide management and information system problems. |
Every state regulates the terms and conditions of insurance sold in the state and nearly all tax insurers. States require health insurance policies sold there to include specific benefits, such as mental health services, mammography screening, chiropractic services, and coverage for newborns. States use a variety of methods to monitor health insurers’ solvency, including minimum capital and surplus levels, investment restrictions, and financial reviews. In addition, many states have enacted reforms to improve access and affordability of health insurance for small employers. Prominent examples of these reforms are guaranteed issuance and renewal, portability, and premium rate restrictions. These reforms are intended to address concerns about certain individuals being excluded from coverage or priced out of the market. These individuals include those who change jobs or experience costly medical conditions while in the small employers’ insurance market. Although states regulate health insurance, state regulation does not directly affect 4 of 10 people with private employer-based health coverage. ERISA preempts states from directly regulating employer provision of health plans, but it permits states to regulate health insurers. Of the 114 million Americans with health coverage offered through a private employer in 1993, about 60 percent participated in insured health plans that are subject to state insurance regulation. However, for plans covering the remaining 40 percent—about 44 million people in 1993—the employer chose to self-fund and retain at least some financial risk for its health plan. Self-funding is most common among large employers. Only 11 percent of employees in firms of 100 or fewer employees were in self-funded health plans compared with 34 percent of those in firms of 101 to 500 employees and 63 percent of those in firms of more than 500 employees, according to a 1993 Robert Wood Johnson Foundation survey. As stop-loss coverage with less risk to the employer becomes available, however, more small employers may start to self-fund. The NAIC has adopted a stop-loss model act that attempts to define the levels of risk that can be assumed by stop-loss carriers for determining which state insurance laws should apply. State insurance regulators are concerned that some employers may purchase stop-loss coverage in which the stop-loss carrier assumes most of the risk and believe, therefore, that the plan should be subject to state health insurance laws. Because self-funded health plans may not be deemed to be insurance, ERISA preempts them from state insurance regulation and premium taxation. Although ERISA includes fiduciary standards to protect employee benefit plan participants and beneficiaries from plan mismanagement and other requirements, in other areas no federal requirements comparable with state requirements for health insurers exist for self-funded health plans. Table 1 compares the requirements that fully insured and self-funded health plans must meet. One of the most direct and quantifiable costs that insured health plans incur compared with self-funded health plans results from state premium taxes and other assessments paid by health insurers. Most of the costs associated with taxes result from premium taxes that increase costs to insured health plans by about 2 percent in most states. In addition, states also assess insurers for other purposes, but these assessments are generally small and, in many states, the insurer may receive a credit from its premium taxes for these payments. Most states tax health insurance premiums. State revenues from premium taxes on all types of insurance, including property, casualty, life, and health insurance, totaled over $8 billion in 1993. Premium taxes for commercial health insurers range from 0 to over 4 percent; most states have premium tax rates of about 2 percent. Many states exempt or have lower rates for Blue Cross and Blue Shield plans as well as health maintenance organizations (HMO). In some states insurers receive credits that lower their premium tax rates, such as credits for insurers who are headquartered locally or invest in state securities. In addition, the expense of state taxes can be deducted from insurers’ federal taxes, reducing their net cost. See appendix I for a list of premium tax rates by state and type of insurance. Health insurers may also be liable for paying other miscellaneous assessments collected by the states, including assessments for guaranty funds and high-risk pools. Guaranty funds provide financial protections to enrollees who have outstanding medical claims in the case of an insurer insolvency. In years that monies are drawn from the guaranty funds due to an insurance failure, states assess insurers a fee on the basis of their market share within the state to pay for the guaranty fund expenses. States cap the maximum rate insurers may be assessed in a year, typically at about 2 percent of gross premiums. Except in a few states where a relatively large insurer has failed, however, actual assessments are much lower than the maximum rate. In 1993, actual assessments against life and health insurers for guaranty funds averaged 0.34 percent, and guaranty fund assessments exceeded 1 percent of premiums in only seven states. Most states allow insurers to deduct some or all of the guaranty fund assessment from their premium taxes. Appendix II shows state assessments for guaranty funds and deductions from premium taxes. About half of the states maintain high-risk pools to provide health coverage for individuals denied health coverage because of a medical condition. In 1994, about 100,000 Americans were covered by high-risk pools. Although participants in these plans pay a premium for their coverage, the costs of the high-risk pools exceed the premiums collected. To compensate for the difference in premiums collected and claims paid, 20 states have the authority to assess insurers who participate in the high-risk pool. In 1994, 15 states actually assessed insurers to cover high-risk pool losses. Minnesota, with the largest high-risk pool in the nation, assessed insurers 1.7 percent of their premiums in 1995 to cover high-risk pool losses. Most states with assessments (although not Minnesota) allow insurers to offset at least some of the expense of the high-risk pool assessments from their premium taxes. Appendix III shows state assessments for high-risk pools. Table 2 summarizes the costs to health insurers of the various state taxes. Most insurers and HMOs are likely to pass on the costs of these taxes to their customers through higher premiums. However, their ability to do so depends on such factors as the competitiveness of the market, size of the employer, and insurer’s marketing strategy. The cost impact of mandated benefits varies because states differ in the number and type of benefits mandated. The available studies reflect this cost variation, estimating higher claims costs in states with the most mandated benefits and more costly benefits, such as treatment for mental health and substance abuse. However, the studies are limited because their measurement of costs does not account for certain other cost elements, including administrative costs for multistate employers and a loss of flexibility claimed by employers in designing cost-effective benefit packages. In addition, reported cost estimates often do not measure the incremental cost of adding a mandated benefit to a health insurance package; instead, the estimates represent the fraction of total health insurance claims that are paid for each of the mandated benefits. Furthermore, claims costs may exaggerate the differences in costs between insured and self-funded health plans because many commonly mandated benefits are often covered by employers who self-fund even though they are not subject to state regulation. On average, states have enacted laws mandating about 18 specific benefits. As shown in figure 1, 16 states have over 20 mandated benefits; 8 states have 10 or fewer mandates. Maryland (39), Minnesota (34), and California (33) have the most mandated benefits. In contrast, Idaho has only six mandated benefits; Alabama, Delaware, Vermont, and Wyoming each have eight mandated benefits. States most frequently mandate coverage for preventive treatments, such as mammograms and well child care, or for treatment of mental illness or alcohol and drug abuse. In addition, states often require coverage for some types of providers such as optometrists and chiropractors. States typically mandate that insurers cover specific benefits in all plans sold, but some states merely mandate that each insurer make the mandated service available in at least one plan that it offers. Appendix IV shows how many states have enacted each of 20 commonly mandated benefits. In addition, many states have recently begun considering mandating that health insurance cover minimum postpartum hospital stays. For example, a state may require the insurer to cover 48 hours of hospitalization following a vaginal delivery or 96 hours following a caesarian delivery if recommended by the doctor, although in some states shorter stays may be allowed if they are accompanied by a home visit by a nurse or other medical professional. According to the American College of Obstetricians and Gynecologists, as of July 28, 1996, 28 states have enacted laws requiring coverage for postpartum care. Studies conducted in several states between 1987 and 1993 provide varying estimates of the claims costs associated with mandated benefits. (See table 3.) The Virginia State Corporation Commission, for example, has required insurers to report cost and utilization information annually for each of the mandated benefits in the state. Overall, the commission’s report, the most recent of these studies, estimated that Virginia’s mandated benefits accounted for about 12 percent of group health insurance claims in 1993. An earlier study in Maryland, the state with the most mandated benefits, estimated that mandated benefits represented 22 percent of average claims costs in 1988. In Iowa, a state representing the other extreme, a 1987 study estimated that the potential costs of introducing several commonly mandated benefits would be about 5 percent of claims costs. The differences in the cost estimates reported by the various studies are in part due to the number of mandated benefits included in each state. For example, the studies that reported the highest estimated costs were those for Maryland and Massachusetts, which have more mandated benefits than most states. Thus, these cost estimates cannot be generalized to other states. Although the studies reported varying total costs in different states, they generally agreed that several specific mandated benefits accounted for a large share of the costs. In particular, obstetrical care and mental health care were cited as among the most costly mandated benefits; other commonly mandated benefits, such as mammography screening, account for less than 1 percent of costs. For example, in Virginia, obstetrical care, mental health care, and substance abuse benefits accounted for over half of the total claims costs associated with mandated benefits in 1993. Table 4 lists the costs of individual mandates in Virginia. In some cases, mandated benefits covering services offered by some alternative types of providers, such as nurse midwives, may reduce costs because they substitute for more costly forms of care. Some provider mandates, however, may also increase the demand for services, increasing costs. For example, although chiropractic services may be a less expensive alternative for some treatments, mandating their coverage may also lead to increased use. One limitation of most studies on mandated benefits is that they have examined the cost effect of mandated benefits using the fraction of the total health insurance claims costs paid for each benefit, instead of estimating the incremental cost of adding a benefit to the health insurance package. In addition, the reported cost estimates do not necessarily capture the actual effect on employers’ costs, especially in cases in which all costs associated with a mandate do not occur at the same point in time. For example, one actuary estimated that including in vitro fertilization services in health plans would increase premiums by less than 1 percent. In the case of one self-funded employer, however, the total costs to the employer of in vitro fertilization would be greater than the initial cost of the service because multiple attempts are often required and its use may lead to costly, high-risk pregnancies or multiple childbirths. Moreover, multistate employers note that the variation in state-mandated benefits results in additional administrative cost that is not reflected in the studies’ estimates. Employers that purchase health insurance may need to modify their plans to meet differences in state-mandated benefits. Furthermore, employers are concerned that, to the extent that they must comply with mandated benefits, they lose the flexibility to design the most cost-effective health benefit plan to meet their employees’ needs. Employers and managed health care plans have also expressed concern about the potentially high costs associated with any-willing-provider laws. The actual cost impact of these laws, however, as they have been enacted by states is likely to be limited. Any-willing-provider laws require managed health care plans to accept any qualified provider who wants to participate and is willing to accept the plans’ contract terms. The few available studies have examined only hypothetical results of broad any-willing-provider laws and provide no definitive measure of actual costs of the laws that have been implemented. The actual costs of enacted laws would be more limited than the studies’ estimates because most states have passed versions with narrow scopes. The American Association of Health Plans (AAHP) reported that, as of April 1996, 19 of the 24 states with any-willing-provider laws limit them to particular providers, such as pharmacists, or particular types of managed care plans. Furthermore, any-willing-provider laws have been enacted mostly in states with relatively low managed care penetration. AAHP reported that 24 percent of HMO enrollees are in states with limited any-willing-provider requirements, and less than 2 percent are in states with broad any-willing-provider laws. The actual cost effect of mandated benefits to employers also depends on whether the employer offers a comprehensive or limited health plan, which in turn often depends on the size of the employer. Employers frequently offer many of the commonly mandated benefits, even employers who self-fund and are not subject to the state mandates. In general, large employers are more likely to self-fund their health plans and tend to offer more comprehensive benefits than small employers. For small employers, who typically purchase fully insured health plans and are less likely to offer any health coverage, mandates may impose claims costs for benefits that they otherwise might not have covered. Studies conflict about whether increased costs associated with mandated benefits lead small employers to drop health insurance coverage. Self-funded health plans typically offer many of the benefits commonly mandated by states for fully insured health plans, according to studies. This may be due in part to the labor market, where firms must offer competitive health plans to compete for labor. As shown in figure 2, a KPMG Peat Marwick survey of employer benefits among all firm sizes indicates that self-funded health plans are more likely to offer well child care, outpatient alcohol treatment, outpatient drug treatment, mental health benefits, and chiropractic care than fully insured health plans. This survey also reported similar patterns for other benefits that are not typically mandated, including prescription drugs, adult physicals, and dental benefits. Similarly, a survey of Wisconsin insurers also found that “self-funded health plans provide at least as many of the mandated benefits as insured health plans and in some cases provide more generous coverage.” This result may partially be due to the tendency of large employers to both self-fund and offer more comprehensive benefits. Although self-funded plans often offer the same types of benefits states commonly mandate for insurers, self-funded plans may include features that differ from those required by state mandates. For example, state mandates generally specify a minimum number of days of care that insurers must cover for inpatient mental health care. One employer association indicated that many employers prefer designing more flexible mental health benefits, for example, requiring case management rather than specifying a limited number of days of care. Thus, even though 97 percent of self-funded plans offer inpatient mental health care services, some of these plans would not meet the state requirements for fully insured health plans. Assessing the cost differences between self-funded and fully insured health plans resulting from mandated benefits is difficult. To the extent that self-funded health plans offer benefits that are like state-mandated benefits, their claims costs would not significantly differ because of their exemption from state-mandated benefit laws. For less commonly offered benefits, such as in vitro fertilization, self-funded employers would face additional claims costs if they were required to meet the state mandates. In addition, if employers who self-fund their health plan were required to comply with state mandates, they would lose flexibility in choosing the benefits to offer and in offering a single uniform health plan in many states. State solvency requirements add costs only to the extent that they exceed prudent industry practices a health insurance carrier would follow in the absence of state requirements. States use a variety of methods to monitor health insurers’ solvency, including minimum capital and surplus levels, investment restrictions, and financial reviews. The specific requirements vary both by state and by type of insurance. State laws generally require insurers to maintain a minimum level of capital or surplus to become licensed, but this level is a small fraction of most insurers’ assets. The minimum levels of capital and surplus vary by state and by type of insurance, ranging in 1993 from $200,000 to $5 million. Most insurers have capital and surplus levels that exceed these minimum requirements. For example, Maryland requires insurers selling both life and health insurance to have a minimum of $3.75 million in capital and surplus to be licensed. In comparison, as of December 31, 1994, the actual capital and surplus level for life and health insurers licensed in Maryland averaged $200 million. The cost effect of the minimum requirements can be more significant for small insurers, however. According to data from the Maryland Insurance Administration, 19 percent of life and health insurers licensed in Maryland had less than $10 million in capital and surplus. Although some insurers may need to keep higher levels of capital and surplus to comply with the minimum levels that states require under the NAIC-developed model risk-based capital standards, most insurers also exceed these levels. Under risk-based capital, a level (called the “control level”) is calculated for each health plan based on its unique characteristics. If a health plan’s reserves were to fall below this level, the state is authorized to take control of the insurer. A range of regulatory actions would occur if an insurer were to approach this control level. At 200 percent of the control level, the state requires an insurer to prepare a plan to increase its capital; at the extreme, if the insurer’s capital were below 70 percent of the authorized control level, the insurance commission would have to take control of the insurance company. However, standard industry practices tend to be similar to or exceed these minimum state requirements. For example, a representative of the Health Insurance Association of America told us that 90 percent of insurers in 1995 exceeded 250 percent of the authorized control level for risk-based capital. In addition, a Virginia state official noted that, since Virginia adopted enforcement actions based on NAIC’s risk-based capital formula in July 1995, no insurers have fallen below the level where state standards would require action. Blue Cross and Blue Shield plans have different requirements under state laws. For example, many states set target capital and surplus levels for Blue Cross and Blue Shield health plans to ensure that they have sufficient funds to cover, for example, 1 or 2 months of claims. Furthermore, to maintain their nonprofit status, some states require that Blue Cross and Blue Shield plans’ surplus not exceed a target level, such as 7 months’ claims. In addition, states restrict how insurers invest their funds, potentially imposing an opportunity cost on insurers who might otherwise invest in higher yielding assets. These investment restrictions vary by state, but in general states regulate the type and amount of assets in which health plans invest to diversify insurers’ investments and minimize their risk. For example, many states limit the amount of funds that a health insurance carrier may invest in certain types of investments, such as common stocks and foreign securities, with potentially higher return rates than other permitted investments. The risk associated with these investments is also greater, however, so the insurer could get a lower rate of return than with permitted investments. An insurer could even lose money, possibly damaging its solvency. Furthermore, actuaries note that investments typically provide a smaller share of income to health insurers than other types of insurance such as life insurance. States’ oversight of health insurers’ solvency may also add administrative costs to insurers who must comply with reporting and review requirements, but industry officials note that such costs are difficult to quantify. The administrative costs include preparing audited financial statements and actuarial analyses for state review, functions insurers would likely perform anyway. States require insurers to report financial information using NAIC’s accounting standards, however, which differ from generally accepted accounting principles in their valuation of assets. In some cases, this may require an insurer to maintain two sets of accounting data, but insurance company executives we spoke with said this is a marginal additional cost. The costs of actuarial certification vary by type of insurance. Insurers selling only health coverage may prepare a simplified actuarial certification that requires few resources. Insurers selling health and life coverage must prepare a more extensive actuarial certification that would be more costly. One insurer, however, noted that the information developed for the actuarial certification provides the insurer with valuable information on the adequacy of the insurer’s reserves for meeting anticipated costs. Finally, many states charge the insurer for the costs of on-site financial examination, which typically occur once every 3 to 5 years. The costs of these exams vary depending on their length and complexity, but one state reported that the cost can be as high as $1 million for a complex review of a large insurer; less complex ones may cost less than $100,000. Most states have recently passed legislation designed to improve portability, access, and rating practices for the small employer health insurance market. It is too early to assess the cost effects of these reforms definitively because most available information is anecdotal. Moreover, even if more systematic data were available, isolating the effect of small group reforms from other factors would be difficult in the currently dynamic health care market. The small group reforms include provisions to help ensure that (1) employees who want health insurance coverage will be accepted and renewed by insurers; (2) waiting periods for preexisting conditions will be relatively short, occur only once, and be based only on recent medical history; (3) coverage will be continuous and portable, even when an individual changes jobs or the employer changes insurers; and (4) wide variation in premium rates will be narrowed to fall within state-specified ranges. In an earlier report, we identified 45 states that passed legislation between 1990 and 1994 regulating the small employer health insurance market (typically fewer than 25 or 50 employees). We also noted that the specific state requirements vary both by state and from the NAIC model act. The available evidence on states’ early experience with small group reform is mostly testimonial, anecdotal, and often contradictory. Following are examples of some of this evidence. The Colorado Insurance Division reports that small employer reforms, including guaranteed issue and rate restrictions, have moderated premium increases and increased the number of individuals covered by small group health plans. Some initial reports on New York’s experience stated that insurers left the state and premiums increased. Subsequent reports, however, have questioned the extent of these problems. Furthermore, state officials note that most changes occurred in the individual market rather than the small employer market and resulted from other factors, particularly the financial status of the state’s largest insurer. Minnesota and Colorado officials point to the decline in enrollment in their high-risk pools as evidence of the success of small group reforms in making private health coverage more available. Washington’s reforms, which were partially repealed before implementation, resulted in a surge in high-cost, high-risk enrollees that has led insurers to warn of high premium increases and their potential withdrawal from the state. Maryland officials asserted that in the first year of implementing small employer reforms competition in the small group health insurance market has increased and premiums have declined, but they acknowledged that data on premiums before the reforms were sparse. As these examples illustrate, the results across states are not consistent or generalizable to other states’ experiences. Furthermore, even within the states noted above, conflicting views exist about the success or failure of the small group reforms. Some states have specifically designed their reforms to minimize potential cost increases. For example, the task force that developed Maryland’s reforms designed the benefits package to cost less than 12 percent of average wages in Maryland. Ohio state officials scaled back their original reforms after receiving estimates that they could increase costs. As a result, Ohio enacted less generous requirements for guaranteed coverage. In addition, because the private insurance market has been changing rapidly, the effect these reforms have had on health insurance premiums is difficult to isolate. Besides the small employer insurance reforms, factors affecting insurance premiums include nationwide declines in the growth rate of health care costs, the growth of managed care, changes in health benefits, and the expansion of Medicaid coverage. Small group reforms may also have redistributive effects, with some enrollees facing increased costs while others face reduced costs, making the net effect unclear. Changes resulting from small group reforms may take several years to play out fully. Finally, the paucity of data preceding the enactment of reforms may hamper before-and-after comparisons of insurance premiums. State requirements on health insurance and their effects raise two questions: who is affected directly, and what factors determine the size of the requirements’ cost impact? Under the ERISA statute, state governments cannot tax or regulate self-funded plans established by an employer who bears most of the financial risk. By contrast, states continue to have authority to tax and regulate health insurance. As a result, enrollees in insured health plans have the benefits associated with state regulation but also bear an additional cost relative to enrollees in self-funded health plans. This cost differential can differ considerably by state. Specifically, state taxes on health insurers raise the costs of fully insured plans by about 2 percent in most states, with the actual level determined by state tax rate and type of health plan. In addition, the extent to which mandated benefits and solvency requirements raise costs differs by state, depending upon the scope of state laws. Furthermore, the extent to which a cost differential between self-funded and insured health plans would be apparent depends on whether state regulation results in a change in employers’ and insurers’ behavior. At the extreme, for health plans that provide comprehensive benefits and maintain surpluses exceeding state minimum requirements, the cost differential may be nonexistent. The burden of state requirements on large versus small employers depends on the employers’ use of self-funding. Because large employers’ health plans are predominantly self-funded (and outside the states’ purview) and small employers generally purchase health coverage from private insurers, the costs associated with state requirements fall largely on small employers. But this may be changing. Some small employers are also beginning to self-fund, partly to avoid state regulation and taxation of their health plans. Whether this trend will continue, and at what rate, is unclear. NAIC officials provided us with comments on a draft of this report. They pointed out that although the costs associated with state requirements are accurately described, the benefits to plan participants are addressed only to a limited extent. We acknowledge that participants benefit from many state requirements. As noted earlier, our ERISA report more comprehensively describes the state and employer perspectives on the implications of ERISA preemption of state regulation. As agreed to with our requester, our primary focus in this report was to provide additional information on the costs associated with these state requirements. In addition, NAIC officials noted that the report could also address “the costs that employers and employees might face when covered through ERISA-governed plans.” Indeed, ERISA requirements, such as reporting, disclosure, and fiduciary responsibilities, may have associated costs. As noted in the report, however, these costs are borne by all ERISA-governed plans, including both fully insured and self-funded health plans. Thus, they do not lead to a differential in costs between fully insured and self-funded health plans in the way that state requirements applying only to fully insured health plans may. NAIC officials also provided technical comments, which we incorporated where appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from the date of this letter. At that time, we will send copies to interested parties and make copies available to others upon request. Please call me on (202) 512-7114 if you or your staff have any questions about this report. Other major contributors are listed in appendix V. Health insurers (percent) Blue Cross and Blue Shield plans (percent) HMOs (percent) (continued) Health insurers (percent) Blue Cross and Blue Shield plans (percent) HMOs (percent) 0.75 aaTax assessed on subscriber fees. bbPay insurance commission maintenance assessment of no more than 0.1 percent of premium, with a minimum of $300. ccAdditional fee assessed for Department of Insurance operations, not to exceed 0.125 percent of receipts. ddHMOs pay franchise tax of 7.9 percent. Assessment cap (percent) Actual assessment, 1993 (percent) Percent offset from premium taxes (continued) Assessment cap (percent) Actual assessment, 1993 (percent) Participants (Dec. 31, 1994) Michael Gutowski, Assistant Director, (202) 512-7128 John Dicken, Senior Evaluator, (202) 512-7135 Carmen Rivera-Lowitt, Senior Evaluator, (202) 512-4342 The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the costs of state health insurance requirements, focusing on: (1) premium taxes on insured health plans; (2) mandated health benefits; (3) financial solvency standards; and (4) state health insurance reforms affecting small employers. GAO found that: (1) state health insurance regulation imposes requirements and costs on third-party health plans, but not on employers' self-funded health plans; (2) state premium taxes and other assessments for guaranty fund and high-risk pool fees, are the most direct and quantifiable costs on insured health plans; (3) the extent to which these requirements increase insured health plans' costs varies by state because of differences in the nature and scope of state regulation and plans' operating practices; (4) most states mandate that insurance policies cover certain benefits and providers that might not otherwise be covered; (5) costs are higher in states that mandate more costly benefits; (6) most self-funded health plans offer many of the same mandated benefits, but these plans would lose flexibility in offering uniform health plans across all states; (7) state solvency standards have a limited potential effect on plan costs, since most insurers maintain capital and surplus levels that exceed state minimum requirements and typically perform tasks similar to state reporting requirements; and (8) the cost implications of states' small employer health insurance reforms are unclear because of incomplete cost data and the difficulty of isolating the impact of such reforms. |
To be prepared for major public health threats such as an influenza pandemic, public health agencies need several basic capabilities, including disease surveillance systems. Specifically, to detect cases of pandemic influenza, especially before they develop into widespread outbreaks, local, state, and federal public health officials as well as international organizations collect, analyze, and share information related to cases of the disease. When effective, surveillance can facilitate timely action to control outbreaks and promote informed allocation of resources to meet changing disease conditions. Influenza is more severe than some other viral respiratory infections, such as the common cold. Most people who get influenza recover completely in 1 to 2 weeks, but some develop serious and potentially life-threatening medical complications, such as pneumonia. People aged 65 and older, people of any age with chronic medical conditions, children younger than 2 years, and pregnant women are more likely than other people to develop severe complications from influenza. Influenza and pneumonia rank as the fifth leading cause of death among persons aged 65 and older. Influenza viruses undergo minor but continuous genetic changes from year to year. Almost every year, an influenza virus causes acute respiratory disease in epidemic proportions somewhere in the world. Vaccination is the primary method for preventing influenza and its more severe complications. Influenza vaccine is produced and administered annually to provide protection against particular influenza strains expected to be prevalent that year. Influenza vaccine takes several months to produce. Deciding which viral strains to include in the annual influenza vaccine depends on data collected from domestic and international surveillance systems that identify prevalent strains and characterize their effect on human health. FDA decides which strains to include in the vaccine and also licenses and regulates the manufacturers that produce the vaccine. HHS has limited authority, however, to directly control influenza vaccine production and distribution. FDA has approved four antiviral medications (amantadine, rimantadine, oseltamivir, and zanamivir) for prevention and treatment of influenza. However, influenza virus strains can become resistant to one or more of these drugs, and so they may not always be effective. In the United States, responsibility for disease surveillance is shared— involving health care providers; more than 3,000 local health departments, including county, city, and tribal health departments; 59 state and territorial health departments; more than 180,000 public and private laboratories; and public health officials from multiple federal departments and agencies. States, through the use of their state and local health departments, have principal responsibility for protecting the public’s health and therefore take the lead in conducting disease surveillance and supporting response efforts. According to the Institute of Medicine (IOM), most states require health care providers to report any unusual illnesses or deaths—especially those for which a cause cannot be readily established. Generally, local health departments are responsible for conducting initial investigations into reports of infectious diseases. Laboratory personnel test clinical and environmental samples for possible exposures and identification of illnesses. Epidemiologists in health departments use disease surveillance systems to detect clusters of suspicious symptoms or diseases in order to facilitate early detection and treatment. Local and state health departments monitor disease trends. Local health departments are also responsible for sharing information they obtain from providers or other sources with their state departments of health. State health departments are responsible for collecting surveillance information—which they share on a voluntary basis with CDC and others—from across their state and for coordinating investigations and response efforts. Public health officials provide needed information to the clinical community and the public. At the federal level, several departments and agencies are involved in disease surveillance and response. For example, HHS has primary responsibility for coordinating the nation’s response to public health emergencies. As part of its mission, the department has a role in planning to prepare for and respond to an influenza pandemic. One action the department has taken is the development of a draft national pandemic influenza plan, titled “Pandemic Influenza Preparedness and Response Plan.” CDC is charged with protecting the nation’s public health by directing efforts to prevent and control diseases and responding to public health emergencies. It has primary responsibility for conducting national disease surveillance and developing epidemiological and laboratory tools to enhance disease surveillance. CDC also provides an array of technical and financial support for state infectious disease surveillance efforts. In addition, CDC participates in international disease and laboratory surveillance sponsored by WHO. FDA is responsible for ensuring that new vaccines and drugs are safe and effective and for conducting research on diagnostic tools and treatment of disease outbreaks. The agency also regulates and licenses vaccines and antiviral agents through the Center for Biologics Evaluation and Research and the Center for Drug Evaluation and Research, respectively. FDA also develops influenza viral reference strains and reagents and makes them available to manufacturers for vaccine development and evaluation. The Department of Defense (DOD) contributes to global disease surveillance, training, research, and response to emerging infectious disease threats. DOD maintains the DOD Influenza Surveillance Program, a laboratory-based surveillance program. DOD maintains multiple sites throughout the world that serve as sentinels for disease outbreaks, where it collects and analyzes viral specimens. The Department of Agriculture (USDA) is responsible for protecting and improving the health and marketability of animals and animal products by preventing, controlling, and eliminating animal diseases. USDA undertakes disease surveillance and response activities to protect U.S. livestock, ensure the safety of international trade, and contribute to the national zoonotic disease surveillance effort. The United States is a member of WHO, which is responsible for coordinating international disease surveillance and response efforts. An agency of the United Nations, WHO administers the International Health Regulations, which outline WHO’s role and the responsibility of member countries and regions in preventing the global spread of infectious diseases. WHO also helps marshal resources from its members to control outbreaks within individual countries or regions. In addition, WHO works with national governments to improve their surveillance capacities through—for example—assessing and redesigning national surveillance strategies, offering training in epidemiologic and laboratory techniques, and emphasizing more efficient communication systems. Surveillance is a key component in planning for an influenza pandemic, and federal public health officials plan to rely on the nation’s existing annual influenza surveillance system and enhancements to identify an influenza pandemic. Federal public health officials have undertaken several initiatives that are intended to enhance influenza surveillance capabilities. These initiatives have been undertaken both through programs specific to influenza as well as through programs focused more generally on increasing preparedness for bioterrorism and other emerging infectious disease health threats. Federal officials have implemented and expanded syndromic surveillance systems in order to detect outbreaks more quickly, but there are concerns that these systems are costly to run and still largely untested. Federal officials have also implemented initiatives designed to improve public health communications and have undertaken initiatives intended to improve the coordination of zoonotic surveillance efforts. Current U.S. surveillance for identifying annual influenza outbreaks as well as an influenza pandemic involves multiple public health partners at all levels of government and relies on several data sources. At the federal level, CDC’s Influenza Branch leads the national influenza surveillance effort, monitoring disease and viral trends using data submitted each week from October through May. These surveillance data are collected at the local and state levels and voluntarily submitted to CDC. Data submitted on influenza activity in the United States include data from more than 120 laboratories and 2,000 health care providers and mortality reports from 122 cities. In addition, influenza data are collected from all 50 state health departments and the health departments in the District of Columbia and New York City. CDC also receives data that are specifically focused on influenza in pediatric patients. When the data are used collectively, they provide a national picture of influenza activity. Specifically, they allow CDC to (1) identify when and where influenza activity is occurring, (2) determine what strains of the influenza virus are in circulation, (3) detect changes in the influenza virus, (4) monitor influenza-related illnesses, and (5) measure the impact influenza is having on deaths in the United States. DOD also plays a role in national and international influenza surveillance. Specifically, DOD’s Influenza Surveillance Program, under the direction of the Air Force, collects viral specimens from its active duty personnel and their dependents at military facilities around the world. DOD’s program also sends specimens to CDC for further analysis and contributes to the determination of which viral strains FDA includes in the nation’s annual influenza vaccine. Internationally, DOD provides viral specimens to WHO and assists in identifying emerging influenza strains. In countries throughout the world, infectious disease surveillance is a national responsibility, but WHO assists its members’ efforts through its Global Influenza Surveillance Network. WHO’s Network is composed of 112 institutions, called National Influenza Centres, from 83 countries. Collectively, these Centres monitor influenza activity and annually gather more than 175,000 viral specimens for analysis from patients with influenza-like illnesses throughout the world. Selected influenza isolates— an estimated 2,000 viruses—may also be sent to one of four WHO Collaborating Centres for further, more specific genetic analysis. The additional analysis conducted by the WHO Collaborating Centers is used for the annual WHO recommendations on which strains to include in the influenza vaccine for the northern and southern hemispheres. In addition to making recommendations on the components of the influenza vaccine, this Global Influenza Surveillance Network also serves as a global alert mechanism for the emergence of influenza viruses with pandemic potential. CDC has undertaken several initiatives that are intended to enhance influenza surveillance capabilities in preparation for an influenza pandemic. CDC works with its international partners to improve global surveillance for influenza. For example, CDC participates in international disease and laboratory surveillance sponsored by WHO. Also, when concerns were raised over recent influenza seasons that the avian influenza A (H5N1) could become the next influenza pandemic, CDC led a variety of efforts with its international partners to plan for and address threats of increased influenza activity worldwide. For example, CDC worked collaboratively with WHO to conduct investigations of avian influenza A in Vietnam and to provide laboratory testing. CDC also provided training assistance and has implemented an initiative to improve influenza surveillance in Asia. CDC also supports several domestic initiatives to improve surveillance capabilities for influenza. For example, CDC supports enhanced influenza surveillance activities through its Epidemiology and Laboratory Capacity (ELC) Grants. Established in 1997, this program provides funding to state and local influenza programs. Grants have steadily increased from the first awards in 1997, when less than $100,000 was provided to five states through August 2004, with funding totaling more than $2 million being given to about 47 states or major metropolitan areas. States and cities receiving ELC-influenza funding are encouraged to achieve three highlighted influenza epidemiology and laboratory surveillance capacities: sentinel physician surveillance, viral isolation and subtyping, and year- round surveillance. Each state targets funding to meet one or more of these three priorities and uses funding for support of improvements that include the assignment or hiring of an influenza coordinator, recruitment of sentinel physicians to collect influenza specimens and report influenza- like illness to the state, laboratory infrastructure enhancements to increase influenza testing capabilities for viral isolation and subtyping, and expansion of influenza surveillance activities to year-round. In an effort to enhance the ability to detect infectious disease outbreaks, particularly in their early stages, federal funding has supported state efforts to implement numerous syndromic surveillance systems. These systems collect information on syndromes from a variety of sources. For example, the National Retail Data Monitor (NRDM) collects data from retail sources instead of hospitals. As of February 2004, NRDM collected sales data from about 19,000 stores, including pharmacies, in order to monitor sales patterns in such items as over-the-counter influenza medications for signs of a developing infectious disease outbreak. CDC is taking steps to enhance its two public health communications systems, the Health Alert Network (HAN) and the Epidemic Information Exchange (Epi-X), which are used in disease surveillance and response efforts. For example, CDC is working to increase the number of HAN participants who receive assistance with their communication capacities. In addition, following reports of human deaths from avian influenza A in Vietnam in August 2004, CDC issued a HAN message reiterating criteria for domestic surveillance, diagnostic evaluation, and infection control precautions. CDC also issued detailed laboratory testing procedures for avian influenza through HAN. Similarly, CDC has expanded Epi-X by giving officials at other federal agencies and departments, such as DOD, the ability to use the system. CDC is also adding users to Epi-X from local health departments, giving access to CDC staff in other countries, and making the system available to Field Epidemiology Training Programs (FETP) located in 21 countries. Finally, CDC is facilitating Epi-X’s interface with other data sources by allowing users to access the Global Public Health Intelligence Network (GPHIN), the system that searches Web-based media for information on infectious disease outbreaks worldwide. In addition to the efforts to enhance communication systems, federal public health officials also have enhanced federal coordination for zoonotic disease surveillance and expanded training programs. According to CDC, nearly 70 percent of emerging infectious disease episodes during the past 10 years have been zoonotic diseases. Moreover, recent outbreaks of human disease caused by avian influenza strains in Asia and Europe highlight the potential for new strains to be introduced into the population. Surveillance for zoonotic diseases requires collaboration between animal and human disease specialists. CDC, USDA, and FDA have made efforts to enhance their coordination of zoonotic disease surveillance. For example, CDC and UDSA are working with two national laboratory associations to add veterinary diagnostic laboratories to the Laboratory Response Network (LRN). As of May 2004, 10 veterinary laboratories had been added to LRN, and CDC officials told us that they had plans to add more veterinary laboratories in the future. In addition, CDC officials told us the agency has appointed a staff person whose responsibility, in part, is to assist in finding ways to enhance zoonotic disease coordination efforts among federal agencies and departments and with other organizations. This person is helping CDC develop a working group of officials from CDC, USDA, and FDA to coordinate zoonotic disease surveillance. According to CDC officials, the goal of this working group is to explore ways to link existing surveillance systems to better coordinate and integrate surveillance for wildlife, domestic animal, and human diseases. CDC officials also said that the agency is exploring the feasibility of a pilot project to demonstrate this proposed integrated zoonotic disease surveillance system. In addition, USDA officials told us that they hired 23 wildlife biologists in fall 2003 to coordinate disease surveillance, monitoring, and management activities among USDA, CDC, states, and other federal agencies. While each of these initiatives is intended to enhance the surveillance of zoonotic diseases, each is still in the planning stage or the very early stages of implementation. USDA also conducts influenza surveillance in domestic animals. Coordination with USDA is important because a pandemic strain is likely to arise from genetic mixing of animal and human influenza viruses. Recent outbreaks in domestic poultry in Asia and Europe associated with cases of human disease highlight the importance of coordinating surveillance activities. Surveillance for influenza viruses in poultry in the United States has increased substantially since the outbreak of highly pathogenic avian influenza (HPAI) in Pennsylvania and surrounding states in 1983 and 1984. However, individual states are generally responsible for the development and implementation of surveillance programs that are consistent with the size and complexity of the resident poultry industry. Challenges regarding the nation’s preparedness for and response to an influenza pandemic remain. Specifically, our prior work has found that although CDC participated in an interagency working group that developed the U.S. plan for pandemic preparedness that was posted for public comment in August 2004, as of May 23, 2005, the plan had not been finalized. Further, we found that the draft plan does not address certain critical issues, including how vaccine for an influenza pandemic will be purchased, distributed, and administered; how population groups will be prioritized for vaccination; what quarantine authorities or travel restrictions may need to be invoked; and how federal resources should be deployed. At the state level, we found that most hospitals across the country lack the capacity to respond to large-scale infectious disease outbreaks. In August 2004, HHS released its national pandemic influenza plan for comment. The draft “Pandemic Influenza Preparedness and Response Plan” describes HHS’s role in coordinating a national response to an influenza pandemic and provides guidance and tools to promote pandemic preparedness planning and coordination at the federal, state, and local levels, including both the public and the private sectors. However, as of May 23, 2005, this document remained in draft form. Further, although the plan is comprehensive in scope, it leaves many important decisions unresolved about the purchase, distribution, and administration of vaccines. For example, some decisions yet to be made include determining the public- versus private-sector roles in the purchase and distribution of pandemic influenza vaccines; the division of responsibility between the federal government and the states for vaccine distribution; and how population groups will be prioritized and targeted to receive limited supplies of vaccines. Until these key decisions are made, public health officials at all levels may find it difficult to plan for an influenza pandemic, and the timeliness and adequacy of response efforts may be compromised. The draft plan does not establish a definitive federal role in the purchase and distribution of vaccines during an influenza pandemic. Instead, HHS provides options for vaccine purchase and distribution that include public- sector purchase and distribution of all pandemic influenza vaccine; a mixed public-private system where public-sector supply may be targeted to specific priority groups; and maintenance of the current largely private system. In its draft plan, HHS does not recommend a specific alternative. Furthermore, the draft plan delegates to the states responsibility for distribution of vaccine. The lack of a clearly defined federal role in distribution complicates pandemic planning for the states. Furthermore, among the current state pandemic influenza plans, there is no consistency in terms of their procurement and distribution of vaccine and the relative role of the federal government. Approximately half of the states handle procurement and distribution of the annual influenza vaccine through the state health agency. The remainder either operate through a third-party contractor for distribution to providers or use a combination of these two approaches. Challenges persist in ensuring an adequate and timely influenza vaccine supply. The number of producers remains limited, and the potential for manufacturing problems such as those experienced during the 2004-2005 influenza season is still present. When one manufacturer’s production is affected, providers who order vaccine from that manufacturer can experience shortages, while providers who receive supplies from another manufacturer may have all the vaccine they need. The allocation plan CDC developed for this past season’s shortage was dependent upon voluntary compliance by the private sector and individuals to forgo vaccination. Most annual influenza vaccine distribution and administration are accomplished within the private sector, with relatively small amounts of vaccine purchased and distributed by CDC or by state and local health departments. In the United States, 85 percent of vaccine doses are purchased by the private sector, such as private physicians and pharmacies. HHS has not yet determined how influenza vaccine will be distributed and administered during an influenza pandemic. There are many issues surrounding the production of influenza vaccine, which will only become exacerbated during an influenza pandemic. Vaccines, which are considered the first line of defense to prevent or reduce influenza-related illness and death, may be unavailable or in short supply. Producing the vaccine is a complex process that involves growing viruses in millions of fertilized chicken eggs. Experience has shown that the vaccine production cycle takes at least 6 to 8 months after a virus strain has been identified, and vaccines for some influenza strains have been difficult to mass-produce, causing further delay. The lengthy process for developing a vaccine may mean that a vaccine would not be available during the initial stages of a pandemic. Vaccine shortages during the 2004-2005 influenza season have highlighted the fragility of the influenza vaccine market and the need for its expansion and stabilization. Currently, only two manufacturers are licensed to sell their vaccine in the United States. Maintaining an influenza vaccine supply is critically important for protecting the public’s health and improving our preparedness for an influenza pandemic. As a result, according to CDC officials, the agency plans to alleviate the impact of next year’s influenza season by taking aggressive steps to ensure an expanded influenza supply to protect the nation. To this end, the agency’s fiscal year 2006 budget request includes an increase of $30 million for CDC to enter into guaranteed purchase contracts with vaccine manufacturers to ensure the production of bulk monovalent influenza vaccine. If supplies fall short, this bulk product can be turned into a finished trivalent influenza vaccine product for annual distribution. If supplies are sufficient, the bulk vaccine can be held until the following year’s influenza season and developed into vaccines if the circulating strains remain the same. In addition, according to CDC, this guarantee will help to expand the influenza market by providing an incentive to manufacturers to expand capacity and possibly encourage additional manufacturers to enter the market. In addition, the fiscal year 2006 budget request includes an increase of $20 million to support influenza vaccine purchase activities. Even if sufficient quantities of the vaccine are produced in time, vaccines against various strains differ in their ability to produce the immune response necessary to provide effective protection against the disease. Studies show that it is uncertain how effective a vaccine will be in preventing or controlling the spread of a pandemic influenza virus. Early in an influenza pandemic, especially before a vaccine is available or during a period of limited vaccine supply, use of antiviral drugs may have a significant effect. Specifically, antiviral drugs can help prevent or mitigate the number of influenza-related deaths until an influenza vaccine becomes available. They can be used against all strains of pandemic influenza and have immediate availability as both a prophylactic to prevent illness and as a treatment if administered within 48 hours of the onset of symptoms. According to HHS, analysis is ongoing to define optimal antiviral use strategies, potential health impacts, and cost-effectiveness of antiviral drugs in the setting of a pandemic. The United States has a limited supply of influenza antiviral medications stored for an influenza pandemic. HHS officials expect the amount produced will be below demand during a pandemic. This assumption, supported by drug manufacturers, is based on the fact that current production levels of antiviral drugs are set in response to current demand, whereas demand in a pandemic is expected to increase significantly if vaccines are unavailable. In addition, the production of antiviral medications cannot be rapidly expanded and involves a long production process. Moreover, sometimes influenza virus strains can become resistant to one or more of the four approved influenza antiviral drugs, and thus the drugs may not always work. For example, the influenza A (H5N1) viruses identified in human patients in Asia in 2004 and 2005 have been resistant to two of the four antiviral drugs, amantadine and rimantadine. Another challenge in responding to an influenza pandemic involves implementing certain control measures to prevent the spread of the disease. These control measures—case identification and contact tracing, transmission control, and exposure management—are well-established and have proved effective in both health care and community settings. However, federal attempts to limit the spread of SARS into the United States by advising passengers who traveled to infected countries faced multiple obstacles. For example, due to airline concerns over authority and privacy, as well as procedural constraints, CDC was unable to obtain passenger contact information it needed to trace travelers. Although HHS has statutory authority to prevent the introduction, transmission, or spread of communicable diseases from foreign countries into the United States, HHS regulations implementing the statute do not specifically provide for HHS to obtain passenger manifests or other passenger contact information from airlines and shipping companies for disease outbreak control purposes. A challenge identified during the SARS outbreak that may also affect response efforts during an influenza pandemic is lack of sufficient hospital and workforce capacity. This lack could be exacerbated during an influenza pandemic, compared to other natural disasters, such as a tornado or hurricane, or an intentional release of a bioterrorist agent, because it is likely that a pandemic would result in both widespread and sustained effects. Public health officials we spoke with said a large-scale outbreak, such as an influenza pandemic, could strain the available capacity of hospitals by requiring entire hospital sections (along with their staff) to be used as isolation facilities. As we have reported earlier, most states lack “surge capacity,” that is, the capacity to respond to the large influx of patients that could occur during a large public health emergency. For example, few states reported that they had the capacity to evaluate, diagnose, and treat 500 or more patients involved in a single incident. In addition, few states reported having the capacity to rapidly establish clinics to immunize or provide treatment to large numbers of patients. Moreover, a shortage in workforce could increase during an influenza pandemic because higher disease rates could result in high rates of absenteeism among health care workers who are likely to be at increased risk of exposure and illness. There are a number of systems in place to identify influenza outbreaks abroad, to alert us to a pandemic, and these systems generally appear to be working well. HHS has taken important steps to enhance surveillance and to fund initiatives for preparedness and response, including steps to increase the vaccine supply. However, important challenges remain in our preparedness to respond, should an influenza pandemic occur in the United States. The steps HHS is taking to address vaccine production capacity and stockpiling of antiviral drugs may not be in place in time to fill the current gaps in preparedness should an influenza pandemic occur in the next several years. As we learned in the 2004-2005 influenza season, problems affecting even a single manufacturer can produce major shortages. Once a pandemic influenza strain is identified, a vaccine will take many months to produce, and our current stockpile of antiviral drugs is insufficient to meet the likely demand. Pandemic influenza would have major impacts on the ability of communities to respond, businesses to function, and public safety to be maintained when communities across the country are simultaneously impacted and hospital capacity is overwhelmed. Since 2000, we have been urging the department to complete its pandemic plan. A draft plan was issued in August 2004, with a 60-day period for public comment, but as of this week, the plan had not been finalized. It is important for the federal government and the states to work through issues such as how vaccine will be purchased, distributed, and administered, how population groups will be prioritized for vaccination, what quarantine authorities or travel restrictions may need to be invoked, and how federal resources should be deployed before we are in a time of crisis. Mr. Chairman, this concludes my prepared statement. I would be happy to respond to any questions you or other Members of the Subcommittee may have at this time. For further information about this testimony, please contact Marcia Crosse at (202) 512-7119. Gloria E. Taylor, Gay Hee Lee, Elizabeth T. Morrison, and Roseanne Price made key contributions to this statement. Emergng Infecious Diseases: Revew of Sate and Federal Disease Surveillance Effors. GAO-04-877. Washington, D.C.: September 30, 2004. t nectous Disease Preparedness: Federal Chalenges in Responding to I f i Influenza Outbreaks. GAO-04-1100T. Washington, D.C.: September 28, 2004. Emergng Infecious Diseases: Asian SARS Outbreak Challenged I tnernational and Natonal Responses. GAO-04-564. Washington, D.C.: i April 28, 2004. Publc Heath Preparedness: Response Capac y mproving, bu Much t Remains to Be Accomp shed. GAO-04-458T. Washington, D.C.: February 12, 2004. Infectious Diseases: Gaps Remain in Survei ance Capabil ies o State and Local Agences. GAO-03-1176T. Washington, D.C.: September 24, 2003. i Severe Acute Respiraory Syndrome: Estabished Infectious Dsease Control Measures Helped Contain Spread, But a Large-Scale Resurgence May Pose Challenges. GAO-03-1058T. Washington, D.C.: July 30, 2003. SARS Outbreak: Improvemens to Pub c Health Capacity Are Needed for Responding o Bioerrorism and Emergng Infectous Diseases. GAO-03-tti 769T. Washington, D.C.: May 7, 2003. Infectious Disease Outbreaks: Bioterrorism Preparedness Efforts Have Improved Pub c HealhResponse Capacty, but Gaps Reman. GAO-03-t liii 654T. Washington, D.C.: April 9, 2003. Global Healh: Chalenges in Improving Infectious Disease Surve ance Systems. GAO-01-722. Washington, D.C.: August 31, 2001. Flu Vaccine: Steps Are Needed to Better Prepare for Possible Future Shortages. GAO-01-786T. Washington, D.C.: May 30, 2001. Flu Vaccne: Supply Probems Heighen Need o Ensure Access for High Risk People. GAO-01-624. Washington, D.C.: May 15, 2001. nluenza Pandemic: Pan Needed for Federal and State Response. GAO- I f 01-4. Washington, D.C.: October 27, 2000. l West Nile Virus Outbreak: Lessons for Pubic Healh Preparedness. GAO/HEHS-00-180. Washington, D.C.: September 11, 2000. Global Health: Framework for Infectious Disease Surveillance. GAO/NSIAD-00-205R. Washington, D.C.: July 20, 2000. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Vaccine shortages and distribution problems during the 2004-2005 influenza season raised concerns about the nation's ability to respond to a worldwide influenza epidemic--or influenza pandemic--which many experts believe to be inevitable. Some experts believe that the next pandemic could be spawned by the recurring avian influenza in Asia. If avian influenza strains directly infect humans and acquire the ability to be readily transmitted between people, a pandemic could occur. Modeling studies suggest that its effect in the United States could be severe, with one estimate from the Centers for Disease Control and Prevention (CDC) ranging from 89,000 to 207,000 deaths and from 38 million to 89 million illnesses. GAO was asked to discuss surveillance systems in place to identify and monitor an influenza pandemic and concerns about preparedness for and response to an influenza pandemic. This testimony is based on GAO's 2004 report on disease surveillance; reports and testimony on influenza outbreaks, influenza vaccine supply, and pandemic planning that GAO has issued since October 2000; and work GAO has done in May 2005 to update key information. Federal public health officials plan to rely on the nation's existing influenza surveillance system and enhancements to identify an influenza pandemic. CDC currently collaborates with multiple public health partners, including the World Health Organization (WHO), to obtain data that provide national and international pictures of influenza activity. Federal public health officials and health care organizations have undertaken several initiatives that are intended to enhance influenza surveillance capabilities. While some of these initiatives are focused more generally on increasing preparedness for bioterrorism and other emerging infectious disease health threats, others have been undertaken in preparation for an influenza pandemic. For example, in response to concerns over the past few years about the potential for avian influenza to become the next influenza pandemic, CDC implemented an initiative in cooperation with WHO to improve influenza surveillance in Asia. CDC has also implemented initiatives to improve the communications systems it uses to collect and disseminate surveillance information. In addition, CDC, the Department of Agriculture, and the Food and Drug Administration have made efforts to enhance their coordination of surveillance efforts for diseases that arise in animals and can be transferred to humans, such as SARS and certain strains of influenza with the potential to become pandemic. While public health officials have undertaken several initiatives to enhance influenza surveillance capabilities, challenges remain with regard to other aspects of preparedness for and response to an influenza pandemic. In particular, the Department of Health and Human Services (HHS) has not finalized planning for an influenza pandemic. In 2000, GAO recommended that HHS complete the national plan for responding to an influenza pandemic, but the plan has been in draft format since August 2004. Absent a completed federal plan, key questions about the federal role in the purchase, distribution, and administration of vaccines and antiviral drugs during a pandemic remain unanswered. Other challenges with regard to preparedness for and response to an influenza pandemic exist across the public and private sectors, including challenges in ensuring an adequate and timely influenza vaccine and antiviral supply; addressing regulatory, privacy, and procedural issues surrounding measures to control the spread of disease, for example, across national borders; and resolving issues related to an insufficient hospital and health workforce capacity for responding to a large-scale outbreak such as an influenza pandemic. |
As of September 30, 1997, the Navy reported that the value of its inventory was $16.8 billion. The Naval Supply Systems Command (NAVSUP) administers the Navy supply system and provides in-transit inventory management policies and procedures. The Command, through its NAVICP,initiates purchases and directs inventory movement for its customers. Until the inventory reaches its intended destination, NAVICP refers to it as in transit. The major categories of in-transit inventory are as follows: Warehoused material—material redistributed between storage activities, broken items shipped from Navy consolidation points to a commercial or other military service repair facility, and material returned from a commercial or other military service repair facility or an end user. Purchased material—new material shipped from a commercial source to a storage activity. End-user material—material ordered from a storage activity or commercial source by a unit that expects to use it. The Navy is required to use a variety of inventory tracking procedures to monitor shipment and receipt of in-transit items. Although the specific procedures for each major category have some differences, they all have three common control elements. First, the recipient of the material is responsible for notifying the NAVICP once the item has been received. This notification is an internal control designed to account for all in-transit assets. Second, if within 45 days of shipment NAVICP has not been notified that a shipment has arrived, it is required to follow up with the intended recipient. The rationale behind this requirement is that until receipt is confirmed, the exact status of the shipment is uncertain and therefore vulnerable to fraud, waste, and abuse. Third, the Navy is required to oversee in-transit inventory to assess the effectiveness of policies and procedures governing that inventory. Appendix II contains additional details on the receipt acknowledgment and follow-up procedures for in-transit items. Implementing inventory controls is a shared responsibility of the NAVICP and shipping and receiving activities, which include Defense Logistics Agency (DLA) and Navy-managed activities, and repair facilities. The Navy reported that it was unable to account for substantial amounts of in-transit inventory. This inventory is vulnerable to theft or loss and could cause managers to implement inefficient, ineffective decisions and practices regarding purchases. Between October 1995 and September 1998, the Navy reported that it wrote off as lost in-transit inventory valued at over $3 billion. Our analysis of financial reports showed that NAVICP Philadelphia was responsible for about $2.5 billion, or 84 percent, of these losses. Figure 1 summarizes the value of in-transit inventory losses by inventory control point. The Navy’s in-transit inventory losses may be greater than the Navy recognizes because of uncertainties about the status of shipments to end users that did not have a corresponding notification of receipt. Figure 1 does not include any unaccounted for shipments to end users. For example, as we reported in February 1998, DOD did not have receipts for about 60 percent of its 21 million shipments to end users in fiscal year 1997. Among the DOD components, the Navy was responsible for over one-third of DOD’s 21 million shipments and almost one-half of DOD’s 12.4 million unacknowledged receipts (valued at $11.7 billion). Our review of 30,314 lost warehoused shipments (representing 132,793 items worth $753 million) at NAVICP Philadelphia in fiscal year 1997 showed that over 8,000 shipments contained military technology that needed to be protected. Classified and sensitive items included aircraft-guided missile launchers, military night vision devices, and communications equipment. Moreover, some shipments reported as lost included pilferable items such as radio sets and radar transmitters that have a ready resale value or civilian application and are therefore especially subject to theft. Although not categorized by DOD as pilferable, the lost items also included such items as video recorders and generators. Figure 2 summarizes the items lost in transit by security classification and figure 3 shows the items’ value. Naval Supply Systems Command and NAVICP Philadelphia officials pointed out that in-transit losses for high-dollar items have declined from $1.2 billion to $600 million over the past 3 fiscal years but acknowledged that in-transit inventory continues to be a primary concern. According to these officials, in some instances the reported in-transit inventory losses might have resulted from accounting adjustments and, as such, were not real losses. They further stated that in most cases, the reported losses occurred because activities involved in the movement, repair, and storage of in-transit items did not (1) notify NAVICP Philadelphia that they shipped or received items as required by Navy regulations or (2) respond to follow-up inquiries made by NAVICP Philadelphia. However, as we note in the following section, our review of lost in-transit sample items revealed that the failure to comply with procedures for controlling in-transit inventory did not stop with the issuing, shipping, and receiving activities and did not result from accounting adjustments as Navy officials asserted. As a result of several significant control weaknesses, the Navy’s in-transit inventory is highly vulnerable to fraud, waste, and abuse. First, end users have not routinely reported receipt of items to the NAVICP. Second, the integrated accounting and logistics systems that tie the Navy’s accounting systems to its in-transit inventory tracking systems have not been effective. Third, NAVICP Philadelphia and its issuing activities, intended recipients, and commercial carriers have not adequately investigated cases in which warehoused material was not acknowledged as received. Fourth, NAVICP Philadelphia has not monitored the receipt of purchased material from commercial sources. Fifth, NAVSUP and NAVICP Philadelphia have not provided adequate oversight and monitoring of in-transit inventory. End users have not routinely reported receipt of items to NAVICP Philadelphia. For a 1-year period ending in May 1998, NAVICP Philadelphia closed the records for over $743 million in shipments that did not have a notification of receipt and had been outstanding for over 90 days. The NAVICP transfers accountability of material when it issues a release order to a DOD storage activity to ship the material and then to customers when they receive the material. End users are required by DOD policy to record receipts of material and notify the appropriate inventory control point within 5 calendar days (either electronically or by mail). We judgmentally selected for review 92 reported end-user shipments (valued at $5.2 million) whose receipt, according to NAVICP Philadelphia records, had not been acknowledged. We sought to determine whether those shipments had in fact been received and reported to NAVICP Philadelphia. According to NAVICP Philadelphia officials, 51 of the 92 shipments (valued at over $566,000) were to storage activities and had been incorrectly shown as end-user shipments. Thus, the records of the shipments should not have been closed by the NAVICP Philadelphia automated tracking system for end-user receipts. We then reviewed the status of these 51 shipments in the warehoused material receipt tracking system. NAVICP Philadelphia and the intended recipient were unable to provide evidence that four shipments had been delivered or received. The remaining 47 shipments had been received. Of the remaining 41 shipments (valued at $4.7 million), we determined that 28 (valued at $3.3 million) had in fact been received and accounted for, but the receipt acknowledgments had not been sent to NAVICP Philadelphia. According to one Defense Automated Addressing System (DAAS) Office official, the end users’ receipt acknowledgment codes were obsolete. Consequently, DAAS did not forward the acknowledgments to NAVICP Philadelphia. When we informed end-user officials that their acknowledgment codes were obsolete, they said that the Navy had not yet changed its reporting systems and procedures to conform with DOD’s changes in the codes. Our review also showed other shortcomings in the execution of in-transit control policies and procedures for the remaining 13 shipments. For example: One shipment valued at $606,330 was assumed by NAVICP Philadelphia to have been received by the end user but was never shipped by the depot. Twelve shipments valued at $737,986 had been received by the end user but were not reported to NAVICP Philadelphia. End-user officials said that their automated logistics system is not designed to acknowledge material receipt. However, DOD policy states that if the reporting activity cannot transmit receipt electronically, it should prepare a manual material receipt acknowledgment and mail the form directly to the inventory control point. Because of poorly integrated accounting and logistics systems, the Navy may have written off as lost millions of dollars of warehoused material shipments that had actually been received and accounted for by NAVICP Philadelphia and in DAAS historical records. Navy policy for following up on in-transit material states that the NAVICP should search its internal files for delinquent receipts of warehoused material shipments. Delinquent shipments, according to Navy policy, should be written off as inventory losses if their receipts remain unconfirmed after 6 months or 11 months, depending on their value. According to Navy policy, shipments of consumable items, depot-level reparable items, and appropriated purchases valued at less than $2,500, $15,000, and $20,000, respectively, should be written off as inventory losses if their receipts remain unconfirmed after 6 months. All other shipments require external follow-up and should be written off as lost if their receipts remain unconfirmed after 11 months. At NAVICP Philadelphia, 15 (16 percent) of the 94 warehoused shipments that we sampled were written off as lost despite the fact that their receipts were recorded in NAVICP Philadelphia’s internal files and DAAS historical records 6 months to 1 year in advance of the date they were written off. These discrepancies reduce the reliability of inventory financial reports, which thus obscure true inventory losses, such as those resulting from theft or loss, and misstate the number of items on hand. We informed NAVICP Philadelphia officials that their internal and DAAS history files contained receipts for 15 warehoused shipments that were written off as lost. They said that in 11 cases, they had not accurately identified these receipts because the Navy’s general ledger system, which ties its accounting systems to its logistics and other key management systems and is used to identify the receipt of shipments, did not update both accounting and logistics records with the in-transit inventory receipts. In the other four cases, the receiving activities did not correctly enter receipt data into the logistics system; thus, the NAVICP’s integrated systems showed that the items were not received. NAVSUP officials said that until the planned resystemization of its databases is complete, NAVICP Philadelphia would need to rely on the Navy’s general ledger system to identify the receipt of shipments. Our prior reports have pointed out deficiencies in DOD’s existing accounting and related systems, including its logistics systems. Although Navy policy requires external follow-up of unconfirmed receipts of warehoused material over a certain dollar threshold, NAVICP Philadelphia has not adequately followed up or resolved such receipts. According to Navy policy, the NAVICP should first seek proof of shipment from the issuing activity on shipments of consumable items, depot-level reparable items, and appropriated purchases valued at more than $2,500, $15,000, and $20,000, respectively, within 45 days from the date the material was issued. After obtaining that information, the NAVICP should seek proof of delivery from the shipping carrier. Navy policy, however, does not set a specific time limit for replies from issuing activities, shipping carriers, and intended recipients. We sampled 17 warehoused shipments (valued at $2.3 million) that required external follow-up. For these shipments, NAVICP Philadelphia officials explained that commercial carriers, storage activities, and repair contractors did not respond to their follow-up requests and the shipments were later written off as lost. However, our review showed that 2 of the 17 shipments (valued at $215,760) were erroneously written off as lost but in reality had been acknowledged as received and accounted for in NAVICP inventory records. For the remaining 15 shipments (valued at $2,085,200), NAVICP did not follow up when receipts were not returned. Specifically, in 6 of the 15 shipments (valued at $910,600) NAVICP Philadelphia did not adequately follow up for proof of shipment, delivery, or receipt with the appropriate activities. For three other shipments (valued at $479,040), the carriers did not respond to NAVICP’s requests for proof of delivery, and NAVICP did not initiate claims against the carriers. For five shipments (valued at $647,230), the storage or repair activity did not respond to NAVICP’s requests for proof of receipt. NAVICP Philadelphia officials could not explain what happened to the remaining shipment (valued at $48,330) and could not provide documentation that they had followed up on the shipment to account for its loss. The following two examples illustrate how the inadequate follow-up and resolution of overdue shipments results in reported in-transit losses of material. In September 1996, the Defense Distribution Depot in Norfolk, Virginia, issued 24 generators (valued at $212,640) to a commercial carrier for shipment to a commercial repair contractor. According to NAVICP Philadelphia officials, the repair contractor did not acknowledge receipt of the material. Over 90 days later, in December 1996, the NAVICP requested proof of issuance from the Norfolk depot, which the depot provided in January 1997. In February 1997, the NAVICP sought proof of delivery from the carrier, which did not confirm delivery. NAVICP officials said they did not initiate a claim against the carrier. The material was later written off as an in-transit loss. In October 1995, the Norfolk depot reportedly issued 29 aircraft guided-missile launchers (valued at over $181,830) to the Fleet and Industrial Supply Center in San Diego, California. According to NAVICP Philadelphia officials, the Center did not acknowledge receiving the equipment. In February 1996, NAVICP sought proof of issuance from the Norfolk depot, which it provided in April 1996. NAVICP Philadelphia officials said that they then unsuccessfully sought proof of receipt from the Center from April to October 1996, when the items were written off as lost. NAVICP Philadelphia has not monitored the receipt of purchased material from commercial sources. Under Navy policy, NAVICP must follow up with the appropriate depot on receipts for purchased material 45 days from the date of the shipment, and the depot must respond to NAVICP on the status of the shipments. However, NAVICP Philadelphia officials told us that they neither monitor shipments nor follow up on delinquent receipts. These officials said they were unaware that NAVICP was required to initiate follow-up on delinquent receipts. During our review, NAVICP Philadelphia reported that in-transit purchased material totaled over $75 million, of which $4.8 million in material had been in transit for over 1 year. We judgmentally selected and reviewed records for 28 shipments (valued at about $1 million) with outstanding purchased material balances over 1 year old and found the following: Eight shipments (valued at $172,099) had been sent from commercial vendors to end users over 1 year earlier, but NAVICP Philadelphia officials had not attempted to follow up on delinquent receipt notifications to determine whether the shipments had been received. NAVICP Philadelphia’s automated records indicated that six shipments of purchased material (valued at $343,679) were in transit, but in fact there were no such shipments. Instead, expenses of $343,679 had been incurred to terminate the six contracts erroneously processed as outstanding purchased material. According to Navy officials, the Defense Finance Accounting Service disbursement system does not distinguish between material and termination settlement payments, both of which accrue purchased material. One shipment (valued at $26,566) reflected outstanding purchased material in NAVICP Philadelphia’s automated financial records, but the amount was in fact for internally generated progress payment expenditure corrections. NAVICP Philadelphia’s automated records indicated that two shipments of purchased material (valued at $38,750) were in transit, but in actuality $38,750 was the difference between the estimated and final contract cost of the two shipments. Eleven shipments (valued at $438,395) were received, but one of NAVICP Philadelphia’s automated inventory records was not updated to reflect the status of these shipments. According to NAVICP Philadelphia officials, receipts for the shipments were processed in their automated contract status file but were not reflected in the procurement obligation status file. Consequently, the established procurement remained on the NAVICP’s file as outstanding purchased material. No effort had been made to reconcile these 11 inconsistencies. In May 1990, we reported discrepancies between NAVICP Philadelphia’s purchased material shipment records and receipt records, a condition that may adversely affect procurement decisions. We further reported that these discrepancies indicated inadequate internal controls over procured assets and did not provide NAVICP Philadelphia with reasonable assurance that its procurement system was adequately protected from waste, fraud, and abuse. In addition, the NAVICP Philadelphia, in its fiscal years 1995-98 management control reviews, cited ongoing problems with the systems used to track purchased material. NAVSUP and NAVICP Philadelphia have not always monitored warehoused material receipt and follow-up efforts as required by Navy policy. The policy requires periodic reviews of in-transit inventory losses to highlight breakdowns in the physical distribution process and assist the NAVICP in monitoring its performance. These reviews are also designed to give NAVSUP a means of assessing the effectiveness of its policies and procedures for governing in-transit inventory. Although NAVICP Philadelphia compiles summary data on in-transit inventory losses, its officials responsible for inventory accuracy acknowledged that they do not compile data that identifies the predominant causes, sources, and magnitude of in-transit inventory losses, even though the compilation of such information is required by Navy policy. The lack of this information impede’s the Navy’s ability to determine which activities are responsible for lost or misplaced items. NAVSUP officials acknowledged that they had not actively monitored in-transit inventory receipt and follow-up efforts but had recently begun to review both systems and processes to correct weaknesses. The Federal Managers’ Financial Integrity Act of 1982 requires that agency heads provide an annual statement to the President and Congress on whether their agency’s internal control systems comply with the internal control objectives of the act. If the agency head decides that agency systems do not comply, a report identifying material weaknesses involved and the plans and schedules for correcting the weaknesses must be submitted with the statement. The statement is also to include a report on whether the agency’s accounting system conforms to the Comptroller General’s standards. However, the Navy did not identify significant weaknesses in internal controls over NAVICP’s in-transit inventory in its Financial Integrity Act statements over the past 3 years, despite the fact that it had written off as lost inventory valued at more than $3 billion. Moreover, the Navy has not established any performance measures, milestones, or timetables for reducing the risk of its in-transit inventory to undetected theft or misplacement. The weaknesses in the Navy’s internal controls over in-transit inventory undermine its ability to measure its progress toward achieving the goals set out in DOD’s recent Performance Plan, covering fiscal year 1999, prepared in response to the requirements of the Government Performance and Results Act. DOD’s plan calls for improving asset visibility in such areas as in-transit assets and sets up the goal to achieve 90-percent visibility over material by 2000. Current Navy internal controls over in-transit inventory do not provide a reliable means to establish visibility. Our review of items that the Navy had reported as being lost in transit indicated that at least some had in fact been acknowledged as received. In other cases, Navy officials wrote off in-transit inventory items because they did not know whether the items had been stolen or otherwise lost. In other words, they did not have adequate visibility over them. The lack of adequate internal controls undermines the Navy’s ability to do its part in helping DOD achieve a 90-percent visibility rate over inventories by 2000 and reduce inventories by 2003. The lack of controls may also limit the ability of DOD and Navy officials to effectively manage the movement of material and to make sound decisions about redistributing items rather than buying new items or optimizing the positioning of stock. DOD is also required by the Strom Thurmond National Defense Authorization Act for Fiscal Year 1999 to develop a comprehensive plan to ensure visibility over in-transit secondary items. For secondary items, the law requires that DOD’s plan address such issues as the vulnerability of in-transit items to loss through fraud, waste, and abuse; loss of oversight of in-transit items, including items transported by commercial carriers; and loss of accountability over in-transit items due to either a delay of delivery of the items or a lack of notification of the delivery. The act called for DOD to submit its plan to Congress by March 1, 1999. However, on March 4, 1999, DOD informed Congress that additional time was necessary to prepare the plan due to, among other things, the broad scope of the requirement and the need to thoroughly study our findings on in-transit inventory. DOD stated that it intended to submit a comprehensive plan to Congress by September 1, 1999. The Navy has not effectively controlled its in-transit inventory, leaving significant amounts of inventory unaccounted for. Significant weaknesses exist at all levels of the Navy’s in-transit inventory management structure. These weaknesses lead to potential theft or undetected losses of items and demonstrate inefficient and ineffective logistics management practices such as potentially shipping or buying unnecessary inventory. These weaknesses and the problems they create are primarily a result of the failure of the Navy to follow its own policies and procedures regarding controls of in-transit inventory. Further, significant problems exist in data reporting systems. In conjunction with developing a statutorily required, comprehensive plan to address visibility over in-transit inventory, DOD should take a number of immediate steps to improve controls over the Navy’s in-transit inventory. Specifically, we recommend that the Secretary of Defense direct the Secretary of the Navy to do the following: Comply with existing DOD and Navy procedures regarding material receipt acknowledgment of in-transit shipments and reemphasize follow-up procedures on unconfirmed warehoused and purchased material receipts. Modify the Navy’s integrated accounting and logistics systems so that they routinely update both financial and inventory records when in-transit inventory items are received. Until the systems are operational, NAVICP Philadelphia should establish routine reconciliation procedures for their supply and financial records to ensure oversight and control over in-transit inventory items. Specifically target in-transit inventory problems as an issue for review in Federal Managers’ Financial Integrity Act assessments. Establish performance measures, milestones, and timetables to help monitor the progress being made to reduce the vulnerability of in-transit inventory to undetected loss or misplacement. In written comments on a draft of this report, DOD agreed with all of our recommendations and stated that the Navy had taken immediate steps to improve in-transit inventory. The Commander, Naval Supply Systems Command, has chartered an Integrated Process Team to review current systems, policies, and processes to investigate material receipt acknowledgment problems and proposed short-term solutions. The Commander has also chartered a team to review in-transit practices of the other services and of commercial activities in order to reengineer the in-transit process. The Naval Inventory Control Point will include in-transit inventory accounting as part of its fiscal year 1999 management control evaluation of internal controls and report material weaknesses to NAVSUP by August 1, 1999. DOD further stated that the Commander, Naval Supply Systems Command, will establish performance measures and a plan of action and milestones to monitor progress being made to reduce the loss or misplacement of shipments. Although DOD agreed with our recommendations, it stated that initial research of the $3 billion in Navy inventory written off as lost supports its belief that most of the material was actually received. A DOD official later said that DOD’s belief was based on its review of 410 lost warehoused material shipments at NAVICP Philadelphia in fiscal year 1997. According to the official, DOD found that 327 (80 percent) of the 410 shipments had been written off as lost even though they had been received. However, our review at NAVICP Philadelphia indicated a different relationship between shipments later accounted for and those actually lost. Our review showed that 15 (16 percent) of the 94 warehoused shipments we sampled were written off as lost despite the fact that their receipts were recorded and that the Navy, after further investigation, could not account for the whereabouts of the remaining 79 shipments. Although some of the items reported as lost may actually be in the inventory, DOD does not have an adequate system for determining that on an item-by-item basis. Therefore, we continue to believe a significant number of items are vulnerable to undetected theft or loss. Moreover, until this situation is resolved, these discrepancies reduce the reliability of DOD inventory financial reports, thus obscuring true inventory losses and misstating the number of items on hand. We believe that the Navy’s planned and ongoing initiatives to address its in-transit inventory deficiencies are a step in the right direction. However, in conjunction with the steps taken to improve controls over the Navy’s in-transit inventory, DOD needs to develop its plan for in-transit inventory and bring it to fruition. DOD has recently indicated that it will take an additional 6 months to develop the statutorily required, comprehensive plan for its in-transit inventory. Because the act calls for us to review the DOD plan and implementation, we will continue to monitor DOD’s efforts to develop its overall plan and be in a position to assess its implementation. Appendix I contains the scope and methodology for this report, and appendix II contains additional details on Navy procedures for acknowledging and following up on receipts of in-transit inventory. DOD’s written comments on this report are reprinted in their entirety in appendix III. As arranged with your offices, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies of this report to Senator Daniel K. Inouye, Senator Joseph I. Lieberman, Senator Carl Levin, Senator Ted Stevens, Senator Fred Thompson, and Senator John Warner and to Representative Rod R. Blagojevich, Representative Dan Burton, Representative Jerry Lewis, Representative John P. Murtha, Representative Christopher Shays, Representative Ike Skelton, Representative Floyd Spence, and Representative Henry A. Waxman in their capacities as Chair or Ranking Minority Member, Senate and House Committees and Subcommittees. We are also sending copies of this report to The Honorable William S. Cohen, Secretary of Defense; The Honorable Richard Danzig, Secretary of the Navy; Lieutenant General Henry T. Glisson, Director, DLA; and The Honorable Jacob J. Lew, Director, Office of Management and Budget. Copies will also be made available to others upon request. Please contact me at (202) 512-8412 if you have any questions. The major contributors to this report are listed in appendix IV. Our objectives for this report were to (1) identify the reported value and types of inventory in transit within and between storage and repair activities, vendors, and end users that were unaccounted for (or lost) and (2) assess the Navy’s adherence to procedures for controlling such in-transit inventory. To assess the Navy’s procedures for controlling in-transit inventory and identify the reported types and amounts of in-transit items that were not accounted for, we took the following steps: We reviewed policies and procedures and obtained other relevant documentation related to in-transit inventory from officials at the Defense Logistics Management Standards Office, McLean, Virginia; the Defense Automated Addressing System Office, Dayton, Ohio; and the Naval Supply Systems Command (NAVSUP), Mechanicsburg, Pennsylvania. We obtained financial reports of in-transit losses between October 1995 and September 1998 at NAVSUP. Using the financial reports, we identified the Naval Inventory Control Point (NAVICP) Philadelphia as the Navy’s inventory control activity with the highest reported dollar value of in-transit inventory losses. At NAVICP Philadelphia, we obtained computerized inventory and financial records of in-transit losses between October 1996 and September 1997, the most current and complete in-transit information available. Using the data, we judgmentally selected and reviewed 214 shipments of warehoused, purchased, and end-user material, valued at $9 million, that were reported as lost or not received. We did not independently verify the overall accuracy of NAVICP Philadelphia’s databases from which we obtained data but used them as a starting point for selecting shipments that we then tracked back to records and documents on individual transactions. For each sample shipment, we reviewed available computer-generated shipment and receipt data, analyzed inventory records, and held discussions at the NAVICP Philadelphia, Pennsylvania; the Defense Distribution Depot, Fleet and Industrial Supply Center, Norfolk Naval Air Station, Norfolk, Virginia; and Oceana Naval Air Station, Virginia Beach, Virginia. To learn whether issues associated with overdue shipments were adequately resolved, we reviewed Department of Defense, Navy, and NAVICP Philadelphia implementing guidance. Such information provided the basis for conclusions regarding the controls over in-transit inventory. To determine whether the Navy had emphasized in-transit inventory as part of its assessment of internal controls, we reviewed assessments from NAVICP Philadelphia for fiscal years 1995-97 and Navy Headquarters for fiscal years 1995-97. We performed our review between February 1998 and January 1999 in accordance with generally accepted government auditing standards. Figure II.1 shows the procedures the Navy is to follow to acknowledge receipts and to follow up on delinquent receipts for shipments of material to end users, figure II.2 shows these procedures for shipments of warehoused material, and figure II.3 shows the procedures for shipments of purchased material. Reports receipt? Reports receipt? Issuing Activity Storage activity Repair activity of issue? Receiving Activity Storage activity Repair facility Reports receipt? Identifies receipt? Reports receipt? Reports receipt? (No procedures) Performance and Accountability Series: Major Management Challenges and Program Risks—Department of Defense (GAO/OCG-99-4, Jan. 1999). Department of Defense: Financial Audits Highlight Continuing Challenges to Correct Serious Financial Management Problems (GAO/T-AIMD/NSIAD-98-158, Apr. 16, 1998). Department of Defense: In-Transit Inventory (GAO/NSIAD-98-80R, Feb. 27, 1998). Inventory Management: Vulnerability of Sensitive Defense Material to Theft (GAO/NSIAD-97-175, Sept. 19, 1997). High-Risk Series: Defense Inventory Management (GAO/HR-97-5, Feb. 1997). High-Risk Series: Defense Financial Management (GAO/HR-97-3, Feb. 1997). The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO reviewed selected aspects of the Navy's management procedures for controlling items in transit, focusing on the: (1) reported value and types of inventory in transit within and between storage and repair activities, vendors, and end users that were unaccounted for (or lost); and (2) Navy's adherence to procedures for controlling such in-transit inventory. GAO noted that: (1) the Navy has not effectively controlled its in-transit inventory and places enormous amounts of inventory at risk of undetected theft or misplacement; (2) for fiscal years 1996-1998, the Navy reported that it had lost over $3 billion in in-transit inventory, including some classified and sensitive items such as aircraft guided-missile launchers, military night vision devices, and communications equipment; (3) the Navy's Inventory Control Point (NAVICP) at Philadelphia, which manages the largest portion of the Navy's inventory, reported the largest losses--$2.5 billion, or 84 percent of the Navy's in-transit losses; (4) however, GAO's work showed that a few of the items reported as lost by NAVICP Philadelphia had in fact been accounted for in inventory records; (5) Navy activities involved in issuing and receiving inventory items have not always followed the Navy's control procedures to ensure that in-transit items are accounted for; (6) Navy units have not always reported to NAVICP Philadelphia that they received requested items; (7) ineffective accounting systems have been used to monitor receipts of items redistributed between storage activities, shipped to and from repair facilities, and shipped from end users; (8) NAVICP Philadelphia and its shipping and receiving activities have not adequately investigated unreported receipts of items redistributed between storage activities, shipped to and from repair facilities, and shipped from end users; (9) NAVICP Philadelphia has not monitored receipts of items it purchased from commercial sources; (10) as early as 1990, GAO reported that there were indications of inadequate internal controls over procured assets; (11) Naval Supply Systems Command and NAVICP Philadelphia oversight of in-transit inventory has not been adequate; (12) although Navy officials have initiated actions intended to correct the problems GAO cited, the Navy has not established any performance measures, milestones, or timetable for reducing the vulnerability of in-transit inventory to theft or loss; and (13) the Navy has not identified management of in-transit inventory as a significant weakness in its assessments of internal controls, as provided in the Federal Managers' Financial Integrity Act of 1982. |
For the purpose of the SBLF program, the Small Business Jobs Act of 2010 defines qualified small business lending—as defined by and reported in an institution’s quarterly regulatory filings, also known as Call Reports—as one of the following: owner-occupied nonfarm, nonresidential real estate loans; commercial and industrial loans; loans to finance agricultural production and other loans to farmers; and loans secured by farmland. In addition, qualifying small business loans cannot be for an original amount of more than $10 million, and the business may not have more than $50 million in annual revenue. The act specifically prohibits Treasury from accepting applications from institutions that are on the Federal Deposit Insurance Corporation’s (FDIC) problem bank list or have been removed from that list during the previous 90 days. The initial baseline small business lending amount for the SBLF program was the average amount of qualified small business lending that was outstanding for the four full quarters ending on June 30, 2010, and the dividend or interest rates paid by an institution are adjusted by comparing future lending against this baseline. Also, the institution is required to report any loans resulting from purchases, mergers and acquisitions so that its qualified small business lending baseline is adjusted accordingly. Risk-weighted assets are weighted according to credit risk and are used in the calculation of required capital levels. Specifically, all assets are assigned a risk weight according to the credit risk of the obligor or the nature of the exposure and the nature of any qualifying collateral or guarantee, where relevant. Purchase Program (CPP).required to submit a small business lending plan to its regulator describing how the applicant’s business strategy and operating goals would allow it to address the needs of small businesses in the area it serves. Some banking institutions are formed as C-Corporations. C-Corporations pay federal and state income tax on earnings. When earnings are distributed to shareholders as dividends, they are subject to taxation. C-Corporations, unlike S-Corporations, are taxed separately from their owners. is designed to encourage CDLFs to repay the capital investment by the end of the 8-year period. Treasury allows an SBLF participant to exit the program at any time, with the approval of its regulator, by repaying the funding provided along with dividends or interest owed for that period. Under the act, Treasury has a number of reporting requirements to Congress related to SBLF: (1) a monthly report describing all of the transactions made under the program during the reporting period; (2) a semiannual report (for the periods ending each March and September) providing all projected costs and liabilities and all operating expenses; and (3) a quarterly report, known as the Lending Growth Report, detailing how participants have used the funds they have received under the program. SSBCI was established to support existing and new state programs that support private financing to small businesses and small manufacturers that, according to Treasury, are not obtaining the loans or investments they need to expand and to create jobs. SSBCI provides direct support to participants for use in programs designed to increase access to credit for small businesses. Using a formula contained in the Small Business Jobs Act of 2010, Treasury calculated the amount of SSBCI funding for which each of the 50 states, as well as the District of Columbia, the Commonwealth of Puerto Rico, the Commonwealth of the Northern Mariana Islands, Guam, American Samoa, and the United States Virgin Islands, were eligible to apply. This formula takes into account a state’s job losses in proportion to the aggregate job losses of all states. In addition to states, the act granted permission to municipalities to apply directly for funding under SSBCI in the event that their state did not apply for funding. Municipalities in Alaska, North Dakota, and Wyoming used this option. Participants are expected to use their SSBCI funds to leverage private financing and investment that is at least 10 times the amount of their SSBCI allocation (a leverage ratio of 10 to 1) by December 31, 2016. Forty-seven states; the District of Columbia; the Commonwealth of Puerto Rico; the Commonwealth of the Northern Mariana Islands; Guam; American Samoa; the United States Virgin Islands; Anchorage, Alaska; Carrington, North Dakota; Mandan, North Dakota; and Laramie, Wyoming, currently participate in the program. The act allowed Treasury to provide SSBCI funding for two state program categories: capital access programs (CAP) and other credit support programs (OCSP). For both CAPs and OCSPs, lenders are required to have a meaningful amount of their own capital at risk. Loan terms, such as interest and collateral, are typically negotiated between the lender and the borrower, although in some cases loan terms are subject to SSBCI participant approval and, in many cases, the SSBCI participant and lender will discuss and negotiate loan terms and options prior to reaching agreement. A CAP is a loan portfolio insurance program wherein the borrower and lender, such as a small business owner and a bank, contribute to a reserve fund held by the lender. Under a CAP, when a participating lender originates a loan, the lender and borrower combine to contribute an amount equal to a percentage of the loan to a loan reserve fund, which is held by the lender. Under SSBCI, the contribution must be from 2 percent to 7 percent of the amount borrowed. Typically, the contribution ranges from 3 percent to 4 percent. The SSBCI participant then matches the combined contribution and sends that amount to the lender, which deposits the funds into the lender-held reserve fund. Under SSBCI, approved CAPs are eligible to receive federal contributions to the reserve funds held by each participating financial institution in an amount equal to the total amount of the contributions paid by the borrower and the lender on a loan-by-loan basis. In addition, the following OCSPs are examples of programs eligible to receive funding under the act: Collateral support programs: A Collateral Support Program is designed to enable financing that might otherwise be unavailable due to a collateral shortfall. It provides pledged cash collateral to lenders to enhance the collateral coverage of individual loans. The SSBCI participant and lender negotiate the amount of cash collateral to be pledged by the SSBCI participant. Loan participation programs: SSBCI participants may structure a loan participation program in two ways: (1) through purchase transactions, also known as purchase participations, in which the SSBCI participant purchases a portion of a loan originated by a lender, or (2) by participating in a loan as a co-lender, where a lender originates a senior loan and the SSBCI participant originates a second loan to the same borrower that is usually subordinate to the lender’s senior loan should a default occur. SSBCI loan participation programs encourage lending to small businesses because the lender is able to reduce its potential loss by sharing its exposure to loan losses with the SSBCI participant. Loan guarantee programs: These programs enable small businesses to obtain a term loan or line of credit by providing the lender with the necessary security in the form of a partial guarantee. In most cases, the SSBCI participant sets aside funds in a dedicated reserve or account to collateralize the guarantee of a specified percentage of each approved loan. The guarantee percentage is determined by the participants and lenders but, under SSBCI, may not exceed 80 percent of loan losses. Venture capital programs: These programs provide investment capital to create and grow start-ups and early-stage businesses, often in one of two forms: (1) an SSBCI participant-run venture capital fund (which may include other private investors) that invests directly in businesses, or (2) a fund of funds, which is a fund that invests in other venture capital funds that in turn invest in individual businesses. Direct loan programs: Although Treasury does not consider these programs to be a separate SSBCI program type, it acknowledges that some states may identify programs that they plan to support with SSBCI funds as direct loan programs. The programs that some participants label as direct loan programs are viewed by Treasury as co-lending programs categorized as loan participation programs, which have lending structures that are allowable under the statute. OCSPs approved to receive SSBCI funds are required to target small businesses with an average size of 500 or fewer employees and to target support toward loans with an average principal amount of $5 million or less. In addition, these programs cannot lend to borrowers with more than 750 employees or make any loans in excess of $20 million. After their applications were approved, the SSBCI participants entered into Allocation Agreements with Treasury before they received their funds. SSBCI Allocation Agreements are signed by Treasury and participants, and they outline how recipients are to comply with program requirements. The act requires that each participant receive its SSBCI funds in three disbursements or tranches of approximately one-third of its approved allocation. As part of its request to receive the second and third disbursements, a participant must certify that it has expended, transferred, or obligated 80 percent or more of the previous disbursement. When participants request subsequent disbursements, Treasury may also review a sample of the participant’s transactions for compliance with SSBCI requirements. All SSBCI Allocation Agreements will expire on March 31, 2017. Treasury may terminate any portion of a state’s allocation that Treasury has not yet transferred to the participant within 2 years of the date on which its SSBCI Allocation Agreement was signed. Treasury may also reduce, suspend, or terminate a state’s allocation at any time during the term of the Allocation Agreement upon an event of default under the agreement. Under the act, participants are required to submit quarterly and annual reports on their use of SSBCI funds. Changes to participants’ Allocation Agreements generally must be approved by Treasury through a program modification. For example, participants must submit a program modification to Treasury for approval in order to use SSBCI funds for a new program that was not originally approved by Treasury, to materially change the scope or purpose of an approved program, or to reapportion and transfer allocated SSBCI funds among approved programs when the cumulative amounts transferred exceed 20 percent of the participant’s total SSBCI allocation. Treasury has procedures for participants to apply for modifications and for its processing of modification approval requests. In general, the procedures require participants to submit, among other things, justification of the need for the modification and the impact of the change on program performance, including the 10 to1 private leverage expectation. As of June 30, 2014, Treasury had approved 60 modifications of SSBCI participants’ programs. Treasury’s 2014 second quarter Lending Growth Report showed that SBLF participants’ aggregate qualified small business lending has continued to exceed their baseline levels since the program began. As of June 30, 2014, total qualified small business lending for SBLF participants increased by $13.5 billion over an aggregate baseline of $33 billion. Banks participating in the SBLF program increased their qualified small business lending by $13.1 billion (41 percent) over a $32.2 billion baseline. CDLFs participating in the SBLF program increased their qualified small business lending by $394.6 million (50 percent) over a $794.5 million baseline. Of the 241 participating banks, 229 (95 percent) increased their qualified small business lending, and 45 out of 49 CDLFs (92 percent) increased their qualified small business lending. Banks and CDLFs had made about $255 million in dividend, interest rate, and fee payments to Treasury as of June 30, 2014. Banks paid $249 million and CDLFs paid $5.6 million in dividend, interest, and fee payments. See figure 1 for the numbers of participants in different dividend or interest rate categories. Between July 1, 2013, and June 30, 2014, five SBLF participants were required to pay approximately $427,000 in CPP lending incentive fees to Treasury. From July 1, 2013, to June 30, 2014, the number of participants that had exited the program more than doubled. In our previous report, we found that as of July 1, 2013, 16 of the 332 institutions (5 percent) that received SBLF funds had fully redeemed Treasury’s investment and exited the program. As of June 30, 2014, a total of 41 institutions (12 percent) had exited the program. These 41 institutions included 39 banks and 2 CDLFs. Of the 39 banks that exited, 23 had used SBLF funds to repay an earlier investment from TARP’s CPP, according to Treasury. As of October 2014, Treasury had not had to write off any of its investments due to bankruptcy, according to agency officials. In August 2014, Treasury reported in its Second Annual SBLF Lending Survey report that of the 299 institutions participating in SBLF at the time the survey was administered, 247 (83 percent) planned to fully redeem Treasury’s investment. These 247 institutions included 208 banks and 39 CDLFs. Of the 208 banks that indicated in the survey that they plan to fully redeem, 168 (81 percent) reported that they are planning to redeem in full by the end of first quarter 2016 when the statutorily required rate increase to 9 percent begins. Of the 39 CDLFs that indicated in the survey that they plan to fully redeem, 35 reported that they plan to redeem Treasury’s investment by the end of third quarter 2019, when the 9 percent interest rate begins. As of June 30, 2014, SSBCI participants have used over half of the total allocated funds, but the rate of funds used among participants continues to vary. Some of the SSBCI participants we interviewed for this report faced challenges using funds that were consistent with the challenges we previously reported, and Treasury and SSBCI participants have continued to undertake activities to address these challenges. The fiscal year 2015 president’s budget recommends legislation authorizing a $1.5 billion extension of SSBCI funding. Overall, SSBCI participants have used about $869 million (60 percent) of the $1.5 billion in allocated funds, as shown in figure 2. Between June 30, 2013, and June 30, 2014, participants used about $320 million in SSBCI funds. As of June 30, 2014, participants’ use of SSBCI funds continued to vary widely, as shown in figure 3. For example, 7 participants have used 25 percent or less of their allocations, while 10 have used 90 percent or more of their allocations. Three participants had used 1 percent or less of their allocations. According to Treasury officials, factors such as interest among local lenders, state marketing efforts, specific program design features, and local economies may account for differences in participants’ use of funds. According to Treasury’s quarterly report on participants’ progress in using SSBCI funds, all 57 participants had received their first disbursement, 47 had received their second disbursement, and 20 participants had received their third disbursement, as of June 30, 2014. As previously discussed, participants can request subsequent SSBCI disbursements when they have used at least 80 percent of their current tranche of SSBCI funds. In addition, 13 states have reused SSBCI funds by using interest or principal repayments on existing SSBCI loans and investments to make additional financing available to other small businesses. As of June 30, 2014, Massachusetts had recycled about 40 percent of the SSBCI funds it had used. Following Massachusetts, Idaho and Michigan recycled about 20 and 12 percent of the funds they had used, respectively. According to a Massachusetts state official, the high rate of recycled funds in the state likely is attributable to, in part, the high interest rate on SSBCI-funded loans, which results in loans that are typically paid off before maturity. The official explained that the SSBCI-funded loan program in Massachusetts is a preexisting program intended to help small business owners who may not qualify for lower rate loans with typical lenders. These loans provide a source of financing for these borrowers until they are more stable and able to refinance at lower rates in the private market. Participants used a variety of different program types to distribute their allocated funds. Figure 4 shows the number of different program types that had used SSBCI funds as of June 30, 2014. Similar to data we reported in our 2013 report, loan participation and venture capital programs continue to be the most common program types. Some participants chose to use only one program type, whereas others used multiple programs. For example, 14 participants used their allocation to fund one program type while others used up to five program types. SSBCI participants distributed their allocated funds using 150 programs. Participants had the option to use existing programs to distribute their allocated funds or create new programs specifically to utilize their SSBCI funds. As shown in figure 5, most of the programs using SSBCI funds are new. Specifically, of the 150 programs, 84 (56 percent) were new programs compared to 66 (44 percent) existing programs. Some SSBCI participants we interviewed for this report faced difficulties in using program funds that were consistent with some of the challenges we previously reported in 2013.interviewed for this report, 2 participants stated they did not encounter significant challenges in using program funds. Three participants we interviewed indicated that Treasury has improved its guidance since the program began, stating that the information on Treasury’s website has been helpful. Some participants, however, stated they continued to face challenges related to a lack of clarity in guidance and some banks’ reluctance to participate. Specifically: Of the 10 SSBCI participants we Treasury officials stated that they have established a process by which they provide written responses to questions raised by states, but officials from three participating states indicated that there continues to be a lack of clarity in Treasury’s guidance regarding the use of SSBCI funds for certain transactions. One participant explained that, while this lack of clarity is not unexpected since SSBCI is still a relatively new program, it may have resulted in some missed opportunities to use SSBCI funds. The participant stated that Treasury responded in writing to questions it raised but the additional guidance Treasury provided was still vague. According to officials in three participating states, some banks were reluctant to participate in the program because they were unfamiliar with it or perceived that it would increase scrutiny from regulators. Specifically, one participant stated that the local banking community generally was not familiar with state lending programs and some have been reluctant to participate in government loan programs overall. The participant explained that some local banks prefer to work with programs that they were more familiar with, such as programs from the Small Business Administration. Another participant highlighted the ongoing concerns about being subject to increased regulatory scrutiny for using SSBCI programs. The participant explained that, although regulators had made efforts to address banks’ concerns about the potential for increased scrutiny from regulators because of the risk associated with loans needing SSBCI funds, banks continued to be reluctant to participate for this reason. SSBCI participants have continued to undertake the types of activities we reported in 2013 to promote the use of SSBCI and address challenges in using program funds. Several of the SSBCI participants we interviewed for this report conducted activities, similar to those we reported in 2013, to promote the program, including holding face-to-face meetings, conducting presentations to interested parties, and maintaining websites, among other activities. In addition, similar to what we reported in 2013, some participants used program modifications to address challenges in using program funds. Specifically, 6 of the 10 participants we interviewed stated they had requested and received approval for program modifications to make use of SSBCI funds. For example, according to state officials, Treasury approved a program modification request from Connecticut in July 2014, which will allow the state to transfer funds from its CAP to a newly created venture capital program. As of June 30, 2014, Connecticut had used only 1 percent of its allocation within its CAP because, according to a state official, a Small Business Administration (SBA) program and a new state program decreased demand for their SSBCI- funded CAP. As a result of the modification allowing the state to transfer funds to a venture capital program, Connecticut officials told us they will partner with the state’s quasi- public entity that supports small business financing that includes venture capital funding and expect to be able to deploy the remainder of the state’s SSBCI allocation within 18 months. Treasury has continued existing activities as well as undertaken new ones to address challenges states face in using program funds and promoting SSBCI. Specifically, Treasury officials stated that they have continued to offer technical assistance to states and utilize relationship managers, who are responsible for working with an assigned group of participants to support their outreach to the lending industry and help them successfully allocate funds to lenders and subsequently borrowers. In addition, Treasury has continued to facilitate information sharing among states through its national conferences and various working groups. For example, Treasury published reports summarizing the discussions and observations of its working groups on venture capital and addressing underserved communities in April and October 2014, respectively. Since our 2013 report, Treasury has undertaken new activities to facilitate information sharing among states such as organizing multistate sessions and other activities. To date, Treasury has facilitated three regional multistate sessions, which provide a forum for state officials and other stakeholders to share information and learn from each other. Officials explained that, although Treasury organizes the sessions, participants determine the content. Treasury officials also told us they facilitate information sharing on venture capital through quarterly calls for SSBCI program managers and contractors that administer venture capital programs. Treasury officials stated that they plan to publish a compilation of case studies on using SSBCI funds to target underserved communities, which is intended to complement its prior work on targeting underserved communities. The fiscal year 2015 president’s budget recommended new legislation that would reauthorize SSBCI and provide an additional $1.5 billion in program funding. Under the proposal, $1 billion of the funds would be awarded on a competitive basis and $500 million would be awarded through a need-based formula. The budget justification states that a second round of funding, which would begin in 2015 and run through 2021, will expand on the success of the first round, capitalize on new working relationships between states and small business lenders and investors, and strengthen the federal government’s relationships with state economic development agencies. In May 2014, members of the United States Senate and House of Representatives proposed companion bills, titled the Small Business Access to Capital Act of 2014, which would reauthorize SSBCI. The bills would reauthorize SSBCI and provide an additional $1.5 billion to be allocated on a similar competitive and need-based formula basis. In developing the budget justification and providing information to the Office of Management and Budget (OMB) on the amount and structure of the proposed additional SSBCI funding, Treasury officials stated they considered data on participants’ progress in using SSBCI funds and considered other information, such as market conditions and lessons learned. In addition, Treasury officials stated they considered data from participants’ quarterly reports and considered states’ disbursement and modification requests to support the proposed $1.5 billion in additional SSBCI funding. Treasury officials indicated that there is demand for additional funding as participants approach their third disbursement. In addition, the rate at which some participants are using their funds indicates additional demand. Specifically, Treasury officials stated they were confident that some participants could use the additional funding based on the 12-month rate of expended, obligated, and transferred funds among participants. To support the proposal for both a competitive process and need-based formula, Treasury officials stated they considered the variation among participants regarding the speed at which funds were disbursed and the impact of the funds, as well as current market conditions in certain areas. Treasury officials stated that they introduced a competitive funding element because some participants were able to more quickly disburse SSBCI funds, demonstrated greater impact using the funds, and demonstrated greater capacity to establish relationships with private lenders and investors. The budget proposal states that the competitive funds would be awarded to states on the basis of their ability to target underserved groups, leverage federal funding, and evaluate results. Officials stated that they proposed maintaining a need-based allocation method because their analysis of market conditions indicated that some areas continued to have significant needs for increased access to capital. The proposal states that the need-based award would be allocated based on economic factors such as job losses and pace of economic recovery. Treasury has not proposed additional details regarding the structure of the proposed additional funding, according to agency officials. However, officials stated that they would recommend that certain features of the program be maintained, such as keeping the five program types, maintaining the 10 to 1 public to private leverage ratio, and emphasizing increasing access to underserved communities. Some participants we interviewed said they were better positioned than others to continue their efforts in the absence of additional SSBCI funding. Participants recognized that additional funds would allow them to meet current demand for existing programs, provide funds more consistently, or explore adding additional programs to meet other economic development needs in the state. Eight of the 10 participants we interviewed stated that recycled funds would play a role in continuing their SSBCI-funded efforts. Two participants indicated that some discussions had been held at the state level about providing state funds to continue efforts currently funded by SSBCI. Conversely, two participants indicated that state funds were not an option for continuing their efforts. For example, one participant explained that the state constitution does not allow public state funds to be used for private lending. Treasury has taken steps to enhance performance measures and evaluation, consistent with our prior recommendations. For SBLF, Treasury conducted an impact evaluation using statistical methods to compare lending between SBLF banks and a control group of non-SBLF banks that are as similar as possible to participating SBLF banks. This rigorous approach estimated the impact of the program and is a significant improvement over its previous comparison assessments of the SBLF program which did not attempt to isolate impact. However, while Treasury discussed the results of its previous comparisons in the body of its Lending Growth Reports, it discussed the results of its more rigorous impact evaluation less prominently and included them only in the appendixes of the reports. In addition, Treasury has not updated the results of its impact evaluation. For SSBCI, Treasury developed some new performance measures and also developed targets for some of its measures. In addition, officials stated they reached out to and received input from internal agency subject-matter experts and experts from OMB on the design of the planned SSBCI evaluation and have reached out to congressional staff for feedback on its proposed design. In 2011 and 2013, we recommended that Treasury include in its evaluation of SBLF measures that isolate the net effect of the SBLF program apart from other factors that could also affect small business lending. See GAO-12-183 and GAO 14-135. adjust for differences between treatment and control groups.instance, SBLF banks are considered the treatment group, and banks that are similar to participating SBLF banks yet did not participate in the program are considered the control group. To conduct its propensity score matching approach, Treasury selected a control group of banks that are as similar as possible to participating SBLF banks along a number of relevant and observable participant characteristics. Specifically, Treasury incorporated a broad set of 71 observable financial and market variables that could affect a bank’s likelihood of participating in the program. These variables include balance sheet measures, financial performance measures, capitalization, and loan composition, among others. Using the observable financial and market variables, Treasury achieved similarity between the two groups of banks by estimating the propensity to participate in the program for participants and nonparticipants alike and then matching nonparticipants to participants with a similar propensity to participate. Treasury officials stated they chose the propensity score matching approach because it makes similar comparisons as their previous assessments in that the propensity score matching approach also compares lending between SBLF banks and a selected control group of banks. Treasury’s impact evaluation of the program estimated that SBLF resulted in a median increase of 23 percentage points in small business lending, relative to the most similar control group of banks that did not participate in SBLF. In other words, when controlling for observable variables, the evaluation estimates that 23 percentage points of the increase in small business lending among SBLF banks is attributable to the program. Because the propensity score matching approach results in a carefully selected control group of non-SBLF banks that is as similar as possible to participating SBLF banks, lending among the control group banks can be used to estimate lending among SBLF banks if they had not participated in the program. Specifically, the propensity score matching approach estimated that the average lending of SBLF banks may have increased by 29 percent in the absence of the program (i.e., the median change in lending over baseline among propensity score matched banks). However, the average lending of participating SBLF banks increased by 52 percent, 23 percentage points more than non-SBLF banks. This difference represents the estimated impact of SBLF. It is difficult to interpret the magnitude of the results of Treasury’s impact evaluation as other evaluations on entrepreneurial assistance—including support for small businesses—are not comparable because they did not evaluate program impact on increasing small business lending. However, because SBLF participants might have increased their lending by 29 percent in the absence of the program, 23 additional percentage points in small business lending is a meaningful increase. Treasury has developed and refined its approach to assessing SBLF, and its impact evaluation is a distinct improvement over its previous comparisons between SBLF banks and groups of non-SBLF banks. While some differences between participants and nonparticipants may be unobserved, such as anticipated demand for small business lending, the control group Treasury developed based on propensity score matching addresses the observable differences among SBLF and non-SBLF banks in an effort to isolate the impact of the program. Previous assessments, however, did not adequately address observable differences between SBLF and non-SBLF banks and did not attempt to isolate the impact of the program. In its earliest approach to assess SBLF, Treasury has compared lending among SBLF banks to small and medium-sized banks, which suggested that SBLF banks increased business lending by 45 percentage points more than non-SBLF banks as of September 30, 2013 (see fig. 6). To improve its approach to assessing the program, Treasury also conducted a peer group comparison by which it compared SBLF banks to a group of peer banks matched according to size, geography, and the Texas Ratio, a measure of asset quality. Treasury officials described these characteristics as common and intuitive for comparing financial institutions. The peer group comparison suggested that SBLF banks increased business lending by about 41 percentage points more than peer group banks as of September 30, 2013. As we stated in our prior reports, these two analyses did not fully identify how SBLF has affected participants’ lending compared to other factors that While the peer group comparison could explain the increase in lending.method was valuable because the peer group was more similar to SBLF banks than the general population of small banks, it omitted important characteristics that could influence small business lending among SBLF participants and nonparticipants, such as liquidity or loan growth rate. The propensity score matching approach attempted to address these limitations because it identified a control group of banks that is similar to SBLF participants along a very broad set of characteristics, which provides greater confidence that any differences observed between participants and nonparticipants are attributable to the program. Treasury adopted a generally accepted and rigorous approach to conduct an impact evaluation, as we recommended, but its presentation did not communicate the results as effectively as possible. In its Lending Growth Reports, Treasury discussed the results of its prior, simpler assessments—those that compare lending among SBLF banks to that of small and medium-sized banks and peer matched banks—more prominently than the more rigorous results of its impact evaluation. Specifically, it discussed the simpler assessments in the body, but published the results of its impact evaluation in the appendixes of its April, July, and October 2014 Lending Growth Reports. Further, Treasury did not reference the results of the impact evaluation in the executive summary or body of the reports. GAO’s Designing Evaluations guide states that how evaluation results are communicated can dramatically affect how they are used. Our review of relevant resources on the use and presentation of program evaluations also indicates that rigorous evidence should be given prominence in comparison to less credible evidence so that the strongest evidence is used to inform policy and the allocation of resources. Further, SBLF’s authorizing legislation requires, in part, that Treasury provide transparency with respect to its use of funds provided by the SBLF program. As we concluded in our prior report, it is important that Congress and stakeholders have information about the extent to which the program has a meaningful impact on small business lending. Treasury officials stated that the results of the SBLF impact evaluation (i.e., the propensity score analysis) were included as appendixes instead of in the body of the reports because the evaluation was intended to be a one-time analysis of the program. They explained that the purpose of the evaluation was to serve as another objective method for assessing the program and validating the results of its previous analyses. According to agency officials, including the results as an appendix allowed the report’s format to remain consistent with prior and future Lending Growth Report iterations, rather than revising the entire report for one quarterly issuance. However, as agency officials explained, the results of the propensity score matching approach are relatively comparable to their previous assessments because the propensity score matching approach also compares lending between SBLF banks and a selected control group of banks. As such, we determined it is unlikely that discussing the results of the impact evaluation in the body of its quarterly Lending Growth Reports would cause inconsistencies or major revisions. Because Treasury presents the results of its simpler group comparison more prominently than the results of its impact evaluation in its Lending Growth Reports, readers may not be aware of the results of the more rigorous analysis or understand the differences between the various alternative control groups and what they might imply about the overall impact of the program. As previously discussed and shown in figure 6, Treasury’s less rigorous comparisons suggested that SBLF banks increased lending by 45 and 41 percentage points more than all small and medium-sized banks and peer banks, respectively. The propensity score matching approach—which is designed to isolate the impact of the program—produced the smallest relative median increase in lending at 23 percentage points. However, these results are not discussed in the body of Treasury’s Lending Growth Reports. As a result, readers—including Congress and other stakeholders—may not use the results of the more credible analysis to inform their conclusions about the program and the extent to which it has impacted small business lending. In addition, Treasury has not updated the results of the impact evaluation. In our work on best practices that enhance the use of performance information, we found that communicating performance information frequently and routinely enhances the use of that information for making decisions that affect future strategies, planning and budgeting, identifying priorities, and allocating resources. Frequently communicated performance information typically includes performance measures, such as the changes in small business lending that Treasury reports each quarter for SBLF banks. Program evaluations, however, are typically conducted less frequently to assess how well a program works. Treasury officials stated that they have not updated the results of the impact evaluation because they intended for the evaluation be a one-time analysis that captured the effect of the program through September 30, 2013—the period during which participating banks were incentivized to increase small business lending over their baselines in order to reduce their dividend rates. Treasury published the same impact evaluation results in appendixes of its April, July, and October 2014 Lending Growth Reports and does not have plans to update the results in future reports. In contrast, Treasury updates the results of its simpler assessments in its quarterly Lending Growth Reports and anticipates continuing to update the results until 2016, when Treasury expects about 80 percent of participants to have exited the program as a result of the scheduled dividend rate increase to 9 percent for most participating banks. Although program evaluations can be costly and time consuming, we determined that Treasury could adjust its existing propensity-matched control group to update the results of its impact evaluation without having to repeat the entire evaluation. Specifically, Treasury could take an approach similar to the one it uses to update the results of its peer group comparison. As SBLF banks exit the program, Treasury could remove similar non-SBLF banks from the control group and repeat its analyses using the updated groups of banks. Treasury officials acknowledged that they could update the results of their impact evaluation using this approach, but explained that they would need to obtain programming software to conduct the analysis and that considerable time and effort would be required to ensure the accuracy of the impact evaluation data and analyses. By updating the results of its impact evaluation, Treasury could further enhance the performance information it provides on SBLF. As we have described in previous reports and summarize in appendix III, Treasury provides quarterly information on the performance of SBLF, including its simpler lending growth comparisons among SBLF and non-SBLF banks. Updated results from Treasury’s most rigorous and accurate assessment of SBLF could enhance the performance information that readers and decision makers consider. For example, updated information on the impact of the program could be useful for observing any changes in the impact of the program over time. In addition, because SBLF capital could still promote small business lending even in the absence of dividend- based incentives, updated information on the effect of the program after the lending incentives expired in September 2013 could be useful. In our prior work, we recommended that Treasury enhance its efforts to measure and evaluate the performance of SSBCI. Consistent with our previous recommendation that Treasury set targets for selected performance measures related to monitoring program performance, Treasury established a target for its performance measure related to the amount of private-sector leverage. In addition, Treasury developed additional performance measures and targets related to the disbursement of funds to states and the extent to which OCSPs target small businesses with an average size of 500 or fewer employees and target support towards loans with an average principal amount of $5 million or less (see table 1). Officials stated that because almost all SSBCI-funded programs became fully operational in 2014, they used the information from the 2013 annual reports to establish performance targets. Officials explained that they used the stated program objectives in the Small Business Jobs Act of 2010 to establish the additional measures and select the measures for which they established targets. OMB guidance defines performance indicators (or measures) as measurable values that agencies use to track progress toward set targets or goals within a time frame. The guidance defines indicators that do not require targets and time frames as “other indicators.” Consistent with this definition, Treasury officials stated that they intend to use the measures for which they did not establish targets as additional indicators of performance. In response to our recommendation that Treasury seek input from Congress and other federal agencies on what information would be useful in assessing SSBCI’s effectiveness as Treasury designs its program evaluation, officials stated they received input from internal agency subject-matter experts and experts from OMB and have reached out to congressional staff for feedback. Specifically, Treasury conducted meetings with experts in December 2013 and January 2014 on how it will evaluate the performance of SSBCI in 2017. Officials stated that they reached out to staff of two congressional committees in October 2014 for feedback on the proposed evaluation design. OMB guidance and our prior work have emphasized the importance of performance information and program evaluations in decision making. Specifically, OMB guidance instructs agencies to include a thorough discussion of evidence, both positive and negative, for major proposed policies in its budget submission, including performance indicators, performance goals, and evaluation results. In addition, our work on improving information to Congress found that information on how activities have been implemented and the extent to which the program reached the intended clients can be useful to inform reauthorization decisions. Further, our work assessing duplication, overlap, and fragmentation looked across 52 programs supporting entrepreneurs and emphasized the importance of performance information for decision making and highlights that program evaluations can provide additional information about program performance and help gauge program effectiveness. Specifically, we reported that several of these programs lacked adequate performance information and program evaluations, which resulted in limited information on program efficiency and effectiveness. We found that, without this type of information, Congress and the agencies may not be able to better ensure that scarce resources are being directed to the most effective programs and activities. Treasury’s existing information on the performance of SSBCI, as well as information that will result from Treasury’s efforts to enhance performance measures and evaluation, could provide useful information for decision makers on the proposed reauthorization of the program. As previously discussed, Treasury officials said they considered information on the performance of SSBCI, such as participants’ progress in using funds, the speed at which funds were disbursed, and the impact of the program, to support the amount and structure of additional program funds under the proposed reauthorization. In addition, Treasury has published performance information on SSBCI that could be helpful for decisions related to the reauthorization of the program. Specifically, Treasury has published quarterly reports on participants’ progress in using funds and two annual reports that summarize key finding from participants’ 2012 and 2013 annual reports. Treasury also published two reports it requested from outside experts on lessons learned from SSBCI loan programs and venture capital programs. Treasury plans to publish its evaluation in 2017. Treasury officials said that they plan to use information from participants’ final program assessments, which are due to Treasury in early 2017, to help them evaluate SSBCI to help them determine whether the program model for SSBCI was successful. To determine the success of SSBCI, officials plan to focus on whether the program achieved its performance targets, whether state managers found the program to be effective for achieving their goals, and whether private lenders and investors found the program to be effective. While the evaluation will be useful for future decisions regarding programs that are intended to increase capital to small businesses in distressed credit markets, the information from Treasury’s evaluation of SSBCI will not be available to inform decisions on the current request for additional funding. Treasury’s efforts to provide performance information on SBLF and SSBCI are positive developments that could help to ensure that agency decision makers and Congress have information to assist them in making programs more efficient and effective and allocating scarce resources. In response to our prior recommendations, Treasury conducted a rigorous impact evaluation, which is a distinct improvement over other analyses using comparisons because it uses statistical methods to compare SBLF banks to a carefully selected control group of banks that did not participate in the program but are as similar as possible to the participating SBLF banks along a broad set of characteristics. Treasury’s impact evaluation is important particularly because it provides a rigorous assessment of the program’s effects and indicates that SBLF increased small business lending by a smaller percentage than Treasury’s other simpler analyses. However, because Treasury presents its impact evaluation in appendixes in its Lending Growth Reports rather than in the body, users of Treasury’s lending reports may rely on less rigorous analyses to inform their conclusions. Further, although Treasury intended for the impact evaluation to be a one-time analysis, the existing control group it used to estimate the impact of SBLF has the potential to be updated for future reports. Treasury officials stated that updating the impact evaluation results would require additional time and effort, and we acknowledge that costs and benefits would have to be considered in determining the frequency of the updates. However, Treasury has an opportunity to better utilize its impact evaluation to further enhance the performance information available on SBLF. Policymakers will likely face future constrained credit environments for small businesses and will seek options to address them. In such circumstances, the results of Treasury’s impact evaluation, and any updates to those results, could provide a useful assessment of the effectiveness of SBLF as a capital investment program. To help ensure that Congress and stakeholders can easily access the best information available to inform their conclusions about the effectiveness of SBLF as a capital investment tool, we recommend that the Secretary of the Treasury take the following two actions: (1) make the results of its SBLF impact evaluation more prominent, such as by discussing the results in the executive summary and body of future Lending Growth Reports, and (2) update the results of its impact evaluation in future reports, taking into consideration the costs and benefits of doing so to determine the appropriate frequency of the updates. We provided a draft of this report to Treasury for their comment and review. Treasury provided written comments, which are reprinted in appendix III. In its written comments, Treasury agreed to implement our recommendations regarding its SBLF impact evaluation and described the actions it plans to take. Treasury stated that it would publish a stand- alone report with its own link on the Treasury website to better communicate the results of the SBLF impact evaluation, which analyzed lending growth performance as September 30, 2013. In its comments, Treasury suggested that all three of its methods of evaluating the performance of SBLF indicate the program has had a positive impact. However, as we stated in our report, only one of its methods—the impact evaluation using the propensity score matching approach—estimates the impact of the program. Treasury also stated that it would update its impact evaluation in the future, taking into consideration the costs and benefits of doing so as well as the lending incentive structure of the program. We did not make any new recommendations regarding SSBCI in this report, but Treasury noted that it appreciated prior GAO recommendations. Treasury stated that it accepted GAO’s guidance on developing program evaluations and has sought to supplement this guidance with input from stakeholders for its planned SSBCI evaluation. Treasury also noted that its final assessment of SSBCI would include three sections: (1) a review of national program-wide outcomes, (2) review of the state-by-state variation in program outcomes, and (3) feedback from private sector lenders and investors. Treasury provided technical comments on the draft report, which we have incorporated in the final report, as appropriate. We are sending copies of this report to appropriate congressional committees and Treasury. In addition, the report is also available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IV. Our objectives were to examine (1) the status of the Small Business Lending Fund (SBLF), (2) the status of the State Small Business Credit Initiative (SSBCI), and (3) the extent to which Treasury’s efforts enhance performance measurement and program evaluation. To examine the status of SBLF, we reviewed Treasury program data from Treasury’s October 2014 Lending Growth Report and its June 2014 monthly transaction report. To show lending growth among SBLF participants, we analyzed Treasury data as of June 30, 2014. We reviewed Treasury’s monthly transaction report to determine the dividend, interest, and fee payment received by Treasury and the number of participants that exited the SBLF program as of June 30, 2014. We also used responses from SBLF respondents to an item in Treasury’s second annual SBLF survey to describe participants’ plans for exiting the program. To assess the reliability of SBLF data, we reviewed prior GAO work on the data and the systems that produced them, which included interviewing Treasury officials on how they assess the reliability of participants’ quarterly data and the information they maintain on SBLF. In addition, we inspected data for missing observations and outliers. Where there were questions or discrepancies we identified related to the data, we clarified them through communications with Treasury officials. We determined that the data were sufficiently reliable for the purposes of describing the status of the program. To examine the status of SSBCI, we analyzed Treasury program data on participants’ allocation amounts and program types, and whether participants developed new programs to participate in SSBCI or expanded existing programs with SSBCI funds. In addition, we analyzed participants’ June 30, 2014, SSBCI quarterly report data—the most recent quarter available—on the total amount of funds used and fund usage by program type. To assess the reliability of SSBCI data, we reviewed prior GAO work on the data and the systems that produced them that included interviewing knowledgeable Treasury officials on how they assess the reliability of participants’ quarterly data and the information they maintain on SSBCI. In addition, we performed electronic testing for obvious errors in accuracy and completeness. Where there were questions or discrepancies we identified related to the data, we clarified them through discussions with Treasury officials. We determined that the data were sufficiently reliable for the purposes of describing the status of the program. We also interviewed Treasury SSBCI officials and 10 purposively selected SSBCI participants on the use of funds, any challenges in using the allocations, and the president’s request for additional program funds. We interviewed officials from Connecticut; Idaho; Louisiana; Massachusetts; Minnesota; Nebraska; Oklahoma; Washington; West Virginia; and Laramie, Wyoming. We selected a non-random sample of 10 participants from the total of 57 participants—which included 47 states; Washington, D.C.; four municipalities; and five U.S. territories— using participants’ March 31, 2014, quarterly report data. We selected this nonrandom, purposive sample of participants because we assumed that the types of challenges related to using SSBCI funds would vary for participants characterized by a mix of fund usage histories and numbers of new and existing programs across all regions. We selected participants based on the following criteria: (1) the percentage of SSBCI funds participants had used as of March 31, 2014; (2) the percentage of SSBCI funds transferred to participants; (3) the percent of SSBCI funds recycled by participants; (4) the number of programs participants implemented and whether the programs were new or existing; (5) the number of program modifications; and (6) geographic dispersion. We purposively weighted the sample to approximate the distribution found in the population for percentage of funds used, percentage of funds transferred, and region to allow for a greater range of views that might also be found in the population. This sample does not represent the experience of the states that are not included in this sample. To reduce respondent burden, we excluded from our selection (1) the four participants that the Treasury Office of the Inspector General told us it was in the process of auditing or was planning to audit at the time we selected the participants and (2) the nine participants we interviewed for our 2013 SSBCI review. When we selected participants to interview, the March 2014 data were the most recent available. We also reviewed testimonial evidence we obtained during our 2013 SSBCI report related to challenges SSBCI participants faced in using SSBCI funds. We also interviewed representatives from three trade associations involved with the SSBCI program: (1) the Council of Development Finance Agencies because of its role in supporting SSBCI participants through webinars and other resources; (2) the Opportunity Finance Network because it is a national network of community development financial institutions; and (3) the Community Development Venture Capital Alliance because of its role in supporting venture capital investing. To describe Treasury’s request for additional funds, we reviewed the 2015 President’s budget justification for SSBCI and interviewed Treasury officials about the budget request and lessons learned they would apply in a second round of funding. To assess the extent to which Treasury’s efforts enhance performance measures and evaluations for SBLF and SSBCI, we interviewed agency officials on the activities they conducted to implement recommendations from our 2012 and 2013 reports and collected information related to these activities. For SBLF, we reviewed Treasury’s impact evaluation presented in its April and July 2014 Lending Growth Reports and interviewed agency officials for additional information on the methodology and results of the evaluation. In addition, to assess the extent to which Treasury effectively communicated the results of the impact evaluation, we reviewed its Lending Growth Reports to determine how other assessments are presented. We developed criteria and based our conclusions on professional judgment and consultation of a variety of relevant resources on the use and presentation of policy evaluations.SSBCI, we reviewed the new performance measures and targets Treasury adopted in October 2014. We conducted this performance audit from April 2014 to December 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. Appendix II: Summary of Treasury’s Efforts to Measure and Evaluate the Performance of the Small Business Lending Fund (SBLF) and State Small Business Credit Initiative (SSBCI) Treasury has undertaken several efforts to measure and evaluate the performance of SBLF and SSBCI, as shown in table 2. Daniel Garcia-Diaz, (202) 512-8678, [email protected]. In addition to the individual named above, Kay Kuhlman (Assistant Director), Charlene Lindsay (Analyst-in-Charge), Bethany Benitez, Mark Braza, Pamela Davidson, Michael Hoffman, Robert Rieke, Jennifer Schwartz, Stephanie Shipman, and Jena Sinkfield made key contributions to this report. | The Small Business Jobs Act of 2010 established the SBLF and SSBCI programs within Treasury to enhance credit opportunities for small businesses. SBLF aims to stimulate job growth by encouraging community banks and community development loan funds with assets of $10 billion or less to increase their small business lending. SSBCI provides direct funding to participants for programs that expand access to capital to small businesses. The act mandates that GAO conduct an audit of both programs annually. GAO's prior audits examined program implementation, monitoring of performance and compliance, and usage of program funds. This fourth report examines (1) the status of SBLF and SSBCI and (2) the extent to which Treasury has enhanced efforts to measure and evaluate program performance. GAO analyzed the most recently available financial and performance information and interviewed officials from Treasury, nine states, one municipality, and trade associations. GAO selected the states and municipality based on usage of SSBCI funds, unique program characteristics, number of programs, and geographic dispersion, among other things. The Small Business Lending Fund (SBLF) and State Small Business Credit Initiative (SSBCI) have continued to support small business lending. According to the Department of the Treasury (Treasury), as of June 30, 2014, SBLF participants had increased their qualified small business lending by $13.5 billion over their aggregate 2010 baseline, and SSBCI participants had used 60 percent of the $1.5 billion in allocated funds. In response to prior GAO recommendations, Treasury has taken steps to enhance performance measurement and program evaluation for SBLF and SSBCI but has not effectively communicated or updated its SBLF evaluation. SBLF. Treasury conducted an impact evaluation, using statistical methods to compare lending among SBLF banks to a control group of non-SBLF banks that are as similar as possible to participating SBLF banks. This rigorous approach is a significant improvement over Treasury's previous analyses because it is designed to isolate the impact of the program and provides greater confidence that any differences observed between SBLF and non-SBLF banks are attributable to the program rather than to other factors. Treasury's impact evaluation estimated that 23 percentage points of the increase in small business lending among SBLF banks is attributable to the program. Although Treasury's previous, less rigorous analyses suggested that SBLF banks increased lending by as much as 45 percentage points more than non-SBLF banks, these analyses did not attempt to isolate the impact of SBLF from other factors. Treasury published its impact evaluation in appendixes in its three most recent Lending Growth Reports . However, it did not discuss the results of the evaluation in the summary or body of the reports and has not utilized the control group to update the results. Relevant resources on program evaluations indicate that the most rigorous evidence should be presented most prominently. Because Treasury has not effectively presented or updated its impact evaluation results, stakeholders may not benefit from the most rigorous and recent information on the effect of SBLF. SSBCI. Treasury established targets for selected measures to monitor program performance and has taken steps to enhance the design of its planned program evaluation. Treasury established a target for one of its existing performance measures and also developed new performance measures and targets. For example, Treasury established a target for its existing performance measure on the amount of private-sector funds leveraged using SSBCI funds and created a new performance measure and target related to the amount of funds disbursed to states. To select and establish the new performance measures and targets, agency officials stated that they used the program objectives stated in the Small Business Jobs Act of 2010 and information from participants' annual 2013 reports. Treasury officials stated they have obtained input from experts on the design of their SSBCI program evaluation and have begun to reach out to congressional staff for feedback on the proposed design. Treasury should make the results of its SBLF impact evaluation more prominent and update its estimate of the impact of SBLF in future reports. In its written comments, Treasury agreed to implement both recommendations. |
The Social Security Act of 1935 authorized the Social Security Administration (SSA) to establish a record-keeping system to help manage the Social Security program, and this resulted in the creation of the SSN. Through a process known as enumeration, unique numbers are created for every person as a work and retirement benefit record for the Social Security program. SSA generally issues SSNs to most U.S. citizens, and SSNs are also available to noncitizens lawfully admitted to the United States with permission to work. SSA estimates that approximately 277 million individuals currently have SSNs. Because of the number’s uniqueness and broad applicability, the SSN has become the identifier of choice for government agencies and private businesses, and thus it is used for a myriad of non–Social Security purposes. With the enhancement of computer technologies in recent years, private sector businesses are increasingly computerizing their records; as a result, these enhancements have spawned new business activities involving the aggregation of personal information. Such entities aggregate large numbers of both public and private data, including SSNs, from record- keeping systems throughout the country into centralized databases and use those databases, in many cases, for the purpose of providing consumer services. Businesses and others rely on entities such as information resellers and CRAs to use SSNs to build credit reports, extract or retrieve data from consumers’ credit histories, verify individuals’ identities, market their products, and prevent financial fraud. Information resellers, sometimes referred to as information brokers, are businesses that specialize in amassing consumer information that includes SSNs for informational services. They may provide their services to a variety of customers, either to specific business clients or through the Internet to anyone willing to pay a fee. Large information resellers limit their services to businesses that establish accounts with them. Law firms, private businesses, law enforcement agencies, and others are usually their clients. For example, lawyers, debt collectors, and private investigators may request information on an individual’s bank accounts and real estate holdings for use in civil proceedings such as divorce; automobile insurers may want information on whether insurance applicants have been involved in accidents or have been issued traffic citations; employers may want background checks on new hires; pension plan administrators may want information to locate pension beneficiaries; and individuals may ask for information to help locate birth parents. When requesting information, customers may ask for nationwide database searches or searches of only specific geographical areas. Other information resellers, particularly those that are Internet-based, generally offer their services to the public at large for a fee. CRAs, also known as credit bureaus, are agencies that collect and sell information about the creditworthiness of individuals. CRAs collect information that is considered relevant to a person’s credit history. These agencies then use this information to assign a credit score to an individual, indicating the person’s creditworthiness. Prospective creditors purchase credit reports about specific individuals from CRAs, and then use this information to decide how much credit, if any, to extend to the individual. Organizations that provide health care services also commonly use consumers’ SSNs. These organizations generally deliver their services through a coordinated system that includes health care providers and health plans (insurers). While both providers and insurers are within this coordinated system, they are distinct from each other. For instance, in conducting business, health care providers offer medical or health services to patients and bill either the patient or the health plan for those services. In contrast, health plans offer insurance to individuals or groups of employees, who then make premium payments in exchange for services. Some health care organizations play dual roles of both health care provider and health insurer, which makes the distinction in how they obtain and use SSNs more complex. Because of the myriad of uses of the SSN, Congress has previously asked GAO to review various aspects of SSN use in both the public and the private sectors. In our previous work, our reports have looked at how private businesses and government agencies obtain and use SSNs. In addition, we have reported that the perceived widespread sharing of personal information and instances of identity theft have heightened public concern about the use of Social Security Numbers. We have also noted that the SSN is used, in part, as a verification tool for services such as child support collection, law enforcement enhancement, and issuing credit to individuals. Although these uses of SSNs are beneficial to the public, SSNs are also key elements in creating false identities. We testified before the Subcommittee on Social Security, House Committee on Ways and Means, about SSA’s enumeration and verification processes, and reported that the aggregation of personal information, such as SSNs, in large corporate databases, as well as the public display of SSNs in various public records, may provide criminals the opportunity to commit identity crimes. Information resellers, CRAs, and health care organizations routinely obtain SSNs from their business clients and use SSNs for various purposes, such as to build tools that verify an individual’s identity or match existing records. In addition to acquiring SSNs from various public sources, officials from these firms said they often obtain SSNs from their business clients wishing to use their services. For example, health care organizations obtain SSNs from the subscriber or policyholder of the employer group during the enrollment process. Given the various types of services these companies offer, we found that all of them have come to rely on the SSN as an identifier, which helps them determine a person’s identity for the purpose of providing the services they offer. These officials said that because the SSN is a unique number, it is the most reliable factor in determining an individual’s identity. However, most of the large information resellers said that the SSN is not needed to develop many of their products, such as products that launch e-mail marketing or telemarketing programs, but when the SSN is used, it provides increased accuracy and completeness in terms of trying to determine an individual’s identity. Information resellers generally obtain SSNs from their business clients, who often provide SSNs to obtain a reseller’s services or products. However, most of the large information reseller officials we spoke to said that many of the products they offer do not incorporate SSN data. They said they generally amass demographic information about households in order to provide marketing products such as detailed data lists of e-mails and postal addresses, and telephone numbers, or information for retailers and others to use to obtain new customers. As a result, their business concentrates more on marketing such products. However, these officials said that they obtain SSNs from their business clients because they also offer specific services, such as background checks, employee screening, determining criminal histories, or searching for individuals. For example, business customers of some of the information resellers who specialize in employee screening provide them with SSNs in order to have background checks done on potential employees. Large information resellers also said they can obtain SSNs from various public and private sources. For example, they obtain SSN data from public records such as bankruptcies, tax liens, civil judgments, criminal histories, deaths, real estate ownership, driving histories, voter registration, and professional licenses. These officials said, however, that the availability of SSN information in public records varied depending on the state and county. For example, some states and counties included SSNs in their filings of tax liens and court records, but not in other records. Bankruptcy information, which is governed at the federal level, always includes SSNs. All of the resellers that we spoke to said that they obtain SSNs from public records where possible, and to the extent the information is provided on the Internet, they are likely to obtain it from such sources. However, given the varied nature of SSN data found in public records, some reseller officials said they are more likely to rely on receiving SSNs from their business clients than they are from obtaining them from public records. Our investigators also used the Web sites of the Internet-based resellers to try to determine the sources they used to obtain information on SSNs. We reviewed the sources of information the resellers listed on their Web sites. They found that they relied mostly on public information and public record data. For example, they listed various kinds of public record information at the state, county, and national levels, as well as other publicly available information, such as newspapers. As with large information resellers, once they obtained an SSN they relied on information in public records to help verify an individual’s identity and obtain additional information. Some large information resellers may also obtain SSN information from private sources. In many cases such information was obtained through review of data where a customer has voluntarily supplied information resellers with information about himself or herself. In addition, large reseller officials said they also use their clients’ records in instances where the client has provided them with information. For example, officials from one large reseller said they obtained lists of their retail customers’ credit card holders. The list includes the names, addresses, SSNs, and other data of the credit card holders. The reseller then uses the list to match the names of the retail company’s delinquent payment holders with the most recent bankruptcy records. In addition, Federal Trade Commission (FTC) staff said that information resellers also obtain information from CRAs. We found the Internet-based resellers to be more dependent on SSNs than the large information resellers, primarily because their focus is more related to providing investigative or background-type services to anyone willing to pay a fee. We found these entities to be primarily focused on amassing information around an individual’s SSN, which in most cases they obtain from customers trying to use their Web sites. To discover what type of information could be obtained from such sources, our investigators accessed the Web sites of six Internet-based information resellers and paid a fee to gain access to the personal data. We found that when we supplied a SSN, these resellers provided with us information such as the corresponding name, address, and telephone number and, on two occasions, a truncated SSN such as 123-45-xxx. All but one of the Internet- based resellers required our investigators to provide both the name and SSN of the person who was the subject of our inquiry. Like information resellers, CRAs also obtain SSNs from their customers or the businesses that furnish data to them, as well as from private and public sources. CRA officials said that they obtain SSNs from businesses that subscribe to their services, such as banks, insurance companies, mortgage companies, debt collection agencies, child support enforcement agencies, credit grantors, and employment screening companies. These businesses voluntarily report consumers’ charge and payment transactions, accompanied by SSNs, to CRAs. Individuals provide these businesses with their SSNs for reasons such as applying for credit. CRA officials said that they also obtain SSNs from public sources. For example, some officials said SSNs can be obtained from bankruptcy records, a fact that is especially important in terms of determining that the correct individual has declared bankruptcy. CRA officials told us that they also obtain SSNs from other information resellers, especially those that specialize in obtaining information from public records. CRA and information reseller officials we spoke to also said that they would support limiting the public display of SSNs, especially where the general public might be able to retrieve such information. For example, they said they support removing the SSN from identification cards, health care insurance cards, and university student identification numbers. None of these officials, however, support removing the SSN from public records or restricting their access to SSN data in public records. They said such restrictions would slow some business transactions and likely increase costs to consumers because many of the conveniences currently enjoyed by consumers, such as obtaining instant credit, would take much longer and, in some cases, cease to exist. Finally, health care organization officials said that they obtain SSNs from individuals themselves and companies that offer health care plans. For example, subscribers or policyholders provide health care plans with their SSNs through their company or employer group when they enroll in health care plans. In addition to health care plans, health care organizations include health care providers, such as hospitals. Such entities often collect SSNs as part of the process of obtaining information on insured people. However, health care officials said that, particularly with hospitals, the medical record number rather than the SSN is the primary identifier. We found that the primary use of the SSN by information resellers, CRAs, and health care organizations alike was to help verify the identity of an individual. In addition, the SSN was also used to compile and match data about individuals with information already in company databases. This was particularly true of CRAs, whose officials said they usually match individuals’ SSNs with records in their data sets. Most information reseller, CRA, and health care organization officials we spoke to said that the SSN is the single most important identifier available, mainly because it is truly unique to an individual, unlike an individual’s name and address, which can often change over an individual’s lifetime. Large information resellers said that they generally use the SSN as an identity verification tool. Some of these entities have incorporated SSNs into their information technology, while others have incorporated SSNs into their client’s databases used for identity verification. For example, one large information reseller that specializes in information technology solutions has developed a customer verification data model that aids financial institutions in their compliance with some federal laws regarding “knowing your customer.” According to this company’s information, the data model compares information provided by the applicant, such as name, address, and SSN, with the data they already have in their databases, which is composed of multiple public and private sources. Another information reseller that specializes in mortgage services uses the SSN as the main factor in identifying individuals for their product reports and also for conducting investigations for their clients for resident screening or employment screening. Yet another large information reseller uses SSNs for internal matching purposes of its databases. For example, this company has various database products that compile information to provide such products as insurance underwriting tools. We also found that Internet-based information resellers use the SSN as a factor in determining an individual’s identity. Although the Internet Web sites we accessed advertised by saying they would be able to find a person’s SSN or find a person using an SSN, these resellers in all but one case required us as the client to supply the SSN. The information they then provided back to us was information that usually restated what we had given them or verified the person’s SSN. Most of the information resellers officials we spoke to said that although they obtain the SSN from their business clients, the information they provide back to their customers rarely contains the SSN. Almost all of the officials said that they provide their clients with a truncated SSN, an example of which would be 123-45-xxxx. In one case, one large information reseller provides business products with three different access levels, which includes the general public, subscriber products, and select products for entities such as law enforcement. Company officials said the subscriber level provides subscribers with truncated SSNs, while full SSNs are viewable at the select group product level, giving the user group a tool to authenticate data about specific individuals. With regard to the Internet-based information resellers we accessed, only one provided the complete SSN back to us. These resellers usually provided information related to the SSN we had provided them, such as name, address, or date of birth. CRAs use SSNs as the primary identifier of individuals that enables them to match the information they receive from their business clients with the information stored in their databases on individuals. Because these companies have various commercial, financial, and government agencies furnishing data to them, the SSN is the primary factor that ensures that incoming data is matched correctly with an individual’s information on file. For example, CRA officials said they use several factors to match incoming data with existing data, such as name, address, and financial account information. If all of the incoming data, except the SSN, match with existing data, then the SSN will determine the correct person’s credit file. Given that people move, get married, and open new financial accounts, these officials said that it is hard to distinguish among individuals. Because the SSN is the one piece of information that remains constant, they said that it is the primary identifier that they use to match data. We found that CRAs and information resellers can sometimes be the same entity, a fact that blurs the distinction between the two types of businesses but does not affect the use of SSNs by these entities. For example, information resellers that assemble or evaluate consumer credit information for the purpose of furnishing consumer reports to third parties would be considered CRAs under federal law, and the law restricts what they can do with the credit report information. Five of the six large information resellers we spoke to said they were also CRAs. CRA officials said that they also build their own databases or purchase databases from other companies, and then resell the information in these databases to their customers. However, CRA officials said that information furnished for credit reports can only be used for credit reporting purposes and cannot be resold. Information not covered by federal law that CRAs use to build their databases or buy from other databases can be resold as consulting solutions or direct-marketing products. In our discussions with CRAs, some officials said that information reselling constituted as much as 40 percent of CRAs’ business. Health care organizations also use the SSN to help verify the identity of individuals. These organizations use SSNs, along with other information such as name, address, and date of birth, as a factor in determining a member’s identity. Health care officials said that health care plans, in particular, use the SSN as the primary identifier of an individual, and it often becomes the customer’s insurance number. Health care officials said that they use SSNs for identification purposes, such as linking an individual’s name to an SSN to determine if premium payments have been made, or they use the SSN as an online services identifier, as an alternative policy identifier, and for phone-in identity verification. Health care organizations also use SSNs to tie family members together where family coverage is used, to coordinate member benefits, and as a cross-check for pharmacy transactions. For example, health care officials said that when people purchase pharmaceuticals, the SSN is used to help identify the person that is authorized to receive the pharmaceuticals and medical benefits. Health care industry association officials also said that SSNs are used for claims processing, especially with regard to Medicare. According to these officials, under some Medicare programs, SSNs are how Medicare identifies benefits to an individual. Given the increased interest in the use and protection of SSNs as well as the recent passage of federal and state laws, health care organization officials said that in some instances health care organizations are limiting their use of SSNs to be in compliance with the laws. For example, one health care organization we spoke to said that certain of its regions no longer use SSNs as a basis for providing member records or for identification purposes. Another region does not use the SSN to verify the identity of members, but instead relies upon the medical record number, date of birth, or address. In yet another region, health care insurers use a unique account number because SSN’s cannot be used as the health care insurer’s account number. Information resellers, CRAs, and health care organization officials said that certain federal laws have helped to limit the disclosures they are allowed to make to their customers. Officials from these companies said that they are either subject to the laws directly, given the nature of their business, or indirectly, through their business clients subject to these laws. In addition, we found that information resellers, CRAs, and health care organizations take steps to safeguard SSN data, sometimes by employing safeguards to protect against the unauthorized use and disclosure of SSNs or, in the case of large information resellers and CRAs, requiring their clients to sign formal agreements saying that their use of SSN data will be only for activities permissible under the law. We also found that Internet- based information resellers also require customers to affirm the permissible purpose under the law for which they are obtaining the information. Finally, at least six states have enacted laws to restrict the private sector’s use of SSNs, and California’s SSN law has had some effect nationwide. In addition, some state regulations and laws regarding the sharing of personal information have extended beyond federal restrictions. According to officials we spoke to, certain federal laws have placed restrictions on their use and disclosure of consumers’ personal information that includes SSNs. These laws include the Gramm-Leach- Bliley Act (GLBA), the Drivers Privacy Protection Act (DPPA), and the Health Insurance Portability and Accountability Act (HIPAA). As shown in table 1, the laws either restrict the disclosures that entities such as information resellers, CRAs, and health care organizations are allowed to make to specific purposes or restrict whom they are allowed to give the information to. Moreover, as shown in table 1, these laws focus on limiting or restricting access to certain personal information and are not specifically focused on information resellers. Prior to GLBA, financial institutions had few limitations as to where, why, and to whom they could provide customer data. GLBA helps protect consumers’ privacy and limits when a financial institution may disclose certain types of a consumer’s financial information. GLBA created a new definition of personal information, referred to as nonpublic personal information, which means personally identifiable financial information that is 1. provided by a consumer to a financial institution (for example, name, address, income, SSN, or other information on an application); 2. the result of any transaction with the consumer or any service performed for the consumer (for example, account numbers, payment history, loan or deposit balances, and credit or debit card purchases); or 3. otherwise obtained by the financial institution (for example, information from a consumer report). Provisions under GLBA limit when a financial institution may disclose a consumer’s nonpublic personal information to non-affiliated third parties. Financial institutions must notify their customers about their information sharing and tell consumers of their right to opt out if they do not want their information shared with certain non-affiliated third parties. GLBA covers a broad range of financial institutions, including many companies not traditionally considered to be financial institutions, because they engage in certain “financial activities.” In addition, any entity that receives consumer financial information from a financial institution under one of the GLBA exceptions may be restricted in its reuse and redisclosure of that information. We found that some CRAs consider themselves to be financial institutions under GLBA. These entities are therefore directly governed by GLBA’s restrictions on disclosing nonpublic personal information to non-affiliated third parties. We also found that some of the information resellers we spoke to did not consider their companies to be financial institutions under GLBA. However, because they have financial institutions as their business clients, they complied with GLBA’s provisions in order to better serve their clients and ensure that their clients are in accordance with GLBA. For example, if information resellers received information from financial institutions pursuant to notice and opt-outs, they could resell the information only to the extent that they were consistent with the privacy policy of the originating financial institution and any opt-outs. Information resellers and CRAs also said that they protect the use of consumers’ nonpublic personal information and do not provide such information to individuals or unauthorized third parties. In addition to imposing obligations with respect to the disclosures of personal information, GLBA also requires federal agencies responsible for financial institutions to adopt appropriate standards for financial institutions relating to safeguarding customer records and information. Information resellers and CRA officials said that they adhere to GLBA’s standards in order to secure financial institutions’ information. FTC staff said that although GLBA helps to limit the disclosure of consumers’ nonpublic personal information, GLBA also includes certain broad exceptions that are unspecific (see app. II for information on GLBA’s exceptions). FTC officials said that they receive many inquiries from CRAs and information resellers concerning the application of GLBA’s exceptions, such as whether the exceptions apply to certain circumstances. As a result, they said it is difficult to determine how and whether certain entities are appropriately interpreting the exceptions. DPPA was enacted to prohibit the release and use of certain personal information from state motor vehicle records. DPPA prohibits any person from knowingly obtaining or disclosing personal information from a motor vehicle record for any use not permitted under DPPA. DPPA specifies certain exceptions when personal information contained in a state motor vehicle record may be obtained and used, such as use by an employer or its agent or insurer to obtain information relating to the holder of a driver’s license (see app. II for a list of permissible uses). As a result of DPPA, information resellers said they were restricted in their ability to obtain SSN and other driver license information from state motor vehicle offices unless they were doing so for a permissible purpose under the law. These officials also said that information obtained from a consumer’s motor vehicle record has to be in compliance with DPPA’s permissible purposes, thereby restricting their ability to resell motor vehicle information to individuals or entities not allowed to receive such information under the law. Furthermore, because DPPA restricts state motor vehicle offices’ ability to disclose driver license information, which includes SSN data, information resellers said they no longer try to obtain SSNs from state motor vehicle offices, except for permissible purposes. HIPAA requires health care organizations and providers to meet certain privacy standards with respect to personal health information. HIPAA’s privacy rule specifically states that “a covered entity must have in place appropriate administrative, technical, and physical safeguards to protect the privacy of protected health information.” The privacy rule provides patients access to their medical records, control over how their health information may be used and disclosed, avenues for recourse if their medical privacy is compromised, and a number of other privacy rights (see app. II for more details on covered entities and individuals’ obligations and rights). HIPAA gives individuals the right, in most cases, to obtain and inspect copies of health information about themselves. In addition, it generally restricts health care plans and certain health care providers from disclosing such information to others without the patient’s consent, except for purposes of treatment, payment, or other health care operations. There are, however, exceptions to facilitate compliance with state reporting requirements and other public health purposes. Health care organizations, including health care providers and health plan insurers, are subject to HIPAA’s requirements. In addition to providing individuals with privacy practices and notices, health care organizations are also restricted from disclosing a patient’s health information without the patient’s consent, except for purposes of treatment, payment, or other health care operations. Information resellers and CRAs do not consider themselves to be “covered entities” under HIPAA, although some information resellers said that their customers are considered to be business associates under HIPAA. As a result, they said they are obligated to operate under HIPAA’s standards for privacy protection, and therefore could not resell medical information without having made sure HIPAA’s privacy standards were met. Under FCRA, Congress has limited the use of consumer reports to protect consumers’ privacy and limits access to credit data to those who have a legally permissible purpose for using the data, such as the extension of credit, employment purposes, or underwriting insurance (see app. II for a list of FCRA’s permissible purposes). However, these limits are not specific to SSNs. All of the CRAs that we spoke to said that they are considered to be consumer-reporting agencies under FCRA. In addition, some of the information resellers we spoke to who handle or maintain consumer reports are classified as CRAs under FCRA. Both CRAs and information resellers said that as a result of FCRA’s restrictions they are limited to providing credit data to their customers that have a permissible purpose under FCRA. Consequently, they are restricted by law from providing such information to the general public. Large information resellers, CRAs, and health care officials said they employ certain safeguards to mitigate the risk of individuals gaining unauthorized access to SSNs or making improper disclosure or use of SSNs. These officials said that potential risks occur from internal sources such as employees’ unauthorized access to information and from external sources such as business clients and computer hackers. To address internal risks, these officials said they (1) conduct background checks on employees, (2) train employees on the appropriate way to handle sensitive information, (3) teach employees about the federal and state laws governing certain information, (4) require employees to sign written agreements that specify what they are allowed to do with information that includes an SSN, and (5) terminate employees and take legal actions against employees that improperly use or disclose SSNs. For example, health care organization officials said they train their employees on how to comply with HIPAA and how to safeguard medical records and other types of personal information. Some information resellers said that they take steps to control and monitor employee access to computerized records that contain SSNs by assigning different levels of access. Employees are, therefore, only given access to information that they need to perform their job. In addition, employees’ access to records that contain SSNs was also monitored. For example, some officials said they track employees browsing in records in certain databases and monitor any unusual transactions. In some cases, CRA and health care officials said they created audit trails for every transaction, and these trails allow them to track employees’ activities. Officials from large information resellers and CRAs also told us that they take action to mitigate external risks that could result in the unauthorized use and disclosure of SSNs. Some of these officials said they have “know your customer” policies in place. For example, one information reseller told us that prior to the sale of information, they verify the identity of their customers and make sure they have the necessary credentials to obtain access to their information database. Large information resellers and CRA officials also said they always determine the eligibility of their customers to have access to their information by conducting audits of their customers prior to entering into a contract with them. For example, they determine prior to entering into a formal contract that in the case of a CRA, the financial institution is what it says it is and is eligible to receive credit reports. Or, in the case of an information reseller, that a law enforcement agency is in fact a law enforcement agency and is eligible to receive motor vehicle information. In conducting their audits, these entities review customers’ business licenses, perform background and credit checks, and often visit the entity itself. Some officials did say, however, that they face certain challenges in protecting SSN data, such as ensuring that they provide their information to legitimate businesses or government agencies that have appropriate, legally permissible purposes to have such information. Nonetheless, there have been cases when the unauthorized use and disclosure of SSNs have occurred. For example, CRA officials told us that through their audit process they discovered instances where their clients have violated their written agreement by using personal information for non-permissible purposes. Large information reseller and CRA officials also said they require their clients to sign formal agreements acknowledging that the information provided to them will be used in accordance with permissible activities under federal and state law. For example, if a business client wanted to obtain information from a state motor vehicle agency, the client would have to sign a formal agreement saying that such information would be used only for permissible purposes, such as the verification of personal information for the purpose of preventing fraud or the pursuit of legal remedies against an individual. Representatives of one large reseller that we spoke to said that they not only require their clients to indicate which permissible use applies before they give access to information, but they also have specific access levels, depending on their client’s formal agreement with them. For example, if the client was an investigative police unit, then it could be granted full access to the reseller’s databases under the formal agreement, which included full SSN disclosure as well as other personally identifiable information. Clients granted this level of access were subject to background checks and other verification techniques, such as on-site verifications, by the reseller. Once a formal contract has been entered into with a customer, large information resellers and CRA officials said that they audit their clients to ensure that they are complying with the legal and contractual restrictions, such as obtaining credit reports for legitimate business purposes. In addition, these audits may be conducted either on-site or by mail requiring the customer to provide documentation regarding the permissible purposes for the information requested by the customer. Officials from one entity told us they conduct an Internet “secret shopper” program whereby they police certain Internet Web sites that sell SSNs to make sure that their customers are not supplying these sites. In addition, health care officials said that health insurance companies are audited by state insurance departments to ensure that, among other things, appropriate computer safeguards are in place. Large information resellers and CRA officials also told us that they are frequently audited by their customers, who need to ensure that they are in turn in compliance with the same laws and restrictions they impose on their clients. For example, CRA officials told us that especially with regard to GLBA requirements, financial institutions are frequently auditing their computer systems to make sure they meet standards under GLBA. We found that Internet-based information resellers require customers, upon accessing their Web site, to acknowledge that they will abide by their “terms and conditions” and indicate the permissible purpose for which they are obtaining the information. For example, we found that they required our investigators to concur with the site’s terms and conditions before any informational service was provided. In addition, two of the Internet-based resellers provided a list of permissible purposes from which we had to select, such as collection purposes. At these resellers’ Web sites, only after we indicated the permissible purpose for which we would like to purchase information were we allowed to purchase personal information by credit card. We did not find that the Internet-based resellers attempted in any way to audit us, determine who we were, or determine that we were indeed using the information for the permissible purpose we had selected. At least six states have enacted their own legislation to restrict private sector uses of SSNs. Based on our review of select legislative documents within 18 states, California, Missouri, Arizona, Georgia, Utah, and Texas had enacted laws to restrict either the display or the use of SSNs. In 2001, California enacted Senate Bill (SB) 168, restricting private sector use of SSNs. Specifically, this law generally prohibits companies and persons from: posting or publicly displaying SSNs, printing SSNs on cards required to access the company’s products or requiring people to transmit an SSN over the Internet unless the connection is secure or the number is encrypted, requiring people to log onto a Web site using an SSN without a password, or printing SSNs on anything mailed to a customer unless required by law or the document is a form or application. Furthermore, in 2002, shortly after the enactment of SB 168, California’s Office of Privacy Protection published recommended practices for protecting the confidentiality of SSNs. These practices were to serve as guidelines to assist private and public sector organizations in handling SSNs. Similar to California’s law, Missouri’s law (2003 Mo. SB 61), which is not effective until July 1, 2006, bars companies from requiring individuals to transmit SSNs over the Internet without certain safety measures, such as encryption and passwords. However, while SB 61 prohibits a person or private entity from publicly posting or displaying an individual’s SSN “in any manner,” unlike California’s law, it does not specifically prohibit printing the SSN on cards required to gain access to products or services. In addition, Arizona’s law (2003 Ariz. Sess. Laws 137), effective January 1, 2005, restricts the use of SSNs in ways very similar to California’s law. However, in addition to the private sector restrictions, it adds certain restrictions for state agencies and political subdivisions. For example, state agencies and political subdivisions are prohibited from printing an individual’s SSN on cards and certain mailings to the individual. Last, Texas prohibits the display of SSNs on all cards, while the Georgia and Utah laws are directed at health insurers and, therefore, pertain primarily to insurance identification cards. None of these three laws contain the provisions mentioned above relating to Internet safety measures and mailing restrictions. Table 2 lists states that have enacted legislation and related provisions. During the course of our work, we found that California is at the forefront with respect to its consumer privacy protection efforts and that the enactment of its SSN law restricting private sector display of SSNs appears to have had some nationwide effect on business practices. For example, a senior manager for at least one private company with locations in California stated that the company identified 175 areas within its organization where SSNs were being used, and 130 of these (over 74 percent) were in connection with health care organizations providing health care services to its employees. As a result, the company has asked all of its health care providers nationwide—regardless of respective state laws—to discontinue their display of SSNs on health benefit cards. In addition, according to officials representing one health care association, as a result of the California law, by January 2006 all of its health care plans— located in various states—are required to discontinue displaying SSNs on their cards. In addition, our review of state legislation and interviews of state and industry officials show several state laws are very similar to California’s law. We found that regulations and laws in 2 of the 18 states we reviewed do not address SSNs specifically but do extend beyond federal restrictions regarding the sharing of “personal information,” which may include SSNs. As previously mentioned, GLBA requires that financial institutions provide consumers the opportunity to opt out of sharing personal information with certain third parties, meaning that unless a consumer notifies the financial institution not to, the institution may share this information. Alternatively, financial institutions may disclose nonpublic information to non-affiliated third parties, including other financial institutions, pursuant to certain exceptions in GLBA, without providing consumers a right to opt out of those disclosures. In addition, FCRA allows those with a legitimate, legally defined purpose or permissible purpose access to consumers’ credit information. To better address consumer concerns about privacy and the protection of personal information, however, states such as Vermont and North Dakota have issued regulations or enacted laws that extend beyond the provisions of these two federal laws. For example, an Assistant Attorney General in Vermont stated that while Vermont does not have any specific laws governing the use of SSNs, it has regulations requiring banking, insurance, and securities companies to obtain consumers’ permission prior to sharing consumers’ personal information—opt-in provisions. The Assistant Attorney General added that Vermont’s Fair Credit Reporting Act has a similar opt-in requirement before permitting access to consumer credit reports. Furthermore, until Congress passed the GLBA, North Dakota had a banking privacy law to protect personal information. This banking law also prohibited financial institutions in North Dakota from selling or sharing customer data with other companies unless the individual provided consent. The North Dakota legislature amended the state’s opt-in privacy law to make it consistent with GLBA’s opt-out requirement. However, in June 2002, following public outcry, North Dakota voters passed a referendum reinstating the former opt-in law, again requiring consumer consent before sharing personal information. Information resellers, CRAs, and health care organizations are likely to continue obtaining and using SSNs primarily to match records, since the SSN is a key factor in determining the identity of an individual and there is no widely accepted alternative. While these entities told us that they typically do not resell SSNs they obtain, there are few restrictions placed on their ability to obtain and use SSNs for their businesses, including information obtained from public records––a primary source of personal data for most information resellers. Certain state laws, however, limit the disclosure of some personal information that includes SSNs. Federal laws that have some restrictions on reselling nonpublic personal information, such as GLBA, have broad exceptions, which entities can broadly interpret. This broad interpretation combined with the uncertainty about the application of the exceptions suggests that reselling personal information—including SSNs—is likely to continue. Private sector officials we spoke to agreed that, given the continued rise in identity crimes, removing SSNs from public display is a step in the right direction. However, these officials stated that they had legitimate uses for the SSN and that restricting business-to-business access or use of such information would hurt consumers and possibly aid identity thieves in their attempts to assume an individual’s identity by making it more difficult for businesses to verify an individual’s identity. Thus, any restrictions Congress deems necessary regarding SSNs will have to weigh the consequences of restricting the use of SSNs on the one hand with legitimate business needs for the use of SSNs on the other. We provided a draft of this report to the Commissioner of the Social Security Administration and the Chairman of the Federal Trade Commission for their review and comment. Neither agency provided a formal comment letter. However, the FTC provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days after its issue date. At that time, we will send copies of this report to the Commissioner of the Social Security Administration and the Chairman of the Federal Trade Commission. Copies will also be made available to others on request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you have any questions concerning this report, please contact me on (202) 512-7215 or George Scott at (202) 512-5932. Other major contributors include Gwen Adelekun, Richard Burkard, Tamara Cross, Jason Holsclaw, Raun Lazier, Kevin Murphy, and James Rebbe. To describe how information resellers, CRAs, and health care organizations obtain and use SSNs, we expanded on previous GAO work in this area and we interviewed officials from large information resellers, CRAs, health care organizations, the Consumer Data Industry Association (an international trade association that represents consumer information companies), and the Social Security Administration. We then selected six large and well-known information resellers and conducted structured interviews about how they obtained and used SSNs. We also had our investigators access six Internet-based information resellers’ Web sites. We researched such resellers on the Internet and choose six that specialized in finding people by their SSN or searched for people by their SSN. To understand how CRAs obtain and use SSNs, we interviewed three large, well-known CRAs. Finally, to determine how health care organizations were obtaining and using SSNs, we talked to two large and well-known health care plans. One submitted our questions to its eight regions, and the other also sought the views of its various regions. We also talked to two health care organizations—one that represents 1,000 health care plans, and one whose 300 members are primarily insurers. Each association asked some of its members to determine how they obtained and used SSNs. We were unable to determine the extent to which some of their responses were representative of associations with similar memberships. To determine the laws and practices relevant to safeguarding SSNs, we determined what federal laws were helping to protect SSNs through our discussions with information resellers, CRAs, health care organizations, and the Federal Trade Commission. We then researched the relevant laws and reviewed them to determine what limits were placed on the use and disclosure of an individual’s personal information, including SSN. To report on the safeguards that information resellers, CRAs, and health care organizations have in place to protect SSNs, we conducted site visits and in-depth interviews with certain of these entities. We asked them about the types of safeguards they employ to protect SSNs from both internal and external misuse. We also reviewed their policies and procedures for protecting SSNs. However, we did not assess the safeguards that they used to protect SSNs. Also, the information we obtained from these entities was self-reported and was not independently verified by GAO. Finally, to gain an understanding of what states are doing legislatively to restrict SSN use, we conducted site visits to two states—California and Washington; conducted interviews with federal, state, and industry officials; and reviewed pertinent state legislation. More specifically, our interviews at the federal level were with officials from the Federal Trade Commission, the Secret Service, and the Department of the Treasury. At the state level, we interviewed officials from Washington’s Office of the Attorney General and California’s Office of Privacy Protection. Also at the state level, we surveyed state audit officials in each of the 50 states to determine whether they had conducted reviews relating to our work, whether they were familiar with state laws affecting private sector use of SSNs, and whether they were aware of any notable practices (within the public or private sector) aimed at protecting consumer privacy and personal information. In addition, we interviewed private sector businesses and organizations and contacted some state offices of the attorney general, and identified state laws and legislative initiatives related to the use of SSNs. This resulted in our legislative review of 18 states (including the 2 states we visited) that were identified as having laws or proposed laws governing SSN use. GLBA requires companies to give consumers privacy notices that explain the institutions’ information-sharing practices. In turn, consumers have the right to limit some, but not all, sharing of their nonpublic personal information. Financial institutions are permitted to disclose consumers’ nonpublic personal information without offering them an opt-out right in the following circumstances: to effect a transaction requested by the consumer in connection with a financial product or service requested by the consumer; maintaining or servicing the consumer’s account with the financial institution or another entity as part of a private label credit card program or other extension of credit; or a proposed or actual securitization, secondary market sale, or similar transaction; with the consent or at the direction of the consumer; to protect the confidentiality or security of the consumer’s records; to prevent actual or potential fraud, for required institutional risk control or for resolving customer disputes or inquiries, to persons holding a legal or beneficial interest relating to the consumer, or to the consumer’s fiduciary; to provide information to insurance rate advisory organizations, guaranty funds or agencies, rating agencies, industry standards agencies, and the institution’s attorneys, accountants, and auditors; to the extent specifically permitted or required under other provisions of law and in accordance with the Right to Financial Privacy Act of 1978, to law enforcement agencies, self-regulatory organizations, or for an investigation on a matter related to public safety; to a consumer reporting agency in accordance with the Fair Credit Reporting Act or from a consumer report reported by a consumer reporting agency; in connection with a proposed or actual sale, merger, transfer, or exchange of all or a portion of a business if the disclosure concerns solely consumers of such business; to comply with federal, state, or local laws; an investigation or subpoena; or to respond to judicial process or government regulatory authorities. Financial institutions are required by GLBA to disclose to consumers at the initiation of a customer relationship, and annually thereafter, their privacy policies, including their policies with respect to sharing information with affiliates and non-affiliated third parties. The DPPA specifies a list of exceptions when personal information contained in a state motor vehicle record may be obtained and used (18 U.S.C. § 2721(b)). These permissible uses include: for use by any government agency in carrying out its functions; for use in connection with matters of motor vehicle or driver safety and theft; motor vehicle emissions; motor vehicle product alterations, recalls, or advisories; motor vehicle market research activities, including survey research; for use in the normal course of business by a legitimate business, but only to verify the accuracy of personal information submitted by the individual to the business and, if such information is not correct, to obtain the correct information but only for purposes of preventing fraud by pursuing legal remedies against, or recovering on a debt or security interest against, the individual; for use in connection with any civil, criminal, administrative, or arbitral proceeding in any federal, state, or local court or agency; for use in research activities; for use by any insurer or insurance support organization in connection with claims investigation activities; for use in providing notice to the owners of towed or impounded vehicles; for use by a private investigative agency for any purpose permitted under the DPPA; for use by an employer or its agent or insurer to obtain information relating to the holder of a commercial driver’s license; for use in connection with the operation of private toll transportation facilities; for any other use, if the state has obtained the express consent of the person to whom a request for personal information pertains; for bulk distribution of surveys, marketing, or solicitations, if the state has obtained the express consent of the person to whom such personal information pertains; for use by any requester, if the requester demonstrates that it has obtained the written consent of the individual to whom the information pertains; for any other use specifically authorized under a state law, if such use is related to the operation of a motor vehicle or public safety. The HIPAA privacy rule also defines some rights and obligations for both covered entities and individual patients and health plan members. Some of the highlights are: Individuals must give specific authorization before health care providers can use or disclose protected information in most nonroutine circumstances, such as releasing information to an employer or for use in marketing activities. Covered entities will need to provide individuals with written notice of their privacy practices and patients’ privacy rights. The notice will contain information that could be useful to individuals choosing a health plan, doctor, or other service provided. Patients will be generally asked to sign or otherwise acknowledge receipt of the privacy notice. Covered entities must obtain an individual’s specific authorization before sending them marketing materials. Congress has limited the use of consumer reports to protect consumers’ privacy. All users must have a permissible purpose under the FCRA to obtain a consumer report (15 USC 1681b). These permissible purposes are: as ordered by a court or a federal grand jury subpoena, as instructed by the consumer in writing, for the extension of credit as a result of an application from a consumer or the review or collection of a consumer’s account, for employment purposes, including hiring and promotion decisions, where the consumer has given written permission, for the underwriting of insurance as a result of an application from a consumer, when there is a legitimate business need, in connection with a business transaction that is initiated by the consumer, to review a consumer’s account to determine whether the consumer continues to meet the terms of the account, to determine a consumer’s eligibility for a license or other benefit granted by a governmental instrumentality required by law to consider an applicant’s financial responsibility or status, for use by a potential investor or servicer or current insurer in a valuation or assessment of the credit or prepayment risks associated with an existing credit obligation, and for use by state and local officials in connection with the determination of child support payments, or modifications and enforcement thereof. | In 1936, the Social Security Administration (SSA) established the Social Security number (SSN) to track workers' earnings for Social Security benefit purposes. However, the SSN is also used for a myriad of non-Social Security purposes. Today, public and private sector entities view the SSN as a key piece of information that enables them to conduct their business and deliver services. However, given the apparent rise in identity crimes as well as the rapidly increasing availability of information over the Internet, Congress has raised concern over how certain private sector entities obtain, use, and safeguard SSN data. In previous reports, we discussed the benefits of government and commercial entities using SSNs. We also examined how certain private sector entities and the government obtain, use, and safeguard SSNs. This report provides additional information on private sector uses of SSNs. The Chairman, Subcommittee on Social Security, House Committee on Ways and Means, asked that GAO examine the private sector use of SSNs by businesses most likely to obtain and use them including information resellers, consumer reporting agencies (CRAs), and health care organizations. Specifically, our objectives were to (1) describe how information resellers, CRAs, and some health care organizations obtain and use SSNs and (2) discuss the laws and practices relevant to safeguarding SSNs and consumers' privacy. GAO makes no recommendations. Information resellers, consumer reporting agencies, and some health care organizations routinely obtain SSNs from their customers and have come to rely on SSNs as identifiers that help them determine an individual's identity and accumulate information about individuals. Larger information resellers usually obtain SSNs from their customers and use them to determine the identity of an individual for purposes such as employment screening, credit information, and criminal history. Other Internet-based information resellers whose Web sites we accessed also obtain SSNs from their customers and scour public records and other publicly available information to provide the information to persons willing to pay a fee. CRAs, too, are large users of SSNs. They obtain SSNs from businesses that furnish individuals' data to them and use SSNs to determine consumers' identities and match the information they receive from businesses with information stored in consumers' credit files. Finally, health care organizations obtain SSNs from individuals themselves and companies that offer health care plans and use them as identifiers. Some health care organizations use SSNs as member identification numbers. Certain federal laws help to safeguard consumers' personal information, including SSNs, by restricting the disclosure of and access to such information, and private sector officials we spoke with said that they indeed take steps to safeguard the SSN information they collect. Information resellers, CRAs, and health care organizations told us they take steps to safeguard SSN data in part for business purposes but also because of federal and state laws that require such safeguards. Finally, some states are taking steps, legislatively, to address consumer concerns regarding SSN use and privacy of their personal information. Of the 18 states we examined, at least 6 had enacted laws specifically restricting private sector use and display of SSNs. California's law, in particular, has had some nationwide effect on business practices in places where some businesses have discontinued the display of SSNs in all of their locations. Also, our review shows that several state laws are similar to California's. In addition, while some state laws and regulations we reviewed did not restrict or prohibit SSN use or display specifically, they did extend beyond federal restrictions regarding the sharing of personal information. |
Based on federal managers’ responses on our four governmentwide surveys conducted over the past 10 years, performance planning and measurement have slowly, yet increasingly, become a part of agencies’ cultures. In particular, as shown in figure 1, significantly more federal managers today report having the types of performance measures called for by GPRA and PART than they did 10 years ago. However, unless federal managers use performance data to make management decisions and to inform policymakers, the benefit of collecting performance information cannot be realized and real improvement in management and program results are less likely to be achieved. We have found that despite having more performance measures, the extent to which managers make use of this information to improve performance has remained relatively unchanged. As shown in figure 2, seven of the nine categories of management activities we asked about showed no significant change over the past 10 years. In particular, despite efforts through GPRA and PART to help government better inform resource allocation decisions with performance information, over the past decade, there has been no significant shift in the percent of managers reporting they use information obtained from performance measurement when allocating resources. In addition, contract management remains the management activity with the least reported use of performance information, despite recommendations for better management of federal contracts from Congress and GAO and efforts to improve contract management through the PMA Competitive Sourcing Initiative. In 2007, 41 percent of managers reported that they use performance information when developing and managing contracts, a 3 percentage point increase from 2000, when we first asked the question. Given the growing fiscal imbalance, the government must get the best return it can on its investment in goods and services by improving its development, management, and assessment of contracts; using performance information in these activities can help to focus contract management on results. Of interest, there were two areas relating to managers’ use of performance information in management decision making that did change significantly between 1997 and 2007. First, there was a significant decrease in the percentage of managers who reported that their organizations used performance information when adopting new program approaches or changing work processes. Performance information can play a valuable role in highlighting the need to take a closer look at the effectiveness of existing approaches and processes. Such an examination could lead to identifying needed changes to bring about performance improvements. Second, there was a significant increase in the percentage of managers who reported that they reward the employees they manage or supervise based on performance information. We believe this is an important development that can play a role in getting managers to pay attention to their performance; we will discuss this in more detail later in this statement. While in general there has been little change in federal managers’ reported use of performance information governmentwide, agency level comparisons between 2000 and 2007 reveal that some agencies have made notable progress. For example, over the last 7 years, the Nuclear Regulatory Commission (NRC) showed a significant increase in positive responses to eight questions related to use of performance information in management activities. At the same time, DOD showed no change in their responses to questions related to the use of performance information and the Small Business Administration (SBA) reported significantly lower use of performance in 2007 than 2000 on two questions. As seen in table 1, the range of use also varied considerably among agencies with Forest Service (FS) and Department of the Interior (Interior) managers among the lowest users, and the Social Security Administration (SSA) and National Aeronautics and Space Administration (NASA) among the highest. The PART has been used by the current administration to increase the government’s focus on improving program performance results. Specifically, OMB includes an assessment of whether programs use performance information for program management as one element of its overall program assessment. In judging agency progress on the Performance Integration Initiative of the PMA, OMB also considers whether PART findings and performance information are used consistently to justify funding requests, management actions, and legislative proposals. However, of the federal managers familiar with PART, a minority—26 percent—indicated that PART results are used in management decision making, and 14 percent viewed PART as improving performance. As our survey results show, despite legislative and administration efforts to focus federal management decisions on the achievement of results and maximize the use of federal funds, changing the way federal managers make decisions is not simply a matter of making program performance information available. Based on our work on management reform efforts as well as analysis of federal managers’ responses to our surveys over the past 10 years, we have identified three key practices that can contribute to greater attention to results when making management decisions. Regardless of the form of future initiatives, the next administration should take steps to ensure that agencies emphasize these practices to make sure that performance information is used in management decision making: 1. demonstrate leadership commitment to results-oriented management; 2. create a clear “line of sight” linking individual performance with 3. build agency capacity to collect and use performance information. Perhaps the single most important element in successfully implementing organizational change is the demonstrated, sustained commitment of top leaders. Leaders can demonstrate their support for results-oriented management and facilitate the use of performance information by agency managers through frequent and effective communication of performance information. On our survey, we found a positive relationship between agency managers who reported that performance information is effectively communicated on a routine basis and managers’ reported use of performance information in key management activities—in other words, greater communication of performance information is associated with greater use. Leaders can communicate performance information in their organizations by promoting the use of visual tools such as poster displays, performance scorecards, and intranet sites. In prior reviews, officials have told us that publicizing performance information can inspire a greater sense of ownership on the part of employees in their unit’s performance; it can also spur competition between units. Additionally, we found that frequently reporting performance information can help to identify program problems before they escalate, identify the factors causing the problems, and modify services or processes to try to address problems. Leaders can play a key role in this process by following up on problems identified during discussions of performance information and by holding managers accountable for addressing the problems. From 1997 to 2007, we saw a significant increase in the percent of managers—from 57 to 67 percent—-who reported that top leadership demonstrates a strong commitment to achieving results (see fig. 3.). Our survey results confirm the relationship between leadership commitment to results-oriented management and managers’ reported use of performance information in key management activities, such as developing program strategy and making decisions about funding or allocating resources. Similarly, managers who believed their immediate supervisor paid attention to the use of performance information in decision making also perceived that managers at their level made greater use of performance information. Regarding the contribution of PART to improving this practice, 37 percent of federal managers familiar with PART reported that upper management has paid greater attention to performance and achieving results. More than any other items we asked about concerning the effect of PART, this item received the greatest degree of endorsement from federal managers. To be successful, governmentwide performance improvement initiatives must ensure that all employees involved in the process understand the rationale for making the changes and their role and responsibility in the process. Performance management systems are a vital tool for managing and directing such organizational transformations because they create a “line of sight” showing how team, unit, and individual performance can contribute to overall organizational results. Additionally, performance management systems can be used to hold employees accountable for achieving and incorporating results into management and employee decision making. Over the past 10 years, we found positive trends in federal managers’ responses to several questions relating to how agencies are managing their employees, which agencies can build upon to further emphasize the importance of managing by results (see fig. 4.). Specifically, we saw a statistically significant increase—from 53 percent in 1997 to 61 percent in 2007—in the percentage of federal managers that reported using performance information when rewarding government employees they manage. Additionally, a significantly higher number of federal managers reported that employees in their agency receive positive recognition for helping the agency accomplish its strategic goals from 1997 to 2007. At the same time, an increasing portion of senior executives report they are being held more accountable for results. In recent years, Congress and the administration modernized the performance appraisal and pay systems for senior executives by requiring a clearer link between individual performance and pay. Specifically, agencies are allowed to raise Senior Executive Service (SES) base pay and total compensation caps if their performance appraisal systems are certified by the Office of Personnel Management (OPM) with concurrence by the Office of Management and Budget (OMB) as, among other things, linking performance for senior executives to the organization’s goals and making meaningful distinctions based on relative performance. In our past work on performance management and pay issues, we have reported that performance-based pay cannot be simply overlaid on most organizations’ existing performance management systems. Rather, as a precondition to effective pay reform, individual expectations must be clearly aligned with organizational results, communication on individual contributions to annual goals must be ongoing and two-way, meaningful distinctions in employee performance must be made, and cultural changes must be undertaken. Most important, leading organizations have recognized that effective performance management systems create a “line of sight” showing how unit and individual performance can contribute to overall organizational goals and can help them drive internal change and achieve external results. Effective performance-management systems that hold executives accountable for results can help provide continuity during times of leadership transition, such as the upcoming change in the administration, by maintaining a consistent focus on organizational priorities. Interestingly, since our 2003 survey, SES responses regarding accountability show a significant increase. Between 2003 and 2007, there was a 14 percentage point increase in the number of SES who responded that managers/supervisors at their level are held accountable for accomplishment of agency strategic goals. In 2007, there was a 12 percentage point increase in the number of SES who reported that they are held accountable for the results of the programs, operations, or projects for which they are responsible as compared to 2003 (see fig. 5.). There was no significant change in responses from 2003 to 2007 in non- SES level responses to either of these questions. As we have previously reported, it is important to ensure that managers have the authority to implement changes to the programs for which they are held accountable. Our 2007 survey results, however, indicate a growing gap between senior executives’ perceptions of their accountability for program performance as opposed to their decision- making authority (see fig. 6). In 2007, 81 percent of senior executives reported that they are held accountable for the results of the programs for which they are responsible, while 62 percent reported that they have the decision-making authority they need to help the agency achieve its strategic goals, a 19 percentage point difference. Managers’ ability to effect change within their organization is limited if they do not have the decision- making authority to help the agency accomplish its strategic goals. While agencies can require managers to collect and report performance information, this does not ensure that managers have the knowledge or experience necessary to use the information or will trust the information they are gathering. The practice of building analytical capacity to use performance information and to ensure its quality—both in terms of staff trained to do the analysis and availability of research and evaluation resources—is critical to using performance information in a meaningful fashion and plays a large role in the success of government performance improvement initiatives. Managers must understand how the performance information they gather can be used to provide insight into the factors that impede or contribute to program successes; assess the effect of the program; or help explain the linkages between program inputs, activities, outputs, and outcomes. In earlier work, we found a positive relationship between agencies providing training and development on setting program performance goals and the use of performance information when setting or revising performance goals. While our survey found a significant increase in training since 1997, only about half of our survey respondents in 2007 reported receiving any training that would assist in strategic planning and performance assessment. We previously recommended that OMB ensure that agencies are making adequate investments in training on performance planning and measurement, with a particular emphasis on how to use performance information to improve program performance. However, OMB has not yet implemented our recommendation. In addition to building agency capacity by educating staff on how to use performance information, it is also important to ensure that the information gathered meets users’ needs for completeness, accuracy, consistency, timeliness, validity, and ease of use. Our survey results indicate that those federal managers who felt they had sufficient information on the validity of the performance data they use to make decisions were more likely to report using performance information in key management activities. Interestingly, this question regarding managers’ perception of the validity of performance data was more strongly associated with managers’ reported use of performance information than it was with any other question on the survey. Additionally, we found a significant relationship between federal managers reporting that managers at their level are taking steps to ensure that performance information is useful and appropriate and their reported use of performance information in key management activities. Getting buy-in from managers by involving them in the selection and development of measures for their programs can help increase their confidence in the data collected and the likelihood that they will use the information gathered in decision making. Regardless of the form, future governmentwide initiatives to improve performance should take into consideration key lessons learned that we have identified through our work. First, the next administration should promote the three key practices we found that facilitate the use of performance information by all levels of agency management. Beyond this, the next administration can better focus its efforts to improve performance by (1) adopting a more strategic and crosscutting approach to overseeing performance; (2) improving the relevance of performance information to Congress; and (3) building agency confidence in assessments for use in decision making. Given the time and effort required to assess agency and program performance, taking a more crosscutting, strategic approach to such assessments may better use limited resources. Additionally, focusing decision makers’ attention on the most pressing policy and program issues and on how related programs and tools affect broader outcomes and goals may better capture their interest throughout the process. The current administration’s PART initiative focuses on individual programs, which aligns with OMB’s agency-by-agency budget reviews, but has been used infrequently to address crosscutting issues or to look at broad program areas in which several programs or program types address a common goal. Crosscutting analysis looking at broad program areas is necessary to determine whether a program complements and supports other related programs, whether it is duplicative and redundant, or whether it actually works at cross-purposes to other initiatives. While OMB has reported on a few crosscutting assessments in recent budget requests, we have suggested that OMB adopt this approach more widely and develop a common framework to evaluate all programs—including tax expenditures and regulatory programs—intended to support common goals. We have previously reported GPRA could provide OMB, agencies, and Congress with a structured framework for addressing crosscutting program efforts. OMB, for example, could use the provision of GPRA that calls for OMB to develop a governmentwide performance plan to integrate expected agency-level performance. Unfortunately, this provision has not been implemented fully. OMB issued the first and only such plan in February 1998 for fiscal year 1999. Without such a governmentwide focus, OMB is missing an opportunity to assess and communicate the relationship between individual agency goals and outcomes that cut across federal agencies and more clearly relate and address the contributions of alternative federal strategies. The governmentwide performance plan also could help Congress and the executive branch address critical federal performance and management issues, including redundancy and other inefficiencies in how the government does business. It could also provide a framework for any restructuring efforts. In addition to the annual performance plan, a governmentwide strategic plan could identify long-term goals and strategies to address issues that cut across federal agencies. Such a plan for the federal government could be supported by a set of key national outcome-based indicators of where the nation stands on a range of economic, environmental, safety/security, social, and cultural issues. A governmentwide strategic plan combined with indicators could help in assessing the government’s performance, position, and progress, and could be a valuable tool for governmentwide reexamination of existing programs, as well as proposals for new programs. Further, it could provide a cohesive perspective on the long- term goals of the federal government and provide a much needed basis for fully integrating, rather than merely coordinating, a wide array of federal activities. In order for performance improvement initiatives to hold appeal beyond the executive branch, and to be useful to the Congress for its decision making, garnering congressional buy-in on what to measure and how to present this information is critical. In a 2006 review, congressional committee staff told us that although OMB uses a variety of methods to communicate the PART assessment results, these methods cannot replace the benefit of early consultation between Congress and OMB about what they consider to be the most important performance issues and program areas warranting review. However, a mechanism to systematically incorporate a congressional perspective and promote a dialogue between Congress and the President in the PART review process is missing. As a result of this lack of consultation, there have been several areas of disagreement between OMB and Congress about this executive branch tool, resulting in most congressional staff we spoke with not using the PART information. Most congressional staff reported that they would more likely use the PART results to inform their deliberations if OMB (1) consulted them early in the PART process regarding the selection and timing of programs to assess, (2) explained the methodology and evidence used or to be used to assess programs, and (3) discussed how the PART information can best be communicated and leveraged to meet their needs. OMB has recently taken some steps to more succinctly report agency performance information. In 2007, OMB initiated a pilot program that explores alternative approaches to performance and accountability reporting, including a “highlights report” summarizing key performance and financial information. However, more work could be done to better understand congressional information needs and communication preferences. We have reported previously that congressional staff appreciate having a variety of options for accessing the information they need to address key policy questions about program performance or to learn about “hot” issues. In a case study we conducted on FAA’s communication of performance, budgeting, and financial information with Congress, congressional committee staff from the House Transportation and Infrastructure Committee were interested in better using technology to gain additional agency data in a timely manner. For example, staff reported that agencies could create a For Congress page on their Web site dedicated to serve as a single repository of data for congressional requesters. In future initiatives, OMB could explore alternative communication strategies and data sources to better meet congressional needs and interest and ensure that the valuable data collected for performance improvement initiatives is useful and used. Additionally, Congress could consider whether a more structured oversight mechanism is needed to permit a coordinated congressional perspective on governmentwide performance issues. Just as the executive branch needs a vehicle to coordinate and address programs and challenges that span multiple departments and agencies, Congress might need to develop structures and processes that better afford a coordinated approach to overseeing agencies and tools where jurisdiction crosses congressional committees. We have previously suggested that one possible approach could involve developing a congressional performance resolution identifying the key oversight and performance goals that Congress wishes to set for its own committees and for the government as a whole. Such a resolution could be developed by modifying the annual congressional budget resolution, which is already organized by budget function. This may involve collecting the input of authorizing and appropriations committees on priority performance issues for programs under their jurisdiction and working with crosscutting committees such as the Senate Committee on Homeland Security and Governmental Affairs, the House Committee on Oversight and Government Reform, and the House Committee on Rules. This year, Congress issued its budget resolution for fiscal year 2009 containing a section directing Committees of the House of Representatives and the Senate to review programs’ performance within their jurisdiction for waste, fraud, and abuse and report recommendations annually to the appropriate Committee on the Budget. As the primary focal point for overall management in the federal government, OMB plays a critical role in the planning and implementation of the President’s initiatives. During the current administration, OMB has reported that is has reviewed over 1,000, or 98 percent, of all federal programs through its PART initiative. Moreover, through its PMA and PART initiatives, OMB has set the tone of leadership at the top by holding agencies accountable for their implementation of recommendations intended to improve program management. However, regardless of the mechanism that the next administration employs to oversee agency and program performance, OMB’s efforts could be enhanced by building agency confidence in the credibility and usefulness of its assessments for management decision making. To build this confidence, OMB could further its efforts to increase OMB examiners’ knowledge of the programs they are assessing and agency knowledge about how to develop and use the information gathered for PART. Our survey results indicate that concerns exist among federal managers regarding the quality of OMB’s assessments. Specifically, managers responding to our survey expressed concerns that OMB examiners may be spread too thinly and do not have sufficient knowledge of the programs they are reviewing necessary for accurate assessments. On our survey, the suggested improvement to PART with the highest level of endorsement from federal managers familiar with PART was to ensure that OMB’s examiners have an in-depth knowledge of the programs they review. Seventy percent of respondents indicated that this was a high to very high priority for improving PART. For example, one respondent told us that “the PART reviewer does not have time to try to understand program” and another stated that “some PART reviewers are not familiar with their agency mission and scope.” These responses echo previous statements officials have given us regarding PART, in particular that PART assessments can be thoughtful when OMB is knowledgeable about a program and has enough time to complete the reviews, but that assessments are less useful when OMB staff are unfamiliar with programs or have too many PART assessments to complete. By taking a more targeted, strategic approach as we previously recommended, OMB could allow examiners time to conduct more in-depth assessments of selected programs and build their knowledge base about the programs. OMB can also help to facilitate implementation of future initiatives by offering training to agency officials on the reporting requirements of the initiatives and how the information gathered for these efforts might be incorporated into management decision making. As we previously mentioned, it is important to build agency capacity in terms of the capability of staff to analyze and use performance information in their decision making. Nearly half of managers familiar with PART indicated that agency-level training on developing acceptable performance measures for PART as well as training on how to use performance measures identified as a result of the PART process should be high to very high priorities for improving PART. One survey respondent commented that “PART is a great concept but poorly understood by many in federal service; more training and interaction among managers [working on PART] could lead to substantial improvements in performance and overall efficiencies.” Another survey respondent emphasized that training needed to be provided to field offices “so field supervisors and front-line employees understand how their work outcomes/outputs roll up to highest levels in government goals and initiatives.” Building agency officials familiarity with and confidence in the performance assessments being conducted will be critical to improving the integration and use of the information gathered in management decision making. Each new administration has the opportunity to learn from and build upon the experiences of its predecessors. While the last decade has seen the creation of an infrastructure for government performance improvement efforts, and a more results-oriented culture in the federal government, we still see more that can be done to make this transformation more widespread among federal agencies. Adopting the key practices we have highlighted—demonstrating leadership commitment to performance, aligning individual performance with the goals of the organization, and building the capacity to use information—would be an important first step, and OMB can play an important role in fostering these practices across government. OMB could also adopt some of these practices in its own engagement with agencies—particularly, by helping to provide the training and development that both OMB analysts and agency program managers will need to make sure that any OMB-led performance review is useful and used. Beyond this, Congress and the administration can help bring a more strategic approach to how government performance is monitored and measured. As we have noted repeatedly in our work, a governmentwide strategic plan, underpinned by a set of key national indicators (KNI), would, in defining outcomes shared by multiple agencies and programs, help keep sight of how well agency programs are working collectively to produce intended results. Whatever performance improvement initiatives the next administration adopts, it will be vital to engage the Congress in helping to identify the meaningful measures of success, as well as the form in which performance information will be useful to Congress itself in carrying out its oversight, legislative, and appropriations roles. Mr. Chairman, this concludes my statement. I would be pleased to respond to any questions you or other members of the committee may have at this time. For further information on this testimony, please contact Bernice Steinhardt at (202) 512- 6806 or [email protected] Elizabeth Curda at (202) 512-4040 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this testimony. Individuals making key contributions to this testimony were Matt Barranca, Thomas Beall, Laura Craig, Scott Doubleday, Daniel Dunn, Catherine Hurley, Stuart Kauffman, Alison Keller, Anna Maria Ortiz, Mark Ramage, Kaitlin Riley, Jerry Sandau, and Katherine Hudson Walker. A Web-based questionnaire on performance and management issues was administered to a stratified random probability sample of 4,412 persons from a population of approximately 107,326 mid-level and upper-level civilian managers and supervisors working in the 24 executive branch agencies covered by the Chief Financial Officers (CFO) Act of 1990. The sample was drawn from the Office of Personnel Management’s (OPM) Central Personnel Data File (CPDF) as of March 2007, using file designators indicating performance of managerial and supervisory functions. In reporting the questionnaire data, when we use the term “governmentwide” and the phrase “across the federal government,” we are referring to these 24 CFO Act executive branch agencies, and when we use the terms “federal managers” and “managers,” we are referring to both managers and supervisors. The questionnaire was designed to obtain the observations and perceptions of respondents on various aspects of such results-oriented management topics as the presence and use of performance measures, hindrances to measuring performance and using performance information, and agency climate. In addition, the questionnaire included a section requesting respondents’ views on the Office of Management and Budget’s (OMB) Program Assessment Rating Tool (PART) and the priority that should be placed on various potential improvements to it. With the exception of the section of the questionnaire asking about OMB’s PART, most of the items on the questionnaire were asked in three earlier surveys. The earliest survey was conducted between November 1996 and January 1997 as part of the work we did in response to a Government Performance and Results Act (GPRA) requirement that we report on implementation of the act. The second survey, conducted between January and August 2000, and the third survey, conducted between June and August 2003, were designed to update the results from each of the previous surveys. The 2000 survey, unlike the other two surveys, was designed to support analysis of the data at the department and agency level as well as governmentwide. Similar to the three previous surveys, this survey covered the CFO Act agencies and the sample was stratified by whether the manager or supervisor was Senior Executive Service (SES) or non-SES. The management levels covered general schedule (GS), general management (GM), or equivalent schedules at levels comparable to GS/GM-13 through career SES or equivalent levels of executive service. Similar to our 2000 and 2003 surveys, we incorporated special pay plans, for example, Senior Foreign Service executives, into the population and the sample to ensure at least a 90 percent coverage of all managers and supervisors at or comparable to the GS/GM-13 through career SES level at the departments and agencies we surveyed. One purpose of this survey was to update the information gathered at the departmental and agency level for the survey done in 2000. Similar to the design of the 2000 survey, stratification was also done by the 24 CFO Act agencies with an additional breakout of five selected agencies from their departments—Forest Service, Centers for Medicare and Medicaid Services (CMS), Federal Aviation Administration (FAA), Internal Revenue Service (IRS), and Federal Emergency Management Agency (FEMA). The first four agencies were selected for breakout in our 2000 survey on the basis of our previous work, at that time, identifying them as facing significant managerial challenges. FEMA, which was an independent agency at the time of our 2000 survey, became part of the Department of Homeland Security (DHS) when the department was created. The intent of this survey was to cover the same set of entities examined in the 2000 survey with the addition of DHS, which was created in 2003, in order to examine possible change in managerial perceptions of performance measurement and use over time at the department and agency level between 2000 and 2007. The PART section was included to obtain feedback from managers that would help inform the transition and management agenda of the next administration. Most of the items on the questionnaire were closed-ended, meaning that, depending on the particular item, respondents could choose one or more response categories or rate the strength of their perception on a 5-point extent scale ranging from “to no extent” at the low end of the scale to “to a very great extent” at the high end. For the PART questions about improvement priorities, the 5-point scale went from “no priority” to “very great priority.” On most items, respondents also had an option of choosing the response category “no basis to judge/not applicable.” We sent an e-mail to members of the sample that notified them of the survey’s availability on the GAO Web site and included instructions on how to access and complete the survey. Members of the sample who did not respond to the initial notice were sent up to four subsequent reminders asking them to participate in the survey. The survey was administered from October 2007 through January 2008. During the course of the survey, we deleted 199 persons from our sample who had either retired, separated, died, or otherwise left the agency or had some other reason that excluded them from the population of interest. We received useable questionnaires from 2,943 sample respondents, or about 70 percent of the remaining eligible sample. The eligible sample includes 42 persons that we were unable to locate and therefore unable to request that they participate in the survey. The response rate across the 29 agencies ranged from about 55 percent to 84 percent. The overall survey results are generalizable to the population of managers as described above at the CFO Act agencies. The responses of each eligible sample member who provided a useable questionnaire were weighted in the analyses to account statistically for all members of the population. All results are subject to some uncertainty or sampling error as well as nonsampling error. As part of our effort to reduce nonsampling sources of error in survey results, we checked and edited (1) the survey data for responses that failed to follow instructions and (2) verified the programs used in our analyses. In general, percentage estimates in this report for the entire 2007 sample have confidence intervals ranging from about +1 to +6 percentage points at the 95 percent confidence interval. Percentage estimates in this report for individual agencies have confidence intervals that range from +3 to +18 percentage points. An online e-supplement GAO-08-1036SP shows the questions asked on the survey with the weighted percentage of managers responding to each item. As part of our analyses of the 2007 survey data, we identified a set of nine items from the questionnaire that inquired about uses of performance information that we identified in a previous GAO report. Using those items we developed an index that reflected the extent to which managers’ perceived their own use of performance information for various managerial functions and decisions as well as that of other managers in the agency. To obtain this overall index score of reported use of performance information, we computed an average score for each respondent across the nine items we identified. By using this average index score, which yields values in the same range as the 5-point extent scale used on each item, we were able to qualitatively characterize index score values using the same response categories used for the items comprising the index. We refer to this index as the “core uses index” in that it indicates managers’ perceptions about the extent to which performance information is used across a core set of management decision-making areas. Because a complex sample design was used in the current survey as well as the three previous surveys, and different types of statistical analyses are being done, the magnitude of sampling error will vary across the particular surveys, groups, or items being compared due to differences in the underlying sample sizes and associated variances. The number of participants in the current survey is slightly larger than the 2000 survey (2,510) and much larger than the 1996–1997 survey (905) and the 2003 survey (503), both of which were designed to obtain governmentwide estimates only. Consequently, in some instances, a difference of a certain magnitude may be statistically significant. In other instances, depending on the nature of the comparison being made, a difference of equal or even greater magnitude may not achieve statistical significance. We note throughout the report when differences are significant at the .05 probability level. Also, as part of any interpretation of observed shifts in individual agency response between the 2007 and the earlier 2000 survey, it should be kept in mind that components of some agencies and all of the Federal Emergency Management Agency (FEMA) became part of the Department of Homeland Security (DHS). We conducted our work from March 2007 to July 2008, in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Over the past 15 years, legislative and executive branch reform efforts have attempted to shift the focus of federal government management from a preoccupation with activities to the results or outcomes of those activities. Based on over a decade of work in this area, GAO has found a transformation in the capacity of the federal government to manage for results, including an infrastructure of outcome-oriented strategic plans, performance measures, and accountability reporting that provides a solid foundation for improving the performance of federal programs. However, agencies have made less progress in getting their managers' to use performance information in their decision making. GAO was asked to testify on the preliminary results of ongoing work looking at (1) trends in federal managers' use of performance information to manage, both governmentwide and at the agency level; (2) how agencies can encourage greater use of performance information to improve results; and (3) lessons learned from prior management reforms for the next administration. Our statement is based on prior GAO reports and surveys we conducted in 1997, 2000, 2003, and 2007. For the results of our 2007 survey, see e-supplement GAO-08-1036SP . GAO will be issuing a report at a later date that will explore the use of performance results in management decision making at selected agencies. According to GAO surveys, since 1997 significantly more federal managers report having performance measures for the programs they manage. However, despite having more performance measures available, federal managers' reported use of performance information in management decision making has not changed significantly. For the collection of performance information to be considered more than meaningless paperwork exercises, it must be useful to and used by federal decision makers at all levels--including Congress. To reach this state, GAO believes that the next administration should promote three key practices that we have identified in our work over the last 10 years: (1) demonstrate leadership commitment to results-oriented management; (2) develop a clear "line of sight" linking individual performance with organizational results; and (3) build agency capacity to collect and use performance information. In addition to encouraging agencies to employ these practices, the next administration should: (1) adopt a more strategic and crosscutting approach to overseeing governmentwide performance; (2) improve the relevance of performance information to Congress; and (3) build agency confidence in assessments for use in decision making. |
Biennially, the Judicial Conference, the federal judiciary’s principal policymaking body, assesses the judiciary’s needs for additional judgeships. If the Conference determines that additional judgeships are needed, it transmits a request to Congress identifying the number, type (courts of appeals, district, or bankruptcy), and location of the judgeships it is requesting. The demands upon judges’ time are largely a function of both the number and complexity of the cases on their dockets. Some types of cases may demand relatively little time, and others may require many hours of work. The federal judiciary has developed workload measures for bankruptcy judges to estimate the national average amount of a judge’s time that different types of cases may require. Individual judges may actually spend more or less time than this average on specific cases within each type— such as personal chapter 7 bankruptcy cases with assets of less than $50,000 or chapter 13 cases with liabilities of $50,000 or more (see app. II). In assessing the need for additional bankruptcy judgeships in a bankruptcy court, the Judicial Conference first considers the court’s weighted case filings. The Judicial Conference has established 1,500 annual weighted case filings per authorized judgeship as an indicator of a bankruptcy court’s potential need for additional judgeships. This represents about 1,500 annual hours of case-related judge time. The Conference’s policy for assessing bankruptcy judgeship needs recognizes that judges’ workloads may be affected by factors not captured in the bankruptcy-weighted case filings. Examples of such factors include historical caseload data and filing trends; geographic, economic, and demographic factors in the bankruptcy district; and the availability of alternative solutions and resources for handling a court’s workload, such as assistance from judges outside the district. However, our analysis focused solely on the weighted case filings workload measure. Each case filed in a bankruptcy court is assigned a case weight. The case weight statistically represents the national average amount of judicial time, in hours, each type of bankruptcy case would be expected to require. The case weights are based on a 1988-1989 study in which bankruptcy judges completed diaries on how many hours they spent on specific types of cases and noncase-related work. Total annual weighted case filings for any specific bankruptcy court is the sum of the weights associated with each of the cases filed in the court in a year. Total annual weighted case filings per judgeship represent the estimated average amount of judge time that would be required to complete the cases filed in a specific bankruptcy court in a year. Weighted case filings per judgeship is the total weighted filings divided by the number of authorized judgeships. For example, if a bankruptcy court had 5,100 weighted case filings and three authorized judgeships, the weighted case filings per judgeship would be 1,700. Because this exceeds the 1,500 threshold, the Judicial Conference would consider this court for an additional judgeship. However, it should be noted that the Judicial Conference’s policy is to consider additional judgeships only for those courts that request them. Thus, if a court would otherwise be eligible for an additional judgeship, but did not request one, the Judicial Conference would not request a judgeship for that court. The Federal Judicial Center (FJC) developed the weights, adopted by the Judicial Conference in 1991, based on a 1988-1989 time study in which 272 bankruptcy judges (97 percent of all bankruptcy judges in those years) recorded the time they spent on specific cases for a 10-week period. Unlike the District Court time study, whose goal was to follow each sample case from filing to disposition—a “case tracking” study—this study was a “diary study” in which judges recorded in a time diary the hours spent on each case in the study and for other judicial work for the 10-week period. This period of time may or may not have covered the entire life of the case from filing through disposition. Appendix III includes a more detailed comparison of case-tracking and diary time studies as methods of capturing judge time spent on specific cases. The case weights were developed using a two-step process. First, time data were collected from 272 judges (97 percent of the total of 280 bankruptcy judges at the time of the study). The judges recorded the time they spent on a sample of cases and other judgeship work over a 10-week period. The judges were subdivided into five groups and the recording time period for each group was staggered over a 1-year period. Second, the researchers assessed the relative impact on judicial workload of different types of cases—that is, which types of cases seemed to take more or less time—and developed individual case weights for specific case categories. The basic case weight computations involved calculating the average amount of time spent on cases of each type during each month of their life. These averages were then summed to determine the total amount of time for each case type. Once the case weights had been created, total weighted case filings were calculated for each bankruptcy court. Then, weighted caseloads were transformed into initial estimates of required judgeships. These initial estimates were adjusted to account for factors other than those covered by the case weight calculation, such as the court’s case management practices and the time required to travel to divisional offices. After all adjustments, the study concluded that bankruptcy judges spent about 1,280 hours annually on direct case-related work and an average of 660 hours on matters not directly related to specific cases (e.g., on court and chambers administration, work-related travel, and other matters related to the judicial role). When it approved the case weights in 1991, the Judicial Conference stated that it expected that in addition to other judicial duties, a bankruptcy court should have at least 1,500 annual case-related hours per judgeship to justify additional judgeships. The federal work year is 2,080 hours per year, based on a 40-hour work week. Assuming that judges spent 1,500 hours annually on cases, there would remain 580 hours for federal holidays, annual leave, training, and noncase-related administrative tasks. Of course, the actual time that individual judges spend on case-related and non case-related work will vary. Overall, the methodology used to develop the bankruptcy case weights appears to be reasonable. The methodology included a valid sampling strategy, a very high participation rate among bankruptcy judges, and a reasonable means of adjusting for such factors as missing data. A notable strength of the methodology was the high participation rate by judges—97 percent of the bankruptcy judges at the time of the study. Thus, participating judges represented almost the entire universe of bankruptcy judges that could be included. The sampling period was not limited to a single time of year, thus minimizing potential bias due to variations in case filings by time of year. FJC researchers systematically used the reported time data to develop the case weights and made an effort to address all known limitations in the data. In computing the case weights, assumptions, and adjustments needed to be made to account for time data that were not linked to specific cases, missing data, and other factors. Both the assumptions and the methods used to make these adjustments appeared to be reasonable. It is important to note that the case weights were designed to estimate the impact of case filings on the workload of bankruptcy judges. Noncase-related time demands, such as time spent on court administration tasks, are not included in the case weights. The Judicial Conference focuses its analysis of the need for additional judges primarily on the demands that result from caseload, not noncase-related tasks and responsibilities. Potential limitations of the methodology included the possibility of judges using different standards and definitions to record their time. Although the judges had written instructions on how to record their time, judges may have varied in how they interpreted case-related and noncase-related hours. To the extent this occurred, it may have resulted in the recording of noncomparable time data among judges. Because some cases require longer calendar time to complete than others, not all cases in the sample were completed at the end of the 10 weeks in which judges recorded their time. In particular, the study captured only a small portion of the total time required for very large business bankruptcies. Where the cases were not completed, it was necessary to estimate the judge time that would have been required to complete the case. However, the method used to make these estimates was also reasonable. The size and time demands of chapter 11 business bankruptcies vary considerably. The bankruptcy case weights, which the Judicial Conference approved for use in 1991, included a weight of 11.234 hours for chapter 11 business filings involving $1 million or more and a weight of 4.021 hours for chapter 11 business filings with assets between $50,000 and $99,999. In 1996, a new method was used for measuring the workload required for very large (“mega”) chapter 11 business cases. This measure was also developed by the FJC and approved by the Judicial Conference’s Bankruptcy Committee. The mega cases were defined as “those involving extremely large assets, unusual public interest, a high level of creditor involvement, complex debt, a significant amount of related litigation, or a combination of such factors.” The Administrative Office of the U.S. Courts defines mega chapter 11 cases as a single case or set of jointly administered or consolidated cases that involve $100 million or more in assets and 1,000 or more creditors. Mega chapter 11 cases are distinct from other large chapter 11 cases in that they generally involve a larger number of associated filings and extend over a longer period of time. The 1991 case weights did not fully reflect the judge time required for these very large, complex bankruptcy filings. The weighting scheme was a particular problem for the Southern District of New York and the District of Delaware, both of which have a high number of mega cases. At the time of the 1988-1989 bankruptcy time study, the highest value for chapter 11 cases in the bankruptcy administrative database was $1 million or more. Subsequently, changes were made to the database, which now includes several subcategories for cases above $1 million, the highest being $100 million and above. Also, the time study estimated the judge time required by cases for the first 22 months after the case was filed, a period which may not have encompassed the entire calendar time required to dispose of the case. Both of these factors contributed to the inability to create case weights for the mega chapter 11 cases. Beginning in 1996, the adjustment of weighted case filings to account for mega chapter 11 cases was implemented in the two districts where most of these cases have been filed—first in the Southern District of New York and later in the District of Delaware. FJC’s research suggested there was no clear linear relationship between asset size and judge time in mega chapter 11 cases. Instead, FJC selected an adjustment method using data routinely collected on docketed events in bankruptcy cases, such as docketed hearings. The method used to adjust the case weights for mega chapter 11 cases consists of a preliminary weighted caseload computation, followed by a ratio adjustment step. The preliminary weighted caseload is the sum of the bankruptcy case weights for each case filing associated with the mega chapter 11 cases. For example, if a mega case consisted of two consolidated cases, one with assets of between $50,000 and $99,999 (weight: 4.021) and one with assets greater than $1 million (weight: 11.234), the preliminary case weight would be 15.255 (4.021 plus 11.234). In the Southern District of New York, this preliminary case weight is adjusted by the ratio of docketed events per weighted case-hour for mega chapter 11 cases to the docketed events per weighted case- hour for nonmega chapter 11 cases involving more than $1 million in assets. In the District of Delaware, where mega chapter 11 cases tended to have a larger number of consolidated filings, several ranges of the number of associated filings are used to classify mega chapter 11 cases. For each range, a separate docketing ratio adjustment is calculated in the same manner as it is for the District of Southern New York. In both districts, the final step is to report these calculations over a period of several years and use the average value across the years as the adjusted weighted caseload for mega chapter 11 cases. The purpose of this final step is to moderate the effect of fluctuations in the number of mega chapter 11 cases filed from year to year. The methodology used to adjust the weighted caseload for mega chapter 11 cases, specifically the ratio adjustment step, cannot be thoroughly assessed because there are no objective time data to use for comparison. The FJC selected this methodology after extensive research on other possible methods. The overall strategy of applying a ratio adjustment using auxiliary information, followed by use of a multiyear average, is a reasonable approach. In June 2002, the Judicial Conference Committee on the Administration of the Bankruptcy System decided to begin a study to create new bankruptcy case weights. The preliminary design for the study had a two-phase structure. In the first phase, a diary time study would be conducted, and the time study data would be used to develop new case weights. In the second phase, research was planned to assess the possibility of developing “event profiles” that would allow future updating of the weights without the necessity of conducting a time study for each update. Future updating of the weights could include revision of case weight values and/or developing case weights for new case categories. The data from the time study could be used to validate the feasibility of the new approach.The preliminary design for this study appeared to be reasonable. In the first phase, new weights would be constructed using objective data from the time study. The second part represented experimental research to determine if it would be possible to make future revisions to the weights without the requirement of conducting a time study. If the research determined this were possible, it would then be possible to update the case weights more frequently with less cost than required by a time study. If bankruptcy reform were enacted during the course of the new bankruptcy time study, FJC officials said they would recommend halting the time study and allowing some period of time for the implementation of the new law before restarting the study. This was a prudent plan because the law had many provisions affecting personal bankruptcy filings and personal bankruptcy filings represent the vast majority of bankruptcy filings. The FJC did begin collecting data for new case weights in 2005, but terminated the effort soon after the Bankruptcy Reform Act was enacted. It is possible, indeed likely, that the Bankruptcy Reform Act’s many new provisions have affected the time that bankruptcy judges spend on cases. For example, there are new objections that can be filed that require hearings. These include a U.S. Trustee’s objection to the debtor’s exemption from credit counseling certification. Under the Bankruptcy Reform Act, debtors who file for bankruptcy are required to complete credit counseling prior to filing. The extent to which new provisions in the Bankruptcy Reform Act affect bankruptcy judges workload depends, of course, on the frequency with which they are invoked and the time it takes to address them. Although nonbusiness (personal) bankruptcy filings accounted for more than 96 percent of total bankruptcy filings both before and after the implementation of the Bankruptcy Reform Act, the Act initially had a dramatic effect on bankruptcy filings. Total personal bankruptcy filings in 2004 were 1,563,145 and in calendar years 2005 were almost a half million higher at 2,039,214. By contrast, in calendar year 2006, the first full calendar year after the Bankruptcy Reform Act became effective, personal bankruptcy filings were 597,965—a drop of about 71 percent compared to 2005 filings and about 62 percent compared to 2004 filings. Personal bankruptcy filings have since grown to 1,153,412 in the 12 month period ending March 31, 2009. Thus, it was prudent for the FJC to suspend its 2005 time study because it would likely take some time for the filings under the new law to normalize, and there would inevitably be issues about the law’s implementation that would need to be addressed. The FJC has again initiated a new case weight study that includes data collected over 5 10-week reporting periods from May 2008 through May 2009. This study, like its predecessors, is a time study in which participating bankruptcy judges record the time they spend on cases and other judicial activities during their assigned reporting period. Each active and recalled bankruptcy judge is to participate during one of the 5 reporting periods. The FJC has dropped the second part of the 2002 design, which was to collect assess whether an event-based approach could be used to more frequently update the case weights. The FJC said that the experience in the 2005 study indicated that the supplemental information about judges’ time reports—which was very detailed and keyed to specific case events—was the most burdensome to provide. These data elements were not included in the 2008 study in order to simplify the process, reduce the burden on judges, and contribute to keeping judges’ participation rate in the 2008 study high, since 125 judges had already participated in the 2005 study and would be asked again to participate in the 2008 study. Moreover, the FJC said that the information from the suspended 2005 study provides the necessary foundation for the exploratory work on the event-based method, which the FJC still intends to do Mr. Chairman, this concludes my prepared statement, I would be pleased to respond to any questions that you or other members of the Subcommittee may have. For further information regarding this testimony, please contact William Jenkins, Jr., at (202) 512-8777. Individuals making key contributions to this testimony included David Alexander, Leyla Kazaz, and Geoffrey Hamilton. All current records related to bankruptcy filings that are reported to the Administrative Office of the U.S. Courts and used for the bankruptcy court case weights are generated by the automated case management systems in the bankruptcy courts. Filings records are generated monthly and transmitted to AOUSC for inclusion in its national database. On a quarterly basis, AOUSC summarizes and compiles the records into published tables, and for given periods, these tables serve as the basis for the weighted caseload determinations. In responses to written questions, AOUSC described numerous steps taken to ensure the accuracy and completeness of the filings data, including the following: Built-in, automated quality control edits are done when data are entered electronically at the court level. The edits are intended to ensure that obvious errors are not entered into a local court’s database. Examples of the types of errors screened for are the district office in which the case was filed, the U.S. Code title and section of the filing, and the judge code. Most bankruptcy courts have staff responsible for data quality control. A second set of automated quality control edits are used by AOUSC when transferring data from the court level to its national database. These edits screen for missing or invalid codes that are not screened for at the court level, such as dates of case events, the type of proceeding, and the type of case. Records that fail one or more checks are not added to the national database and are returned electronically to the originating court for correction and resubmission. Monthly listings of all records added to the national database are sent electronically to the involved courts for verification. Courts’ monthly and quarterly case filings are monitored regularly to identify and verify significant increases or decreases from the normal monthly or annual totals. Tables on case filings are published on the Judiciary’s intranet for review by the courts. Detailed and extensive statistical reporting guidance is provided to courts for reporting bankruptcy statistics. This guidance includes information on general reporting requirements, data entry procedures, and data processing and reporting programs. Periodic training sessions are conducted for bankruptcy court staff on measures and techniques associated with data quality control procedures. In addition to the quality control procedures listed above, AOUSC indicated that an audit was performed in 1997 by Clifton Gunderson L.L.C., a certified public accounting firm, to test the accuracy of the bankruptcy statistical data maintained by bankruptcy courts and the AOUSC. The firm compared individual case records in 11 courts nationwide with data in the national database for cases filed in 1993, 1994, and 1995 for completeness and accuracy. Excluding problems in one district, the overall match rate of all statistical data elements captured exceeded 97 percent, and the fields with most mismatches were not relevant to the bankruptcy weighted caseload. AOUSC was unaware of any other efforts to verify the accuracy electronic data to “hard copy” case records for bankruptcy courts. AOUSC noted that it did not have time to seek detailed information from the individual bankruptcy courts on this issue within the short time available to respond to our questions. The current Bankruptcy Court and District Court workload measures were developed using data collected from time studies. The District Court time study took place between 1987 and 1993, and the Bankruptcy Court time study took place between 1988 and 1989. Different procedures were used in these two time studies. The Bankruptcy Court time study protocol is an example of a “diary” study, where judges recorded time and activity details for all of their official business over a 10 week period. The District Court time study protocol is an example of a “case-tracking” study, where a sample of cases were selected, and all judges who worked on a given sample case recorded the amount of time they spent on the case. Time studies, in general, have the substantial benefit of providing quantitative information that can be used to create objective and defensible measures of judicial workload, along with the capability to provide estimates of the uncertainty in the measures. At the conclusion of a case-tracking study, total time spent on each sample case closed during the study period is readily available by summing the recorded times spent on the case by each judge who worked on the case. For a given case type, the summed recorded times can be averaged to obtain an estimate of the average judicial time per case for that case type. For a diary study, however, it is necessary to make estimates of judicial workload for all cases that were not both opened and closed during the data collection period. This estimation step requires information from the caseload database, and thus the accuracy of estimates depends in part on the accuracy of the caseload data. Two kinds of information are required from the caseload database: case type and length of time the case has been open. With the diary approach, the total judicial time that is required for lengthy case types is estimated by combining “snap shots” of the time required by such cases of different ages. Thus, in theory, reducing accurate weights for lengthy case types is not problematic. In practice, however, difficulties may be encountered. For example, in the 1988-1989 bankruptcy time study, the asset and liability information for cases older than 22 months was inadequate and appropriate adjustments had to be made. In addition, difficulties may arise if only a small number of cases of the lengthy type are in the system. This is an issue FJC said it is considering as it finalizes how to assess the judicial work associated with mega cases in the upcoming bankruptcy case-weighting study. Each study type has advantages and disadvantages. The following outlines the similarities and differences in terms of burden, timeliness of data collection, post-data collection steps, accuracy, and comprehensiveness. Each study type places burden on judicial personnel during data collection. It is not clear that one study type is less burdensome than the other. The diary study procedure requires more concentrated effort, but data are collected for a shorter period of time. Data collection for a diary study can be completed more quickly than for a case-tracking study. Post Data Collection Steps More effort is needed to convert diary study data to judicial workload estimates than case tracking study data. Also, the accuracy of estimates from diary study data depends in part on the accuracy and objectivity of the information in the caseload database. It is not clear that one study type collects more accurate data than the other study type. Some of the Bankruptcy Court case-related time study data could not be linked to a specific case type due to misreporting errors and/or errors in the caseload database. Some error of this type likely is unavoidable because of the requirement to record all time rather than record time for specific cases only. However, it is plausible that a diary study collects higher quality data, on average, because all official time is to be recorded during the study period; judicial personnel become accustomed to recording their time. In contrast, the data quality for a case- tracking study could decline over the study’s length; for example, after a substantial proportion of the sample cases are closed, judicial personnel could become less accustomed to recording time on the remaining open cases. In theory, a case-tracking study collects more comprehensive information about judicial effort on a given case than a diary study, because data for a sampled case almost always are collected over the duration of the case. (Data collection may be terminated for a few cases that remain open, or are reopened, many years after initial filing.) For case types that simultaneously stay open for a long period and require a substantial amount of judicial effort, it is possible that a diary study would not be able to produce suitable estimates of judicial workload due to a lack of data. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Judicial Conference of the United States, the federal judiciary's principal policymaking body, uses 1,500 annual weighted case filings per authorized judgeship (judgeship position) in a bankruptcy court as an indicator of the need for additional bankruptcy judgeships for that court. Total annual weighted case filings for any specific bankruptcy court is the sum of the weights associated with each of the cases filed in the court in a year. Total annual weighted case filings per judgeship represent the estimated average amount of judge time that would be required to complete the cases filed in a specific bankruptcy court in a year. In May 2003 GAO testified on whether weighted case filings were a reasonably accurate measure of the case-related workload of bankruptcy judges. The accuracy of weighted case filings rests in turn on the soundness of the methodology used to develop them. GAO's work focused on whether the methodologies used to develop the current case weights and to revise and update those weights were likely to result in reasonably accurate measures of bankruptcy judges' case-related workload. This statement is based on GAO's May 2003 testimony on weighted case filings as a measure of bankruptcy judges' case-related workload and documentation provided by the Federal Judicial Center (FJC) in June 2009 on subsequent efforts to update the current weighted filings measure. In May 2003 GAO reported that the methodology used to develop the case-related workload measure for federal bankruptcy judges--weighted case filings--were likely to result in reasonably accurate workload measures. The current study to revise those weights, begun in 2008, uses the same methodology as the study used to develop the current case weights and, as designed, is also likely to result in reasonably accurate workload measures. (1) The time demands on bankruptcy judges are largely a function of the number and complexity of the cases on their dockets, with some cases taking more time than others. To measure these differences, the Judicial Conference uses weighted case filings, which are a statistical measure of the average estimated judge time that specific types of bankruptcy cases are expected to take. Each case filed is assigned a weight, and the total weight of all cases filed in a bankruptcy court divided by the number of judgeships for that court provides a measure of the total average case-related workload per judgeship. (2) In assessing the need for new bankruptcy judgeships, the Judicial Conference relies on the weighted case filings to be a reasonably accurate measure of case-related bankruptcy judge workload. Whether the weighted filings are reasonably accurate depends in turn upon the soundness of the methodology used to develop the case weights. (3) On the basis of the documentation provided for our review and discussions with FJC and Administrative Office of the U.S. Courts officials, GAO concluded in 2003 that the case weights, as approved by the Judicial Conference in 1991 and 1996, were likely to be reasonably accurate. (4) The original case weights are now 18 years old. Changes in the intervening years in case characteristics, case management practices, and the implementation of new statutory or procedural requirements, such as the many changes in 2005 Bankruptcy Abuse Prevention and Consumer Protection Act, may have affected the continued accuracy of the current case weights. (5) To the extent that the case weights now understate or overstate the total time demands on bankruptcy judges, use of the weights could potentially result in the Judicial Conference understating or overstating the need for additional bankruptcy judgeships. (6) In 2008, the Federal Judicial Center began a study to revise the current case weights that is designed to collect data on the time bankruptcy judges spend on cases filed during 5, 10-week data collection periods from May 2008 through May 2009. Each active and recalled bankruptcy judge is to participate during one of the five reporting periods. This study design permits the development of new case weights based on the same type of objective time data as the current weights, which we found to be reasonable. |
Scientific research on and projections of the changes taking place in the Arctic vary, but there is a general consensus that the Arctic is warming and sea ice is diminishing. The U.S. National Snow and Ice Data Center reported that the annual Arctic minimum sea ice extent—which typically occurs in September each year—for 2015 was the fourth lowest in the satellite record, and 699,000 square miles less than the 1981 to 2010 average (see fig. 1). Further, it also reported that the 10 lowest September ice extents on satellite record have all occurred in the last 10 years. While much of the Arctic Ocean remains ice-covered for a majority of the year, most scientific estimates predict there will be an ice- diminished Arctic Ocean in the summer in the next 20 to 40 years. Roll over the year to view recorded ice extent. See appendix I for the printable,non-interactive version. (in millions of square kilometers) These Arctic environmental changes make maritime transit more feasible and are increasing the likelihood of further expansion of human activity including tourism, oil, gas, and mineral extraction, commercial shipping, and fishing. Melting ice could increase the use of three trans-Arctic routes—the Northern Sea Route, Northwest Passage, and Transpolar Route—saving several thousands of miles and several days of travel between major trading blocs. Increased trans-Arctic use of the Northern Sea Route could particularly affect the U.S. Arctic because vessels may pass through the Bering Strait, a body of water about 50 miles wide at its narrowest point between Russia and the United States. Vessel data show that transits through the Bering Strait increased from about 220 in 2008 to about 540 in 2015, and Coast Guard officials stated that they anticipate this number to increase annually. Significant oil, gas, and mineral deposits in the Arctic, including an estimated 13 percent of the world’s undiscovered oil, 30 percent of undiscovered gas, and some $1 trillion worth of minerals including gold, zinc, nickel, and platinum have also increased interest in exploration opportunities in the region. Cruise line interests in exploring the Arctic may also increase as evidenced by Crystal Cruise Lines’ planned 2016 Arctic voyage that is expected to be the largest cruise ship yet to traverse the Northwest Passage, a dynamic ice area with thick ice hazards usually present all summer. Various strategic guidance and policies govern U.S. operations in the Arctic region. These include overarching national policies as well as more specific maritime policies and authorities. A 2009 national security presidential directive reflects current U.S. Arctic policy and is key among U.S. policies. The Coast Guard’s role in the Arctic was implicated in this directive, which acknowledges the effects of climate change and increased human activity in the Arctic region; lays out specific policy objectives and federal partners; and addresses issues related to national security, international governance, international scientific cooperation, economic issues, environmental protection, and maritime transportation in the Arctic region. Additional White House national strategies and plans supplementing existing Arctic policy have been issued since the 2009 presidential directive on the Arctic region. Specifically, in May 2013, the White House issued the National Strategy for the Arctic Region that articulates the administration’s strategic priorities for the Arctic region and includes lines of effort related to (1) advancing U.S. security interests, (2) pursuing responsible Arctic region stewardship, and (3) strengthening international cooperation. The White House released an implementation plan for the National Strategy for the Arctic Region in January 2014 that sets forth the methodology, process, and approach for executing the strategy. This plan was superseded in March 2016 by the Implementation Framework for the National Strategy for the Arctic Region which incorporated new priorities, among other things. The Coast Guard and some other federal agencies have also issued their own strategies for the Arctic. For example, the Coast Guard issued its 10-year strategy in May 2013, which seeks to support national policy with three key objectives of improving awareness, modernizing governance, and broadening partnerships. The Coast Guard issued its implementation plan for this strategy in December 2015. While encompassing more than the Arctic region, the White House National Ocean Council issued the National Ocean Policy Implementation Plan in April 2013 which specifically identifies Arctic issues—such as the need for improvements to communications; navigation; and oil spill prevention, containment, and response to provide maritime safety and security in a changing Arctic. In an effort to coordinate the actions of federal entities involved in the Arctic, the White House established the Arctic Executive Steering Committee (AESC) in January 2015 and tasked it with shaping priorities, providing strategic direction, overseeing implementation of the National Strategy for the Arctic Region, and ensuring coordination of federal activities in the Arctic, among other things. In addition, since the Arctic region has significant maritime domain area, existing U.S. strategic guidance relating to maritime areas continues to apply, such as the Maritime Security Policy issued by the President in December 2004. Given the Arctic region’s extensive maritime domain, the Coast Guard plays a significant role in Arctic policy implementation and enforcement. The Coast Guard is a multimission, maritime military service that is responsible for maritime safety and security, environmental protection, and national defense, among other missions. The Coast Guard has these same mission responsibilities in the Arctic Ocean as it does in other oceans. Therefore, as more navigable ocean water has emerged in the Arctic and human activity increases, the Coast Guard has faced, and will continue to face, expanding responsibilities in the region. Other DHS components and federal agencies—such as the Departments of Defense, Interior, and Commerce, and the National Science Foundation—as well as interagency groups, such as the AESC, also have responsibilities in the Arctic, as detailed in Appendix II. State and local governments, Alaska Native tribal governments, Alaska Native corporations, and other Alaska Native entities, private industry, and nonprofit groups are also important Arctic stakeholders. State government is involved in, among other things, Arctic fishery enforcement, oil spill planning and response, emergency management, and economic development. Local governments, Alaska Native tribal governments, and Alaska Native entities are in some cases the closest stakeholders to activities taking place in the Arctic. Consequently, the responsibility for responding to Arctic incidents often falls to local governments. For example, the North Slope Borough, which encompasses about 89,000 square miles of northern Alaska, maintains its own search and rescue capabilities including fixed and rotary wing aircraft designed for shore-based response and a small boat for on the water response. Additionally, Alaska Native communities have inhabited the Arctic region for thousands of years and are particularly sensitive to changes in the environment due to a subsistence way of life and culture revolving around marine ecosystems. Finally, private sector and nonprofit groups are also important Arctic stakeholders, and they represent a wide spectrum of interests, including resource extraction companies, cruise lines, vessel tracking organizations, and conservation groups, among others. Presently, all of the Coast Guard’s permanent assets are based well below the Arctic Circle, so Coast Guard operations above the Arctic Circle are constrained by several factors, including the time required for surface vessels and aircraft to travel vast distances to reach the Arctic Circle and the scarcity of physical infrastructure to support operations. Figure 2 compares the state of Alaska to the lower 48 states to illustrate the large distances between, for example, Kodiak (the Coast Guard’s northernmost air station) and Point Barrow (the northernmost point of land in Alaska). Within the Coast Guard, District 17 and Sector Anchorage have primary responsibility for operations in the Arctic region. Since 2008, District 17 has conducted an annual operation in the Arctic (now known as Operation “Arctic Shield”). Coast Guard officials stated that Arctic Shield is a seasonal surge operation designed to help the Coast Guard learn how to operate in this increasingly active area of responsibility. Arctic Shield is intended to provide the Coast Guard with the opportunity to (a) perform Coast Guard missions and activities, (b) advance maritime domain awareness, (c) broaden partnerships in support of Coast Guard Arctic operations, and (d) enhance and improve preparedness, prevention, and response capabilities in the Arctic. It is also the primary operation through which the Coast Guard carries out activities in the Arctic region and includes the deployment of aircraft, cutters, and personnel to the Arctic region. It is generally conducted between June and October—although some planning and outreach activities may take place before. The general area of operation for Arctic Shield each year is smaller than the Coast Guard’s District 17 area of operation, see figure 3. Under federal law, the Coast Guard has been responsible for carrying out the nation’s polar icebreaking needs since 1965—when it assumed primary responsibility for the nation’s polar icebreaking fleet. In addition, the Coast Guard cites a variety of statutes, strategic policies, and interagency agreements that drive the Coast Guard’s employment of polar icebreakers. A summary of some of these provisions can be found in Appendix III. The Coast Guard’s polar icebreaking fleet comprises three polar icebreakers—the Polar Star, Polar Sea, and Healy—of which, the Polar Star and Healy are currently active. See figure 4 for photographs of the Coast Guard’s active icebreakers. Commissioned in 1976 and 1978, respectively, the Polar Star and the Polar Sea are heavy polar icebreakers and the world’s most powerful non-nuclear icebreakers. The third icebreaker, the Healy, is a medium icebreaker that primarily supports Arctic research. Although the Healy is capable of carrying out a wide range of activities, it cannot operate independently in the ice conditions in the Antarctic or ensure timely access to some Arctic areas in the winter. Figure 5 details the history of the Coast Guard’s current icebreaking fleet, including commission dates, expected service life, and re-activation dates. The Coast Guard has reported making progress implementing its Arctic strategy and addressing tasks in its implementation plan. The Coast Guard’s May 2013 strategy aims to ensure safe, secure, and environmentally responsible maritime activity in the Arctic, while the related implementation plan, issued in December 2015, is intended to operationalize this strategy—within existing resources. The implementation plan also incorporates tasks assigned to the Coast Guard from the National Strategy for the Arctic Region, its implementation plan, and the National Ocean Policy (see App. IV and V for more on these strategies and plans). According to the Coast Guard, these national strategies and plans, as well as key presidential directives, executive orders, and other national strategies guided the development of its strategy. In addition, Coast Guard officials stated that they factored in findings and recommendations from other studies into their strategy, such as the Committee on the Marine Transportation System’s report on the Arctic Marine Transportation System. For example, the Coast Guard included tasks such as completing a study on the Bering Strait port access route in its Arctic Strategy, which was also included in the committee report. According to the Coast Guard’s implementation plan, the document is to be updated as new information is learned, and according to Coast Guard officials, expected timeframes for completion can be adjusted given funding and resources. The Coast Guard’s implementation plan includes 13 tasks (or initiatives) and identifies lead Coast Guard components for each initiative. Many of the tasks require the Coast Guard to research, coordinate, and evaluate Arctic issues—an indication that many of the Arctic efforts are planning- oriented and are to help agency officials better understand Arctic issues, and prepare the Coast Guard for increased Arctic operations. Coast Guard officials stated that the tasks in its strategy generally included actions that the Coast Guard was already planning to take in the Arctic, and new tasks were only agreed upon if resources permitted. The Coast Guard’s implementation plan also states that appropriate metrics are to be applied to each of the tasks and associated next steps to ensure that they are on schedule and properly tailored for the operational and resource environments faced by the Coast Guard and the nation. Specifically, the implementation plan states that Coast Guard component leads for each task are to specify the desired outcomes to define success for each task and develop supporting plans that specify the scope, timeline, and resources needed across the 10-year plan, and highlight significant challenges. However, this information was not included in the implementation plan and according to Coast Guard officials, it was not included because they anticipate that the plan will be updated annually, and as such, they wanted to keep the plan flexible to such change. Coast Guard officials stated that each lead component has drafted plans that specify the desired outcome for success, scope, timeline, and resources needed, and anticipate finalizing them in August 2016. Officials also stated that they wanted to wait for the White House to release its March 2016 revised implementation plan for the national strategy before finalizing these efforts. The revised national implementation plan incorporated new priorities, and Coast Guard officials stated that better prioritization will help the Coast Guard in making decisions about what it needs to achieve in the Arctic given its limited resources. Coast Guard officials stated that they have made some progress on the 13 tasks established in the Coast Guard’s implementation plan, as described in more detail in table 1. To track its progress on the 13 tasks, the Coast Guard is in the process of developing a web-based site for its components to enter and track the status of implementation plan tasks, as well as the status of its Arctic- related responsibilities under other national strategies, presidential directives, and service directives. Information on this site is to include the responsible component, milestones, status, and percentage toward completion for each task or responsibility. The Coast Guard expects that the web-based site will be updated continually as tasks are completed to ensure the most accurate reporting. Coast Guard officials stated that they delayed finalizing this tool until they saw the revised implementation plan for the national strategy. Officials also stated that they anticipate finalizing the tool by mid-year 2016, but that system integration and resource constraints could create delays. In addition to taking actions to implement its Arctic strategy, the Coast Guard assessed its capability to perform its missions in the Arctic and identified various capability gaps, primarily through two key studies. Specifically, a November 2011 Coast Guard study identified both the Coast Guard’s Arctic requirements and Arctic capability and capacity gaps. Another study, issued by the DOD–DHS Arctic Capabilities Assessment Working Group in March 2012, consolidated the needed capabilities identified in various federal agency studies on the Arctic, and is intended to guide both departments’ investment priorities. According to this study, the identified gaps lend themselves to further evaluation and investment consideration. The capability gaps identified in these two key reports include the following: Communications: including the lack of communications architecture. Harsh weather conditions, high latitude disturbances, and geomagnetic storms combine to make communications in the Arctic difficult. Arctic maritime domain awareness: including limited nautical charting, inadequate navigation systems, and insufficient surveillance. Extremely limited operational assets and support infrastructure in the Arctic, as well as the harsh operating environment make achieving maritime domain awareness a challenge. Infrastructure: including limited aircraft infrastructure on the North Slope and limited logistical support. Facilities located below the Arctic Circle, and even those within Alaska, provide limited capability to support Arctic missions due to the long transits to the Arctic region. No deepwater ports currently exist on the North Slope or near the Bering Strait that are capable of refueling and re-provisioning polar capable cutters. This forces polar capable cutters to expend significant time transiting long distances to and from replenishment ports. Development of infrastructure to support operations is challenging, in part, due to the high cost of transporting materials to the Arctic and short construction seasons. Icebreaking: including limited icebreaking capacity given the Coast Guard’s existing active inventory of one medium and one heavy polar icebreaker, as discussed later in this report. Training and exercise opportunities: including a limited pool of Arctic- trained and experienced Coast Guard personnel, and limited training, exercise, and educational opportunities to enhance Arctic skills among staff. According to Coast Guard officials, few opportunities exist to train in the Arctic, in part, because of limited Coast Guard icebreaking capacity. Coast Guard officials confirmed that the capability gaps identified in these reports remain relevant today, and are highlighted in the Coast Guard’s Arctic strategy. According to Coast Guard officials, some of the gaps are complex and more long-term than its 10-year Arctic strategy, and some are not the sole responsibility of the Coast Guard to mitigate or do not impact its operations. For example, rather than building permanent infrastructure, which its current Arctic strategy does not support given existing resources, the strategy relies on the seasonal use of mobile assets to support current demand. In addition, the Coast Guard does not have sole responsibility for addressing all of the gaps identified in the two reports. For example, although the Coast Guard’s Arctic strategy identifies nautical charting as a gap and one of the Coast Guard’s critical enablers for future success, NOAA has lead responsibility for charting U.S. coastal waters, including those in the Arctic. Further, Coast Guard officials stated that the capability gaps identified above do not completely impair or eliminate the ability to perform operations. For example, while communications can be a challenge in remote regions, the risk of lost communications can be mitigated by, for example, using multiple assets working together to mitigate risk if lost communications are anticipated. In addition, Coast Guard officials stated that lack of infrastructure and logistical and communications challenges have been mitigated through the use of offshore cutter-based command and control platforms, shore- based mobile command and control platforms, and seasonal air and communications capabilities through leased facilities and deployable assets. Coast Guard officials stated that, given its current activity levels, its Arctic presence being mobile and seasonal, and its ability to leverage partners’ resources, it has had sufficient resources to fulfill current Arctic responsibilities. Specifically, according to Coast Guard officials, partnerships are key to achieving agency goals in the Arctic. For example, the North Slope Borough provides the Coast Guard with additional search and rescue capabilities year round, and DOD counterparts have provided the use of a DOD base to extend Coast Guard aircraft ranges during Arctic operations. However, all 11 of the Arctic stakeholders we interviewed in Alaska—who represented state and local governments, Alaska Native Corporations, private industry, and non- profits—expressed concerns that the Coast Guard lacks resources in the Arctic. Specifically, three stakeholders stated concerns about the Coast Guard’s ability to respond to its usual missions elsewhere in Alaska when its assets were deployed for Arctic operations. Coast Guard officials stated they will reassess their approach as Arctic activity and resulting mission requirements change over time, but if Arctic activity continues to increase, as anticipated, they may have insufficient resources to meet expanded Arctic requirements with current funding levels. Coast Guard officials also stated that federal efforts are underway to better understand capabilities and these efforts often include tasking or decision making outside of the Coast Guard. For example, Coast Guard officials stated that until national priorities are better articulated by the AESC, the Coast Guard will not be able to identify all of its Arctic requirements. However, the Coast Guard’s Arctic strategy states that the agency is to continue to monitor evolving Arctic activities, and re-invest, where funding allows, to overcome potential gaps and shortfalls. The Coast Guard has worked with its Arctic partners—such as other federal agencies—to carry out actions to help mitigate Arctic capability gaps; however, it has not systematically assessed how its actions, across the agency, have helped to mitigate these gaps. According to Coast Guard officials, through the agency’s role in implementing the tasks from the various Arctic strategies and implementation plans, the Coast Guard has taken actions, along with its Arctic partners, that have helped to mitigate capability gaps. For example, the Coast Guard is the lead agency for implementing the strategies’ tasks related to enhancing Arctic maritime domain awareness—a capability gap identified in the previously noted reports. In another example, the National Ocean Policy directs the Coast Guard to work with other federal agencies to identify, analyze, rank, and implement the most cost-effective options to reduce communication gaps, and it has taken action that could affect these gaps. In addition, as discussed later in this report, the Coast Guard is also taking action to address the icebreaking capacity gap. In addition to the implementing tasks from the Arctic strategies that can help mitigate capability gaps, Coast Guard officials reported that they utilize Arctic Shield as the primary operational method to better understand agency capabilities and associated gaps in the Arctic and to take actions to help mitigate them. The Coast Guard Research, Development, Test, and Evaluation Program has also helped to test Arctic capabilities, such as navigation systems—in part through Arctic Shield operations. The Coast Guard reported that upon the publication of the Coast Guard’s Arctic Strategy, it aligned its Arctic Shield operations with the strategy’s objectives. According to our review of the Coast Guard’s Arctic Shield operational planning documents and AARs, among other actions, the Coast Guard executed select Coast Guard missions; tested a variety of equipment, technologies, and processes; conducted internal training exercises; and improved maritime domain awareness by conducting operations, research, and outreach to partners. For example, during Arctic Shield 2015, the Coast Guard tested communications equipment belonging to DOD, extending communications capabilities further north than previously possible. During Arctic Shield 2014, the Coast Guard tested response equipment and communications systems to assess capabilities and refine Arctic resource requirements. According to Coast Guard officials, they will continue with mobile and seasonal operations, which will provide them with opportunities to continue assessing and testing operational capabilities. Although the Coast Guard has reported that these various actions have improved its Arctic capabilities, it has not systematically assessed the extent to which these actions have helped mitigate the identified capability gaps. Standards for Internal Control in the Federal Government provide that ongoing monitoring should occur in the course of normal operations and should help ensure that the findings of reviews, such as the capability gaps identified in the previously mentioned reports, are resolved. This monitoring should be built into the Coast Guard’s operations, performed continually, and be responsive to change. Standards for Internal Control in the Federal Government also calls for management to establish performance measures and indicators that help ensure that management’s directives are carried out. Coast Guard officials stated that they have not systematically assessed their progress in mitigating capability gaps, or developed measures for them, because the Coast Guard cannot unilaterally mitigate these gaps, not all of them are easily measurable, and because not enough is known about them. However, while taking actions to help mitigate these capability gaps requires joint efforts among Arctic partners, the Coast Guard has taken actions in the Arctic that are specific to its missions and therefore has responsibility for assessing the extent to which its actions have helped to mitigate its part of these capability gaps. Assessing relevant information on how its actions have helped to mitigate these gaps could also increase agency knowledge about capabilities. Coast Guard officials also stated that they track some of their Arctic activities through various mechanisms, but do not assess how these actions have helped to mitigate capability gaps. For example, the Coast Guard’s AARs for Arctic Shield document information on activities that the Coast Guard has conducted during each annual operation, as well as any lessons learned, key observations, best practices, challenges, and recommendations. In addition, the Coast Guard reported it has efforts underway to track its progress in implementing the national and Coast Guard Arctic strategies which will help it to more systematically track Arctic activities, as discussed previously. But, it does not plan to assess how the completion of these activities will affect capability gaps. While the Coast Guard’s various tracking efforts may inform the Coast Guard about its overall status in conducting Arctic activities, it does not provide a systematic assessment, across the agency, of how these actions have helped to mitigate the capability gaps—efforts which also help it determine resource needs. Systematically assessing the impact of its actions agency-wide—including using measures for gauging its progress, when feasible—is critical for the Coast Guard to be able to fully assess the status of its efforts to help mitigate the various Arctic capability gaps. By systematically assessing its own progress, the Coast Guard will better understand the status of the gaps and be better positioned to effectively plan its Arctic operations, including its allocation of resources and prioritization of activities to help mitigate them. Coast Guard officials stated several factors affect their Arctic Shield planning, including data limitations, uncertainty surrounding future Arctic activity, and limited resources. To carry out Arctic Shield, the Coast Guard manages a year-round process to plan, execute, and evaluate this annual operation. The Coast Guard also reported that this operation is to be scalable to match the level and type of threats and risks, opportunities, and mission responsibilities in the Arctic each year, and flexible to accommodate varying needs for Coast Guard services and the availability of resources. As part of its year-round planning process, Coast Guard officials hold a series of planning meetings with internal and external stakeholders, during which they finalize operational documents. According to the Coast Guard’s Arctic strategy implementation plan, outreach activities conducted during this planning process are to include regular engagement with tribal communities to ensure the operation does not interfere with tribal rights, interests, or subsistence activities. In addition, following each year’s Arctic Shield operation, Coast Guard officials assess the operation, develop lessons learned, and propose changes for the next year’s operation. The Coast Guard also produces an AAR each year, which describes the activities conducted during Arctic Shield that year and discusses challenges encountered and lessons learned. Coast Guard officials stated that when planning the size and scope of Arctic Shield operations they use information learned from prior operations, as well as review a wide variety of external sources that analyze present conditions and forecast future conditions. Specifically, these officials stated that they review commercial trends analyses, ice and weather forecasting, vessel tracking data, information on local fish stocks and subsistence hunting times, and law enforcement intelligence. Because commercial activity is the primary determinant of Arctic maritime activity levels, Coast Guard officials stated that they also review analyses that predict trends in oil and gas, mining, tourism, shipping, and other commercial sectors. Coast Guard officials reported that they discuss this information with various federal, state, industry, academic, and not- for-profit entities. Although Coast Guard officials reported using these data, they also stated that one factor affecting their planning for Arctic operations is the limited amount of data on regional activity, which they attributed to various factors. For example, because Arctic activity is limited, changes in year- to-year data do not always provide useful statistics. Further, the Coast Guard cannot always access some companies’ proprietary information on Arctic commercial trends, which also limits the robustness of the Coast Guard’s data sources. In addition, Coast Guard officials stated that recent commercial marine traffic in the Arctic has been variable rather than trending predictably, providing inconsistent data trends. As a result, Coast Guard officials stated that there are limited data to help them make planning decisions and as a result they are taking steps to improve their data collection on their own operations and as well as continuing to develop partnerships to collect external data. For example, during the course of our review, the Coast Guard began collecting data on its aircraft and cutter resource hours expended on 2015 Arctic Shield activities to improve its mission management and resource allocation. The Coast Guard also established an Arctic Information Fusion Center as part of its 2015 Arctic Shield operation, which helped to track the number of deployed Coast Guard personnel. Further, Coast Guard officials reported that they are working toward more systematically documenting AAR information—including lessons learned, best practices, and recommended improvements—to better track the Coast Guard’s Arctic activities. Specifically, Coast Guard officials stated that they are starting to accomplish this through their Contingency Preparedness System, the Coast Guard’s web-based data management tool that links, among other items, after action reporting and corrective actions. Although the Coast Guard designed the Contingency Preparedness System as a tracking tool for discrete exercises, not large operations like Arctic Shield which incorporate multiple exercises, Coast Guard officials stated that they are determining how to best use this system—and have begun to enter data—to better track Arctic Shield activities and increase their senior leadership’s awareness of Arctic challenges and opportunities. Coast Guard officials reported that they are also identifying ways to work with other agencies to better collect data. For example, Coast Guard officials stated they participate in conference calls with Arctic stakeholders that provide information on subsistence hunting activities to help with their planning. Coast Guard officials stated they continue to look for opportunities to gain better information on Arctic activities. The Coast Guard also faces inherent uncertainty surrounding drivers of future Arctic maritime activity and the potential corresponding increase in commercial activity in the region. These drivers of activity include the pace and effects of climate change in the Arctic and economic trends, and could affect the need for Coast Guard services. Many projections about future Arctic activity look forward only 2 to 3 years because of this uncertainty. According to Coast Guard officials, the uncertainty of these drivers of maritime activity render long-term planning beyond the 10-year time frame particularly difficult, and as a result, the Coast Guard must remain flexible to adjust its planning as conditions change. Limited resources is another factor that Coast Guard officials have reported affecting their Arctic planning process. Coast Guard officials stated that they must make tradeoffs on how to best deploy limited resources and among potential courses of action. Further, officials noted that funding uncertainty has also affected Coast Guard planning and operations for Arctic Shield. For example, the Coast Guard was not able to establish its forward operating base in the preferred location because funding for Arctic Shield 2015 had not been secured before a private entity leased that space. As a result, the Coast Guard stationed aircraft for monitoring Arctic activity at an alternate location farther from active oil rigs, which increased its travel time to sites being monitored. Coast Guard officials stated that despite these challenges, they have received support from Coast Guard leadership and were able to achieve Arctic Shield objectives. Various requirements drive the Coast Guard’s icebreaking mission responsibilities, and since 2010 the Coast Guard has been unable to fulfill some of these responsibilities. The Coast Guard’s icebreaking responsibilities are based in statute, presidential directive, strategies, and interagency agreements. Under statutory law, the Coast Guard has responsibility for operating the nation’s polar icebreaker fleet, which supports the Coast Guard in carrying out its missions. For example, the Coast Guard’s icebreaker fleet supports scientific research as part of its Ice Operations mission and promotes maritime security as part of its Defense Readiness mission, according to a 2013 Coast Guard report. In addition, the goals and activities set forth in the National Strategy for the Arctic Region and the 2009 presidential directive on the Arctic region drive the Coast Guard’s need to maintain the ability to project a sovereign presence in the Arctic—a standard which requires the use of a polar icebreaker at certain times when seasonal ice covers large portions of the Arctic region. The Coast Guard’s icebreaking responsibilities are also derived from interagency agreements that commit it to providing icebreaking services to other departments and agencies in support of various strategic and scientific missions, including national defense. For example, the Coast Guard assumed responsibility for the Navy’s icebreaker fleet in1965 and a memorandum of agreement first signed in 2008 identifies how the Coast Guard’s icebreakers would be used to support DOD. More recently, Coast Guard officials stated that the President’s September 2015 announcement about national priorities in the Arctic further emphasized the importance of the nation’s capability for year-round access to this region. Appendix III provides a selection of the laws and policies that are cited as sources for the Coast Guard’s need to maintain polar icebreaking capability. Coast Guard officials reported being able to minimally complete agency polar icebreaking responsibilities, that is, carrying out the annual McMurdo Station resupply in the Antarctic region and scientific research in the Arctic, with two functional icebreakers. However, when neither the Polar Sea nor the Polar Star was active in 2011 and 2012, the Coast Guard did not maintain assured, year-round access to both the Arctic and Antarctic, as the Healy cannot reach ice-covered areas with more than 4 ½ feet of ice. For these years, and in prior and subsequent years, the National Science Foundation chartered foreign icebreakers to support the resupply of the McMurdo Station, although National Science Foundation officials reported that this was challenging. Coast Guard officials stated that a short-term charter would not meet the Coast Guard’s needs in the Antarctic region because a sovereign U.S. presence can only be established by a vessel that is available year-round, able to fly the U.S. flag, and perform Antarctic treaty inspections. Further, the Coast Guard has set a target of meeting 100 percent of its internal and interagency requests for polar icebreaking, and it annually calculates its success rate in meeting this target. In the last 6 years of available data (fiscal years 2010 through 2015), the Coast Guard reported that it failed to attain this target for 3 years—primarily when neither heavy icebreaker was operational. Specifically, the Coast Guard was unable to complete 5 out of 26 requests for polar icebreaking, including 4 out of 11 requests in 2011 and 2012 when both heavy icebreakers were unavailable. These unfulfilled requests included support for the resupply of McMurdo Station, Arctic Shield activities, and an Arctic science deployment, some of which would have required weeks or months of icebreaker use. See Table 2 below for specific results. The Coast Guard reported in acquisition documentation that the addition of one heavy icebreaker would allow it to maintain current icebreaking capacity by replacing the Polar Star after its useful service life ends in 4 to 7 years. However, the Coast Guard reported that increased heavy icebreaking capacity is needed to fully meet requirements in the Arctic and Antarctic regions. Although record lows for recent summer and early autumn sea ice extent have made seasonal maritime navigation more feasible in the Arctic, the Coast Guard reported that polar icebreakers can still be necessary during these seasons to conduct research or to assist other vessels. Winter sea travel is also still severely limited due to extensive ice coverage across the Arctic region, necessitating heavy icebreaker assistance. Furthermore, although slightly decreased in 2015, the maximum ice extent in the Antarctic has expanded in recent years. The Coast Guard reported that a medium icebreaker, like the Healy, can complete many of the Coast Guard’s Arctic missions, but cannot operate independently in the presence of thick ice. Even with melting Arctic ice, Coast Guard officials noted that it would be risky to assume that a medium icebreaker would be sufficient to provide year-round access to the Arctic. In addition, Coast Guard officials anticipate that heavy icebreaking capability may continue to be necessary in an operating environment with much less ice overall because ice sometimes piles up, creating thicker ice. Because only heavy polar icebreakers can provide assured, year-round access to both polar regions, the Coast Guard maintains that it must have heavy icebreaking capability to fully meet its responsibilities as outlined above and in Appendix III. A 2010 Coast Guard-commissioned study found an even greater need for icebreakers, if the Coast Guard were to fully accomplish all of its polar icebreaking responsibilities. Specifically, this study determined that at least six icebreakers—three heavy and three medium—would be required to carry out the Coast Guard’s statutory missions. To carry out its statutory missions as well as fulfill all interagency responsibilities for defense readiness, the report states that the Coast Guard would need four to six heavy and two to four medium icebreakers depending on various operational factors, such as whether the Coast Guard employs multiple crewing models and where the Coast Guard homeports the icebreakers. Recognizing the fiscal challenges posed by such a request, Coast Guard officials have stated that obtaining a minimum of two heavy icebreakers is needed to at least maintain the fleet’s self-rescue capability in the event one vessel became beset in ice—a capability the Coast Guard does not currently have. In addition, without two or more heavy icebreakers, the Coast Guard reports that it may not be able to: (1) complete its polar icebreaking missions if one vessel suffered a disabling casualty, (2) conduct the McMurdo Station resupply and also ensure the continued ability to operate in the Arctic, or (3) conduct the McMurdo Station resupply if the mission required more than one icebreaker as it did in prior years. To maintain polar icebreaking capability after the Polar Star’s projected service life ends between 2020 and 2023, the Coast Guard initiated a program in 2013 to acquire a new heavy icebreaker and is currently working to determine the optimal acquisition strategy. From fiscal years 2013 to 2016, Congress directed that $16 million of appropriated funds were for the Coast Guard to conduct early acquisition activities, and the President’s budget has since requested $150 million to continue pre- acquisition and design activities over multiple years starting in fiscal year 2017. As of May 2016, the acquisition program was in the Analyze/Select phase, during which the Coast Guard was establishing asset requirements, evaluating the feasibility of alternatives, and developing a cost estimate for the preferred acquisition strategy. As part of this phase, the Coast Guard reports that it will identify the optimal acquisition strategy and will consider several options including new construction, parent craft, and parent craft design, as well as leasing arrangements. The President’s fiscal year 2017 budget request outlined plans to accelerate the acquisition process, so that production activities commence by 2020. The Coast Guard expects a new heavy icebreaker to cost approximately $1.09 billion, according to a 2013 preliminary estimate, which included development, procurement, and Coast Guard facilities improvements for one vessel. Although they have yet to complete a more detailed cost estimate, Coast Guard officials stated that they believe the primary construction cost drivers are likely to be the icebreaker’s size, weight, and horsepower. While the Coast Guard’s icebreaker fleet supports other federal agencies and departments, Coast Guard officials—as well as other federal officials—stated that these other agencies and departments do not require specific operational capabilities that would significantly increase the overall acquisition cost of an icebreaker. Coast Guard officials also noted that it would be unreasonable to build an icebreaker that could operate in the Arctic but not the Antarctic because that would limit the type of operations it could conduct. To move forward with the acquisition process, the Coast Guard would need to receive funding and ensure that a U.S.-based commercial shipyard would be able to build the vessel. However, the Coast Guard’s annual acquisition budget—which averaged $1.5 billion from fiscal year 2012 to fiscal year 2016—has primarily been allocated to other projects, such as the National Security and Fast Response cutters. The Coast Guard’s fiscal year 2016 acquisition budget was $1.945 billion— approximately 60 percent higher than the prior year, largely due to the addition of a ninth National Security Cutter for which the Coast Guard had not planned. We previously found when reviewing the Coast Guard’s acquisition portfolio in 2014 that the Coast Guard was further from fielding its planned fleet in 2014 than it was in 2009, in terms of the funding needed to complete these programs. The Coast Guard reported that it believes that the U.S. shipbuilding industry—which must be used to build all Coast Guard vessels unless the President has authorized a national security exception—is capable of building a heavy icebreaker. Specifically, the Coast Guard reported that several U.S. shipyards responded to a March 2013 market survey and indicated that they have the ability or could make necessary infrastructure upgrades to build a vessel similar to the Polar Star. Coast Guard officials told us that the selected shipyard or shipyards would likely need to upgrade their facilities because of the size, weight, and complexity of an icebreaker and that facility upgrades represent a calculated risk on the part of the shipyard, particularly if the Coast Guard only orders one vessel. The Coast Guard met with industry representatives in March 2016 to learn about industry capabilities. Prior GAO work on Navy and Coast Guard shipbuilding indicates that new icebreaker construction is likely to be an expensive and lengthy process because of cost growth associated with lead ships—that is, the first ship constructed in a class of ships, which the Coast Guard icebreaker would be. In September 2014, we identified cost growth that totaled over 150 percent for the first two lead ships of the Navy’s Littoral Combat Ship. We also reported in May 2009 that lead ships often experience schedule delays, such as the Navy’s first San Antonio-class ship which was delivered 52 months late, and in June 2008 we reported that the lead ship of the Coast Guard’s National Security Cutter was delayed by approximately 2 years. Thus, the potential for costly delays on lead ships has some precedent. The Coast Guard reported in 2015 that it will begin to plan for the acquisition of additional heavy icebreakers in line with the President’s September 2015 announcement. Various factors limit the options available to the Coast Guard to maintain, or increase, its icebreaker capacity, and the Coast Guard has reported that the long-term lease of a polar icebreaker is unlikely to result in cost savings when compared with a purchase. Specifically, as figure 6 depicts, two key factors limiting the Coast Guard’s options are the lack of an available icebreaker for lease that meets agency and legal requirements, and the total cost associated with leasing. Availability. The Coast Guard reported in October 2015 that no existing icebreakers were available to lease or purchase that met both its legal and operational requirements. First, with respect to legal requirements, the Coast Guard would need to either purchase or demise charter an icebreaker, as legal requirements associated with several Coast Guard missions prohibit a short-term lease. Specifically, under federal law, to be capable of conducting all of its statutory missions, the Coast Guard must use a public vessel, which federal law defines as one that the United States owns or demise charters. For example, federal law states that the Coast Guard’s Ports, Waterways, and Coastal Security Mission may be carried out with public vessels or private vessels tendered gratuitously for that purpose. Similarly, for the Coast Guard to employ its law enforcement authorities in the conduct of certain missions, the icebreaker would need to operate as a warship, and warships are necessarily sovereign immune, public vessels, according to Coast Guard officials. In addition, federal law also provides that no Coast Guard vessel may be constructed in a foreign shipyard. According to the Coast Guard, besides the Polar Star and the Polar Sea, the only existing icebreakers that are powerful enough to meet the Coast Guard’s operational requirements were built in and are owned by Russia, and, thus, would not comply with this legal requirement. As a result of these constraints, that is, the lack of a U.S.-built icebreaker available to purchase or demise charter with sufficient horsepower to conduct all of the Coast Guard’s missions, the Coast Guard’s only procurement options are for a U.S.- based shipyard to agree to build a new icebreaker for the Coast Guard to lease or purchase outright. However, the Coast Guard has also reported that the long-term lease of a polar icebreaker built expressly for the Coast Guard is likely to be more costly than purchasing an icebreaker for several reasons. Budgeting and Total Cost. Office of Management and Budget (OMB) guidelines require federal agencies to acquire assets in the manner least costly overall to the government. For a large acquisition like a heavy icebreaker, OMB Circular A-94 requires the Coast Guard to conduct a lease-purchase analysis based on total lifecycle costs. To then proceed with a lease, the Coast Guard would need to show that leasing is preferable to direct government purchase and ownership. The purpose of this requirement is to promote efficient resource allocation through well- informed decision-making by the federal government. Budget scorekeepers—specifically, OMB, the Congressional Budget Office, and the House and Senate Budget Committees—score purchases and capital leases at the outset of the acquisition. Based on scoring rules, the long- term lease of a polar icebreaker would not qualify as an operating lease, which is intended for short-term needs and would allow the costs to be recognized over time. As a result, whether the Coast Guard purchased or leased an icebreaker, it would need full funding up front to enter into a legal obligation with a shipbuilder, unless the Coast Guard uses incremental funding, as was authorized in the Coast Guard Authorization Act of 2015. With incremental funding authority, the Coast Guard would be able to proceed with the acquisition with only part of the estimated costs of a capital acquisition. However, we have previously discouraged the use of incremental funding, except in cases with especially high research and development costs, because incremental funding erodes future fiscal flexibility and limits cost transparency. The Coast Guard has also reported that the total cost of a long term lease is likely to exceed the total cost of a purchase. A 2011 preliminary cost analysis prepared for the Coast Guard indicated that the lease option would be more costly to the federal government over an icebreaker’s expected 30-year service life. According to this analysis, the prospective ship owner’s profit rate would increase the overall expense as this profit rate is priced into the lease, such that government ownership would be less costly in the long run. Moreover, because a demise charter requires the lessee to operate and maintain the vessel, the Coast Guard would not be able to outsource crewing or maintenance activities, actions which we previously reported could reduce ongoing operating costs. According to a subsequent 2012 report prepared for the Coast Guard, legal and operational requirements render additional cost-benefit analysis of leasing unnecessary. Nevertheless, Coast Guard officials stated that they will consider leasing as a possible acquisition strategy in a forthcoming report, as directed by language in committee reports accompanying the fiscal year 2014 DHS appropriations bill. Previous GAO work on the question of leasing versus buying an icebreaker identified important assumptions in comparing the costs to the federal government and suggests that outright purchase could be a less costly alternative than a long-term vessel lease. Assuming that the cost of building and operating the vessel was the same under both the buy and the lease scenarios, the cost advantage to government purchase over leasing in our previous work was based on two factors. First, the costs of private sector financing under a lease arrangement—which were higher than the government’s borrowing costs—could be expected to be passed on to the federal government in lease payments, thereby increasing the vessel’s financing costs over what they would be under outright government purchase. Second, under a lease arrangement, an additional profit would accrue to the lessor for services related to its retained ownership of the vessel. Separately, in multiple other reports we found that when other agencies sought to enter into long-term lease arrangements, they did so for reasons unrelated to cost, such as acquiring already-built aircraft sooner, and these explanations are not pertinent in this case. Anticipating a likely gap in heavy icebreaker capability between the end of the Polar Star’s service life and the deployment of a new icebreaker, the Coast Guard is developing a bridging strategy, as required by law, to determine how to address this expected gap. Based on current projections, if the Coast Guard’s icebreaker acquisition proceeds on schedule, the Coast Guard will likely lack heavy icebreaker capability for several years. Currently, the Coast Guard estimates that the Polar Star’s service life will likely extend until 2020 to 2023, while the Coast Guard’s 2016 timeline for a new icebreaker indicates that it would not achieve its operational requirements until fiscal year 2026, leaving a potential gap in heavy icebreaking capability of 3 to 6 years. See Figure 7. The Coast Guard has not determined the cost-effectiveness of reactivating the Polar Sea, and reported that it was conducting a Bridging Strategy Alternatives Analysis that will assess and make recommendations on whether to reactivate the Polar Sea and whether to further extend the service life of the Polar Star. Coast Guard officials said that they have not established a completion date for this report, but do not anticipate a final decision on the Polar Sea before fiscal year 2017, after which they will evaluate the cost-effectiveness of extending the Polar Star’s life, if necessary. Given the heightened interest in the Arctic, the Coast Guard has taken actions to implement its Arctic strategy, and conduct Arctic operations— both of which may help the Coast Guard better understand and mitigate identified Arctic capability gaps. In addition, the Coast Guard is tracking, or has plans to track, its various activities in the Arctic. For example, the Coast Guard reports on activities it conducts during its annual Arctic Shield operation in an AAR each year, and is in the process of the developing a system that will track its Arctic actions taken to implement the various strategies and directives. However, the Coast Guard has not systematically assessed how its actions have helped to mitigate Arctic capability gaps. Such an assessment—which includes developing measures for gauging its progress, when feasible—is critical for the Coast Guard to be fully informed about its own progress in helping to mitigate these gaps. By systematically assessing and measuring how its actions have helped to mitigate capability gaps, the Coast Guard will better understand the status of these gaps and be better positioned to effectively plan its Arctic operations, including its allocation of resources and prioritization of activities to target the gaps. To better position the Coast Guard to effectively plan its Arctic operations, we recommend that the Commandant of the Coast Guard take the following two actions: develop measures, as appropriate, for gauging how the agency’s actions have helped to mitigate the Arctic capability gaps; and design and implement a process to systematically assess the extent to which actions taken agency-wide have helped mitigate the Arctic capability gaps for which it has responsibility. We provided a draft of this report to the Departments of Homeland Security, Commerce, Defense, and Interior and the National Science Foundation for comment. DHS provided written comments, which are summarized below and reproduced in full in appendix VI. In addition, components within the Departments of Commerce and Interior provided technical comments, which we incorporated as appropriate. In its written comments, DHS concurred with and described actions it has planned to address our recommendation that the Coast Guard develop measures and design and implement a process for systematically assessing the extent to which its actions have helped to mitigate Arctic capability gaps. Specifically, DHS stated that the Coast Guard plans to develop specific measures for some of its Arctic activities which will be tracked on the web-based site that it has under development. DHS further stated that these measures will be used as part of the Coast Guard’s annual review of its implementation plan for its Arctic strategy. Through this annual review, the Coast Guard plans to systematically assess how its actions have helped to mitigate the capability gaps for which the Coast Guard is the lead agency, per the Implementation Framework for the National Strategy for the Artic Region. According to DHS, this review will begin in December 2016 and continue throughout calendar year 2017. We believe that these actions will help the Coast Guard better understand the status of these capability gaps and better position it to effectively plan its Arctic operations. However, we continue to believe that it is important for the Coast Guard to also systematically assess how its actions affect Arctic capability gaps for which it is not the lead as well. Although the Coast Guard may not be the lead for these gaps, its Arctic missions can still be affected by them, and thus, it remains important for the Coast Guard to be aware of its own progress in helping to mitigate its part of these gaps. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate committees and federal agencies. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7141 or [email protected]. Contact points for our Office of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix VII. Appendix II: Selected Federal Stakeholders and Interagency Groups with Arctic Responsibilities Examples of Arctic responsibilities The U.S. Coast Guard is a multimission, maritime military service within the Department of Homeland Security that has responsibilities including maritime safety, security, environmental protection, and national defense, among other missions. Other departmental components also have Arctic responsibilities. For example, the National Protection and Programs Directorate protects critical infrastructure, and the Federal Emergency Management Agency has responsibility for disaster assistance that could increase with climate change. The Department of Commerce’s National Oceanic and Atmospheric Administration provides information on Arctic oceanic and atmospheric conditions, issues warnings for hazardous weather, issues weather and ice forecasts, provides fisheries management and enforcement, develops and maintains nautical charts, provides scientific support in the event of oil or other hazardous material spills, and operates the Search and Rescue Satellite Aided Tracking System, among other responsibilities. The National Telecommunications and Information Administration under the Department of Commerce is responsible for the telecommunication infrastructure in the Arctic. The Department of Defense is responsible in the Arctic and elsewhere for securing the United States from direct attack; securing strategic access and retaining global freedom of action; strengthening existing and emerging alliances and partnerships; and establishing favorable security conditions. The Department of the Interior is responsible for management and regulation of resource development in the U.S. Arctic region and coordinates with the Coast Guard on safety compliance inspections of offshore energy facilities and in the event of a major oil spill. Specifically, within the Department, the Bureau of Ocean Energy Management is responsible for managing development of offshore resources, and the Bureau of Safety and Environmental Enforcement enforces safety and environmental regulations. The Department of State is responsible for formulating and implementing U.S. policy on international issues concerning the Arctic and Antarctic, leading the domestic interagency Arctic Policy Group, and leading U.S. participation in the Arctic Council. The department has also established a senior-level representative for the Arctic region to support efforts on increasing engagement with international partners. The Department of Transportation and its component agency, the Maritime Administration, is involved in marine transportation and shipping issues in the Arctic and elsewhere, among other things. The National Science Foundation is responsible for funding U.S. Arctic research— including research on the causes and effects of climate change––and providing associated logistics and infrastructure support to conduct this research. The National Science Foundation and Coast Guard also coordinate on the use of the Coast Guard’s icebreakers for scientific research. Other federal departments and agencies also have a role in U.S. Government efforts in the Arctic, but were not discussed in this report. They include the Environmental Protection Agency, Department of Energy, Department of Health and Human Services, Federal Communications Commission, and National Aeronautics and Space Administration, among others. Examples of Arctic responsibilities The Arctic Executive Steering Committee provides guidance to federal departments and agencies and coordinates implementation of national Arctic policies and plans, such as the National Strategy for the Arctic Region and its implementation plan. The steering committee is chaired by the Director of the Office of Science and Technology Policy and consists of representatives from over 20 federal departments, agencies, and offices. The Arctic Policy Group is an informal interagency group led by the Department of State that shares Arctic-related information and oversees implementation of U.S. Arctic policy. The group consists of officials from numerous federal agencies and the state of Alaska Governor’s and Lieutenant Governor’s offices. The Committee on the Marine Transportation System is a federal interagency coordinating committee that assesses the adequacy of the marine transportation system and coordinates and makes recommendations on federal policies that affect the marine transportation system. The Coast Guard and the National Oceanic and Atmospheric Administration co-chair the Committee’s Arctic Integrated Action Team with the Maritime Administration. The Interagency Arctic Research Policy Committee helps set priorities for future Arctic research, works with the Arctic Research Commission to develop and establish national Arctic research policy, and promotes federal interagency coordination on Arctic research activities, among other things. The committee is chaired by the National Science Foundation and consists of representatives from over 15 departments, agencies, and offices, including the Department of Defense. The Interagency Coordinating Committee on Oil Pollution Research coordinates federal oil pollution research activities and establishes oil pollution research priorities. The Committee is chaired by the Coast Guard with the National Oceanic and Atmospheric Administration, the Bureau of Safety and Environmental Enforcement, and the Environmental Protection Agency serving as rotating Vice Chairs. The Interagency Working Group on Coordination of Domestic Energy Development and Permitting in Alaska, led by the Department of the Interior, coordinates federal oversight of the development of energy resources and associated infrastructure in Alaska. The National Ocean Council consists of representatives from 27 federal agencies, departments, and offices and is responsible for implementation of the National Ocean Policy. The U.S. Arctic Research Commission is responsible for, among other things, developing and establishing an integrated national Arctic research policy that guides federal agencies in developing and implementing their Arctic research programs. The commission consists of representatives from the National Science Foundation, academic and research institutions, private industry, and indigenous residents of the U.S. Arctic. The Extended Continental Shelf Task Force, led by the Department of State, coordinates the collection and analysis of relevant data and prepares the necessary documentation to establish the limits of the U.S. continental shelf in accordance with international law. Table 3 identifies selected laws and policies that cite polar icebreaking capability. . The May 2013 National Strategy for the Arctic Region seeks to integrate the work of federal departments and agencies with the activities already underway in Alaska and at the international level. The Coast Guard is the lead for 7 of the 36 total tasks (or objectives) in the January 2014 implementation plan, and DHS and the Coast Guard support another 19. Each task also has various, actionable next steps. According to Coast Guard officials, the agency is responsible for coordinating the completion of tasks for which it has been identified as the lead agency, as funding and resources allow. To complete its tasks, the Coast Guard must coordinate with other agencies. As described in the implementation plan, federal departments and agencies are to report on their progress on the tasks, and the plan is to be revisited after 5 years to ensure that it still meets the intent and priorities of the nation. The implementation plan includes timeframes for some, but not all, next steps, and Coast Guard officials stated that tasks are being completed as resources permit. According to a March 2016 White House report describing federal agencies’ progress on Arctic strategy tasks, the Coast Guard, along with supporting agencies, has taken action toward implementing all the strategy tasks for which the Coast Guard is assigned as the lead, as detailed in table 4. In March 2016, the White House issued the Implementation Framework for the National Strategy for the Arctic Region which is to supersede its 2014 implementation plan. The AESC led the efforts to develop the revised framework, which updates the 2014 implementation plan by (1) incorporating the Administration’s new priorities into the existing lines of efforts, particularly placing greater importance on community sustainability and resilience; (2) removing actions listed in the 2014 implementation plan that have been completed, or are no longer considered an actionable priority; (3) including factors to improve efficiency by reducing redundancies and closing interagency coordination gaps; and (4) increasing the importance of science by incorporating the entire Interagency Arctic Research Policy Committee Arctic Research Plan by reference into the Pursuing Responsible Arctic Region Stewardship line of effort. In addition, the revised framework assigned an overall coordination lead for each line of effort from the national strategy. The 2016 framework includes 28 tasks that encompass various next steps and, unlike the 2014 plan, assigned a lead agency to each next step rather than to the overarching task. The Coast Guard was assigned to lead next steps that fall within 8 of the 28 tasks—7 of which it was also assigned as the lead in the 2014 plan. For the additional 2016 task, the Coast Guard has the lead for one of the next steps, which involves the analysis and monitoring of illegal, unreported, and unregulated fishing in the Arctic. The 2016 framework is to be revisited in 5 years; however, the framework states that because the Arctic is undergoing changes, the AESC may make adjustments before then. According to Coast Guard officials, the AESC’s efforts to update the implementation plan’s priorities are important because the tasks in the national strategy need to be balanced with new priorities announced by the President—some of which may be difficult to accomplish because they are evolving and may be planned further into the future than the 10-year national strategy. Further, Coast Guard officials stated that better prioritization of the national efforts will help the Coast Guard in making decisions about what it needs to achieve in the Arctic given its limited resources. The April 2013 National Ocean Policy Implementation Plan and its appendix—developed by the National Ocean Council—identify the Arctic as one of nine key objectives and include tasks for federal agencies consistent with their existing missions and activities. Although the plan does not assign designated leads for each task, the Coast Guard is charged with helping to implement three Arctic-specific tasks—which include various next steps. The National Ocean Council developed and maintains a U.S. government-authorized, web-based site for federal agencies to report the status of the tasks under the National Ocean Policy. The Coast Guard, along with supporting agencies, has taken steps toward implementing all three of its assigned tasks, as detailed in table 5. For example, the National Ocean Council reported that the Coast Guard and its partners completed one task in its entirety, and that the two other tasks and related next steps were from 55 to 95 percent complete, as of December 2015. All of the Coast Guard’s tasks were to have been completed in either 2013 or 2014, but the Coast Guard reported to the National Ocean Council that funding and resource constraints challenged their ability to complete the tasks in their entirety. In addition to the contact named above, Dawn Hoff (Assistant Director), Tracey Cross (Analyst-in-Charge), Jillian Schofield, Linda Collins, Eric Warren, Susan Hsu, Tracey King, Chuck Bausell, Jan Montgomery, Michele Fejfar, Eric Hauswirth, Katherine Trimble, Laurier Fish, Carol Henn, and John Crawford made key contributions to this work. | The retreat of polar sea ice in the Arctic, as reported by the U.S. National Snow and Ice Data Center, combined with an expected increase in human activity, has heightened U.S. interests in the Arctic region. To supplement U.S. Arctic policy, the White House and federal agencies have issued Arctic strategies and plans. Since the Arctic region has a substantial maritime domain, the Coast Guard plays a significant role in Arctic policy implementation and enforcement. GAO was asked to examine the Coast Guard's responsibilities, capabilities, and plans for the Arctic. This report discusses, among other things, the extent to which the Coast Guard has (1) reported progress in implementing its Arctic strategy, (2) assessed its Arctic capabilities and taken actions to mitigate any identified gaps, and (3) reported being able to carry out polar icebreaking operations. GAO reviewed relevant laws and policies and Coast Guard documents that detail its Arctic plans. GAO conducted a site visit to Alaska and interviewed officials from the Coast Guard, state and local government entities, native village corporations, and private or nonprofit organizations. These observations are not generalizable, but provided insights on Coast Guard activities. The U.S. Coast Guard, within the Department of Homeland Security, reported making progress implementing its Arctic strategy . For example, the Coast Guard reported conducting exercises related to Arctic oil spill response and search and rescue, and facilitating the formation of a safety committee in the Arctic, among other tasks in its strategy. To track the status of these efforts, the Coast Guard is developing a web-based tool and anticipates finalizing the tool in mid-2016. The Coast Guard assessed its capability to perform its Arctic missions and identified various capability gaps—including communications, infrastructure, and icebreaking, and has worked to mitigate these gaps with its Arctic partners, such as other federal agencies. Specifically, Coast Guard officials stated that the agency's actions to implement the various Arctic strategies and carry out annual Arctic operations have helped to mitigate Arctic capability gaps. However, the Coast Guard has not systematically assessed the extent to which its actions agency-wide have helped to mitigate these gaps. Coast Guard officials attributed this, in part, to not being able to unilaterally close the gaps. While mitigating these gaps requires joint efforts among Arctic partners, the Coast Guard has taken actions in the Arctic that are specific to its missions and therefore has responsibility for assessing the extent to which these actions have helped to mitigate capability gaps. By systematically assessing and measuring its progress, the Coast Guard will better understand the status of these gaps and be better positioned to effectively plan its Arctic operations. The Coast Guard has been unable to fulfill some of its polar icebreaking responsibilities with its aging icebreaker fleet, which currently includes two active polar icebreakers. In 2011 and 2012, the Coast Guard was unable to maintain assured, year-round access to the Arctic and did not meet 4 of 11 requests for polar icebreaking services. With its one active heavy icebreaker—which has greater icebreaking capability—nearing the end of its service life, the Coast Guard initiated a program in 2013 to acquire a new one and is working to determine the optimal acquisition strategy. However, the Coast Guard's efforts to acquire an icebreaker, whether by lease or purchase, will be limited by legal and operational requirements. In addition, current projections show that the Coast Guard is likely to have a 3- to 6-year gap in its heavy icebreaking capability before a new icebreaker becomes operational, as shown below. The Coast Guard is developing a strategy to determine how to best address this expected gap. Coast Guard's Heavy Icebreaker Availability and Expected Capability Gaps, Present until 2030 GAO recommends that the Coast Guard develop measures for assessing how its actions have helped to mitigate Arctic capability gaps, and design and implement a process to systematically assess its progress on this. DHS concurred with our recommendations. |
Established in 1993, HUD’s Discount Sales Program seeks to expand affordable housing opportunities, help revitalize neighborhoods, and reduce the agency’s inventory of single-family properties in a timely, efficient, and cost-effective manner. Under the program, approved nonprofit organizations receive a discount when purchasing HUD-owned single-family properties and are required to rehabilitate and resell them to low- or moderate-income homebuyers. As of August 2003, 423 nonprofits were approved to participate in the program, down from more than 2,000 nonprofits 3 years earlier. HUD attributed the reduction to changes in the program, such as stricter approval standards and increased reporting requirements, and to the agency’s efforts to remove nonprofits that violate program rules. HUD acquires properties through foreclosures of homes with FHA-insured mortgages. FHA provides federally backed mortgage insurance primarily to low-income and first-time homebuyers who might otherwise have difficulty obtaining a mortgage. In calendar year 2002, HUD acquired more than 67,000 properties through foreclosures and sold approximately 65,000 properties from its inventory. At the end of calendar year 2002, HUD had an inventory of 32,018 single-family properties. HUD sells the properties in its inventory in as-is condition through a number of different programs. Table 1 shows the primary programs HUD uses to sell properties and the number of properties sold under each during calendar year 2002. Most HUD-owned properties are eligible for price reductions under the Discount Sales Program. The program accounted for approximately 2 percent of HUD’s overall property sales in calendar year 2002. HUD offers discounts of 10, 15, and 30 percent to nonprofit organizations. The size of the discount depends on several factors: whether a property in as-is condition is eligible for FHA insurance, whether it is located in a revitalization area, and whether it is sold individually or in a package of five or more homes. HUD inspects and appraises all foreclosed properties to determine whether they are again eligible for FHA mortgage insurance. FHA will insure mortgages only on properties that meet HUD’s minimum property standards and local building codes or that need less than $5,000 in repairs in order to meet these standards. Properties needing more than $5,000 in repairs are considered uninsurable. For purposes of the Discount Sales Program, HUD then differentiates properties by location. All insurable properties receive a 10 or 15 percent discount whether or not they are located in a revitalization zone. The 15 percent discount is only applied if the property is part of a group of five or more properties purchased in a single transaction. Uninsurable properties lying outside revitalization areas also receive these discounts, but those located within revitalization areas are eligible for the steepest discount—30 percent. Under the Discount Sales Program, HUD has two methods of selling properties to nonprofits: competitive bidding and noncompetitive sales. Both methods allow discounts for nonprofits. Under the competitive process, HUD establishes a list price for the properties but will accept bids that are lower. HUD posts the properties, with their list prices, on the Internet in its general listings and accepts bids from prospective owner- occupants and nonprofits, but not investors, for a priority period of 10 to 30 days, depending on the geographic area. HUD awards the property to the owner-occupant or nonprofit with the highest bid. If the highest bidder is a nonprofit, HUD grants a 10 or 15 percent discount off the bid price when it closes on the home. For properties that fail to sell during this priority period, HUD then accepts bids from the general public, including investors. The noncompetitive sales method applies only to uninsurable properties. HUD lists these properties separately from its general listings and makes them available to nonprofits through a HUD contractor’s Web site. Nonprofits have a priority period of 5 days to express interest in the properties at HUD’s list price. If more than one nonprofit expresses interest in a property, HUD selects the buyer by lottery. As with competitive sales, the discount is applied at closing. Properties that are not sold noncompetitively are placed in HUD’s general listings and made available for sale on a competitive basis. Nonprofits that purchase properties under the Discount Sales Program are responsible for rehabilitating them as needed to meet HUD’s minimum property standards and local building codes. Nonprofits are required to limit their resale price to no more than 110 percent of their “net development cost,” or the sum of their allowable costs for acquiring, rehabilitating, and reselling the properties. Nonprofits must also sell the homes to buyers whose incomes do not exceed 115 percent of their area’s median income, adjusted for family size. HUD’s four HOCs administer the Discount Sales Program and oversee the participating nonprofits. The HOCs process nonprofits’ applications to participate in the program and monitor nonprofits for compliance once they begin purchasing, rehabilitating, and reselling homes. To help monitor the program, HUD requires nonprofits to submit annual reports to the appropriate HOC by February 1 of each year. The reports must provide information on properties the nonprofits have bought, rehabilitated, and resold, including repair costs, prices to homebuyers, and homebuyers’ incomes. HOC staff also conduct on-site visits to nonprofits and properties to review files and inspect repairs, among other things. When a nonprofit fails to follow the program’s requirements, HOCs may remove the nonprofit from the program. In recent years, HUD has changed some of its program requirements to increase its oversight of nonprofits. For example, in 2000 HUD issued guidance establishing uniform standards for nonprofits applying to participate in the program. The guidance outlines specific information nonprofits must submit in applying for the program, mandates that nonprofits recertify with HUD every 2 years, and requires that nonprofits answer detailed questions about their ability to carry out affordable housing programs. To address concerns raised in the HUD Inspector General’s 2001 report on the program, HUD issued additional guidance in December 2001 designed to strengthen the program’s reporting and accountability requirements. Until this guidance was issued, nonprofits needed to meet HUD’s annual reporting and net development cost requirements only for properties purchased at a 30 percent discount. The guidance expanded annual reporting and resale price requirements to all properties, regardless of discount level, and clarified HUD’s net development cost calculation by providing a detailed list of allowable and unallowable costs. Also in response to the Inspector General’s report, HUD issued guidance in January 2002 designed to tighten eligibility requirements for nonprofits. Among other things, the guidance described circumstances that could create a conflict of interest between nonprofits and their business partners. In addition, it required that nonprofits be incorporated as 501(c)(3) organizations for at least 2 years and have a minimum of 2 consecutive years of affordable housing experience within the last 5 years. Finally, to accommodate HUD’s on-site reviews, the guidance required nonprofits to maintain property records in a specified format. HUD did not implement all of the Inspector General’s recommendations. Specifically, the Inspector General’s report recommended that HUD suspend the program and evaluate it to determine whether the program was viable or should be discontinued. HUD Office of Housing officials told us they developed a proposal for a contractor study of the program but that the proposal was never funded. HUD officials said they did not suspend the program because they felt the improvements made following the Inspector General’s review would prevent further problems. We estimate that the Discount Sales Program cost HUD between $18.8 and $23.9 million in calendar year 2002. Most of this cost, between $15.1 and $20.2 million, was a reduction in net revenue resulting from HUD’s selling properties through the program rather than through its regular sales process. Personnel expenses for administering the program accounted for the remaining $3.7 million of HUD’s cost. The net revenue HUD receives from each property it sells is less than the property’s selling price because HUD incurs certain holding and selling costs. Some of these costs are common to both discounted and regular HUD property sales, while others are not. For example, on a regular sale, HUD pays the homebuyer’s closing and financing costs and the sales commission of the successful selling broker, within certain guidelines. HUD does not pay either of these costs for properties sold through the Discount Sales Program. HUD does not require a selling broker for the properties nonprofits purchase through the program; consequently, there is generally no selling broker’s commission for these transactions. HUD incurs other types of costs for all properties whether or not they are part of the program. These costs include (1) the fees and reimbursable expenses it pays to management and marketing contractors responsible for inspecting, appraising, securing, maintaining, and selling HUD-owned properties; (2) sales incentives in the form of cash allowances that HUD periodically offers to homebuyers—including nonprofits—that close relatively quickly on executed sales contracts; (3) the listing broker’s fee; and (4) the property taxes for the period when HUD owned the home. To determine the impact of the Discount Sales Program on HUD’s net revenues (i.e., the selling price minus holding and selling costs) we compared the estimated net revenues HUD received for the discounted properties with the estimated net revenues HUD would have received if it had sold the properties through its regular sales process. Using data from HUD’s SAMS and the U.S. Census Bureau, we made this determination for 1,194 properties that HUD sold through the program in calendar year 2002. We used a statistical model that included data for these properties and approximately 4,000 properties HUD sold through its regular process during the same year. We found that by selling the 1,194 properties through the Discount Sales Program instead of its regular sales process, HUD reduced the net revenue it received in calendar year 2002. Specifically, we estimate that the total reduction in HUD’s net revenue was between $15.1 and $20.2 million, an average of between $12,672 and $16,945 per property. (See app. II for a detailed discussion of our statistical analysis.) Without the program, and with all other things remaining equal, cash flows into HUD’s insurance fund would have increased by that amount. As shown in table 2, the overall and average reductions in net revenue varied according to the discount level. The properties sold with 10 percent discounts accounted for about two-thirds of the homes that HUD sold through the program in calendar year 2002, but for less than half the total estimated reduction in net revenue. In contrast, the properties sold with 30 percent discounts represented less than one-third of the total properties sold but more than 40 percent of the overall reduction in net revenue. Finally, the properties with 15 percent discounts accounted for about 9 percent of the total properties and between 7 and 10 percent of the overall reduction in HUD’s net revenue. According to HUD officials, the agency’s database somewhat overstates the number of properties sold with a 10 percent discount (the most common type) and somewhat understates the number sold with a 15 percent discount (the least common type). The officials said this overstatement occurs because HUD does not always update its database to reflect the fact that a property, indicated in the database as being sold with a 10 percent discount, may actually have been sold at a 15 percent discount if it was part of a group of five or more properties bought in a single transaction. As a result, our analysis may overestimate the reduction in net revenue for properties discounted by 10 percent and underestimate it for those discounted by 15 percent. As shown in table 3, the overall and average reductions in net revenues also varied by HOC. A major reason for this variance was differences among the centers in the proportion of their properties sold with 30 percent discounts. Because 30 percent discount properties cost HUD more in net revenue than properties at the other discount levels, the HOC with the highest proportion of 30 percent properties—Santa Ana—had the greatest reduction in net revenue. The HOC with the lowest proportion—Denver— had the smallest reduction in net revenue. HUD officials told us they were aware that the program reduced the agency’s net revenue from property sales. However, HUD has not evaluated whether the program is reducing HUD’s property inventory in a timely, efficient, and cost-effective manner, as intended. To determine the impact of the Discount Sales Program on HUD’s administrative costs in calendar year 2002, we compared the administrative costs HUD incurred under the program to what HUD would have incurred had the discounted properties been sold through HUD’s regular process. According to HUD, in administering the Discount Sales Program, HOC staff perform tasks that are not part of HUD’s regular home-selling process. For example, for the Discount Sales Program, center staff approve and recertify participating nonprofit organizations and monitor the nonprofits’ compliance with program requirements—tasks they do not perform for the regular sales process. As a result, HUD’s administrative cost per property is lower for its regular sales process than it is for the Discount Sales Program. HUD officials told us that for this reason and the small volume of properties sold through the Discount Sales Program, selling the discounted properties through HUD’s regular process would have had no measurable effect on the administrative costs for the regular sales process. The bulk of HUD’s administrative costs for the Discount Sales Program are the salaries and benefits of staff who work on the program. According to HUD officials, most of these staff split their time among several programs, but HUD’s time and attendance system does not record the time they spend on each one. Therefore, we relied on estimates from HUD to determine how many staff years were spent on the program in calendar year 2002 and the associated costs. Although HUD incurred other types of costs to administer the program, such as mailing costs and travel expenses for visiting nonprofit offices, these were minor compared with the personnel costs and were not included in HUD’s estimate. HUD estimates that its personnel costs for the Discount Sales Program were approximately $3.7 million in calendar year 2002. (See table 4.) HUD’s estimate was based on information provided by its HOCs and Office of Housing, which showed that their staffs devoted a total of 45 staff years to the program. The number of staff years and the associated cost varied across offices, however. Among the HOCs, the Atlanta center had the most staff years and highest personnel costs and the Denver center the fewest staff years and lowest personnel costs. HUD’s Office of Housing devoted the equivalent of about one staff year to the program. HUD headquarters and HOC officials told us that in the absence of the Discount Sales Program, these staff years would have been dedicated to administering other HUD programs, so that HUD would have incurred the personnel costs with or without the program. Our analysis of 238 properties sold under the Discount Sales Program in calendar year 2002 indicates it is likely that most homebuyers did not benefit financially from the program. Specifically, assuming that nonprofits and homebuyers had the same rehab costs, we estimate that 76 percent of the homebuyers would have spent less if they had purchased the properties through HUD’s regular sales process and paid for the rehab work themselves. In part, the lack of financial benefit to homebuyers is attributable to the program’s rules, which authorize nonprofits to pass on costs that homebuyers would likely not incur using the regular sales process. Despite the program’s limited financial benefits, it may help homebuyers access a range of services and assistance—such as homeownership counseling, down payment assistance, and home maintenance courses—that are beneficial but also available from other sources. The program may also help improve neighborhood conditions by rehabbing and putting back on the market homes that might otherwise remain vacant or in disrepair. To determine the extent to which homebuyers benefited financially from purchasing a rehabilitated home through the Discount Sales Program, we performed a statistical analysis comparing what the homebuyers actually paid for these homes with our estimate of what they would have spent had they purchased the homes under HUD’s regular process and paid for the rehab work themselves. Our analysis assumed that in the absence of the Discount Sales Program, a homebuyer would be able to (1) purchase the same home and rehabilitate it to the same extent as the nonprofit and (2) incur the same rehab costs as the nonprofit. We also assumed that the homebuyer would inhabit the home during the rehabilitation and therefore would not incur housing expenses for two residences during that period. We performed this analysis on 238 properties that nonprofits purchased and resold between February 1 and December 31, 2002. These properties were the only ones for which HUD could provide the rehab costs and selling prices to homebuyers at the time of our review. (See app. II for a detailed discussion of our statistical analysis.) Assuming equal rehab costs for nonprofits and homebuyers, we estimate that 182 of the 238 homebuyers, or 76 percent, did not benefit financially by purchasing a rehabbed property from a nonprofit that bought the property through the Discount Sales Program. That is, the buyers would have spent less had they purchased the property through HUD’s regular sales process and paid for the rehab work themselves. Under the assumptions of our analysis, we estimate that these purchasers spent an average of $9,200 more buying the house through the program than they would have spent otherwise. Our analysis indicated that the other 24 percent of the homebuyers benefited financially from the program, because purchasing the homes through HUD’s regular sales process and rehabbing them would have been more expensive. We estimate that these homebuyers saved $9,200, on average, by purchasing through the Discount Sales Program. Because nonprofits may, in some circumstances, be able to rehab a home more cheaply than an individual homebuyer, we also performed the analysis assuming that a homebuyer would pay 25 percent more than a nonprofit for the same rehab work. Even under that assumption, we estimate that 59 percent of the homebuyers would not have benefited financially from the program. More specifically, we estimate these purchasers spent an average of $8,000 more buying the house through the program than they would have spent otherwise. We estimate that the remaining 41 percent of homebuyers saved $10,100, on average, by purchasing a home through the program. Our estimates of the extent to which homebuyers did or did not benefit varied according to the discount level of the property purchased. Assuming equal rehab costs for nonprofits and homebuyers, we estimate that 79 percent of the homebuyers purchasing houses that had been discounted 10 percent saw no financial benefit. For the properties with 15 percent discounts, we estimate that more than 90 percent did not benefit. However, for the properties with 30 percent discounts, we estimate that one-half of the homebuyers saw some financial benefit. (See table 5.) One reason homebuyers did not benefit financially, according to our analysis, was that nonprofits sometimes resold the properties for more than the program allowed. This finding was especially strong for purchases in the 15 and 30 percent discount categories. Had the nonprofits not overcharged the homebuyers in these cases, we estimate that more than one-third of the homebuyers who bought properties with a 15 percent discount and more than three-quarters of those who bought properties with a 30 percent discount would have benefited financially. Our analysis did not take into account certain factors that are difficult to quantify but may make the program either more or less beneficial from a homebuyer’s perspective. For example, some homebuyers may be willing to incur significant costs to avoid the time, difficulty, and inconvenience involved in selecting materials, obtaining and evaluating contractor bids, residing in a property undergoing rehab work, and possibly obtaining a separate loan to finance the rehab work. Conversely, some homebuyers may not view these tasks as major obstacles and may see significant benefits to controlling the rehab process themselves, such as the ability to select the materials used and the ability to oversee the rehab work as it progresses. Some of the Discount Sales Program’s rules make it unlikely that purchasing a property from a nonprofit that purchased the property from HUD at a 10 or 15 percent discount will benefit homebuyers more than purchasing the same property from HUD through the regular sales process. For example, HUD allows nonprofits to resell discounted properties for up to 110 percent of the “net development cost,” or the cost of buying the property plus allowable rehab, holding, and selling costs. The 10 percent markup helps nonprofits to cover the overhead expenses they incur by participating in the program. However, taking a 10 percent markup on a property purchased at a 10 or 15 percent discount effectively cancels out all or most of the discount. As a result, the price of the home to the eventual homebuyer reflects little, if any, of HUD’s discount to the nonprofit. Furthermore, program rules authorize nonprofits to include in their calculations of net development cost certain “allowable” financing and closing costs they incur in buying discounted HUD properties. As a result, a homebuyer who purchases a property from a nonprofit pays not only his or her own financing and closing costs but—through the sales price—the nonprofit’s as well. In contrast, when a homebuyer purchases a property using HUD’s regular sales process, HUD pays allowable financing and closing costs on the buyer’s behalf. Also, a nonprofit’s net development cost may include the principal and interest payments for the mortgage on the property while the property is being renovated for up to 6 months. Raising the nonprofit’s net development cost effectively raises the price for the eventual homebuyer, who could have avoided some of these expenses by purchasing the house directly from HUD and, if possible, inhabiting it during the renovation. According to HUD and nonprofit officials, many of the families who purchase properties through the program are first-time homebuyers. Accordingly, HUD strongly encourages nonprofits to provide homeownership counseling services and requires participants to submit “affordable housing plans” detailing, among other things, the services and assistance that low- and moderate-income homebuyers using the program can expect to receive. During our visits to HUD’s homeownership centers, we reviewed the affordable housing plans for a judgmental sample of 17 nonprofits. The plans showed that the nonprofits offered a wide range of services and assistance to homebuyers, either directly or through referrals to other agencies. The services included mortgage credit counseling, “hotlines” homebuyers could call with questions, and courses on budgeting and home maintenance. Some nonprofits also offered assistance with down payments and closing costs. HOC staff told us that these services and assistance were typical of those provided by most participating nonprofits. Both HUD and nonprofit officials told us they believed that providing such services to new homebuyers facilitated homeownership among low-income families that might otherwise have a hard time purchasing a home. These officials also said that the services helped minimize the likelihood of default by preparing families for the responsibilities of homeownership. However, we found that similar services were widely available outside the Discount Sales Program. For example, HUD itself provides financial support to hundreds of housing counseling agencies across the country. Any prospective homebuyer can access these services at no cost. According to HUD, the Discount Sales Program also generates benefits and serves policy objectives, such as neighborhood revitalization and stability, that extend beyond the individual households that purchase properties. Some HUD and nonprofit officials told us they believe that the Discount Sales Program may help to improve neighborhood conditions by supporting the rehabilitation and sale of properties that would otherwise be vacant and in disrepair, reducing surrounding property values, and becoming magnets for vandalism and trespassing. For example, one nonprofit official told us that by purchasing and rehabbing multiple properties over a period of several years, the organization had not only improved the housing stock of one community but also helped create an environment that encouraged economic development and social service opportunities nearby. HUD officials also told us that many prospective owner-occupants are not willing to purchase homes requiring significant rehab work because of the difficulty and risks of undertaking a rehab project. They said that even if owner-occupants were to purchase these properties, they might do less rehab work than a nonprofit would or not rehab them at all. Finally, HUD believes that by promoting homeownership and property rehabilitation, the program has stabilizing effects on neighborhoods and contributes to property values—factors that reduce the risk of foreclosure and losses to FHA’s insurance fund. Although expansion of homeownership opportunities and neighborhood revitalization are objectives and potential benefits of the program, HUD has not studied the extent to which the program is serving these ends. The HOCs use two monitoring tools to assess nonprofits’ compliance with program requirements: desk reviews of annual reports and on-site evaluations. However, the HOCs had trouble conducting desk reviews because many program participants turned their reports in late or not at all, and many reports were incomplete. In addition, the HOCs’ use of on-site reviews was uneven, with two centers conducting them routinely and the other two doing few or none. Even with these problems, the HOCs’ monitoring efforts uncovered numerous violations of program rules, such as making excess profits by reselling discounted properties for more than the program allowed. The HOCs have removed many nonprofits for noncompliance but lack an effective mechanism for enforcing requirements concerning excess profits. Nonprofits participating in the Discount Sales Program are required to submit annual reports to the HOCs each February 1 that provide information on the properties purchased under the program the previous calendar year. The required information includes the status of the property (i.e., whether it has been rehabbed and resold), the rehab costs, and the selling price to the homebuyer. Nonprofits must also provide documentation, such as settlement statements, giving detailed financial information on the purchase and resale of the properties. Desk reviews of these reports are HUD’s primary method of determining whether nonprofits comply with key program requirements, such as those restricting the resale prices of rehabilitated homes and the purchasers’ income levels. However, the effectiveness of desk reviews as a monitoring tool has been limited because many nonprofits have not submitted annual reports on time, and others have provided incomplete information. Specifically, as of July 2003—more than 5 months after the annual reports were due—HUD lacked reports from nonprofits accounting for more than half of the 626 properties it estimates were bought, rehabbed, and resold in calendar year 2002. The HOCs had reports for properties resold to homebuyers from only 44 of the 166 nonprofits that purchased discounted properties in calendar year 2002. Other nonprofits submitted reports that lacked all of the data the HOCs needed to assess the participants’ compliance with program requirements. For example, as of April 2003, more than half of the annual reports received at the Denver HOC did not contain the information necessary to determine the nonprofits’ net development costs for the properties. As a result, staff could not determine whether the nonprofits had sold their properties at prices that were within program limits. Similarly, more than one-third of the reports received by the Atlanta HOC as of July 2003 did not contain the required certification of the homebuyers’ income levels. Without this information, the HOC had no assurance that the properties were sold to homebuyers with low and moderate incomes, as required. According to HOC officials, efforts to collect missing data and resolve other reporting issues can take months. For example, staff at the Atlanta HOC told us that they spent large amounts of time calling and writing nonprofits to gather the information missing from the annual reports. Although three of the HOCs—Atlanta, Denver, and Santa Ana---had originally planned to complete their desk reviews by the end of April 2003, these reviews were still under way in mid-July 2003. At that time, the remaining HOC—Philadelphia—had completed reviews of just 16 percent of its properties. The reporting problems occurred despite the HOCs’ efforts to remind nonprofits of the reporting requirements and to provide training on the program rules. For example, all four HOCs sent reminder letters to nonprofits several weeks before the annual reports were due. In addition, HOC officials told us they provided either one-on-one or group training to nonprofits on submitting annual reports and meeting other program requirements. HOC officials speculated that a major reason for the reporting problems was that many nonprofits lacked adequate administrative capacity. However, they also said that carrying out in-depth assessments of administrative capacity as part of the initial approval process would require a costly on-site evaluation of every applicant. In October 2003, HOC officials told us that as a result of their follow-up efforts, they had made significant progress in obtaining annual reports from nonprofits that had not reported earlier in the year. However, during the long time it takes the HOCs to obtain and review annual reports, nonprofits may continue to purchase more homes and violate program rules. In addition, according to HOC officials, many nonprofits that had failed to report had either withdrawn or been removed from the program, leaving little incentive to report. Consequently, it is unlikely that HUD will ever know whether these nonprofits followed program requirements in rehabbing and reselling discounted properties. HUD’s guidelines not only require that nonprofits allow on-site reviews of their operations as a condition of program participation but also outline the types of records participants must maintain and make available for HUD’s on-site review. On-site reviews generally allow for a more in-depth assessment of a nonprofit’s program activities than desk reviews. For example, on-site reviews may include examining invoices and cancelled checks to determine the validity of claimed rehab costs. They may also involve inspection of rehabbed homes and interviews with homeowners. We found that only two of the four HOCs—Atlanta and Denver—routinely used on-site reviews as a monitoring tool in calendar year 2002. Atlanta HOC officials told us that they tried to review each of their medium- and high-risk nonprofits at least once every 2 years. Consistent with this policy, the center performed 22 on-site reviews in calendar year 2002, covering about half of the nonprofits that had purchased discounted homes that year. The Atlanta HOC had trained staff stationed throughout the center’s geographic jurisdiction to perform the on-site reviews and also employed two specialists with backgrounds in home construction. The Denver HOC performed on-site reviews of 10 of the 23 nonprofits it sold properties to in calendar year 2002. Officials there said that they targeted nonprofits using desk reviews, homebuyers’ complaints, and applications to the program. The reviews were performed by staff working out of the HOC, with assistance from other HUD staff stationed near the nonprofits. In contrast to the Atlanta and Denver centers, the other two HOCs— Philadelphia and Santa Ana—used on-site reviews rarely or not at all. The Philadelphia HOC, which sold properties to 48 nonprofits in calendar year 2002, conducted just two on-site reviews during that year, citing a shortage of staff as the primary reason. Center officials told us that they plan to use a contractor to conduct on-site reviews of nonprofits with known performance problems and that the contractor will be required to have construction specialists assist in these reviews. The Santa Ana HOC, which sold properties to 52 nonprofits in calendar year 2002, did not perform any on-site reviews. Santa Ana HOC officials told us that the center’s large geographic jurisdiction made it impractical for them to travel to nonprofits’ offices. To compensate for the lack of on-site reviews, the Santa Ana center uses an in-depth version of the desk review, requiring nonprofits to submit large amounts of supporting documentation, including invoices, with their annual reports. A Santa Ana official said that this is the same documentation that HOC staff examine during on-site reviews but acknowledged that desk reviews do not include property inspections. The HOCs identified violations of program requirements during both desk and on-site reviews. Primary among these were violations of the ceiling for resale prices: 110 percent of the net development cost. The desk reviews the HOCs had conducted as of July 2003 showed that nonprofits often did not comply with the resale restriction. This problem occurred despite the fact that in December 2001 HUD had issued guidance to nonprofits clarifying net development costs and providing detailed instructions for calculating them. As shown in figure 1, 28 of the 44 nonprofits that had submitted annual reports as of July 2003 overcharged homebuyers for one or more properties. These violations occurred on about 124 (47 percent) of the 265 properties covered by the annual reports and resulted in homebuyers being overcharged an estimated total of $704,720. The amount of the estimated overcharges varied significantly from property to property, ranging from under $10 to more than $40,000. For example, one nonprofit closed on a discounted home in New York for $117,600 in October 2002 and spent about $41,000 to rehab the property. The nonprofit subsequently resold the property for $234,000, or $43,333 more than the program allowed. Assuming the homebuyer had secured a 30-year loan at 6 percent interest (the prevailing rate at the time the homebuyer made the purchase), the overcharge increased the homebuyer’s annual mortgage payments by more than $3,100. The HOCs’ desk reviews also identified three cases in which nonprofits violated program requirements by reselling discounted properties to homebuyers whose incomes exceeded 115 percent of the area median income. For example, the Denver HOC found that one of its nonprofits sold a Texas home to a buyer whose income was 141 percent of the area median income, adjusted for family size. The HOCs’ on-site reviews also revealed instances of serious noncompliance, underscoring the importance of these reviews as a monitoring tool. Among these violations were a lack of auditable records, unallowable rehabilitation costs, and conflicts of interest between nonprofits and their rehabilitation contractors. For example, one review disclosed that the nonprofit had made bulk purchases of the materials it needed to rehabilitate discounted properties but, contrary to program requirements, did not maintain records showing the costs of these purchases or the materials that were used for each home. As a result, the reviewers could not verify the net development cost for any of these properties. In another on-site review, the Atlanta staff found that the nonprofit was not in control of the day-to-day operations of its discount property purchases. Instead, the nonprofit allowed its affiliated contractors and realtors to control the buying, rehabbing, and selling of the properties acquired through the Discount Sales Program and to share in the profits from the sale. To hold nonprofits accountable for program violations, the HOCs may use two main enforcement tools: (1) removing participants from the program and (2) requiring them to use excess profits to pay down overcharged homebuyers’ mortgages. The HOCs have often exercised their authority to remove nonprofits but lack an effective mechanism for enforcing requirements concerning excess profits. As a result, some nonprofits that did not comply with program requirements have retained excess profits, and homebuyers who were overcharged have not received financial restitution. HUD issued regulations in June 2002 authorizing the agency to remove a nonprofit from its roster of approved organizations for any cause HUD judged to be detrimental to the agency or to any of its programs. These causes include failure to comply with HUD guidance and instructions and failure to respond within a reasonable time to HUD inquiries, including requests for documentation. In recent years, the HOCs frequently used removal to hold nonprofits in the Discount Sales Program responsible for a variety of compliance problems. In calendar year 2002, for example, the Santa Ana HOC removed 31 nonprofits from the program, mostly for failure to submit annual reports, conflicts of interest, selling homes for more than program limits or to families that were not low- or moderate-income, and lack of administrative or financial capacity. In calendar year 2003, all four HOCs removed nonprofits that had failed to file annual reports or committed other program violations. For example, as of October 2003, the Atlanta HOC had removed 18 nonprofits from the program—more than one-third of the nonprofits that had purchased discounted properties in calendar year 2002. The other three HOCs removed a total of 63 nonprofits that had purchased properties that year. Despite its importance as an enforcement tool, HOC officials told us that removing nonprofits from the program had significant limitations. First, the process can take months to complete, allowing nonprofits to continue purchasing properties and possibly to commit additional violations. HOC staff must carefully document their justification for the action and must follow due process procedures that can be lengthy, particularly if a nonprofit appeals the removal decision. HOC officials said that once they decide to remove a nonprofit, they often restrict the number of properties it may purchase in an effort to reduce the potential for further noncompliance during the due process period. Second, once a nonprofit is removed, it has little incentive to report to HUD on the discounted properties it resold or to surrender any of the excess profits it may have earned. As a result, the centers may never learn whether these properties were resold at reasonable prices to low- or moderate-income homebuyers, and the homebuyers who were overcharged for their properties do not receive any financial restitution. In December 2001, HUD issued instructions requiring nonprofits to sign an addendum to every sales contract that limited the resale price of discounted homes to 110 percent of the net development cost. The instructions also mandated that nonprofits use the excess profits they earn by exceeding the 110 percent limit to pay down the mortgages of the homebuyers they overcharged. The four HOCs have attempted to implement this requirement by requesting mortgage “pay downs” from nonprofits that are making excess profits. However, Philadelphia HOC officials and attorneys from HUD’s Office of General Counsel also told us that the agency’s authority to enforce the requirement was not specified in regulation and was therefore in question. Furthermore, the attorneys said that as a practical matter the requirement would be difficult to enforce, as HUD would have to refer nonprofits that refused to comply to the Department of Justice for legal action. The officials said they doubted whether Justice would accept these cases because the amounts of money involved are generally relatively small—often less than $10,000—and it would be cost-prohibitive for Justice’s attorneys to pursue them. HUD officials added that obtaining enough documentation to build a convincing legal case was difficult, because many nonprofits do not keep proper financial records that adequately document the amount of excess profits earned. As a result of these problems, the HOCs had limited success getting nonprofits to use excess profits to pay down homebuyers’ mortgages. According to HOC officials, the nonprofits that have paid down mortgages did so voluntarily because they wanted to stay in the program. As of July 2003, the HOCs’ desk reviews had identified 28 nonprofits that made an estimated total of $704,720 in excess profits. At that time, seven of the nonprofits had made combined mortgage pay downs of $62,002, or only about 9 percent of the total estimated excess profits. (See table 6.) HOC officials told us that although some of the remaining 21 nonprofits had withdrawn or were removed from the Discount Sales Program, others were still being evaluated by HOC staff and were continuing to purchase discounted properties. Moreover, these nonprofits retained all of the excess profits they had made. For example, one nonprofit still under review as of October 2003 made an estimated $28,700 in excess profits on five discounted properties that it resold in 2002. The nonprofit did not pay down any mortgages, purchased 27 additional properties in 2003, and is still in the program. HUD’s inability to enforce its requirements on excess profits in a vigorous and timely manner not only deprives homebuyers that have been overcharged but also puts the financial interests of other prospective homebuyers at risk. HUD’s Discount Sales Program is intended, among other things, to help make homes affordable for low- and moderate-income homebuyers. However, deficiencies in the program’s design and implementation have undermined its ability to serve this end. Our analysis suggests that the program is of questionable benefit to most homebuyers. In addition, the HOCs’ monitoring and enforcement efforts do not adequately ensure that nonprofits are complying with requirements designed to protect homebuyers’ financial interests. And despite the program’s significant cost, HUD has not determined whether the program is meeting its objectives of expanding affordable housing opportunities, helping to revitalize neighborhoods, and reducing HUD’s property inventory in a timely, efficient, and cost-effective manner. Measures to address the cost, benefit, and compliance issues raised in this report are likely to be expensive or have adverse effects. For example, to reduce the cost of the program, HUD could reduce the size of its discounts, dedicate fewer staff resources to the program, or both. However, these actions would likely reduce the program’s financial benefit to homebuyers and weaken HUD’s ability to oversee participating nonprofits. Conversely, to increase financial benefits to homebuyers, HUD could increase the size of its discounts, but doing so would effectively raise the cost of the program. Taken together, the program’s problems and the lack of clear solutions raise serious questions about whether HUD should continue to operate it. We recognize that contemplating the termination of the program involves trade-offs. In the absence of the program, it is possible that some individuals and families would have difficulty purchasing suitable homes and that neighborhood conditions would suffer if HUD-owned properties were not rehabilitated or sold as quickly. However, unless significant changes are made to the program, it will likely continue to experience the problems raised in this report and by HUD’s Inspector General. GAO recommends that the Secretary of HUD take the following two actions: Evaluate options to improve the program’s benefit to homebuyers, the agency’s monitoring of nonprofits, and enforcement of excess profits requirements. Assess the extent to which the program is meeting its objectives. If the Secretary determines that the current cost of the program plus the resources needed to improve it exceed the program’s benefits, GAO recommends that the program be terminated. We provided HUD with a draft of this report for review and comment. In a letter from the Assistant Secretary for Housing (see app. I), HUD agreed with our recommendations to further assess the program and said it would proceed accordingly. Also, HUD disagreed with some aspects of our methodology and said that our analysis overstated the program’s costs and understated its benefits. Lastly, HUD said that the report should acknowledge the significance of the multiple public policy objectives the program serves. However, HUD did not respond to our third recommendation concerning the possible termination of the program if, after further evaluation, HUD determines that the program’s current costs plus the resources needed to improve it exceed its benefits. More specifically, HUD stated that any conclusions about program costs should be based on actual program performance rather than on “hypothetical extrapolations.” We designed our analysis to estimate the effect of the Discount Sales Program while holding constant the effect of other factors, such as neighborhood and property characteristics, that might also influence the ratio of the net revenue HUD receives from selling a property to the property’s appraised value. To implement this approach, we developed a statistical model using data from actual HUD property sales and compared (1) the net revenue our model estimated HUD would have received for each discounted property had the property been sold through the regular process with (2) the net revenue our model estimated HUD would have received by selling the property through the Discount Sales Program. Each estimated value contained an error term that captured the effects of omitted variables unavailable for the modeling process. As appendix II of our draft report explained, comparing two estimated values removed the influence of the omitted variables from our comparison, leaving the effect of the program on HUD’s net revenue. HUD said that its own preliminary comparison of net revenues from program and nonprogram property sales had shown that the loss in net revenue from the program was substantially less than our estimate indicated, and that our report significantly overstated the program’s cost. Because HUD did not provide us details of its analysis, we cannot determine why HUD’s results differed from ours. We continue to believe that isolating the effect of the program from other influences, rather than making comparisons that do not control for these factors, is the most appropriate way to estimate the impact of the Discount Sales Program on HUD’s net revenue. HUD also said that our conclusion that most homebuyers did not benefit financially from the program rested on the assumption that individual homebuyers would have access to rehab financing on terms as favorable as nonprofits and would have the skills to oversee the construction. HUD disagreed with this assumption and said it believes that nonprofits have both the ability to obtain financing that is unavailable to average homebuyers and the capacity to oversee the rehab work at a cost that “may be less than that” charged by profit-motivated firms. As a result, HUD said that our report significantly understated the program’s benefit to homebuyers. Our draft report recognized the possibility that individual homebuyers might not be able to rehab a home as cheaply as a nonprofit. For this reason, we estimated the program’s financial benefits under two scenarios. The first assumed equal rehab costs for nonprofits and homebuyers; the second assumed that homebuyers would pay 25 percent more than a nonprofit for the same rehab work. Under both scenarios, our estimates indicated that most homebuyers did not benefit financially from the program. Our draft report also recognized that obtaining financing for rehab work and overseeing this work are obstacles for some homebuyers, and that these and other factors that are difficult to quantify may make the program either more or less beneficial from a homebuyer’s perspective. However, it is important to note that homebuyers financing properties purchased through the Discount Sales Program in effect pay financing costs for the rehab work because the cost of this work is included in the nonprofit’s selling price (i.e., the homebuyer’s purchase price) and therefore is reflected in the homebuyer’s mortgage costs. Furthermore, because more than half of the properties we reviewed received less than $15,000 in rehab work—including some that received none at all—it is unlikely that the oversight costs for these projects would be very substantial. Finally, HUD said that the Discount Sales Program serves several public policy purposes and was neither conceived as nor intended to be only a source of revenue for FHA. HUD stated that the program contributes in a “direct and positive manner” to the promotion of homeownership and the revitalization of neighborhoods and that our report should acknowledge the significance of these objectives. Our draft report did not indicate that the program was intended to be solely a source of revenue. In addition, our draft report recognized that the goals of the program include the expansion of affordable housing opportunities and neighborhood revitalization and included statements from HUD and nonprofit officials about how the program may help to improve neighborhood conditions. Furthermore, HUD’s comments do not recognize the potential of the agency’s regular sales process to help achieve the same goals. Nevertheless, we added language to the final report to reflect HUD’s views about the program’s potential benefits. As our report notes, HUD has not provided any analysis to support its assertion that the program is contributing to the stated policy objectives. Accordingly, we believe that HUD needs to undertake such an analysis before making decisions about the program’s future. We are sending copies of this report to the appropriate congressional committees, and it will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about this report, please call me at (202) 512-8678. Key contributors to this report are listed in appendix IV. Our objectives were to assess (1) the cost of the Discount Sales Program to HUD, (2) the benefits of the program to homebuyers, and (3) HUD’s efforts to monitor participating nonprofits and enforce program requirements. Our work focused on the approximately 1,200 properties HUD sold through the program in calendar year 2002 and the monitoring and enforcement activities the four HOCs performed in connection with those properties. To determine the cost of the Discount Sales Program to HUD, we examined the program’s impact on HUD’s net revenue from property sales and the cost of administering the program. To determine the effect of the program on HUD’s net revenue, we performed a statistical analysis of data from HUD’s Single-Family Acquired Asset Management (SAMS) and the U.S. Census Bureau. This analysis allowed us to estimate how much less net revenue HUD received by selling properties through the program instead of its regular sales process, while controlling for other factors. Appendix II provides detailed information on our statistical model. Because HUD does not keep records that would identify the costs to administer the program, we asked HUD to estimate them. HUD developed its estimate by querying HOC and Office of Housing officials about the number of staff years they allotted to the program in calendar year 2002. HUD used this information and salary and benefit data to derive an approximate personnel cost for the program. HUD’s estimate of administrative costs did not include comparatively minor expenses, such as travel and mailing costs. We did not assess the reliability of HUD’s estimate. To determine the benefits of the program to homebuyers, we examined the program’s potential financial benefits and the types of homeownership services and assistance provided by participating nonprofit organizations. To determine the extent to which homebuyers benefited financially from the program, we performed a statistical analysis using data from HUD’s SAMS, the Bureau of the Census, and the four HOCs. Our analysis was limited to 238 discounted properties that HUD sold between February 1 and December 31, 2002, that nonprofits resold to homebuyers that same year. These were the only properties for which the HOCs had the rehab and resale data necessary for our analysis. This analysis allowed us to compare what homebuyers actually paid for the discounted homes to our estimate of what they would have spent had they purchased the homes under HUD’s regular sales process and paid for the rehab work themselves. Our analysis assumed that in the absence of the Discount Sales Program, a homebuyer would be able to purchase the same home and rehabilitate it to the same extent as the nonprofit. We also assumed that a homebuyer would inhabit the home during the rehabilitation and, therefore, would not incur housing expenses for two residences during that period. We performed the analysis twice using different assumptions about rehab costs each time. The first time we assumed that a homebuyer would incur the same rehab costs as a nonprofit; the second time we assumed that homebuyers would incur 25 percent higher rehab costs than a nonprofit. Appendix II provides detailed information on our statistical model. In assessing the program’s financial benefits, we also reviewed HUD’s rules and instructions for both the Discount Sales Program and the agency’s regular sales process and interviewed officials from HUD’s Office of Housing. To determine the types of services and assistance provided by participating nonprofits, we visited 6 nonprofits that were actively involved in the program and interviewed officials from these organizations. During our visits to the four HOCs, we reviewed the affordable housing plans for a judgmental sample of 17 nonprofits and interviewed the nonprofit coordinator at each HOC. We did not evaluate the impact of the Discount Sales Program on neighborhood conditions. However, we discussed this issue with HUD and nonprofit officials and visited six properties that nonprofits had either rehabbed or were in the process of rehabbing. To assess HUD’s efforts to monitor participating nonprofits, we reviewed HUD’s program guidance and instructions, SAMS data on the number of discounted properties each nonprofit purchased in calendar year 2002, nonprofits’ annual reports on these properties, and the results of the HOCs’ desk and on-site reviews. We analyzed SAMS data, nonprofits’ annual reports, and desk reviews to determine the extent to which (1) nonprofits submitted required monitoring information through their annual reports and (2) the HOCs’ monitoring efforts identified noncompliance with requirements governing the resale price of discounted properties and the income level of the homebuyers. From the desk review information, which was current as of July 2003, we also determined the estimated excess profits earned by the nonprofit organizations that submitted annual reports. For each HOC, we used SAMS data and on-site review logs to determine how many of the nonprofits that purchased discounted properties were subject to an on-site visit. We also examined the results of these reviews and discussed them with cognizant HOC officials to determine how they were conducted and the types of problems they uncovered. Finally, we interviewed HUD Office of Housing and HOC officials about factors that hampered their ability to monitor nonprofits. To assess HUD’s efforts to enforce program requirements, we reviewed the agency’s regulations and guidance to determine the major enforcement actions available to the HOCs. We interviewed officials from HUD’s Office of Housing, Office of General Counsel, and the four HOCs about their ability to take these actions. At each HOC, we collected information on how frequently and in what situations they used these enforcement tools. We also collected information on the amount of excess profits nonprofit organizations used to pay down homebuyers’ mortgages as of July 2003. Finally, we obtained data from each HOC showing the calendar year 2003 discounted home purchases of nonprofits that sold properties for more than program limits the previous year. We tested the data we obtained from HUD’s SAMS and the HOCs’ desk reviews for reasonableness and completeness and found them to be reliable for the purpose of our analyses. In addition, we reviewed existing information about data quality and controls supporting SAMS and discussed the data we analyzed with agency officials to ensure that we interpreted them correctly. We conducted this review from December 2002 through November 2003. We performed our work in accordance with generally accepted government auditing standards. Two objectives of the study were to determine (1) the cost of the Discount Sales Program to HUD and (2) the benefits of the program to homebuyers. For the cost objective, the scope of the study included properties that HUD sold to nonprofit organizations in calendar year 2002. For the benefits objective, the scope included the properties that HUD sold to nonprofits between February 1 and December 31, 2002, that nonprofits rehabilitated and resold to homebuyers during the same year. The empirical analysis used to address these objectives was based upon two procedures. The first procedure was the estimation of a model for which the dependent variable is the fraction of the appraised value that HUD recovers for each property after taking the agency’s selling costs into account. Controlling for a number of factors discussed below, the difference between the estimated net revenue HUD would have received by selling the properties at a discount versus an estimate of what HUD have would received if the property had been sold under HUD’s regular sales process represented the cost of the Discount Sales Program to HUD. The second procedure was an estimate of the financial benefits a homeowner received from purchasing a rehabilitated Discounted Sales Program property from a nonprofit organization rather than purchasing the property through HUD’s regular sales process and paying for the rehab work personally. This appendix is organized in the following manner. First, there is a brief discussion of the data. Second, there is an explanation of the specification of the two econometric models that differ only in their dependent variables, as mentioned above. Next, there is a discussion of the estimation results of the two models. Finally, these results are used to calculate estimates of the costs and benefits of the Discount Sales Program. For our analysis, we obtained from HUD’s Single-Family Acquired Asset Management System (SAMS) computerized files for the 65,039 properties sold by the agency during calendar year 2002. Each record provided financial information, such as selling price, appraised value, and various transactions costs. Each record also contained information on the structural characteristics of the property, such as the number of bedrooms and bathrooms. To describe the impact of neighborhood characteristics, we obtained data at the census tract level on the percent of the population living within an urbanized area, median household income in 1999, and median real estate taxes. The source of these data was the Census 2000 Summary File 3 prepared by the U.S. Census Bureau. A review of the data identified a number of outliers and missing values. These observations were replaced using the means from the overall data set minus these observations. In addition, 3,776 observations were lost during the merger of the Census data because of the inability to identify the census tract in which they were located. As a result, these observations were not included in our analysis. In order to make the properties more comparable, we also restricted the set of properties to only those properties in census tracts in which at least one discount sale was made. Finally, we excluded some observations with extreme values for the dependent variable in our first model, which resulted in 5,189 observations being used in the regression analysis. Specification of the Models We developed two econometric models possessing the same set of explanatory variables. We used the first model to estimate the cost of the Discount Sales Program to HUD. In this model, the dependent variable is HUD’s net revenue from the sale of a property divided by the property’s appraised value. Net revenue equals HUD’s selling price minus property taxes paid by HUD, management and marketing contractor costs, financing and closing costs (including discounts) paid by HUD, the listing broker fee, and the cost of any HUD sales incentives. We used the second model to estimate the benefits of the program to homebuyers. In this model, the dependent variable is simply HUD’s selling price for a property divided by its appraised value. The explanatory variables used in both models are of four types: dummy variables identifying the homeownership center (HOC) that administered the sale; dummy variables describing a combination of HOC and discount level, for those properties sold through the Discount Sales Program; characteristics of the property; and characteristics of the neighborhood. We chose the final specification of the models to obtain a good fit while avoiding problems with multicollinearity. We chose the property and neighborhood characteristics based on a review of the specifications employed in hedonic housing models. Such models treat the housing market as an integrated series of submarkets for various housing characteristics such as house size and neighborhood quality. A set of housing and neighborhood characteristics can serve to describe a product like housing because individual housing units can be differentiated from one another in many ways. Selling price is the amount paid to HUD by either the nonprofit or the private individual purchasing the property. Property taxes are the annual property tax multiplied by the number of days the property was owned by HUD divided by 365. Management and marketing contractor costs encompass all fees and reimbursable costs HUD pays to these contractors. Financing and closing costs paid by HUD include any discount granted to a nonprofit organization. The selling fee is the commission that HUD paid to the selling broker. This fee is generally zero for properties sold to nonprofits. All HUD properties are placed with a listing broker, so this generates a listing broker fee. Incentives are cash back allowances that HUD periodically pays to homebuyers who close on an executed sales contract relatively quickly—for example, within 30 to 60 days. Appraised value is the amount at which the property was appraised before the sale. The explanatory variables belong to one of four groups of variables: those identifying the HOC that administered the sale; those describing a combination of HOC and discount level, for those properties sold through the Discount Sales Program; those describing characteristics of the house; and those describing characteristics of the neighborhood. This specification allows the net revenue as a fraction of the appraised value for properties sold through the regular program to vary by HOC, and it allows the effect of the Discount Sales Program on HUD’s net revenue to vary by HOC and by discount level. We defined a set of HOC dummy variables that take on a value of 1 for all sales (discounted and not discounted) administered by that HOC, with Atlanta as the omitted category, and 0 otherwise. We then defined a set of dummy variables that represented combinations of HOC and discount program level. For example, there is a dummy variable that takes on a value of 1 for all sales with a 10 percent discount made by the Atlanta HOC and 0 otherwise, etc. In this way, the coefficient on that variable represents the difference in the fraction of the appraised value obtained on property sales with a 10 percent discount and made by the Atlanta HOC, compared with the fraction obtained by the Atlanta HOC on sales made through the regular program. Similarly, the coefficient on the dummy variable that takes on a value of 1 for all sales with a discount level of 30 percent made by the Santa Ana HOC represents the difference in the fraction of the appraised value obtained on property sales made at a 30 percent discount and made by the Santa Ana HOC, compared with the fraction obtained by the Santa Ana HOC on sales made through the regular program. There are three variables that provide characteristics for each property. These variables measure the property’s number of bedrooms, bathrooms, and stories. Although the likely association between those variables and HUD’s net revenue from a property sale relative to the property’s appraised value is not clear-cut, we anticipated that there may be a positive association for the number of bedrooms and bathrooms. HUD’s costs associated with property management and sale include a fixed cost component not related to property value as well as a component that varies with selling price. Accordingly, if properties with more bedrooms and bathrooms tend to be valued more, increasing both their selling prices and appraised values, then HUD’s net revenue relative to the appraised value will be higher for higher-valued properties because HUD’s fixed costs will be lower relative to the appraised value. Because the relationship between number of stories and market value is less clear, we had no clear expectation for the sign of the coefficient for that variable. Because any effect of these variables on market value is likely to similarly affect both selling price and appraised value, for the equation with selling price divided by appraised value as the dependent variable we had no clear expectation of the signs of the coefficients of these variables. However, we included them to keep our equations consistent and because these variables may exhibit statistically significant effects if HUD is able to obtain more accurate appraisals for certain types of properties. Finally, there are four variables for neighborhood characteristics: the percent of the population in the census tract living within an urbanized area, median household income in 1999, median real estate taxes, and whether the property is located in a revitalization area. As for the property characteristics, we anticipated that to the extent that these neighborhood characteristics are associated with higher (lower) property values, they would be positively (negatively) associated with HUD’s net revenue from a property sale relative to that property’s appraised value because for higher- (lower-) valued properties HUD’s fixed costs will be lower (higher) relative to appraised values. Accordingly, we anticipated positive coefficients in the equation for which the dependent variable is HUD’s net revenue relative to appraised value for the percentage of the population living within an urbanized area, median income, and median real estate because all of these variables are likely to be positively associated with property value. In contrast, we anticipated a negative coefficient for location in a revitalization area because that variable may indicate lower property values that would raise the ratio of HUD’s fixed costs to a property’s appraised value and because HUD may also incur additional costs to maintain properties in those areas. Again, similar to the property characteristics, we had no clear expectations for the signs of the neighborhood characteristics in the equation in which the dependent variable is HUD’s selling price relative to the appraised value because any effect of these variables on property value is likely to similarly affect selling price and appraised value. But, for the reasons cited above, we included them in the equation. Table 7 presents the variable names and descriptions, along with mean values of the explanatory variables. In a previous version of the model that we estimated using a data set representing all usable observations of HUD property sales, rather than the data set containing only sales made in census tracts in which discount sales were made, we included as variables the year in which the structure was built and the average age of homes in the census tract. These variables were significant at that time, but they became insignificant in the final model when we limited our data set, so we dropped them from the analysis. Although the rate of change in house prices is another variable that may have some predictive value, we did not include it in our models because information on the rate of house price change was not available at the census tract level. Also, according to HUD officials, the average time between the appraisal and the sale of a property is about 3 months, so in most cases we did not anticipate that there would be much price appreciation or depreciation resulting from market conditions. We estimated the two models using ordinary least squares due to its ease of calculation and interpretation. Table 8 presents the estimated coefficients, their standard errors, and the summary statistics. In general, both models were consistent with our expectations. In the model for net revenue relative to appraised value, the coefficients on the Discount Sales Program category showed the expected pattern. That is, for each HOC, coefficients became more negative at higher discount levels. In both models the coefficients for the characteristics for the property possessed the same sign. In general, a higher fraction of the appraised value was obtained from larger homes, as measured by more bedrooms and bathrooms, as well as homes with fewer floors. The fraction of the appraised value obtained by HUD tended to be higher for properties located in more urban areas and where median real estate taxes were higher. In the model for selling price relative to appraised value, the coefficient for median household income was negative and statistically significant at less than the 0.01 percent level. However, in the model for net revenue relative to appraised value, the coefficient on this variable was statistically insignificant. We used the estimated coefficients for the Discount Sales Program variables from the model for net revenue relative to appraised value to estimate the cost of the program to HUD. We made this estimate by comparing the (1) net revenue that our model predicted HUD would have received for each discounted property had it been sold through the regular sales process with (2) net revenue our model predicted HUD would have received by selling it through the Discount Sales Program. Even though we knew the actual amount HUD received by selling the property through the Discount Sales Program, we compared two estimated values in order to be consistent. Each estimated value contained an error term that captured the effects of omitted variables unavailable for the modeling process. By comparing two estimated values, we removed the influence of the omitted variables from our comparison, leaving the effect of the Discounted Sales Program. This analysis was conducted using 1,194 discounted properties that were sold during calendar year 2002. The values of the Discount Sales Program dummy variables reflect the estimate of the difference in the fraction of appraised value obtained by HUD for each combination of discount level and HOC. That is, for a given property’s program characteristics—discount level and HOC—these estimates represent the difference in value HUD obtains compared to the case in which that property had been sold through the regular program. Because we included HOC dummies to capture otherwise unmeasured factors that might vary by region, the program characteristic dummy variables describe incremental revenue differences associated with each discount level as compared to the level of nondiscount sales in each HOC. For example, if a property was sold by the Philadelphia HOC at a 15 percent discount, the estimated difference in the net revenue value would be about –13 percent of appraised value. The relevant coefficient in table 8 is –0.1267. Similarly, if a property was sold by the Santa Ana HOC at a 15 percent discount, the estimated difference in the net revenue value would be about 20 percent of appraised value. The relevant coefficient in table 8 is –0.1959. We also estimated a range of costs using confidence intervals around the estimates for the sales category dummy variables. We did this by multiplying each coefficient estimate by 1.645 times its associated standard error. We then added and subtracted this amount from the coefficient estimate to create a 90 percent confidence interval around each estimate. We then recalculated program costs assuming that the estimates associated with the lower and upper bounds of the confidence interval reflected the difference between the value HUD obtains through the Discount Sales Program as compared to the value obtained through the regular sales process. In the model for selling price relative to appraised value, the benefit to the homebuyer of purchasing a property from a nonprofit organization was taken to be the estimated price a homeowner would have paid to buy the house through HUD’s regular sales process, minus the estimated financing and closing costs that HUD would have paid in that situation, plus the rehabilitation costs, minus the actual sales price paid to the nonprofit. This analysis was conducted using 238 observations for discounted properties purchased by nonprofits between February 1 and December 31, 2002, and resold to homebuyers that same year. These were the only properties for which data on the nonprofits’ rehabilitation costs and the selling price to the final homeowners were available. We performed the analysis twice using different scenarios. In the first scenario, we assumed that the rehabilitation costs incurred by a homebuyer operating outside of the Discount Sales Program would be the same as the rehabilitation costs actually incurred by the nonprofit. In the second scenario, we assumed that a homebuyer’s rehabilitation costs would be 25 percent higher than those incurred by the nonprofit. Under both scenarios, we assumed that the financing and closing costs HUD would pay for under its regular sales process were equal to 3 percent of the estimated selling price. Because these properties were originally bought from HUD by a nonprofit organization, we needed to estimate the prices homebuyers would have paid to purchase the properties directly from HUD through the regular sales process to calculate the difference in price paid by homeowners purchasing a property after it had been rehabilitated under the Discount Sales Program. In a manner parallel to our estimate of net revenue described earlier, we used the values of the estimated Discount Sales Program dummy variables from our second model to make this calculation. In addition to those named above, Kimberly Berry, Gwenetta Blackwell, Stephen Brown, Emily Chalmers, Rudy Chatlos, Jay Cherlow, David Dornisch, John McGrail, John Mingus, Mark Molino, David Pittman, Steve Ruszczyk, Stewart Seman, and Mark Stover made key contributions to this report. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. 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To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | In 2001, the Department of Housing and Urban Development's (HUD) Inspector General reported on serious problems in HUD's Discount Sales Program, under which nonprofit organizations purchase HUD-owned properties at a discount, rehabilitate them, and resell them to low- and moderate-income homebuyers. The objectives of the program are to expand affordable housing opportunities, help revitalize neighborhoods, and reduce HUD's property inventory in a timely, efficient, and cost-effective manner. Although the Inspector General recommended that the agency suspend the program and evaluate its viability, HUD did neither. GAO was asked to assess (1) the costs of the program to HUD, (2) the benefits of the program to homebuyers, and (3) HUD's efforts to monitor participating nonprofits and enforce program requirements. GAO found that the Discount Sales Program poses significant costs to HUD, is of questionable benefit to homebuyers, and has serious monitoring and compliance problems. GAO estimates that the program cost HUD between $18.8 and $23.9 million in calendar year 2002. Between $15.1 and $20.2 million was a reduction in net revenue resulting from HUD's selling approximately 1,200 properties through the program instead of through its regular sales process. Personnel expenses for administering the program accounted for the remaining $3.7 million. GAO's analysis of 238 properties sold under the program in 2002 suggests that most of the homebuyers did not benefit financially. Assuming that nonprofits and homebuyers would incur the same rehabilitation costs, GAO estimates that 76 percent of the homebuyers would have spent less purchasing the properties through HUD's regular process and paying for the rehabilitation work themselves. And while the program can help homebuyers access a range of homeownership services, these services are also available from other sources. GAO did not evaluate the extent to which the program generated other benefits, such as neighborhood revitalization. While uncovering numerous program violations, HUD's monitoring efforts have faced challenges. For example, HUD monitors nonprofits through desk reviews of the annual reports it requires nonprofits to submit each February. However, as of July 2003, HUD's four homeownership centers, which administer the program, had not received reports for more than half of the properties the agency estimates were purchased and resold under the program in 2002. Even with this problem, the desk reviews found that 28 of the 44 nonprofits that submitted reports violated resale limits, earning an estimated total of $704,720 in excess profits. HUD requires that nonprofits use their excess profits to pay down the mortgages of the homebuyers they overcharged, but the agency's ability to enforce this requirement is extremely limited. As of July 2003, nonprofits had made only $62,000 in payments on mortgages. |
The American Diabetes Association’s (ADA) clinical care recommendations, which reflect the published research evidence and expert opinion, are widely accepted as guidance on what constitutes quality diabetes care. We selected for review six of ADA’s recommended monitoring services that can be measured using Medicare claims data (see table 1). The service frequencies recommended in table 1 generally apply to the average person with noninsulin-dependent diabetes, the type that accounts for more than 90 percent of diabetics in Medicare. Of course, some individuals may need more or fewer services depending on their age, medical condition, whether they use insulin, or how well their blood sugar is controlled. Eye exam (dilated) Flu shot (in season) As figure 1 shows, our cohort of about 168,000 Medicare beneficiaries with diabetes in fee-for-service delivery fell far short of the recommended frequencies of most monitoring services in 1994. Although 94 percent of the beneficiaries received at least two physician visits, less than half (42 percent) received an eye exam, only 21 percent received the recommended two glycohemoglobin tests, and 53 percent had a urinalysis. The fact that 70 percent received a serum cholesterol test may reflect both the successful public education campaign in the late 1980s and the frequent inclusion of cholesterol in automated blood tests. We believe the flu shot (44 percent) is underreported in Medicare claims data, because many people receive flu shots in nonmedical settings. Utilization rates are even lower when the monitoring services are considered as a unit. (See fig. 2.) About 12 percent of our diabetes cohort did not receive any of four key monitoring services: at least one each of the eye exam, glycohemoglobin test, urinalysis, and serum cholesterol test. About 11 percent showed Medicare claims for all four of these services. We analyzed utilization rates by patient characteristics and found that rates were generally similar for men and women and for all age groups over age 65. However, only 28 percent of beneficiaries under age 65 (who were eligible for Medicare because of disability) received an eye exam, compared with 43 percent of those aged 65 to 74 and 44 percent of those 75 and older. We also found that white beneficiaries with diabetes received the six monitoring services at consistently higher rates than beneficiaries who were black or of another racial group, but the differences were not great. We were unable to conduct a similar analysis of the six monitoring services’ use rates among beneficiaries with diabetes who were enrolled in Medicare HMOs because HCFA does not require its HMO contractors to report patient-specific utilization data. According to the limited data we obtained from published research and other sources, however, it appears that use rates are also below recommended levels in Medicare HMOs. Although it is unclear what specifically accounts for the less-than-recommended use of monitoring services found in our study, a number of factors—including patient and physician attitudes and practices—may contribute to the situation. Some experts expressed concern that both patients and physicians need to take diabetes more seriously and make the effort to manage it more aggressively. Patients with a chronic condition such as diabetes bear much of the responsibility for successful disease management; but for many patients, self-management does not become a priority until serious complications develop. Then, difficult lifestyle changes may be required, such as weight loss, smoking cessation, and increased exercise. Patients may lack the knowledge, motivation, and adequate support systems to make these changes in addition to undertaking the active self-monitoring and preventive service regimens that are necessary to control diabetes. The substantial out-of-pocket costs of active self-management also may discourage Medicare beneficiaries with diabetes. Diabetes-related supplies that are used at home, such as insulin, syringes, and blood glucose-testing strips, are not fully covered by Medicare. For example, insulin costs about $40 to $70 for a 90-day supply, syringes cost $10 to $15 per 100, and glucose-testing strips cost 50 to 72 cents each (or about $1,000 a year for a diabetic who tests four times a day). Another factor in the underutilization of recommended preventive and monitoring services may be physicians and other health care providers who are not familiar with the latest diabetes guidelines and research supporting the efficacy of treatment. Moreover, many Medicare beneficiaries with diabetes have several serious medical conditions, and in the limited time of a patient visit, a physician is likely to focus on the patient’s most urgent concerns, perhaps neglecting ongoing diabetes management and patient education. Finally, managed care plans and physician practices alike tend to lack service-tracking systems capable of reminding physicians and patients when routine preventive and monitoring services are needed. range of diabetes management efforts, and a few were developing comprehensive programs; but most plans’ efforts were limited primarily to educational approaches. Most efforts were initiated recently, and little is known yet about their effectiveness. Every HMO in our survey reported using at least one approach to educate enrollees with diabetes about appropriate diabetes management. The most common approach—used by 82 of the 88 plans—was featuring articles about diabetes in publications for all enrollees. In addition, some plans provided comprehensive manuals to their diabetic enrollees. Sixty-eight HMOs reported having diabetes-related health professionals, such as nurses, certified diabetes educators, and nutritionists available to educate enrollees. A number of plans offered classes for several levels of diabetes education ranging from basic to advanced. Ten plans contracted with disease management companies to provide diabetes education services, and a few reported telephone advice services. Most of the HMOs reported they also had undertaken educational efforts directed to their physicians, stressing the importance of preventive care through such means as written materials and meetings. Nearly three-fourths of the HMOs reported using clinical practice guidelines for diabetes care. In one HMO, endocrinologists meet regularly with small groups of primary care physicians to provide training on important diabetes topics, such as diabetic eye disease and foot care. This plan also has developed a physician training video on diabetic foot care. Although information and education may produce short-term behavioral changes, they may not be enough to sustain the long-term behavioral and lifestyle changes necessary to achieve good diabetes control. Recognizing this, many of the HMOs in our survey reported using additional approaches to continuously encourage appropriate diabetes management. For example, about half of the HMOs reported one or more types of reminders for enrollees and physicians, such as wallet-sized scorecards for enrollees to chart receipt of recommended services and posters in examining rooms reminding patients to take off their shoes and socks to prompt physicians to check their feet. As another example, 52 of the 62 plans that used clinical practice guidelines for diabetes reported having a system to monitor physicians’ compliance with the guidelines and, in some cases, to provide feedback to the physicians. In our follow-up interviews with 12 HMOs that reported using a variety of diabetes services, 5 told us they have committed substantial resources to develop systemwide, comprehensive diabetes management programs. For example, one HMO has based its approach to diabetes management around the long-term goals of improving patient health status and satisfaction as well as on plan performance on cost and utilization. Through a variety of interventions, such as diabetes care clinics, patient self-management notebooks, and diabetes education by telephone, this HMO tries to improve patient outcome measures ranging from improved blood glucose control and prevention of microvascular disease to the patient’s assessment of improved quality of life and sense of well-being. Interventions designed to help physicians provide better diabetes care include an online diabetes registry updated monthly, use of evidence-based clinical practice guidelines, outcomes reports for physicians, and training by diabetes expert teams. Even the HMOs reporting the most comprehensive programs, however, generally had little information about the extent to which their diabetes management approaches had affected the use of recommended preventive and monitoring services. At best, they tended to collect utilization data on five or fewer services, and they began collecting these data only in 1993 or 1994. The service monitored most frequently, by 58 of the plans, was the diabetic eye exam. This was probably due to the eye exam’s inclusion in HEDIS (the Health Plan Employer Data and Information Set), the performance-reporting system for commercial HMOs. Although little information exists on the relative effectiveness of specific diabetes management approaches, experts generally believe that intensive and sustained interventions, such as in-person counseling and education rather than telephone calls or mailings, are most likely to support long-term behavior change. Because intensive interventions probably are more expensive than other approaches, it is important to measure their effectiveness before committing resources to them. diabetes as well as patient and provider education about diabetes and practice guidelines. HCFA works with local peer review organizations (PRO), each of which currently is required to implement at least one diabetes-related quality improvement project involving the providers in its state or states. A total of 33 diabetes-related projects were under way in late 1996. Finally, HCFA is sponsoring a multistate evaluation of diabetes intervention strategies, the Ambulatory Care Diabetes Project, which involves fee-for-service and HMO providers and PROs in eight states. The project has completed its baseline data collection and intervention stages, and began remeasurement for outcomes analysis in January 1997. HCFA also wants to encourage development of better data collection systems for improved service utilization tracking. The agency anticipates requiring its Medicare HMO contractors to report the new HEDIS 3.0 performance measures, which include the diabetic eye exam and flu shot rates, and may add a measure of the glycohemoglobin test in the future. Moreover, HCFA is supporting research on other process- and outcomes-based performance measurement systems and is considering testing the feasibility of performance measurements in fee-for-service Medicare. Like the diabetes management approaches we learned about in our survey of Medicare HMOs, HCFA’s initiatives either have been undertaken recently or are still in the planning stages, and it is too soon to tell which of these projects will prove most effective. At the same time, some diabetes specialists have suggested that HCFA should be doing more, such as studying the effects of easing current coverage limitations on diabetes self-management training and supplies like blood-testing strips. Diabetes care is a microcosm of the challenges facing the nation’s health care system in managing chronic illnesses among the elderly. The prevalence and high cost of diabetes make it an opportune target for better management efforts. When beneficiaries receive less than the recommended levels of preventive and monitoring services, the result may be increased medical complications and Medicare costs. Conversely, following the recommendations may enhance beneficiaries’ quality of life. physicians. Among HMOs, where coordinated care and prevention are expected to receive special emphasis, many plans are exploring ways to improve diabetes management; but providers may be reluctant to invest in expensive approaches until their cost-effectiveness is more evident. HCFA, also recognizing the importance of this issue, has initiated a promising strategy of testing a variety of approaches to learn what works best in Medicare—that is, what is effective and what can be implemented at reasonable cost. Mr. Chairman, this concludes my statement. I would be happy to answer any questions from you and other members of the Subcommittee. Thank you. This testimony was prepared under the direction of Bernice Steinhardt, Director, Health Services Quality and Public Health Issues, who may be reached at (202) 512-7119 if there are any questions. Other key contributors include Rosamond Katz, Assistant Director, and Ellen M. Smith, Jennifer Grover, Evan Stoll, and Stan Stenersen, Evaluators. 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A recorded menu will provide information on how to obtain these lists. | GAO discussed its recent report on preventive and monitoring services provided to Medicare beneficiaries with diabetes, focusing on: (1) the extent to which Medicare beneficiaries with diabetes receive recommended levels of preventive and monitoring services; (2) what Medicare health maintenance organizations (HMO) are doing to improve delivery of recommended diabetes services; and (3) the activities that the Health Care Financing Administration (HCFA) supports to address these service needs for Medicare beneficiaries with diabetes. GAO noted that: (1) while experts agree that regular use of preventive and monitoring services can help minimize the complications of diabetes, most Medicare beneficiaries with diabetes do not receive these services at recommended intervals; (2) this is true both in traditional fee-for-service Medicare, which serves about 90 percent of all beneficiaries, and in managed care delivery; (3) the efforts of Medicare HMOs to improve diabetes care have been varied but generally limited, with most plans reporting that they have focused on educating their enrollees with diabetes about self-management and their physicians about the need for preventive and monitoring services; (4) very few plans have developed comprehensive diabetes management programs; and (5) at the federal level, HCFA has targeted diabetes for special emphasis and has begun to test preventive care initiatives, but like the HMOs, HCFA's efforts are quite recent and the agency does not yet have results that would allow it to evaluate effectiveness. |
All Medicare beneficiaries entitled to benefits under Medicare Part A or enrolled in Part B are eligible to enroll in Medicare Part D. Medicare beneficiaries who qualify for full coverage under their state’s Medicaid program, as well as Medicare beneficiaries who qualify for more limited Medicaid coverage, Supplemental Security Income (SSI), or state Medicare Savings Programs are automatically enrolled in a prescription drug plan by CMS, automatically qualify for the full subsidy of their premium and deductible, and do not need to file an application. They are referred to as “deemed.” Other Medicare beneficiaries who do not automatically qualify for the subsidy (i.e., who are not deemed) must apply and meet the income and resource requirements. These beneficiaries generally qualify if they have incomes below 150 percent of the federal poverty level and have limited resources. Generally, in 2007, individuals qualify if they have an income of less than $15,315 and have resources of less than $11,710; couples qualify if they have a combined income of $20,535 and resources of $23,410. The amount of the subsidy for premiums, deductibles, copayments, and catastrophic coverage varies, depending on income and resources. Subsidy benefits are provided to these individuals on a sliding scale, depending on their income and resources. Individuals generally apply for the benefit directly through SSA, although they may also apply through their state Medicaid office. The agency that receives an application, whether SSA or a state Medicaid agency, is responsible for making initial subsidy determinations and deciding appeals and redeterminations. Those who apply through SSA may submit their subsidy application using SSA’s paper application or an Internet application form. Applicants may also have their information entered electronically by visiting an SSA field office or by calling SSA’s toll-free phone line. Under the MMA, beneficiaries may also apply for the subsidy through their state Medicaid office. However, according to state Medicaid officials we spoke with, they encouraged beneficiaries to apply for the subsidy through SSA whenever possible. As of March 2007, only the Colorado and Kansas state Medicaid agencies had made Part D subsidy determinations. Under the MMA, the Congress provided SSA with a $500 million appropriation from the Federal Hospital Insurance Trust Fund and the Federal Supplementary Medical Insurance Trust Fund to pay for the initiation of SSA’s Part D responsibilities, and the activities for other MMA responsibilities for fiscal years 2004 and 2005, but later extended the appropriation to fiscal year 2006. Since January 2006, SSA officials told us that the agency has had to draw on its overall administrative appropriation to support its Part D activities. SSA has approved 2.2 million applicants for the subsidy as of March 2007, despite some barriers, but measuring their success is difficult because no reliable data are available to identify the eligible population. SSA officials told us that their outreach goal was to inform all individuals potentially eligible for the subsidy and provide them an opportunity to apply for the benefit. Because the agency lacked access to reliable data that might help target their outreach efforts more narrowly, SSA used income records and other government data to identify a broad group of potentially eligible individuals. Outreach efforts were further limited by several barriers to soliciting applications. Since its initial outreach campaign, SSA has not developed a comprehensive plan to identify its continued outreach efforts apart from other activities. SSA conducted its initial outreach campaign from May 2005 to August 2006, but has decreased its efforts since then. SSA sent targeted mailings, which included an application for the subsidy and instructions on how to apply, to the 18.6 million individuals it had identified as potentially eligible. After the subsidy applications were mailed, a contractor then made phone calls to 9.1 million beneficiaries who had not responded to the initial mailing. SSA also conducted other follow up efforts, including sending notices to individuals whom the contractor was unable to contact and to specific subgroups that it identified as having a high likelihood of qualifying for the subsidy, such as the disabled; individuals 79 years of age and older living in high-poverty areas; and individuals in Spanish-speaking, Asian-American, and African-American households. The outreach efforts also included over 76,000 events conducted in collaboration with federal, state, and local partners, such as CMS, state Medicaid agencies, state health insurance programs, and advocacy groups for Medicare beneficiaries. Events were held at senior citizen centers, public housing authorities, churches, and other venues. As figure 1 shows, the number of outreach events has declined significantly, from a high of 12,150 in July 2005 to 230 at the completion of the campaign in August 2006. Although the initial campaign has ended, SSA is continuing to solicit applications. For example, SSA has conducted various activities to inform individuals in rural and homeless communities about the subsidy, and is planning to launch a new strategy this week for Mother’s Day to inform relatives and caregivers—the sons, daughters, grandchildren and family friends---about the subsidy. SSA has incorporated its strategy for continuing outreach efforts for the subsidy into its National Communications Plan. However, it has not developed a comprehensive plan that specifically identifies those efforts separate from other agency activities. As a result, SSA has a limited basis for assessing its progress and identifying areas that require improvement. SSA did not have access to data that might have helped to narrowly target the eligible population. Because of the lack of reliable data for identifying the entire population, SSA broadly targeted 18.6 million individuals who might be eligible for the subsidy. SSA identified the target population by using income data from various government sources to screen out Medicare beneficiaries whose income made them ineligible for the Part D subsidy. SSA realized that using these data sources would result in an overestimate of the number of individuals who might qualify for the subsidy, because the data provided limited information on individuals’ resources or nonwage income. SSA officials said they took this approach to ensure that all Medicare beneficiaries who were identified as potentially eligible for the subsidy were made aware of the benefit and had an opportunity to apply for it. SSA officials said that they would have preferred to specifically target Medicare beneficiaries who were likely to be eligible for the subsidy by using tax data from IRS on individuals’ wage, interest, and pension income. Current law permits SSA to obtain income and resource data from IRS to assist in verifying income and resource data provided on subsidy applications. The law, however, prohibits IRS from sharing such data with SSA to assist with outreach efforts. According to SSA officials, such data would allow SSA to identify individuals to target for more direct outreach and to estimate how many individuals qualify for the subsidy. In November 2006, the HHS Office of Inspector General reported that legislation is needed to provide SSA and CMS access to income tax data to help the agencies more effectively identify beneficiaries potentially eligible for the subsidy. SSA officials believe IRS income tax data could provide access to information on individuals’ income and resources. However, IRS officials told us that its data have many limitations. For example, IRS officials said that they have limited data on resources for individuals whose income is less than $20,000, because these individuals do not typically have interest income, private pensions, or dividend income from stocks that could assist SSA in estimating an individual’s potential resource level. Also, the officials said that many people with low incomes do not have incomes high enough to require them to file taxes, and therefore, IRS might not have information on them. IRS also explained that its tax data would most likely identify individuals that would not qualify for the subsidy, rather than individuals that would qualify. Moreover, the IRS officials said that the data it would provide to SSA to determine eligibility could be almost 2 years old. For example, for subsidy applications filed in early 2007, the last full year of tax data the IRS could provide would be for 2005. Given these factors, IRS officials stated that summarily sharing private taxpayer data to identify individuals who could qualify for the subsidy, and the potential cost of systems changes, would have to be weighed against the added value of the data. No effort has been undertaken to determine the extent to which IRS data could help SSA or improve estimates of the eligible population. Legislation is currently pending before the Congress to permit IRS to share taxpayer data with SSA to assist the agency in better identifying individuals who might be eligible for the subsidy. SSA’s efforts to solicit applications were hindered by beneficiaries’ confusion about applying for subsidy and the drug benefit. According to SSA field office staff and state Medicaid and advocacy group officials, many individuals were confused about the difference between the prescription drug benefit and the subsidy, and did not understand that they involved separate application processes. Consequently, some individuals thought that once they were approved for the subsidy, they were also automatically enrolled in a prescription drug plan. Additionally, some individuals were reluctant to apply because they did not want to share their personal financial information for fear that an inadvertent error on the application could subject them to prosecution under the application’s perjury clause. Though individuals have become more educated about the subsidy, concerns remain about eligibility requirements and the overall complexity of the application. SSA field office staff and advocacy group officials have concerns that the eligibility requirements set by the MMA may be a barrier. For example, they said that the subsidy’s resource test may render some low-income individuals ineligible because of retirement savings or the value of other resources. Legislation has been proposed to increase the resource limit. Advocacy group officials have also said that the application may be too complex for many elderly and disabled beneficiaries to understand and complete without the assistance of a third party. SSA headquarters officials told us they worked with various focus groups to develop the subsidy application and that they have revised the application several times to address such concerns, but that much of the information that applicants may view as complex is required by the MMA. The success of SSA’s efforts is uncertain because no reliable data exist on the total number of individuals potentially eligible for the subsidy. Using available estimates of the potentially eligible population, SSA approved 32 to 39 percent of the eligible population who were not automatically deemed by CMS for the subsidy. According to these estimates by CMS, the Congressional Budget Office, and other entities, about 3.4 million to 4.7 million individuals are eligible for the subsidy, but have not yet enrolled (See table 1.) In developing these estimates, however, these entities faced the same data limitations as SSA in identifying potentially eligible individuals. SSA officials said that it is unfair to judge the success of its outreach efforts for the subsidy in relation to the estimates of the total eligible population, given the limitations in identifying it. SSA officials stated that their efforts have been successful in meeting their outreach goals. In fact, after almost 2 years of implementation efforts, SSA’s participation rate compares favorably to that of the Food Stamp Program, which had a participation rate of 31 percent after its second year of implementation. The low-income subsidy participation rate compares less favorably, however, to that of the Supplemental Security Income program, which had a participation rate of approximately 50 percent among the aged a year after the program began. SSA officials noted that the SSI participation rate included individuals who were automatically transferred from state government programs to SSI, which is somewhat similar to the “deemed” population that was automatically transferred to the low-income subsidy. SSA has collected data and established some goals to monitor its progress in implementing and administering the subsidy benefit, but still lacks data and measurable goals in some key areas. To enable agencies to identify areas in need of improvement, GAO internal control standards state that agencies should establish and monitor performance measures and indicators. Accordingly, agencies should compare actual performance data against expected goals and analyze the differences. SSA monitors various aspects of its determination process, such as the number of applications received and their outcomes and length of processing, but did not establish a performance goal for processing times until March 2007. SSA largely relies on an automated process to determine individuals’ eligibility for the subsidy. Income and resource data provided by the applicant are electronically compared to income data provided by IRS and other agencies to determine if the individual meets income and resource requirements. SSA field office staff follow up with individuals in cases where there are conflicting data or questions. SSA tracks the number of eligibility determinations, the outcome of those determinations, and the length of time for completing the determinations. SSA also tracks denials and periodically samples denied claims to examine the reasons for such actions. As of March 2007, approximately 6.2 million individuals had applied for the subsidy. SSA received the heaviest volume of applications when the public outreach campaign was the most active. Figure 2 provides data on the cumulative number of subsidy applicants and approvals from November 2005, when SSA began tracking the data, to December 2006. While SSA has captured data on the length of time it takes to make eligibility determinations, it did not develop the capability to report the data, and did not establish a performance goal for processing times until March 2007. SSA has now established a goal of processing 75 percent of subsidy applications in 60 days. Of the approximately 6.2 million individuals who had applied for the subsidy as of March 2007, SSA approved 2.2 million, denied 2.6 million, and had decisions pending for 80,000 applicants. SSA officials determined that no decision was required for 1.4 million because they were duplicate applications, applications from individuals automatically qualified for the subsidy, or canceled applications. To identify reasons for subsidy denials, SSA conducted three separate studies that sampled a total of 1,326 denied claims. These studies showed that 47 percent of applicants were denied due to resources and 44 percent because of income that exceeded allowable limits set by the MMA. SSA officials stated that they plan to conduct a longitudinal study to examine the reasons for all denied claims. SSA tracks data on the total number of appeals, the reason for appeals, the time it takes to process them, the method used to resolve them, and their final disposition. Individuals may appeal denied claims, as well as the level of the subsidy, by calling SSA’s national toll-free number, submitting the request in writing, or visiting any Social Security field office. Individuals may also complete an appeals form available on SSA’s Web site and mail it to SSA. Individuals have the choice of having their appeal conducted through a telephone hearing or a case file review. According to SSA, about 79,000, or 3 percent of denied subsidy applications were appealed from August 2005 to February 2007. SSA completed about 76,000 appeals in that time frame. On the basis of an SSA sample of 781 appeals, SSA reversed its decision for 57 percent of the cases and upheld its decision for the remaining 43 percent. SSA data show that the overall volume of appeals received was the highest between November 2005 and July 2006, declined between August and November 2006, and rose again between December 2006 and February 2007. During the decline, SSA closed all but one of its six Special Appeals Units by October 2006. Further, the time it took SSA to process appeals varied widely, and did not necessarily decrease when the caseloads grew smaller. SSA tracks various results from the redeterminations process, such as the number of decisions made, and number and level of continued subsidies. However, SSA does not track processing time for redetermination decisions and has not established a performance time target for processing such actions. According to the MMA and SSA regulations, all recipients of the subsidy are required to have their eligibility redetermined within 1 year after SSA first determines their eligibility. Future redeterminations are required to be conducted at intervals determined by the Commissioner. SSA’s regulations provide that these periodic redeterminations be based on the likelihood that an individual’s situation may change in a way that affects subsidy eligibility. Additionally, SSA’s regulations provide that unscheduled redeterminations may take place at any time for individuals who report a change in their circumstances, such as marriage or divorce. SSA officials stated that since the redeterminations process is conducted within a certain period of time, it is unnecessary to track the processing time for individual redetermination decisions. SSA initiated its first cycle of redeterminations in August 2006, which including all of the approximately 1.7 million individuals who were determined to be eligible for the subsidy prior to April 30, 2006. SSA excluded from the redeterminations process about 562,000 individuals who were either deceased, automatically deemed eligible for the benefit by CMS, or whose subsidy benefit had been terminated. SSA data show that as of February 2007, SSA had completed approximately 237,000 redeterminations. About 69,000 individuals remained at the same subsidy level, another 69,000 had a change in their subsidy level, and 98,000 individuals had their subsidies terminated, based on a change in their circumstances. SSA has monitored some aspects of the increased workload and found that implementing the low-income subsidy was manageable overall, due to increased funding for its MMA startup costs. Although the subsidy program affected SSA’s workload and operations, SSA officials told us that implementing the subsidy did not significantly affect the agency’s workload and operations. SSA hired a total of 2,200 field office staff to assist with subsidy applications, as well as an additional 500 headquarters staff to support its MMA activities. SSA officials attribute the light impact of the subsidy program to various factors, including the automation of the subsidy application process and the $500 million appropriation it received for administrative startup costs to implement its MMA responsibilities. SSA officials pointed out that as they implemented the subsidy, the processing times for other workloads improved. Officials explained that they were able to manage the other workloads because the peak increases in subsidy applications and inquiries were short-lived, allowing SSA’s operations to return to a more normal operating level after handling these peak work volumes. SSA officials stated that they expect small increases in its low-income subsidy workload during future prescription drug plan open seasons, which are typically held from November to December. Although SSA can track expenditures for implementing its various MMA responsibilities overall, it cannot track expenditures related specifically to low-income subsidy activities. For example, SSA cannot calculate how much of the $500 million appropriation it received for MMA startup costs was spent on the subsidy program versus its other MMA responsibilities. Although SSA could not provide documentation of the total amount of its subsidy-related expenditures, it estimates that its costs related to administering the subsidy are about $175 million annually, based on workload samples. However, SSA is planning to develop a tracking mechanism to more accurately capture the data. Recent increases in SSA’s administrative resources may have also been a factor in limiting the impact of the subsidy program workload. The amount of SSA’s administrative costs covered by the Medicare Trust Funds is projected to increase by about 37 percent between fiscal year 2003 and fiscal year 2008. This increase occurred despite the transfer of the Medicare appeals processing function from SSA to CMS in 2005. While this increase has helped SSA to carry out its various Medicare responsibilities (such as taking applications for Medicare benefits and withholding Medicare premiums, among others), it may have also helped to cushion the impact of the subsidy program. Reaching the millions of people who are forgoing the government’s help in paying for their prescription drug benefit remains a significant challenge. Using the $500 million appropriation for its MMA start up costs, SSA was able to initiate the Part D subsidy and sign up 2 million people for the subsidy without adversely affecting SSA’s overall operations. However, while it is not clear how to reach the remaining eligible people, the momentum of the initial outreach campaign should not be lost. The barriers to identifying eligible people and convincing them to sign up remain. For some, the subsidy application is complicated, which is due in part to the low-income subsidy eligibility requirements. Further, no one has yet studied whether or not IRS data can help identification efforts. While advocacy groups have called for a more personalized outreach approach to encourage additional enrollments, it may be unrealistic to expect SSA to conduct such efforts, given its resource limitations. Both a better understanding of who is eligible and a plan for continued outreach could help SSA make efficient use of limited staff resources by targeting outreach more narrowly to the eligible population. Further, a timely and reliable process for deciding initial determinations, hearing appeals, and making redeterminations is essential to effective management of the subsidy. SSA has focused on developing and improving the processes for serving its customers in a timely manner. As SSA moves forward, it may need better information to ensure that the subsidy program serves its target population as efficiently and effectively as possible. We are considering recommendations for SSA to work with IRS to assess the extent to which taxpayer data could help identify individuals who might qualify for the subsidy, and help improve estimates of the eligible population; and for SSA to develop a plan to guide its continuing outreach efforts and develop key management tools to measure the results of its subsidy application processes. Mr. Chairman, this completes my prepared statement. I would be happy to respond to any questions you or other members of the committee may have at this time. For further information regarding this testimony, please contact Barbara D. Bovbjerg, Director, Education, Workforce, and Income Security Issues, on (202) 512-7215. Blake Ainsworth, Jeff Bernstein, Mary Crenshaw, Lara L. Laufer, Sheila McCoy, Kate France Smiles, Charles Willson, and Paul Wright, also contributed to this statement. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | To help the elderly and disabled with prescription drug costs, the Congress passed the Medicare Prescription Drug, Improvement, and Modernization Act (MMA) of 2003, which created a voluntary outpatient prescription drug benefit (Medicare Part D). A key element of the prescription drug benefit is the low-income subsidy, or "extra help," available to Medicare beneficiaries with limited income and resources to assist them in paying their premiums and other out-of-pocket costs. To assess Social Security Administration's (SSA) implementation of the Medicare Part D low-income subsidy, GAO was asked to review (1) the progress that SSA has made in identifying and soliciting applications from individuals potentially eligible for the low-income subsidy, and (2) the processes that SSA uses to track its progress in administering the subsidy. This statement is drawn from GAO's ongoing study for the committee on the Medicare Part D low-income subsidy, which is expected to be published at the end of May. To conduct this work, GAO reviewed the law, assessed subsidy data, and interviewed officials from SSA, the Centers for Medicare and Medicaid Services, the Internal Revenue Service, state Medicaid agencies, and advocacy groups. SSA approved approximately 2.2 million Medicare beneficiaries for the low-income subsidy as of March 2007, despite barriers that limited its ability to identify individuals who were eligible for the subsidy and solicit applications from them. However, the success of SSA's outreach efforts is uncertain because there are no reliable data to identify the eligible population. SSA officials had hoped to use Internal Revenue Service (IRS) tax data to identify the eligible population, but the law prohibits the use of such data unless an individual has already applied for the subsidy. Even if SSA could use the data, IRS officials question its usefulness. Instead, SSA used income records and other government data to identify 18.6 million Medicare beneficiaries who might qualify for the subsidy, which was considered an overestimate of the eligible population. SSA mailed low-income subsidy information and applications to these Medicare beneficiaries and conducted an outreach campaign of 76,000 events nationwide. However, since the initial campaign ended, SSA has not developed a comprehensive plan to distinctly identify its continuing outreach efforts apart from other agency activities. SSA's efforts were hindered by beneficiaries' confusion about the distinction between applying for the subsidy and signing up for the prescription drug benefit, and the reluctance of some potential applicants to share personal financial information, among other factors. SSA has collected data and established some goals to monitor its progress in administering the subsidy, but still lacks data and measurable goals in some key areas. While SSA tracks various subsidy application processes through its Medicare database, it has not established goals to monitor its performance for all application processes. For example, SSA tracks the time for resolving appeals and the outcomes of its initial redeterminations of subsidy eligibility, but does not measure the amount of time it takes to process individual redetermination decisions. According to SSA officials, implementing the low-income subsidy was manageable overall due to increased funding for the outreach and application processes and did not significantly affect the agency's workload and operations. GAO is considering recommendations for SSA to work with IRS to assess the extent to which taxpayer data could help identify individuals who might qualify for the subsidy, and help improve estimates of the eligible population; and for SSA to develop a plan to guide its continuing outreach efforts and develop key management tools to measure the results of its subsidy application processes. |
Since 2003, NRC has worked with agreement states and others to identify the radioactive materials that pose the greatest risk of being used to make an RDD, established additional security measures for these materials, and taken steps to ensure the increased security measures are effectively implemented. However, NRC has not successfully corrected the weaknesses in its radioactive materials licensing processes. Further, NRC has taken limited steps to determine how to effectively mitigate the potential psychological effects of an RDD. Finally, NRC has not yet decided whether certain radioactive sources need stronger licensing requirements. An NRC and DOE working group had established a tentative list of radioactive materials under NRC license and DOE control and the quantities at which they pose the greatest risk. However, according to agreement states representatives, the agreement states were not directly involved in creating this list prior to the release of our August 2003 report. Our report recommended that the Chairman of NRC collaborate with the agreement states on this list, which NRC did before the list was finalized in August 2005. Specifically, in July 2002, the chairman of the NRC and the Secretary of Energy established a working group to identify radioactive materials according to the relative risk they posed of being used by terrorists to make an RDD. The working group assessed the relative hazards of various radioactive isotopes, taking into consideration both the nature of the materials (their potential threat to human health) and their attractiveness for use in an RDD (their half-lives, the quantities in which such materials are typically found, the level of protection typically surrounding them, and the ease with which they might be dispersed). The working group completed its initial study in November 2002 and issued a final report in May 2003. During this period, NRC, DOE, and other U.S. government entities were also negotiating with other countries under the auspices of the International Atomic Energy Agency (IAEA) to create a single international threshold quantity at which nations adopting IAEA’s Code of Conduct would agree to take measures to more closely track and consider increased security measures to protect radionuclides of concern. NRC also consulted with agreement states on this issue. In the end, it was agreed in September 2003 that the threshold for increased concern—that is, the quantities at which various radionuclides become subject to more stringent security—should be category 2 quantities. After our August 2003 recommendation that NRC consult with the agreement states on this list, NRC officials formally provided it to agreement state officials for their review. The agreement states agreed with the list and the thresholds developed by the IAEA and participating countries (see table 1). NRC also implemented our recommendations to (1) determine how agreement state and nonagreement state officials could participate in the development and implementation of additional security measures for radionuclides of concern and (2) include performance criteria for assessing NRC’s and agreement states’ implementation of these additional security requirements in periodic evaluations of both NRC and agreement state effectiveness. First, NRC worked with agreement states to devise and implement several additional security measures—called “increased controls” —to protect category 2 or greater quantities of radionuclides of concern from theft, diversion, and other unauthorized access. In late 2003, NRC and state officials, some of whom were also officers of the Organization of Agreement States or Conference of Radiation Control Program Directors (an organization that includes both agreement and nonagreement states), established several working groups to facilitate the participation of state officials and their organizations in developing and implementing additional security measures for certain radioactive sources and materials. Several state officials, including a former chair of the Organization of Agreement States (OAS), told us that these working groups functioned in a highly collaborative and deliberative manner. Another OAS official told us that the fact that so many agreement state officials have been willing to volunteer to serve in working groups, and that NRC has been willing to provide some financial support for state officials’ involvement, is a testament to the importance that both NRC and agreement states placed on federal-state collaboration. NRC and agreement states officially issued requirements for the increased controls in December 2005. The purposes of the increased controls, according to NRC, are to reduce the risk of unauthorized use of radioactive materials and to aid the prompt detection and assessment of and response to any such attempt. Increased controls include such measures as 24-hour surveillance, multiple layers of physical security, and measures to ensure the immediate notification of local law enforcement agencies in the event of any actual or suspected breach in security. For example, increased controls on medical sources require some sources to be kept in heavily secured rooms with limited access (see fig. 1). According to NRC, all increased controls were to be fully implemented by June 2006. Some licensees with the highest-risk sources were inspected by June 2007, while all increased controls must be fully inspected by June 2009. NRC regional offices and agreement state regulators are also currently in the process of reaching out to licensees to help ensure they will be able to meet the June 2009 deadline and have already performed preliminary increased controls inspections on approximately 1,100 of the 1,700 licensees subject to the new controls (see table 2). Agreement state officials told us that they have already prevented at least one attempted theft of an industrial radiography source typically used to inspect metal parts and welds for defects. The would-be thieves broke in to an area protected by an alarm system that had been recently installed by the licensee to comply with the new requirement mandating the capacity to monitor, detect, and respond quickly with local law enforcement in the event of any unauthorized access. This new alarm system immediately notified local law enforcement authorities, who responded in time to prevent the criminals from obtaining an iridium-192 radiography source—a potent gamma emitter that could cause extensive radiation burns if handled improperly. NRC and agreement states have also collaborated in establishing criteria for assessing the implementation of increased controls and integrated these criteria into NRC’s existing oversight program, the Integrated Materials Performance Evaluation Program (IMPEP). In March 2006, NRC established performance criteria devised in working groups with agreement state officials for evaluating the implementation of increased controls. Under each of the existing performance categories—staffing and training, the technical quality of inspections, licensing actions, incident and allegation activities, and the overall status of the materials inspection program—NRC added additional performance criteria. For example, NRC regional and agreement state programs are now evaluated on whether they have established a system to readily identify new licensees that should be subject to increased controls and to determine whether sensitive licensee information is being securely maintained. Although not all NRC regional and agreement states’ radioactive materials programs have been evaluated on their implementation of the increased controls, 22 of the 35 agreement states and one of the three NRC regional offices with responsibilities for regulating such materials have to date had aspects of their implementation of increased controls at least partially assessed in this manner. Moreover, agreement state officials familiar with this revised performance evaluation process told us that the new criteria were effective and valid measures of the implementation of the increased controls. To increase the security of radioactive materials and sealed sources and better ensure that they are used as intended, we recommended in 2003 that NRC modify its process for issuing specific licenses to ensure that such sources cannot be purchased before NRC has verified, through inspection or other means, that the materials and sources will be used as intended. In December 2006, NRC issued new prelicensing guidance to help NRC and agreement state licensing officials to make a risk-based determination of whether an applicant for a license to possess an amount of radioactive material or source sufficient to require a specific (rather than a general) license should have to undergo some sort of verification before being granted a license. This guidance asked two screening questions: (1) whether “the applicant is an entity or a licensee transferring control to an entity that has never had a license or is unknown” and (2) whether the applicant is seeking category 2 or greater quantities of one or more of the 16 radionuclides of concern and has not already been licensed to possess materials subject to a security order or additional requirements for increased controls. If the applicant answers yes to either question, according to the guidance, the license examiner should consider whether it is necessary to take any of the steps on a 12-item checklist. For example, one checklist item suggests doing an Internet search on the name of the applicant; another suggests conducting a site visit to the stated place of business. In spring 2007, however, our investigators, posed as first-time radioactive materials license applicants for devices containing sources large enough to require specific licenses, and therefore subject to the extra scrutiny from the 12-item checklist, they were able to obtain a materials license from NRC, even though an Internet search or a prelicensing site visit would have revealed the application to be based on false claims. After being notified of the results of our undercover investigation in June, NRC stopped issuing specific licenses for radioactive materials and sources until it could develop and issue “supplemental interim prelicensing guidance.” This supplemental guidance, issued 12 days after NRC stopped issuing specific licenses, requires a first-time licensee to pass a site visit inspection at the applicant’s place of business or appear at an NRC regional office for a face-to-face meeting with a license application reviewer and satisfy this official that the radioactive materials will be used as intended. Applicants would not be subject to these requirements if they already have an established regulatory relationship with NRC or an agreement state and meet other specific criteria. In September 2007, NRC announced in a public briefing that it had developed a comprehensive plan for resolving all the vulnerabilities in its radioactive materials licensing processes. NRC announced plans to do several things to help make its program more secure, including the following. Establish a panel of independent external reviewers to study NRC’s materials licensing program vulnerabilities, with particular scrutiny of its “good faith assumptions” about applicants. This panel presented a number of observations and recommendations to NRC in March 2008. Reconstitute the NRC and agreement state prelicensing working group to develop solutions to vulnerabilities associated with verification, counterfeiting, and general licenses. Establish a new materials program working group that would review the results of an independent external review and comprehensively assess the entire materials licensing program, including NRC’s evaluation of state programs. Leverage the capabilities of new databases currently under development— the National Source Tracking System and Web-based licensing. To assure themselves that other radioactive materials licenses had not been issued to fraudulent individuals, NRC also undertook a retrospective review of a sampling of licenses to verify their legitimacy. NRC officials stated that these reviews uncovered no other incidences of fraud. We think all of these actions are useful steps toward closing the long-standing vulnerabilities in NRC materials licensing processes, but it is too early to evaluate whether these steps will be successful. In addition to recommending that NRC work with agreement states and others to identify and better secure the radioactive sources that pose the greatest risk of being used to make an RDD, we also recommended that NRC determine how to effectively mitigate the potential psychological effects of malicious use of radioactive materials. Since we issued our 2003 report, DHS issued the National Response Plan in December of 2004 to establish a comprehensive all-hazards approach to domestic incident management. The National Response Plan, revised and reissued as the National Response Framework in January 2008, details how federal agencies and others should coordinate to ensure an efficient and effective nationwide response to a broad spectrum of domestic incidents, including those involving the malicious use of radioactive materials. Under the National Response Framework, where a radiological incident involves facilities or materials licensed by the NRC or agreement states, NRC either coordinates federal response activities or assists DHS in doing so, depending on the scope of the incident. In our view, such coordination should include taking actions to determine how to effectively mitigate all the effects of such an RDD—including psychological effects. However, NRC has not implemented this recommendation because, according to NRC officials, NRC has only a very limited role to play in mitigating the psychological effects that may occur in the aftermath of an RDD event unless the amount of radioactive materials released is sufficient to cause “prompt fatalities”—that is, fatalities directly caused by exposure to radioactive materials. Accordingly, NRC has identified and taken limited steps that it sees as consistent with its prescribed role. Specifically, NRC points to its participation in the interagency Radiation Source Protection and Security Task Force Public Education Working Group with DHS, DOE, agreement and nonagreement states, and others to design a coordinated public education campaign to, among other things, reduce public fears of radioactivity and diminish the impact of a terrorist attack using radioactive materials. This working group issued a draft public education action plan in December 2007 and provided an update on its efforts on May 15, 2008. NRC is also a member of and has provided input to a Health Physics Society working group that is putting together a program to educate the public about radiation and help counteract unfounded or irrational fears. Despite these activities, in our view, NRC’s response to our recommendation is inadequate. Over 4 years after we made our recommendation, NRC has not yet determined how to effectively mitigate the potential psychological effects of the malicious use of radioactive materials. Moreover, according to existing EPA protective action guidelines, the amount of radioactive material needed to cause “prompt fatalities”—the threshold at which NRC accepts having a significant role— is significantly greater than would be necessary to cause contaminated areas to be evacuated, a threshold at which psychological effects could reasonably be expected to occur. According to NRC officials, unless the prompt fatalities threshold is met, NRC believes its job is to provide the public with prompt, complete information about the effects of any release of radiation involving material the agency regulates and, to the extent it is relevant, to inform the public about the NRC regulations or guidance that may be relevant as a result. Beyond participating in an interagency task force working group, providing any additional information that may be needed is, according to NRC, the responsibility of others (federal, state, or local officials, etc.). This approach is consistent with NRC’s view that its primary responsibility is to regulate “inside the fence, inside licensee- controlled areas.” “Outside the fence,” NRC views its role as assisting those federal agencies that have primary responsibility, namely DHS, DOE, and others and making sure that its licensees comply with these agencies’ legitimate concerns. In light of growing concerns about the potential malicious use of radioactive sealed sources, and to better secure generally licensed devices containing such sources, we recommended that NRC, in consultation with agreement states, re-examine whether certain radioactive sources should be regulated through specific licenses rather than general licenses. According to NRC, by November 2007 it had gathered the necessary information about generally licensed devices containing relatively larger radioactive sources (the largest category 4 sources or higher) to decide whether changes should be made. NRC and agreement state officials are currently analyzing the data and conferring in working groups and, according to NRC officials, initiated a rulemaking process in September 2007. Given the complexity and range of the issue and the solutions to be considered, NRC officials estimate the formal rulemaking process will take approximately 2 years, depending on what form a new rule takes. Rules that require states to make statutory changes typically take longer to implement. NRC officials stressed that it is impossible to predict what form a final rule would take. The various options—for example, a lower activity cap for general licenses; specific licensing requirements for particular radionuclides regardless of activity; or the development of a new, more streamlined specific license—will continue to be a subject of discussion among federal and state radioactive materials regulators until a decision has been reached. If a revised rule is finalized by September 2009, agreement states could have up to an additional 3 years to fully implement any changes—meaning that any rule change may not be fully implemented until the fall of 2012. NRC has developed an interim database that can monitor and track the more dangerous, category 1 and 2 radioactive sealed sources. However, two additional systems—one to track radioactive sealed sources and one to track licenses—have been repeatedly delayed. A third system under development will draw on information in both of these systems to provide regulators and vendors with the ability to verify that those seeking to purchase radioactive sources are licensed to do so. NRC established the interim database in October 2003 to provide NRC and agreement states a stop-gap means of more closely monitoring the potentially more dangerous sources until the new National Source Tracking System (NSTS) could be completed. This database is called “interim” because it is intended to be a temporary measure for implementing a quick, practical response to the recommendation in the May 2003 DOE–NRC report on RDDs that the U.S. government develop a database of sources at greatest risk of being used to make an RDD. The interim database currently records information about category 1 and 2 radioactive sealed sources licensed by both NRC and agreement states. For a given source, the interim database records the radionuclide; the quantity (activity); the licensee address; and the make, model, and serial number (where available) of the registered source. Although participation is voluntary, NRC successfully persuaded agreement states to provide data on their licensees for inclusion in the interim database, and as a result, the database includes information from 99 percent of all licensees. Originally, the database was intended to be a one-time snapshot of what radioactive materials existed in the United States during fiscal year 2004. However, NRC began to update the database annually as it became apparent that the development and launch of the NSTS would take longer than expected. The result is an annual snapshot of information about radioactive sources as they were at one point during a given year, not a system that tracks the current location of sources. The information for any given source in the database is, at any given time, 0 to 12 months old. It is important to note that the licensee address listed in the interim database may simply be the address for the licensee’s administrative offices—that is, the place where the company officials responsible for dealing with NRC or state regulators have offices—and not necessarily the address of the physical location of the material. A licensee may be allowed to store radioactive materials in several locations throughout one or more states but still provide only a single administrative address for reporting purposes in the interim database. NRC and agreement states check the completeness and accuracy of this inventory of source locations during routine inspections of licensees. The completion and implementation of the major new systems NRC is developing to help it better track, and ultimately help secure, radioactive sealed sources have been delayed repeatedly. The impetus for the creation of the NSTS was a recommendation in the May 2003 DOE-NRC report on RDDs that radionuclides identified as being at greatest risk of use by terrorists to make an RDD be nationally tracked. The Energy Policy Act of 2005 required the establishment of a mandatory tracking system. The NSTS is also consistent with the United States’ endorsement of the IAEA Code of Conduct, which recommends that nations establish a national source registry to include, at a minimum, category 1 and 2 sources of radionuclides of concern. The NSTS will initially track category 1 and 2 sources of the 20 radionuclides that NRC has determined are sufficiently attractive for use in an RDD or for other malicious purposes that warrant national tracking. The 20 radionuclides include the 16 radionuclides of concern plus four additional radionuclides: actinium-227, polonium-210, and thorium-228 and -229. In April 2008, NRC proposed a rule to expand the NSTS to include all category 3 sources and the largest category 4 sources (at or about one- tenth of the activity threshold for category 3). Although the NSTS was originally supposed to be operational in mid-2007, difficulties in developing the system have led NRC to postpone the launch of the NSTS multiple times. NRC’s current estimate for the launch of the NSTS (tracking category 1 and 2 sources) is January 31, 2009. NRC estimates the expansion of the NSTS will be implemented by March 2010. According to NRC, the NSTS will initially be populated by the data from the interim database. However, unlike the interim database, the NSTS will not be an annual snapshot of source inventories. The NSTS will be a transaction-based system that will track each major step that each tracked radioactive source takes within the United States, from “cradle to grave.” That is, licensees will be responsible for recording the manufacture, shipment, arrival, and disposal of all licensed and tracked category 1 and 2 radioactive sources. More specifically, the NSTS will include the radionuclide, quantity (activity), manufacturer, manufacture date, model number, serial number, and site address. The licensee will have until the close of the next business day after a transaction takes place to enter it into the system. As a result, the location of all such sources will be accounted for and more closely tracked than in the interim database. While some sources may be moved temporarily to different sites, any time that the source changes its “home base,” the transaction must be registered through the NSTS. In this way, the data in the system should be kept up-to-date. For security reasons, access to the information in the NSTS will be on a need-to-know basis. Licensees will have access to information about their sources, agreement state officials will have access to information about licensees and sources in their state, and only selected NRC officials will have access to the entire system. While the NSTS is designed to track larger and potentially more dangerous radioactive sealed sources, NRC’s Web-based licensing system is being developed to provide quick access to up-to-date information on all NRC specific licenses for radioactive materials and sources in all five IAEA categories. In its technical comments on a draft of this report, NRC told us that it is developing a third system—a license verification system—which, once operational, will draw on the information in NSTS and the Web-based licensing system which will provide regulators and vendors of radioactive sources with an easily accessible ability to verify that those seeking to purchase nationally tracked sources are licensed to do so. Taken together, these systems will include detailed information about what licensees are allowed to possess and, importantly, whether a prospective licensee seeking to purchase additional sealed sources is authorized to possess the additional types and quantities. For example, an individual from a construction company wanting to purchase a piece of equipment containing a radioactive sealed source must demonstrate to the vendor that the company is licensed to possess such a source. Once all three systems are operational, the vendor could easily verify that the company is legitimately licensed to purchase a given piece of equipment containing the particular sealed source. Although the Web-based licensing system was originally supposed to be deployed in 2005, it is now estimated be completed no earlier than the late summer of 2010. Moreover, the Web- based licensing system may not initially include any information on radioactive materials licenses issued by agreement states—which represent over 80 percent of all U.S. licenses for these materials. NRC officials told us that they are currently working with agreement states to determine the most efficient means of including agreement state data in the Web-based licensing system. Finally, NRC has only recently begun developing its new license verification system and has not yet established firm completion dates. However, NRC officials told us that they expect it to be complete by the time that the Web-based licensing is launched. The delays in the development of both the NSTS and the Web-based licensing system are especially consequential because NRC officials, both commissioners and staff, have identified the deployment of these systems as key to improving the control and accountability of radioactive materials in the United States. More specifically, in NRC’s September 2007 public hearing addressing the weaknesses that we uncovered in NRC’s materials licensing program, the commissioners said that an expanded NSTS including category 3 and perhaps the largest category 4 sources, a Web- based licensing system including agreement state data, and some means for making relevant information in both of these systems available to vendors and officials at ports of entry, would be a secure and effective means of verifying that those seeking to obtain radioactive materials, or enter the United States with licensable quantities of radioactive materials or sources, were doing so for legitimate purposes. CBP has a comprehensive, layered system for detecting and identifying radioactive materials as they enter the United States at land ports of entry—whether they are in the form of industrial sources, raw materials, trace amounts of radiation found in such common products as ceramics or bananas, or radionuclides left in the human body in the aftermath of medical procedures. However, some equipment that is used to protect CBP officers is in short supply. According to CBP, over 90 percent of the personally owned vehicles entering the United States at land ports of entry pass through radiation portal monitors. Portal monitors are very sensitive and can detect even the very small amounts of radiation. All vehicles must pass through the monitors at every port of entry that deploys them. Any vehicle triggering a portal monitor alarm is referred to a secondary screening area, where it is sent through a second portal monitor to confirm (or disconfirm) the original alarm. Whether the second portal monitor confirms the alarm or not, the vehicle, the driver, any passengers, and any cargo are scanned by a CBP officer with a hand-held radiation isotope identification device (RIID). The RIID can detect very small amounts of radiation and also identify many of the most commonly used radionuclides by name and activity level. CBP keeps detailed records on the cause of each alarm and its resolution and sends them to a central location for archiving. All portal monitor alarms must be resolved—that is, CBP officers must investigate each alarm until they are convinced that the vehicle, occupants, and any cargo pose no threat and, if radioactive materials are found, that the vehicle occupants appear to have a legitimate reason to possess and transport them—before the vehicle, driver, and any passengers can be allowed to enter the United States. The vast majority of portal monitor alarms are resolved by CBP officers at the border using the information available to them directly from portal monitor and RIID scans, documents provided by shippers and passengers, and the explanations of the travelers (commercial and passenger vehicle drivers and passengers) for why they are carrying radioactive materials, whatever the amount or form. When CBP officers cannot resolve the radiation alarm with information available to them at the border, they are required to contact technical experts at CBP’s National Targeting Center for assistance. These experts offer scientific expertise to help CBP officers interpret and use the portal monitor and RIID data and will also verify whether any radioactive sources have been properly licensed by checking NRC and agreement state licensing data. Figures 2 and 3 show vehicles lining up and passing through portal monitors at ports of entry. Figure 4 shows an inspection area and a truck-sized portal monitor on the southern border. Most of the CBP officers we spoke with at the ports of entry we visited told us they had never or rarely felt it necessary to contact the National Targeting Center for assistance, but they all stated that they would not hesitate to do so if they encountered anything out of the ordinary or if they thought something might pose any threat to national security. Those CBP officers who told us they had contacted the center for assistance were very pleased with the timely and practical help they received. Finally, we found that personal radiation detectors—an important component of the suite of radiation detection equipment at the borders— are in short supply. Unlike portal monitors and RIIDs, personal radiation detectors are not designed to be used as screening tools for radioactive materials. Instead, they are designed to alert the individual wearer when he or she is being exposed to unusually high levels of radiation, permitting CBP officers to take protective measures if needed. While most CBP officers dealing with the public in frontline positions are equipped with personal radiation detectors, some are not. According to CBP officials, the agency lacks sufficient resources to purchase the approximately 1,500 personal radiation detectors it needs to provide one for each officer at the border who currently needs one. In fact, during our visit to one port of entry, we found that some officers in frontline positions at the border did not have a personal radiation detector. Moreover, CBP has no money currently in the budget to acquire the approximately 2,000 additional personal radiation detectors it would require to equip the new officers it plans to hire—leaving a shortfall of about 3,500 personal radiation detectors. CBP headquarters officials are aware of the shortage of personal radiation detectors and they hope to procure enough of them for each officer who needs one. However, they acknowledged that, in doing so, they have to consider competing priorities at the border, and also whether emerging technologies may provide a more effective solution. In December 2003, CBP issued a radiation detection program directive that contained, among other things, the requirement that CBP officers at the border contact the National Targeting Center for assistance under certain circumstances when radiation is detected. Under the directive, even large shipments of radioactive materials can be admitted without a CBP officer contacting the National Targeting Center to verify whether the materials are legitimately licensed. The radiation detection program directive was scheduled for review in December 2006, but CBP officials told us that this review was delayed pending the resolution of unrelated matters regarding the CBP’s right to search property for radioactive materials between ports of entry. In response to our March 2006 reports assessing the progress DHS has made deploying radiation detection equipment at U.S. ports of entry and detailing how our investigators used fake documents to bring licensable quantities of industrial radioactive sources into the United States respectively, CBP revised its policy. Specifically, in May 2006, CBP issued a memorandum that officials told us tightened security by requiring CBP officers to contact the center to verify the legitimacy of a license or obtain technical assistance whenever they detect more than incidental, trace amounts of radiation, such as that found in ceramics and bananas or in people who have recently undergone a medical treatment using radionuclides. This memorandum, according to headquarters officials, was intended to communicate to officers at the border that they should verify the legitimacy of radioactive materials because CBP officers at a port of entry cannot determine whether a licensee or shipper is authentic without the assistance of the National Targeting Center. This updated guidance, however, was not effectively communicated to officers at the border. Specifically, we asked border officials at the several ports of entry we visited and the four others we interviewed on the telephone about the current guidance they use for regulating the flow of radioactive materials across borders. All either provided us copies of the 2003 radiation detection program directive or confirmed it was current and operative, and some gave us versions of the directive that were port- specific, and therefore, more detailed. Only one port of entry provided us with guidance reflecting the May 2006 memorandum and its requirement that CBP officers contact the National Targeting Center to verify the legitimacy of all licensable quantities of radioactive materials crossing the border. Moreover, officials at all these ports of entry told us that they contact the National Targeting Center for technical assistance when they need it; officials at only one port of entry told us they would call solely to verify whether radioactive materials are appropriately licensed. Officials representing a few other ports of entry told us they had never called the National Targeting Center to verify the legitimacy of a license and that all of their inquiries had been made solely to seek technical assistance. In addition, the officers we spoke to had minimal knowledge of the general regulatory structure established by NRC and agreement states. While we found officers generally were aware that radioactive materials and sources must be licensed, they typically did not take steps to verify licenses, as required by the May 2006 guidance. At the ports of entry we visited, we observed CBP officers working to ensure that when radioactive materials triggered an alarm, the people carrying (or contaminated with) these materials had a good explanation and that the readings from the portal monitors and RIIDs were in accord with what travelers said and what their documents attested to. In short, the officers were focused on resolving the alarm according to the rules established in the 2003 radiation detection program directive and on attending to the many other tasks they have in monitoring what flows through U.S. land ports of entry. In fact, the approach to resolving radiation alarms according to the procedures prescribed in the 2003 radiation detection directive has been so ingrained in day-to-day practice at one port of entry that CBP field office managers had discovered only in the week before our visit that officers had been allowing large neutron radiation-emitting shipments to enter the United States without contacting the National Targeting Center for technical support and to verify their legitimacy. While this situation has since been corrected, this is of particular concern because (1) some neutron radiation-emitting materials can be used to produce nuclear weapons and (2) it is in direct conflict with CBP’s 2003 directive and 2006 supplemental guidance. A senior CBP headquarters official told us that the 2003 radiation detection program directive, as supplemented by the additional criteria established by the May 2006 memorandum on when CBP officers must call to verify the legitimacy of radioactive materials, reflected current policy. He told us that the May 2006 memorandum was always envisioned as only an interim solution, pending a revision of the directive. According to this official, CBP was still working on a revision to the directive that would fully incorporate the heightened security of the memorandum—but he could not give a firm date when an updated directive would be issued. In our view, until CBP effectively communicates the guidance in the 2006 memorandum to its border locations, CBP officers at the border will not know when they should contact the National Targeting Center to verify that radioactive materials being brought into the United States are legitimately licensed. NRC has taken a number of important actions to implement several of our recommendations from our 2003 report that will enhance the accountability and control of radioactive sources and materials and its ability to help protect the nation from nuclear smuggling. Still, its actions in three key areas remain incomplete. In our view, the reasons behind our recommendations 4 years ago are still valid today. Accordingly, to further enhance public protection from the threats posed by potentially dangerous quantities of radioactive sealed sources and materials, we continue to believe that NRC should implement the recommendations from our 2003 report. Specifically, NRC should correct the vulnerabilities uncovered in NRC’s materials licensing process and implement the steps needed to ensure that radioactive materials can only be purchased by those with a legitimate reason to possess them, and determine whether certain radioactive sources should be regulated through specific licenses rather than general licenses and move quickly to implement whatever changes are deemed necessary. In addition, we continue to believe that a plan of how to effectively mitigate the potential psychological effects of an RDD event needs to be developed. For potential incidents involving radiological facilities or materials licensed by NRC or agreement states, for which NRC has coordinating responsibilities, NRC should work with DHS, other federal agencies, and agreement states, respecting the roles described in the National Response Framework, to take action to determine how to effectively mitigate the potential psychological effects of such an event. Also, the causes of the delays in the development and implementation of NRC’s more comprehensive systems for securing, monitoring, and tracking radioactive materials need to be confronted and addressed. Specifically, NRC’s National Source Tracking System and Web-based licensing system have missed numerous milestones and are not expected to be complete as currently envisioned until at least 2010. Past delays in implementing these systems give reason to wonder whether these dates will again be extended and whether NRC is firmly committed to delivering these systems. The recent decision to develop a third new system has added to these concerns. In our view, given the potential consequences of the use of these materials in an RDD and the potential for these systems to greatly improve the security of both NRC’s and agreement states’ materials licensing processes, it is time for NRC to make meaningful progress in successfully completing these important initiatives. While CBP has a comprehensive system in place to detect radiation at ports of entry on the northern and southern borders, CBP’s task of preventing the smuggling of radioactive materials is made more difficult by the fact that guidance on when officers should verify whether radioactive materials being brought into the United States are legitimately licensed has not been effectively communicated. The result of this communication gap is that resources that are available to CBP officers at the border to ensure that those possessing radioactive materials are doing so legitimately are underutilized. Given the repeated delays in implementing improvements to the Nuclear Regulatory Commission’s ability to monitor and track radioactive sealed sources, we recommend that the Chairman of the Nuclear Regulatory Commission take steps, consistent with sound systems development practices, to ensure that priority attention is given to meeting the current January 2009 and summer 2010 target dates for launching the National Source Tracking System, Web-based licensing system, and the new license verification system, respectively. In addition, because some quantities of radioactive materials are potentially dangerous to human health if not properly handled, we recommend that the Nuclear Regulatory Commission complete the steps needed to include all potentially dangerous radioactive sources (category 3 and the larger category 4 sources, as well as categories 1 and 2) in the National Source Tracking System as quickly as is reasonably possible. Finally, to improve the likelihood of preventing radioactive sources and materials from being smuggled into the United States, we recommend that the Secretary of Homeland Security direct the Commissioner of Customs and Border Protection to effectively communicate current Customs and Border Protection guidance to officers at ports of entry regarding when they are required to contact the National Targeting Center to verify that radioactive materials are legitimately licensed, and take measures to ensure that this guidance is being followed. We provided the Chairman of the Nuclear Regulatory Commission, the Secretary of Homeland Security, the Secretary of Energy, the Administrator of the Environmental Protection Agency, and the Chair of the Organization of Agreement States with draft copies of our report for their review and comment. In commenting on the draft of this report, NRC neither agreed nor disagreed with our findings and recommendations. Instead, NRC described its current efforts to implement the recommendations from our 2003 report. On this point, NRC outlined the steps it is taking to modify and strengthen its processes and procedures for licensing radioactive materials. NRC also provided an update on the status of the efforts of the Radiation Source Protection and Security Task Force’s subgroup on public education—a subgroup led by DHS of which NRC is a member—to proactively educate the general public about radiation with the goal of reducing public anxiety and mitigating the adverse psychological effects in the event of an RDD attack. Finally, NRC described its proposed rule, expected to be issued in the fall of 2009, to limit the quantity of radioactive material allowed in a generally licensed device. Although we are encouraged by NRC’s efforts to finish implementing the recommendations from our 2003 report, we remain concerned that nearly 5 years after we issued our report these recommendations have yet to be fully implemented. Furthermore, NRC stated that it is taking the steps necessary to launch the National Source Tracking System (NSTS) and Web-based licensing and to complete the needed steps to include all potentially dangerous radioactive sources in the NSTS as quickly as is reasonably possible. In addition, NRC assures that it intends to place the highest priority on the completion and deployment of the NSTS and Web- based licensing system. However, we are concerned that NRC has once again postponed its estimated completion dates for these systems—by at least 9 months in the case of expanding NSTS to include the smaller but still potentially dangerous radioactive sources and estimates a similar delay in the deployment of the Web-based licensing system. Finally, in its technical comments, NRC informed us that it is developing a new, third system which will draw information from both the NSTS and the Web- based licensing system to provide an improved capability for vendors and regulators to verify licensing information. While we hope this new, third system provides the intended additional capabilities, we are concerned that after so many delays with NSTS and the Web-based licensing system, adding a third system may further delay the ultimate security benefits that these systems are expected to provide. NRC also provided additional technical comments, which we incorporated into the report as appropriate. The other federal agencies that were offered the opportunity to comment on our report either agreed with our recommendations and outlined the steps to be taken to implement them, or chose not comment on the final draft. Specifically, according to DHS’s written comments, CBP concurred with our recommendations and specified the steps it will take to effectively communicate current Customs and Border Protection guidance to officers at ports of entry regarding when they are required to contact the National Targeting Center to verify that radioactive materials are legitimately licensed, and the measures it will take to ensure this guidance is being followed. In fact, CBP has already updated its current guidance to CBP officers at the border by issuing a memorandum to the field directors restating and clarifying when officers must contact the National Targeting Center to verify that radioactive materials are legitimately licensed and requiring them to incorporate this guidance into ports of entry standard operating procedures. Finally, DOE and EPA reviewed and provided comments on earlier versions of our draft report and, after reviewing our final draft, had no further comments. The Organization of Agreement States neither agreed nor disagreed with our findings and recommendations, but offered two comments which we incorporated into the report. Specifically, state officials thought it was important to recognize the quality of agreement state regulatory programs by highlighting the fact that while GAO investigators succeeded in obtaining an NRC radioactive materials license using fictitious documents, GAO withdrew its application to obtain a materials license from the agreement state when that state informed GAO investigators that it would take steps that would have revealed the application not to be authentic. State officials also wanted to stress what they view as the high level of collaboration they enjoy with NRC, as evidenced by the number of state officials involved in security-related working groups with NRC officials and the financial support that NRC provides to states to enable this level of state participation. As agreed with your offices, unless you publicly announce the contents of this report, we plan no further distribution until 24 days from the report date. At that time, we will send copies of this report to the Chairman of the Nuclear Regulatory Commission, the Secretary of Homeland Security, the Secretary of Energy, the Administrator of the Environmental Protection Agency, the Chair of the Organization of Agreement States, and interested congressional committees. We will also make copies available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staffs have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff that made major contributions to this report are listed in appendix V. A radiological dispersal device (RDD) is any type of device that is intended to disperse radioactive materials, through conventional explosives or other means. Among the federal agencies, the Environmental Protection Agency (EPA) has lead responsibility for providing radiological emergency planning guidance, known as Protective Action Guides (PAG), to protect the public from exposure to radiation. In addition, the Department of Homeland Security (DHS) issued PAGs for responses to RDD and improvised nuclear devices (IND) for interim use and comment. Both EPA’s and DHS’s PAGs can be used by other federal agencies or state governments to develop their own guidance or regulations to protect public health. According to EPA officials, the general public’s fear of radiation, coupled with most law enforcement officers’ relative inexperience dealing with radioactive material, would likely cause any emergency incident that triggers first responders’ radiation detectors to be treated as an RDD. Until the type and specific quantity of radioactive material could be determined, the situation would initiate a federal response, whether or not specific, federal thresholds for safety have been reached. Even very small amounts of radioactive material are sufficient to set off the radiation detectors of first responders. For purposes of illustration (see table 3), we calculated how large an area might be sufficiently contaminated using International Atomic Energy Agency (IAEA) category 1, 2, and 3 quantities of cesium-137—assuming the material could be evenly distributed—to (1) trigger the EPA PAG recommending relocation of the public until the site is cleaned up and (2) reach the threshold at which potential direct health effects, such as radiation sickness, might occur. We used category 2 and 3 amounts of cesium-137 (one of the 16 radionuclides of concern) because, according to the International Atomic Energy Agency categorization scheme, the threshold category 3 quantity is the amount at which a radionuclide becomes potentially dangerous to human health if not handled appropriately. A category 2 quantity of a radioactive material is at least 10 times more dangerous than the category 3 threshold quantity and is also the level at which NRC requires licensees to take additional security measures to protect the material from unauthorized access or use. We calculated how large an area might be contaminated with a category 1 quantity of cesium-137 because such quantities can be found in medical devices and irradiators throughout the United States. Specifically, when the potential additional exposure to radiation for a person remaining in a given area for 1 year reaches 2 rem, EPA considers the area sufficiently dangerous to recommend that people be relocated until the site can be decontaminated. When the potential exposure to radiation over the course of 1 year reaches 100 rem, the International Commission on Radiological Protection—an organization of radiation scientists from around the world who provide recommendations regarding radiation exposure—concludes that readily observable health effects, such as radiation sickness, are possible with extended exposure. Only a category 1 quantity would be likely to produce health effects due to acute radiation doses. This level, however, is still substantially below the level at which prompt fatalities could occur. (Prompt fatalities from untreated radiation exposure may only result from acute radiation doses—that is, doses delivered in their entirety in a matter of hours or days—of at least hundreds of rem from a predominately beta-gamma emitting radionuclide like cesium-137.) EPA guidance is based on protecting human health and calculating the odds that radiation exposure will lead to cancer, the most common of radiation’s long term side effects. In the event of an RDD, federal RDD PAGs, such as those issued by DHS in 2006, would be used to manage the response to the incident. PAGs are operative during the emergency, and their chief goal is to protect the public by providing standards to guide the response in the early and intermediate phases of an incident. However, any PAG guidance is only a series of recommendations and is not legally enforceable or binding. Furthermore, a PAG does not establish cleanup levels. In fact, guidance for specific cleanup levels after an RDD has been deliberately left ad hoc, and is to be established after an evaluation occurs using an “optimization” process for long-term site cleanup and restoration. The level to which a contaminated site would be cleaned up for the long term would be agreed upon after the emergency has passed and would depend on the uses of the site. A cleanup standard would factor in the lifetime exposure that the contamination creates for the people using the site—generally, the long- term increased risk of developing cancer. For example, a site that is used for business purposes, where the typical person would spend only working hours, would not have to be cleaned up to the same level as a site where people live, where some people could reasonably be exposed to the post- cleanup radiation levels 24 hours a day. Public involvement in the decision would play a significant role in determining what risk levels are acceptable. While EPA provides guidelines, state and local authorities make the ultimate decisions under most scenarios. In addition to the contact named above, Ned Woodward, Nabajyoti Barkakati, Kevin Bray, Ryan Coles, Nancy Crothers, Walker Fullerton, Cindy Gilbert, Richard Hung, Carol Kolarik, Keith Rhodes, and Kevin Tarmann made significant contributions to this report. | Concerns have grown that terrorists could use radioactive materials and sealed sources (materials sealed in a capsule) to build a "dirty bomb"-- a device using conventional explosives to disperse radioactive material. In 2003, GAO found weaknesses in the Nuclear Regulatory Commission's (NRC) radioactive materials licensing process and made recommendations for improvement. For this report, GAO assesses (1) the progress NRC has made in implementing the 2003 recommendations, (2) other steps NRC has taken to improve its ability to track radioactive materials, (3) Customs and Border Protection's (CBP) ability to detect radioactive materials at land ports of entry, and (4) CBP's ability to verify that such materials are appropriately licensed prior to entering the United States. To perform this work, GAO assessed documents and interviewed NRC and CBP officials in headquarters and in several field locations. NRC has implemented three of the six recommendations in GAO's 2003 report on the security of radioactive sources. It has worked with the 35 states to which it ceded primary authority to regulate radioactive materials and sources and others to (1) identify sealed sources of greatest concern, (2) enhance requirements to secure radioactive sources, and (3) ensure security requirements are implemented. In contrast, NRC has made limited progress toward implementing recommendations to (1) modify its process for issuing licenses to ensure that radioactive materials cannot be purchased by those with no legitimate need for them, (2) determine how to effectively mitigate the potential psychological effects of malicious use of such materials, and (3) examine whether certain radioactive sources should be subject to more stringent regulations. Beyond acting on GAO's recommendations, NRC has also taken four steps to improve its ability to monitor and track radioactive materials. First, NRC created an interim national database to monitor the licensed sealed sources containing materials that pose the greatest risk of being used in a dirty bomb. Second, NRC is developing a National Source Tracking System to replace the interim database and provide more comprehensive, frequently updated information on potentially dangerous sources. However, this system has been delayed by 18 months and is not expected to be fully operational until January 2009. Third, NRC is also developing a Web-based licensing system that will include more comprehensive information on all sources and materials that require NRC or state approval to possess. Finally, NRC is developing a license verification system that will draw information from the other new systems to enable officials and vendors to verify that those seeking to bring these radioactive materials into the country or purchase them are licensed to do so. However, these systems are more than 3 years behind schedule and may not include the licensing information, initially at least, on radioactive materials regulated by agreement states--which represent over 80 percent of all U.S. licenses for such materials. The delays in the deployment and full development of these systems are especially consequential because NRC has identified their deployment as key to improving the control and accountability of radioactive materials. While CBP has a comprehensive system in place to detect radioactive materials entering the United States at land borders, some equipment that is used to protect CBP officers is in short supply. Specifically, vehicles, cargo, and people entering the United States at most ports of entry along the Canadian and Mexican borders are scanned for radioactive materials with radiation detection equipment capable of detecting very small amounts of radiation. However we found that personal radiation detectors are not available to all officers who need them. Moreover, while CBP has systems in place to verify the legitimacy of radioactive materials licenses, it has not effectively communicated to officers at the borders when they must contact officials to verify the license for a given sealed source. Consequently, some CPB officers are not following current guidance, and some potentially dangerous radioactive materials have entered the country without license verification. |
The SRB program is authorized by 37 U.S.C. 308 to help maintain an adequate level of experienced and qualified enlisted personnel. The program authorizes bonuses of up to $45,000 to personnel in critical skills who have between 21 months and 14 years of active-duty service and who reenlist or extend their reenlistments for at least 3 years. The intent of the program, according to DOD, is to focus reenlistment incentives on critical skills that are in short supply and have high training costs. The current SRB program can be traced to 1965, when the services began to experience increasing problems in first-term retention and career manning in a number of technical, high training cost skills. In addressing the problem, DOD recommended the creation of a flexible reenlistment bonus program that could be tailored to fit particular skill-retention requirements and that could be changed as those requirements changed. As a result, Congress established the Variable Reenlistment Bonus program in 1965. In the ensuing years, this became the SRB program and was modified and extended to address concerns about retention and manning problems. The Secretary of Defense has established three eligibility zones for the payment of SRBs. Zones are defined in terms of years of active-duty service. Zone A includes reenlistments falling between 21 months and 6 years of active duty; zone B, between 6 and 10 years; and zone C, between 10 and 14 years. The service secretaries designate which skills and which zones within those skills are eligible to receive SRBs. Servicemembers may receive only one SRB within any one zone. The total cost of new SRB contracts awarded has declined over the past 5 years (see fig. 1). According to service officials and budget justification documents submitted to Congress, the main reason for the declines was the force downsizing occurring during this period, which reduced the need for military personnel. According to DOD, SRB contracts declined by nearly 60 percent during the last 5 years while the force declined about 30 percent. In fiscal years 1993 and 1994, personnel in approximately 20 percent of DOD’s enlisted skills were awarded SRBs. More than 30 percent of the enlisted personnel were in those skills. However, not all of these servicemembers would be eligible for SRBs in a given year because they would not be up for reenlistment in that year or would not be in a zone that was eligible for SRBs. According to DOD, 1.1 percent of all active-duty personnel received a new SRB contract in 1994, down from 2.4 percent in 1990. The cost of the SRB program varies considerably by service. Table 1 shows the number of people who received new SRB payments in fiscal year 1994, the total cost, and the average cost per recipient of those new SRB contracts. Nearly 60 percent of the total cost for new SRB contracts was incurred by the Navy. Also, the average new SRB contract cost per recipient was higher in the Marine Corps and the Navy than in the other two services. Many SRBs have gone to personnel who are not in skill categories where extensive shortages exist. To determine whether SRBs are awarded only where needed to overcome shortages, we applied two measures to each skill category that received SRBs in either fiscal year 1994 or 1993: (1) overall fill rate at the beginning of the fiscal year (defined as the percent of required positions that were filled) and (2) whether individuals in that same skill category had been given financial incentives to leave the service. We used the proportion of required positions filled as an indicator of whether a skill was experiencing a significant personnel shortage. The Status of Resources and Training System (SORTS), which is the system used by the services for reporting unit readiness, has established criteria that units with 90 percent of their assigned personnel on hand are considered prepared to conduct all required wartime missions. Therefore, we used the 90-percent fill rate as an indicator of high fill. Also, according to representatives of the Air Force and the Marine Corps, a fill rate of 90 percent or less in a skill category flags that category for consideration for an SRB. Neither the Army nor the Navy had a specific fill rate threshold for SRB consideration. Using service-provided fill rates and SRB information, we found that 81 percent of people awarded SRBs across DOD in fiscal year 1994 and 78 percent in fiscal year 1993 were in skill categories that were filled at least at the 90-percent level. The cost of these contracts was about $155 million in fiscal year 1994 and about $165 million in fiscal year 1993. Figures 2 and 3 show the percentage of new SRB contracts given to personnel in high-fill skill categories in fiscal years 1994 and 1993. The figures show the results of analyses at three levels of fill (90, 95, and 100 percent) by service. As these figures show, a substantial proportion of the SRB payments went to personnel in skill categories that were not experiencing large shortfalls. While the percentages drop as the fill rate increases, each service paid a substantial proportion of its new SRBs to personnel in skill categories that were already filled 100 percent or higher. Across DOD, 25 percent of fiscal year 1994 and 30 percent of fiscal year 1993 SRB recipients were in skill categories with fill rates of 100 percent or higher. The cost of these contracts was about $58 million in fiscal year 1994 and about $71 million in fiscal year 1993. In recent years, retention needs have declined with reduced force levels. To facilitate military downsizing, Congress authorized two types of special separation pay to personnel who voluntarily leave the military by September 30, 1999, but are not eligible to retire: (1) the Voluntary Separation Incentive (VSI), which is a variable annuity payment, and (2) the Special Separation Benefit (SSB), which is a one-time, lump-sum payment.We were initially told by OSD and service representatives that retention and exit bonuses should not be going to personnel in the same skill categories. However, in fiscal years 1994 and 1993, 48 percent of the personnel awarded new SRB contracts were in skill categories in which other personnel in the same skill categories received financial separation incentives. In fiscal year 1994, nearly 8,800 military personnel who received new SRB contracts (at a cost of about $73 million) were in the same skill categories as about 2,100 of the separation-incentive recipients (who received about $82 million to leave the military). In fiscal year 1993, nearly 10,300 military personnel who received new SRB contracts (at a cost of about $75 million) were in the same skill categories as about 2,100 of the separation incentive recipients (who received about $82 million to leave). Thus, either the services are paying SRBs to people with skills that are not in short supply or they are paying exit incentives to people with skills that are in short supply. Table 2 shows the number of new fiscal year 1994 SRB recipients in each service who were in skill categories where separation incentives were paid, the percentage of total SRB recipients that this group comprised, and the cost of those new SRB contracts. Eighty-four percent of the Army’s new SRB recipients were in skill categories in which separation incentives were also paid. A more stringent test of whether SRBs were going to personnel who were not in shortage categories involves the determination of how many SRB recipients were in skill categories that had high fill rates and where other personnel in the same skill categories received incentive payments to leave the military. In fiscal years 1994 and 1993, 43 percent of the new SRB contracts awarded (at a cost of about $64 million in fiscal year 1994 and $65 million in fiscal year 1993) were in skill categories that met both of the measures we applied—fill rates of 90 percent or higher and payment of separation incentives. Furthermore, 9 percent of new SRB contracts awarded in fiscal year 1994 and 17 percent in fiscal year 1993 were in skill categories with fill rates of 100 percent or higher and to which exit incentives were paid. The cost of these contracts was about $14 million for fiscal year 1994 and about $29 million for fiscal year 1993. Figures 4 and 5 show the percentage of new SRB contracts by service that went to personnel in skill categories having high fill rates and where other personnel in the same skill categories received separation incentives in fiscal years 1994 and 1993. The number of separation incentives given by the Air Force in fiscal year 1993 includes those given in fiscal year 1992. Air Force officials told us that they ran fiscal years 1992 and 1993 exit incentive programs as one program and were unable to provide information on fiscal year 1993 by itself. The reduction of the percentages from fiscal years 1993 to 1994 in the Air Force and the Marine Corps results primarily from reductions in the number of separation incentives given. Service officials told us that although they had paid some people to stay and other people to leave in the same military skills, the retention and separation incentive programs were directed at different grade and year groups. We agree. However, we believe that if a skill is critically short and warrants retention bonuses, separation incentives should not be given to personnel in those skills. Air Force officials told us that they changed their policy in fiscal year 1994 to not allow members in SRB skills to separate using VSI/SSB except in cases of documented extreme hardships because they did not think it was appropriate to pay some people to stay and others to leave in the same skill. Service officials also said that their payment of VSI/SSB incentives to personnel in an SRB skill did not mean that they were satisfied with the fill rate in that skill. Rather, they said the separation incentives were given in an effort to comply with congressional direction to use voluntary means to achieve force reductions. While Congress encouraged the services to use voluntary means wherever possible to achieve needed reductions, we found no indication in the legislative history that Congress intended that the services offer voluntary separation incentives to personnel in critically short skills to avoid involuntarily separating personnel in skills with excesses. Service officials also took issue with our use of the 90-percent fill level as an indication that a skill was not critically short. We agree that some skills might be considered critically short at anything less than 100-percent fill. That is why we also provided data on the 95-percent and 100-percent fill levels. However, the services have not defined which skills require higher fill rates than the 90-percent criterion used for readiness reporting. OSD is not providing adequate direction and oversight of the SRB program. OSD guidance to the services for determining which skills should receive SRBs is general and oversight review of the services’ programs is lacking. OSD guidance for determining those skills to receive SRBs instructs the services to use a “balanced evaluation” that “should include, but not be limited to, a full assessment of the following factors.” Serious undermanning in three or more adjacent year-groups in the bonus zones. Chronic and persistent shortages in total career manning. High replacement cost. Skills that are relatively arduous or otherwise unattractive compared to other military skills or civilian alternatives. Skills that are essential to the accomplishment of defense missions. OSD has not defined many of the terms in its guidance, such as “serious undermanning” and “chronic and persistent shortages,” nor has it established how much weight should be given to each of the selection factors. As a result, each service uses a different procedure to identify and prioritize which skills will receive SRBs. Service officials said that, in deciding who will receive SRBs, they consider factors similar to the OSD guidance, such as whether the skill is currently receiving an SRB, reenlistment trends, fill rates, the skill’s criticality to accomplishing the defense mission, and the cost, length, and availability of training. They too have not established criteria for determining how much weight to give these various factors. OSD has proposed new guidelines for the SRB program, but these guidelines do not clarify the selection criteria. They state that the purpose of the SRB program is “to encourage the reenlistment of sufficient numbers of qualified enlisted uniformed services personnel in critical military specialties with high training costs or demonstrated retention shortfalls.” The use of the connector “or” appears to broaden the purpose of the program, which is stated in the current guidelines as “intended to attract more reenlistments in critical military specialties characterized by retention levels insufficient to sustain the career force at an adequate level.” While we agree that training costs should be a consideration in deciding whether to give retention bonuses, we do not believe that high training cost alone justifies payment of retention incentives if the personnel are not in specialties experiencing demonstrated retention shortfalls. Although OSD guidance specifies that OSD conduct a detailed annual review of the SRB program, examining each skill category programmed for an SRB, such annual reviews have not been conducted. A one-time study conducted by OSD in 1991 of the skill categories that the services were including in their programs, identified several areas of concern and questioned the need to provide SRBs to 34 percent of the proposed skill categories. OSD did not require the services to respond to the report’s findings, took no action on the findings, and has conducted no further reviews of the SRB program. We recommend that the Secretary of Defense establish guidance and controls to ensure that the SRB program provides bonuses only for reenlistments in skill categories that are in short supply. Specifically, we recommend that the Secretary (1) provide more explicit guidance regarding the determination of shortage categories and eligibility for SRBs and require the services to establish and document more specific criteria for determining which skills will receive SRBs and (2) monitor the services’ adherence to this guidance. Because of the extent to which exit incentives have been provided to personnel in skills which also received SRBs, we recommend that the Secretary ensure that payment of exit and retention incentives is coordinated so that they are not both provided to personnel in the same skill categories. DOD did not agree with our findings or recommendations, stating that our methodology and analysis were flawed. DOD’s comments are included in their entirety in appendix I. DOD stated that our analysis was flawed by an assumption that 90 percent manning is a satisfactory level of fill in all skill categories. DOD stated that certain skill categories are imminently critical to the mission of each service and that, in many cases, 100 percent of authorized manning is not enough to do the job. Consequently, using 90 percent as the delineation of high fill for critical skills is unacceptable to DOD. We did not assume that 90-percent fill is necessarily sufficient. Although 90 percent of authorized positions is the fill level used in the official DOD unit readiness reporting system to indicate a capability to perform all assigned missions, we agree with DOD that what is considered to be an adequate fill level can vary by skill. For this reason, we provided data on the 90-percent, 95-percent, and 100-percent fill levels. Our point, therefore, was not that 90 percent represents high fill, but that DOD has failed to adequately define which skills require higher fill rates. That is, when DOD states that “certain skill categories are imminently critical to the mission of each service,” we expected to find some definition or criteria that would identify which skills those were or how they could be determined. Furthermore, if it is true as DOD asserts that “in many cases . . . 100 percent of authorized manning is not enough to do the job,” then manpower requirements need to be reexamined. In addition, if DOD believes that the 90-percent manning figure used in readiness reporting does not represent a level that enables a unit to perform all required missions, it needs to revise its criteria so that an accurate picture of readiness can be conveyed to military decisionmakers. DOD stated that our methodology was also flawed because we looked at manning levels across entire skills rather than looking at manning within SRB years of experience zones. DOD stated that it is essential to continue to administer the SRB program by zones “since the services have requirements for minimum levels of manning within each of these zones.” However, enlisted force managers in each of the services told us that they do not manage their enlisted force by SRB zones nor do they routinely express their requirements by zone. Rather, they manage by grade level or years of service groups that overlap the SRB zones. We originally attempted to analyze fill rates by SRB zone, but, except for the Navy, the services could not readily provide us with fill rates by zone. In analyzing the Navy’s data by zone, we found that about 50 percent of the skill zones given SRBs in fiscal year 1994 were filled at rates of 90 percent or higher. In fact, 35 percent were filled at rates of 100 percent or higher. Consequently, looking at fill rates by zone where the services were able to provide the data did not change our conclusion that some SRBs were being paid to people in skills that did not appear to have critical shortages. We found similar results when we looked at the Air Force. Air Force officials told us that they do not consider fill rates by zone when making SRB decisions. They stated that in most cases they provide SRBs to personnel in zones A and B to ensure sufficient personnel at the noncommissioned officer (NCO) level. In examining this, however, we found that most of the skills that were filled at or above the 90-percent level overall, also had NCO fill rates of at least 90 percent. In fiscal year 1994, 64 percent of SRB skills with fill rates of 90 percent or higher also had NCO fill rates of 90 percent or higher and 21 percent had fill rates of 100 percent or higher. In fiscal year 1993, 78 percent of SRB skills with fill rates of 90 percent or higher also had NCO fill rates of 90 percent or higher and 44 percent had fill rates of 100 percent or higher. Thus, looking at Air Force NCO fill rates rather than overall fill rates does not change the conclusion that some SRBs were being paid to people in skills that did not appear to have critical shortages. DOD noted that a person with 2 years’ experience cannot be substituted for a person with 10 to 14 years of experience. We agree. Therefore, when we found the services paying separation bonuses to personnel with 10 to 14 years of experience in a skill area, we viewed it as an indication that the service personnel managers did not consider that skill area to be experiencing a critical shortfall. If service personnel managers believed that a skill area was critically undermanned, it would make no sense to provide incentives to the higher experienced personnel in that skill to leave the service and thus exacerbate the undermanning. DOD also noted that it is not cost-efficient for a senior person to perform a function for which he is overqualified. Again, we agree. However, if there is really a critical shortage of lower skilled personnel and an excess of higher skilled personnel in that same occupation, we would expect the service to backfill with the higher skilled personnel rather than paying them bonuses to leave. DOD also took issue with our finding that additional OSD oversight is required. DOD stated that the services and the Department spend a great deal of time and effort on the SRB program and it already goes through several lengthy review processes, including an annual budget justification. DOD also argues that the 1991 study declared the SRB program to be well-run and, therefore, no additional OSD oversight is required. The 1991 study, however, does not really support that conclusion. While making the general comment that the services’ SRB programs were in compliance with DOD policy and were well-managed, the study identified 84 skills out of 250 (about 34 percent) that should be considered for further review. We could find no indication that those 84 skills were reexamined. Also, the study noted that the OSD policy guidance is very general and that there are numerous ways it can be interpreted, each interpretation leading to a very different analytic criteria. The study proposed an automated approach that would apply a set of objective criteria to each skill, resulting in two groups of skills—those that were acceptable and those that needed further consideration. The services would then be asked to comment on any skills that were identified by the criteria as needing further review. OSD also stated that it does not want to add more complications to an already cumbersome system by layering additional restrictions on the services. DOD also noted that the services need flexibility to be able to respond to rapidly changing requirements for readiness. We do not see the exercise of adequate oversight as necessarily decreasing flexibility. The 1991 study stated that the approach it proposed would allow each of the services to develop, execute, and justify its SRB plans based on its unique requirements and objectives as long as they fit within the overall policy guidance. Rather than use the approach suggested by the 1991 study or develop a similarly streamlined method of maintaining adequate oversight, OSD has opted for reducing its oversight of the SRB program. DOD Instruction 1304.22 stated that OSD “shall conduct a detailed annual review of the enlistment bonus, selective reenlistment bonus, and special duty assignment pay programs” in conjunction with Program Objectives Memorandum cycle. It further stated that each military specialty programmed for a bonus in the next 2 fiscal years shall be examined. However, OSD has not performed such a review since the 1991 study and it has drafted new guidance that eliminates the detailed review requirement. We examined the legislative history of the SRB program and OSD and service regulations for the program. We also interviewed OSD and service representatives to determine their policies on designating SRB skills, awarding SRBs, and paying of VSI and SSB to servicemembers in SRB skills. We analyzed information provided by the services from a number of databases to determine the following for fiscal years 1993 and 1994: the number and cost of new SRBs awarded by skill, fill rates at the beginning of the year for skills receiving SRBs, the number and cost of SRBs awarded to skills with high fill rates, and the number of VSIs and SSBs given to personnel in skills eligible for SRBs. We did not perform a reliability assessment of the databases from which the services provided us data. However, we compared the information provided us to that contained in service reports and discussed the information with service officials to ensure it provided a reasonable and accurate profile of individuals receiving SRBs, the fill rates for SRB skills, and VSI and SSB recipients. Our review was conducted from June 1994 to October 1995 in accordance with generally accepted government auditing standards. Please contact me at (202) 512-5140 if you or your staff have any questions concerning this report. Major contributors to this report are listed in appendix II. The following are GAO’s comments on the Department of Defense’s letter dated September 28, 1995. 1. While there may have been other contributors, the drawdown was the main reason for the reductions cited by service Selective Reenlistment Bonus (SRB) program managers and stated in service budget justification documents submitted to Congress. In its budget documents over this period, the Navy stated that “the number of new payments declined . . . due to force structure reductions.” In discussing the declining total cost of new SRB contracts, the Air Force reported in its budget documents to Congress that “. . . the overall drawdown of the force is a contributing factor to the lower totals . . .” In addition, SRB program managers in all four services told us that, generally speaking, the declining total cost of new SRB contracts resulted from the drawdown. 2. As of September 1995, the Navy had 989 Independent Duty Corpsmen (IDC) against an authorization of 981 billets, a fill rate of over 100 percent. The Navy has requirements for an IDC functioning as the sole medical care provider on 231 of its approximately 372 ships. Even in the unlikely scenario that all 231 ships were deployed at one time, the Navy should have no trouble providing the 231 IDCs from its inventory of nearly 1,000 IDCs. 3. While Navy data shows that the first-term retention rate for Gas Turbine Mechanics (GSM) declined from 63.3 percent to 37.8 percent during fiscal year 1994, there is no apparent relationship between the decline and the SRB program. When the Navy reduced the first-term SRB award payment for GSMs by nearly two-thirds over the course of fiscal year 1991, the first-term retention rate actually increased to 57.6 percent from 53.9 percent during the year. With the SRB award to first-term GSMs maintained at the reduced payment level, retention rates were 68.2 percent and 63.3 percent at the end of fiscal years 1992 and 1993, respectively. According to Navy officials, the drop in reenlistment of first-term GSMs that occurred in fiscal year 1994 was the result of a perception among personnel within that skill area that, because of reduced ship construction and possible ship decommissionings, there was no future in the GSM rating. Despite the drop in the first-term reenlistment rate, as of September 1995, the Navy had an inventory of 2,974 GSMs against an authorization of 2,871 billets, a fill level of over 100 percent. Janet Keller, Evaluator-in-Charge Sharon Reid, Evaluator The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO reviewed whether the Department of Defense (DOD) has effectively managed the Selective Reenlistment Bonus (SRB) Program. GAO found that: (1) the services have awarded some SRB to personnel in high-skill categories where a high percentage of the required positions are already filled; (2) in fiscal year (FY) 1994, 43 percent of the new SRB contracts went to service members in skill categories where 90 percent or more of the required positions were filled and in which many higher skill level service members were paid incentives to leave the service; (3) each SRB program is targeted to different segments of the military, including personnel in different grades and year groups; and (4) the Office of the Secretary of Defense has not provided adequate oversight of the SRB program, having performed only one skills review in FY 1991. |
A rare pediatric disease, as defined by statute, is one that primarily affects children 18 years and younger and generally affects fewer than 200,000 individuals in the United States. Some diseases affect less than a handful of children, while others affect many more. In many cases, no FDA-approved therapy exists for the treatment of the disease. Drug development is inherently challenging, and developing drugs to treat rare pediatric diseases adds layers of complexity. The drug development process in general is time-consuming and costly for drug sponsors. The drug industry estimates that, on average, a sponsor spends over a decade developing a drug at an average cost of $2.6 billion. The industry also reports that the percentage of drugs that enter clinical trials and that are eventually approved by FDA as safe and efficacious is less than 12 percent. Many more drugs will fail and prove to be either unsafe or ineffective at the earlier, preclinical stage. Developing drugs to treat rare pediatric diseases is even more challenging for several reasons. By definition, the number of patients affected by any individual rare disease is small, making it difficult to understand a disease’s progression and to design studies for potential new drugs. For example, FDA has pointed out that this challenge is further compounded in drug development for children, as they represent a smaller percentage of the overall population, which makes it difficult to identify and recruit sufficient numbers of patients to include in studies. The agency further notes that conducting these studies is difficult because the manifestation and progression of the same rare disease can vary by patient. There can also be different sub- types of a single disease, which can further reduce the number of patients to study. Further, there are relatively few researchers who are knowledgeable about a particular rare disease, which makes designing studies challenging. In addition, according to drug sponsors, there may be a greater incentive for them to focus on developing drugs for large patient populations that produce higher returns on investment than drugs for smaller patient populations that may generate less revenue. As a result of these challenges and others, drug sponsors may be hesitant to attempt to develop drugs to treat rare pediatric diseases. FDA, an agency within the Department of Health and Human Services (HHS), is responsible for overseeing the safety and efficacy of drugs sold in the United States. This responsibility includes the implementation of the pediatric voucher program, as provided for in FDASIA. FDA may award a drug sponsor a voucher upon approval of that sponsor’s new drug application for a rare pediatric disease. Specifically, the drug must be for the prevention or treatment of a rare disease that primarily affects children 18 or under. The application may include the same indication for use in adults with the same rare pediatric disease, but it cannot include a different adult indication. Other criteria must also be met in order to receive a voucher. For example, the drug must not contain an active ingredient that has been previously approved by FDA in another drug application, and the drug must be eligible for priority review. New drug applications that FDA determines not to qualify for a priority review, and which therefore receive a standard review, are ineligible to receive a pediatric priority review voucher. If a drug meets the eligibility criteria, the drug sponsor should include a request for a pediatric voucher in its new drug application, including supporting documentation demonstrating how the application meets the eligibility criteria for a pediatric voucher. Alternatively, if a drug sponsor does not submit a request for a pediatric voucher, but FDA determines that the sponsor may be eligible to receive one, FDA notifies the drug sponsor of its possible eligibility. Once FDA receives a sponsor’s new drug application and pediatric voucher request, it reviews the information and considers whether it should be approved. If FDA approves the drug application, it includes its decision regarding whether to award a pediatric voucher in its approval letter. In making this decision, FDA determines whether the drug sponsor has met all of the eligibility criteria for a pediatric voucher, which includes determining that the drug is for a rare pediatric disease as well as reviewing the clinical data examining the drug’s use in a pediatric population included in the drug application. Once a drug sponsor is awarded a voucher, it can later be redeemed by that sponsor with the submission of another new drug application for a drug to treat any disease or condition in adults or children, making the sponsor automatically eligible for a 6-month priority review. The original drug sponsor also has the option of selling or transferring the voucher to a new drug sponsor, who may then choose to use the voucher or similarly sell or transfer it. The voucher may be transferred any number of times before it is used. When the sponsor who possesses the voucher ultimately decides to redeem it, the sponsor must notify FDA at least 90 days in advance of submitting the new drug application. The sponsor redeeming the voucher must also pay any other required user fees. Figure 1 provides a general overview of the pediatric voucher program. Before submitting a new drug application, a sponsor may also request a rare pediatric disease designation for a drug that is still in development. This designation was established as part of the pediatric voucher program in 2012. In its designation request, a sponsor is to include information about, among other things, the drug and the rare pediatric disease for which the drug is being investigated, and the basis for concluding that the disease is rare and primarily affects children. FDA reviews the provided information and generally informs a drug sponsor of its designation decision within 60 days of receiving the request. FDA encourages drug sponsors to request such a designation in order for the agency to have the necessary information to evaluate a drug’s pediatric voucher eligibility and to ensure that drug sponsors have an adequate opportunity to provide this information before requesting a voucher. However, requesting such designation is not required in order to receive a rare pediatric disease voucher. If a rare pediatric disease designation is not requested prior to a drug sponsor submitting its new drug application, FDA officials may determine through their reviews of a new drug application and discussions with a drug sponsor that a certain drug may be eligible for a voucher. FDA officials will ask the drug sponsor to submit the necessary information to demonstrate that the drug is for a rare pediatric disease as, according to FDA, that information is generally not included in a new drug application. Given that the typical drug development process often exceeds a decade, insufficient time has elapsed to gauge whether the 3-year-old pediatric voucher program has been effective at encouraging the development of drugs for rare pediatric diseases. We found that each of the drugs awarded pediatric vouchers were in development prior to the voucher program’s implementation. Any sponsors motivated by this relatively new program to attempt to develop drugs for such diseases would likely be years away from submitting their new drug applications to FDA. Although it is too early to gauge whether the program stimulates drug development, a potential indication of sponsor interest in the program may be reflected by the number of requests that have been submitted for a pediatric voucher or a rare pediatric disease designation. We examined how many requests for pediatric vouchers and rare pediatric disease designation were submitted to FDA and how many of these vouchers were awarded and designations were granted. As of December 31, 2015, there have been 11 requests for a pediatric voucher. Of these, 6 have been awarded, 2 denied, and 3 are still under review. The fact that the sponsors of these drugs took the steps to request vouchers and demonstrate their eligibility—either on their own initiative or in response to FDA’s suggestion—suggests interest in the program. Similarly, taking steps to demonstrate that their drugs are intended to treat rare pediatric diseases and requesting such designations also indicates that these sponsors are considering applying for a pediatric voucher. Since the pediatric voucher program and designation were established, through December 31, 2015, there have been 52 rare pediatric disease designations requested and 29 granted. Because requests for a rare pediatric disease designation can be submitted at any time in the drug development process prior to submitting a new drug application, these designations could be for drugs that, for example, are in early stages of development and were pursued specifically in response to the program. Alternatively, these designations could be for drugs that were being studied before FDASIA was enacted and thus are farther along in the development process. According to FDA, the agency does not track which stage of development a drug is in when a request for this designation is submitted. The six drugs for which pediatric vouchers were awarded helped fulfill an unmet medical need. Specifically, these six drugs were the first drugs approved by FDA to treat the seven rare pediatric diseases for which they are indicated. No other drugs had been previously approved for these diseases. Vimizim, sponsored by BioMarin Pharmaceutical, treats children with Mucopolysaccharidosis Type IVA, a rare inherited metabolic disorder resulting from an enzyme deficiency. According to FDA and NIH, the drug significantly improves patients’ ability to walk. Unituxin, sponsored by United Therapeutics, is intended to help patients with high-risk neuroblastoma, a rare pediatric cancer, and, according to FDA, improves the overall survival rates of affected children. Cholbam, sponsored by Asklepion Pharmaceuticals, is considered by relevant patient advocacy groups to be an effective and important therapy for children with some bile acid synthesis disorders and some peroxisomal disorders, both of which are metabolic disorders. Xuriden, sponsored by Wellstat Therapeutics, allows certain children with hereditary orotic aciduria—an extremely rare, genetic metabolic disorder—to live life unimpeded by the disease as long as they continue treatment, according to FDA. Strensiq, sponsored by Alexion Pharmaceuticals, is for use by children suffering from hypophosphatasia, a genetic, rare metabolic disorder. FDA and physicians reported that the drug increased survival rates and alleviated symptoms among children in clinical trials. Kanuma, also sponsored by Alexion Pharmaceuticals, is for use by patients with lysosomal acid lipase deficiency, a rare, genetic, progressive metabolic disorder. According to FDA, the drug demonstrated increased life expectancy in a clinical trial among children who were diagnosed as infants. Officials from both NIH and FDA agree that these drugs are meaningful for patients with the rare pediatric diseases as the drugs may, for example, increase life expectancy, alleviate certain symptoms, or otherwise improve quality of life. Similarly, patient advocacy groups and physicians said that these drugs provide important new treatment for patients and improve survival rates and symptoms. (See app. II for a summary about each of these diseases based on information available from NIH, patient advocacy groups, and physicians familiar with these diseases.) As of December 31, 2015, four of the six pediatric vouchers—for Vimizim, Unituxin, Cholbam, and Xuriden—have been sold or transferred to other drug sponsors. Sale prices of the pediatric vouchers have ranged from $67.5 million to $350 million. The other two awarded vouchers—for Strensiq and Kanuma—remain held by the original sponsor. Only the voucher awarded for Vimizim has been redeemed. It was used to expedite the review of Praluent, a new drug to treat adults with high cholesterol. See table 1 for more detailed information about the status of these vouchers. FDA officials expressed concern about the pediatric voucher program, and do not support its continuation after its current authorization expires October 1, 2016. In written responses to our questions, FDA officials reported that they have seen no evidence that the program has encouraged increased development of drugs for rare pediatric diseases. The agency also indicated that while it strongly supports the goal of the program—incentivizing the development of drugs for rare pediatric diseases—it has not seen evidence that the program has yet been effective in achieving this goal. Instead, the agency suggested that companies may consider that other incentives, such as provision of an additional period of “market exclusivity,” may be more effective at incentivizing drug development than the priority review vouchers. FDA specifically cited its authority to provide an additional 6 months of market exclusivity for FDA requested pediatric studies in products that may produce health benefits in the pediatric population—known as pediatric exclusivity—as providing an effective incentive to drug sponsors. In addition to sharing its views regarding the program’s effectiveness in incentivizing drug development, FDA cited concerns about what it considers to be the significant adverse impact of the program on the agency’s ability to determine its public health priorities. According to FDA, the program interferes with its ability to set priorities on the basis of public health needs by requiring FDA to provide priority reviews of new drug applications that would not otherwise qualify, based on the merits of those applications. The agency noted that an application for a drug will receive priority review designation if it is for a drug that treats a serious condition and, if approved, would provide a significant improvement in safety or effectiveness. However, FDA anticipates that sponsors will seek to redeem their vouchers for new drug applications that would otherwise receive a standard 10-month review for more prevalent conditions that already have available treatments. Such applications may be for drugs to treat diseases or conditions such as elevated blood pressure, high cholesterol, obesity, or diabetes and other drugs with substantial market potential. FDA explained that, in effect, the program allows sponsors to “purchase” a priority review at the expense of other important public health work in FDA’s portfolio, which undermines FDA’s public health mission and the morale of its professional review staff. According to FDA, the pediatric voucher program also places a substantial strain on its workload. First, the agency explained that performing a priority review on a drug that would otherwise merit a standard review requires the agency to conduct significant work in a compressed timeframe. FDA pointed out that, while patients and providers are willing to accept a greater risk for a drug that fulfills an unmet medical need, there is a different benefit risk balance that must be considered when assessing drugs for more prevalent conditions that may be used in millions of patients. A new drug application qualifying for a standard review is typically accompanied by very large data sets, reflective of the study of thousands of patients to support substantial evidence of the drug’s effectiveness and to provide the safety data required to demonstrate that its benefits outweigh its risks. As a result, 6- month priority reviews of applications that would otherwise receive a 10- month standard review require FDA to conduct work in 4 months less time. FDA noted that, in order to meet the required shortened timeframe for review, staff must divert attention from other important work or management must assign more reviewers to review an application. FDA noted that it confronted this challenge and had to curtail or defer other important work with the first redemption of a pediatric voucher for Praluent. Second, FDA indicated that the pediatric voucher program hinders its ability to effectively manage its own workload. FDA pointed out that it is organized into separate review divisions with specific areas of expertise and that it cannot quickly train new staff. There is not a pool of review staff that can be moved from one review division to another review division on an ad hoc basis to complete priority reviews for the application based on the rare pediatric review vouchers. According to FDA, it cannot predict which review divisions will need additional staff to complete the additional priority reviews, making anticipatory hiring infeasible. Although FDA receives a special user fee from a drug sponsor when the sponsor redeems a voucher, in addition to the regular user fee that accompanies a new drug application, the agency noted that FDASIA did not authorize resources beyond the user fees—funding or staff—to administer the program, including determining rare pediatric disease designations. FDA noted that there is a disconnect in the timing of its collection of the additional user fee and the time it takes the agency to hire, orient, and train additional reviewers to assist with the additional reviews. Furthermore, the additional user fee is a one-time payment and does not provide the funding needed to sustain the longer-term employment of additional staff hired to assist with conducting the priority review. While the additional user fee is intended to compensate for FDA’s increased workload related to redemption of the vouchers, FDA noted that the funding mechanism does not provide the agency the resources required to review the particular voucher priority application. FDA told us that, if the number of pediatric vouchers awarded and redeemed continues to increase, the agency’s ability to meet its public health mission and other commitments will be adversely affected, including monitoring postmarket safety, engaging with patient and stakeholder groups, and advising drug sponsors on their development programs, including those focused on pediatric drugs. Third, in a discussion with FDA, officials said that the pediatric voucher program has also significantly increased its workload due to its need to respond to requests for rare pediatric disease designations, often within 60 days, and the complexity involved in making such determinations. Determining whether to designate a drug as one for a rare pediatric disease is challenging; FDA officials told us that the vast majority of initial requests for such designation have not included adequate information to demonstrate that the disease primarily affects children 18 years and younger. As a result, FDA must work with the drug sponsor to determine what types of information are acceptable to support such an assertion. Feedback from stakeholders about the pediatric voucher program varied but has been generally positive, with nearly all drug sponsors and patient advocacy groups we spoke with saying that the program could potentially motivate further research in rare pediatric diseases. Drug sponsors largely favor the program; one sponsor and half of the patient advocacy groups with whom we spoke pointed to the sales of and prices for the vouchers as evidence that demand for the vouchers exists. Most sponsors also noted that each sale provides cash infusions for drug sponsors who were initially awarded—and later sold—the vouchers. Four of five sponsors that were awarded or transferred and later sold vouchers told us that they plan to reinvest a portion of the proceeds they received into additional research and development of drugs to treat other rare pediatric diseases. However, there is no requirement that sponsors must use the proceeds in this way. A few sponsors said that the program will be a factor in future business decisions and most said that it will likely encourage the development of drugs for treating rare pediatric diseases if it is reauthorized. Patient advocacy groups also generally favor the program. For example, one group we spoke to said that the program has stimulated a transfer of cash from larger drug sponsors to smaller ones through the sales of the vouchers, and that these smaller drug sponsors may reinvest a portion of the proceeds to continue developing drugs for rare pediatric diseases. A few groups also indicated that the program could lead to the development of much-needed pediatric drugs without costing the government resources. Most told us that they believe the program incentivizes drug development. A few groups told us that, since the creation of the program, they have spoken with several drug sponsors interested in discussing the extent to which their drugs in development might be able to treat the patients that these groups represent. Although sponsors and patient advocacy groups were generally positive about the voucher program, some also expressed concerns related to the uncertain future of the program and FDA’s interpretation of what diseases are considered rare pediatric diseases, concerns also expressed by organizations representing physicians and the health insurance industry. For example, some of the sponsors, patient advocacy groups, and other organizations that we contacted said that the FDASIA provision providing for termination of FDA’s authority to award pediatric vouchers one year after the award of the third voucher under the program (March 2016) created ambiguity for industry that therefore diminishes the program’s appeal. Specifically, two drug sponsors told us that they are concerned about pursuing lengthy and costly drug development for rare pediatric diseases in order to obtain a voucher that may be unavailable by the time they are ready to submit new drug applications to FDA. To enhance the program’s effectiveness, most drug sponsors and many patient advocacy groups said that they believe the program should be reauthorized for a longer period of time, or even permanently. Additionally, a drug sponsor and a few patient advocacy groups told us that, in their view, FDA’s interpretation of the definition of a rare pediatric disease is too narrow. Some said that as a result, certain rare diseases, such as sickle cell disease and some pediatric cancers, are not eligible for a pediatric voucher because more than 50 percent of afflicted children survive to adulthood. One patient advocacy group indicated that such an exclusion effectively penalizes all patients with these diseases because a majority of them live past 18 years, although the onset of the disease occurs during childhood. They told us that they believe such diseases should be included in FDA’s definition. When asked about how the agency determined its definition of a rare pediatric disease, FDA officials pointed out that a vast majority of rare diseases are diagnosed in childhood— given this, products for all rare diseases diagnosed at that time would be eligible for a voucher. However, since children were to be the intended population for pediatric voucher program per FDASIA, FDA officials noted that, by law, the definition applies to those diseases that primarily affect children 18 years and younger. Several drug sponsors and a patient advocacy group raised some concerns about the program but were uncertain about how to address them. For example, certain drug sponsors and the patient advocacy group suggested that there might be an optimal number of vouchers to be awarded to maximize their value to industry and their incentivizing effect. The patient advocacy group suggested that awarding too many vouchers would cause their value to plummet. However, most of them were uncertain about what the optimum quantity of awarded vouchers should be. In addition, similar to a concern raised by FDA, one drug sponsor told us that it was concerned that incentivizing development of drugs for rare pediatric diseases could potentially lead to unintended consequences, such as diverting attention from mass-market diseases such as diabetes. Finally, feedback from organizations representing physicians, health insurers, and children’s hospitals about the pediatric voucher program was varied. While two of these organizations generally favored the program, all told us that there was insufficient information to judge the program’s overall effectiveness or that it was simply too soon to tell. One organization shared FDA’s concerns about potential unintended consequences, such as the diversion of resources from other agency priorities. Feedback from the academic community was also varied. One academic told us that the voucher program has been consistent with his expectations and echoed what a few patient advocacy groups said—that the program could be a stimulant for developing drugs for rare pediatric diseases at little cost to the federal government. In contrast, another academic said it was difficult to determine whether the program stimulated research since only a few years have elapsed since the program was implemented. He indicated, similar to FDA’s concern, that the program could instead lead to unintended consequences. For example, this academic suggested that the program could strain FDA resources, commoditize its approval process, and result in the granting of a priority review to a drug that is neither novel nor fulfills an unmet medical need. He also proposed that, if the pediatric voucher program is reauthorized it could be improved by delaying the awarding of the vouchers until several years after the drugs’ approval. This would allow more time to assess whether patients have actually benefitted from the drugs, and are able to access the drugs, before the voucher is awarded. We provided a draft of this report for comment to HHS. HHS provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees and the Secretary of Health and Human Services. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix III. 1. American Academy of Pediatrics 2. Children's Hospital Association 3. America’s Health Insurance Plans 4. Jerry Vockley, MD., Ph.D. Professor of Pediatrics and Human Genetics University of Pittsburgh 5. Dr. David Ridley Duke University The Fuqua School of Business Faculty Director of the Health Sector Management Program 6. Aaron S. Kesselheim, M.D., J.D., M.P.H. Pediatric patients affected by seven diseases that previously had no approved treatment may now benefit from six newly-approved drugs for which pediatric vouchers were awarded. We have summarized information about each of these diseases obtained from the National Institutes of Health’s Genetics Home Reference, patient advocacy groups, and physicians familiar with these conditions. Mucopolysaccharidosis type IVA, also known as Morquio A Syndrome, is a rare, progressive, hereditary disease that mainly affects the skeleton and can lead to paralysis and early death. Genetic mutations reduce or eliminate the activity of certain enzymes that are involved in the breakdown of large sugar molecules, resulting in the accumulation of such molecules to toxic levels in many tissues and organs, particularly in the bones, causing deformities. Affected individuals typically demonstrate signs of the disease during early childhood, including skeletal abnormalities such as knock knees, short stature, and abnormalities of the chest, hips, ribs, spine, and wrists. Other symptoms may include vision loss; hearing loss; frequent upper respiratory infections; thin tooth enamel and multiple cavities; heart valve abnormalities; and a mildly- enlarged liver. Morquio A Syndrome does not affect intelligence. Although the exact prevalence of Morquio A Syndrome is unknown, it is estimated that the broader condition—Mucopolysaccharidosis type IV— occurs in approximately 1 in every 200,000 to 300,000 individuals. The life expectancy of individuals with Morquio A Syndrome depends on the severity of symptoms, with the most severely affected patients surviving only until late childhood or adolescence. Individuals with milder forms of the disorder may live into adulthood, although their life expectancy may be reduced. Vimizim (elosulfase alfa), is the first FDA-approved drug for the treatment of Morquio A Syndrome. No other FDA-approved therapies exist for treatment of this disease. Neuroblastoma, a type of pediatric cancer that occurs when immature nerve cells become abnormal and multiply uncontrollably, most often occurs in children before age 5 and rarely occurs in adults. Most commonly, a tumor forms in the adrenal gland located above each kidney and can spread to other parts of the body such as the bones, liver, or skin. Tumors also commonly grow in the nerve tissue in the abdomen, chest, neck, or pelvis. Individuals with neuroblastoma may exhibit symptoms such as fever, irritability, pain, tiredness, diarrhea, loss of appetite, and weight loss. Some symptoms may be location-specific, such as a tumor in the abdomen causing abdominal swelling; a tumor in the chest causing difficulty breathing; and a tumor metastasizing to the bone causing bone pain, bruises, and pale skin. Neuroblastoma occurs in approximately 1 in every 100,000 children and is diagnosed in about 650 children each year in the United States. It is the most common cancer in infants younger than 1 year. Only 40 to 50 percent of children with high-risk neuroblastoma live at least 5 years after diagnosis. Unituxin (dinutuximab) is the first FDA-approved drug for the treatment of high-risk neuroblastoma. There are currently other FDA-approved drugs for neuroblastoma (specifically, Cyclophosphamide, Vincasar PFS, and Doxorubicin Hydrochloride); however, none of these were approved specifically for the treatment of patients with high-risk neuroblastoma. Bile acid synthesis disorders are a group of rare metabolic disorders characterized by impaired production and release of a digestive fluid, called bile, from liver cells. People with bile acid synthesis disorders cannot produce bile acids, which are a component of bile that stimulate bile flow and help it absorb fats and fat-soluble vitamins, such as vitamins A, D, E, and K. Consequently, an abnormal form of bile is produced. The failure to produce normal or functional bile acids results in the accumulation of abnormal bile acids and other substances that normally would be broken down within the body, leading to deterioration of certain organ systems. Symptoms may include interruption or suppression of the flow of bile from the liver, fat-soluble vitamin malabsorption, progressive neurological disease, and liver disease. Bile acid synthesis disorders are estimated to occur in between 1 to 9 individuals in every 1,000,000 births. If left untreated, the disorders may lead to cirrhosis of the liver and death in childhood. Cholbam (cholic acid) is the first FDA-approved drug for the treatment of bile acid synthesis disorders due to single enzyme defects. No other FDA-approved therapies exist for these disorders. Peroxisomal disorders are a group of metabolic disorders, including those in the Zellweger spectrum. These systemic diseases, which affect multiple organs and may have neurological manifestations, present as rare autosomal recessive disorders with impairment of production and release of digestive fluid, called bile, from liver cells. Bile is used during digestion to absorb fats and fat-soluble vitamins, such as vitamins A, D, E, and K. Individuals with the most severe forms of this disease develop symptoms of the condition as newborns, and experience weak muscle tone, feeding problems, hearing and vision loss, and seizures. They may also develop life-threatening problems in other organs and tissues, such as the liver, heart, and kidneys, and may have skeletal abnormalities. Affected individuals have distinctive facial features, including a flattened face and broad nasal bridge. Individuals with less-severe forms of the disease may not develop signs of the disease until late infancy or early childhood. They may have many of the same features as those patients with severe cases; however, their conditions typically progress more slowly. Children with these less-severe conditions often exhibit developmental delays and intellectual disability. Zellweger spectrum disorders (a subset of peroxisomal disorders) are estimated to occur in approximately 1 in every 50,000 individuals. Peroxisomal disorders encompass a spectrum of disorders, which means the life expectancy of a patient depends on the severity of his or her disease. Patients diagnosed with the most severe form typically do not live beyond 1 year. Children with less severe forms generally live until 10 years of age, although there have been cases reported of children living longer. Cholbam (cholic acid) is the first FDA-approved drug for the treatment of peroxisomal disorders (including Zellweger spectrum disorders). No other FDA-approved therapies exist for these disorders. Hereditary orotic aciduria is an extremely rare, potentially life-threatening, genetic disorder in which patients cannot produce adequate amounts of uridine, a component of ribonucleic acid that is involved in the synthesis of protein in the body. Patients with inadequate amount of uridine can suffer from blood abnormalities, failure to thrive, a range of developmental delays, and episodes of crystal formation in the urine leading to obstruction of the ureter (a tube that carries urine from the kidneys to the bladder), causing urine to back up into the kidney, making it swell. Hereditary orotic aciduria is extremely rare, with only four known patients with this disease in the United States, and an estimated 20 worldwide. Left untreated, the disease can contribute to early mortality. Xuriden (uridine triacetate) is the first FDA-approved drug for the treatment of hereditary orotic aciduria. No other FDA-approved therapies exist for this disease. Hypophosphatasia is a rare, genetic, progressive, metabolic disease in which patients experience devastating effects on multiple systems of the body, leading to severe physical disability and life-threatening complications. With a spectrum of symptoms and severity, the disease is characterized by defective bone mineralization and softening of the bones. Though forms of hypophosphatasia may appear in childhood or adulthood, the most severe forms tend to occur before birth and in early infancy. Affected newborns exhibit short limbs, an abnormally-shaped chest, and soft skull bones. Additional complications in infancy include poor feeding, a failure to gain weight, respiratory problems, and high levels of calcium in the blood that may lead to kidney problems. Early loss of primary (baby) teeth is one of the first signs of the condition in children. Affected children may have short stature with bowed legs or knock knees, enlarged wrist and ankle joints, and an abnormal skull shape. Afflicted individuals may exhibit delayed development with traditional milestones such as sitting, crawling, or walking. Severe forms of hypophosphatasia are estimated to occur in approximately 1 in every 100,000 births. Milder cases, such as those that appear in childhood or adulthood, may occur more frequently. The life expectancy of a patient depends on which form of hypophosphatasia (perinatal, infantile, juvenile, or adult) he or she has. The life expectancy of those with the most severe form, perinatal hypophosphatasia, is measured only in days or weeks. Strensiq (asfotase alfa) is the first FDA-approved drug for the treatment of perinatal, infantile, and juvenile-onset hypophosphatasia. No other FDA- approved therapies exist for this disease. Lysosomal acid lipase deficiency is an inherited spectrum condition in which affected individuals are unable to properly breakdown and use fats and cholesterol in the body. The condition ranges from the infantile-onset form (Wolman disease) to later-onset forms (known as cholesteryl ester storage disease). In affected individuals, harmful amounts of fats may accumulate in areas such as the spleen, liver, bone marrow, and small intestine. Chronic liver disease can develop, along with accumulation of fatty deposits in the arteries. The deposits may eventually block the arteries, which may increase the chance of having a heart attack or stroke. The symptoms of lysosomal acid lipase deficiency are highly variable. Individuals in which onset occurs later in life may experience mild symptoms that are undiagnosed until late adulthood, while those with early onset of the disease may have liver dysfunction in early childhood. Infants with Wolman disease may demonstrate an enlarged liver and spleen, poor weight gain, low muscle tone, jaundice, vomiting, diarrhea, developmental delay, anemia, and poor absorption of nutrients from food. Wolman disease is estimated to occur in 1 in 350,000 newborns. Children affected by Wolman disease develop severe malnutrition and generally do not survive past early childhood. Comparatively, about 50 individuals affected by cholesteryl ester storage disease have been reported worldwide, and the lifespan of these individuals depends on the severity of the associated complications. Kanuma (sebelipase alfa) is the first FDA-approved drug for the treatment of lysosomal acid lipase deficiency. No other FDA-approved therapies exist for this disease. In addition to the contact named above, Geri Redican-Bigott, Assistant Director; George Bogart; Muriel Brown; Kaitlin Coffey; Jesse S. Elrod; and Cathleen Hamann made key contributions to this report. | Almost 7,000 rare diseases, most of which are serious or life-threatening, affect more than 25 million Americans. About half of all rare diseases affect children, and few of these diseases have viable treatments. To encourage the development of drugs to treat or prevent rare pediatric diseases, the Food and Drug Administration Safety and Innovation Act (FDASIA) of 2012 authorized FDA to award a priority review voucher to a drug sponsor upon approval of that sponsor's drug to treat a rare pediatric disease. A drug sponsor can later redeem the voucher when submitting another new drug application to treat any disease or condition in adults or children, or sell or transfer the voucher to another sponsor. A voucher entitles a sponsor to a 6-month priority review by FDA rather than the 10-month standard review. FDASIA included a provision for GAO to study the pediatric voucher program. GAO examined what is known about the effectiveness of the program in encouraging the development of drugs to prevent or treat certain rare pediatric diseases. GAO reviewed relevant laws and documentation related to the program and its management, and identified drug sponsors who were awarded vouchers, the diseases their drugs were approved to treat, and whether the vouchers were redeemed, sold, or transferred. GAO also interviewed FDA officials, drug sponsors, patient advocacy groups, and organizations representing physicians and children's hospitals, among others. It is too early to gauge whether the Food and Drug Administration's (FDA) pediatric voucher program has stimulated the development of drugs to treat or prevent rare pediatric diseases. Given that the typical drug development process often exceeds a decade, insufficient time has elapsed to determine whether the 3 year-old program has been effective. Any drug sponsors motivated by the program to attempt to develop a drug for a rare pediatric disease may be many years from submitting new drug applications—which contain scientific and clinical data about safety and effectiveness—to FDA for review. As of December 31, 2015, there have been 11 requests for a pediatric voucher. Of these, six have been awarded, two denied, and three remain under review. The six drugs for which vouchers were awarded were in development prior to the program's implementation and these drugs helped fulfill unmet medical needs. One drug is indicated to treat a rare pediatric cancer, and the other five drugs treat rare metabolic diseases affecting children. No other drugs had been previously approved by FDA for these conditions. Four of the six awarded pediatric vouchers have been sold to other drug sponsors for prices ranging from $67.5 million to $350 million. One of the six vouchers awarded has been redeemed and was used to obtain a priority review of a new drug application for a drug to treat adults with high cholesterol. FDA approved this new drug application in July 2015. FDA officials stated that, while they strongly support the goal of incentivizing drug development for rare pediatric diseases, they have seen no evidence that the program is effective. The program's authorization, as amended, is set to terminate October 1, 2016, and FDA officials said they do not support the program's continuation. They expressed concern that the program adversely affects the agency's ability to set its public health priorities by requiring FDA to provide priority reviews of new drug applications that would not otherwise qualify if they do not treat a serious condition or provide a significant improvement in safety or effectiveness. Additionally, FDA officials said that the additional workload from the program strains the agency's resources. However, other stakeholders provided generally positive feedback on the program. For example, drug sponsors that sold these vouchers said they plan to reinvest portions of the proceeds they received into additional research on rare pediatric diseases, although there is no requirement to do so. Patient advocacy groups told GAO that the program could lead to the development of needed drugs. We provided a draft of this report for comment to the Department of Health and Human Services (HHS). HHS provided technical comments, which we incorporated as appropriate. |
In 1986, a report to the President on defense management concluded that the defense industry needed to promote principles of ethical business conduct, detect acts of procurement fraud through self-governance, and voluntarily report potential fraud to the government. The report noted that DOD awarded contracts worth about $164 billion in 1985, 70 percent of which went to a group of 100 contractors. Twenty-five contractors reportedly did business of $1 billion or more, 147 contractors did $100 million or more, and almost 6,000 contractors did $1 million or more. In fiscal year 1994, the number of contractors doing business with DOD did not substantially change. Total DOD contracting for goods and services over $25,000 in fiscal year 1994 amounted to $118 billion. In response to the 1986 report, a number of defense contractors established self-governance programs that included monitoring compliance with federal procurement laws and voluntarily disclosing violations to government authorities. These efforts became known as the Defense Industry Initiative on Business Ethics and Conduct. To facilitate contractor self-governance and to encourage contractors to adopt a voluntary disclosure policy, DOD established the Voluntary Disclosure Program in July 1986. This program provides general guidelines, policy, and processes to enable DOD and its contractors to address matters of wrongdoing the contractors discover. At the time, DOD recognized that there was a need for a process to deal in a consistent manner with matters disclosed by contractors. In return for voluntarily disclosing potential wrongdoing and cooperating in any government audit and investigation, the government generally allows a contractor to conduct its own investigation, which the government then attempts to verify expeditiously. Upon receipt of an initial contractor disclosure, the DOD Inspector General’s office (1) makes a preliminary determination as to whether the disclosure satisfies the program’s requirements, (2) coordinates the execution of the standard voluntary disclosure agreement, (3) assigns the disclosure to a DOD criminal investigative organization for verification and to a suspension and debarment authority, and (4) coordinates the disclosure with the Justice Department for potential civil and criminal action. The Justice Department reviews all voluntary disclosures. It conducts, either through its Defense Procurement Fraud Unit or through referral to the appropriate U.S. Attorney’s Office, a preliminary inquiry to determine if there is credible evidence suggesting prosecutable violation of federal laws. The Justice Department has sole responsibility to initiate or decline prosecution. It also has an opportunity to concur in the voluntary disclosure agreement between the contractor and DOD. Acceptance of a voluntary disclosure into the program by DOD is based on four criteria. The contractor voluntarily disclosing the potential fraudulent action must (1) not be motivated by the recognition of imminent detection, (2) have status as a business entity, (3) take prompt and complete corrective actions, and (4) fully cooperate with the government in any ensuing investigation or audit. The number of voluntary disclosures under the program has been relatively small and the dollar recoveries have been modest. From its inception in 1986 through September 1994, DOD reported that 138 defense contractors made 325 voluntary disclosures of potential procurement fraud, of which 129 have been closed. According to DOD, 48 of the top 100 defense contractors made 222 disclosures. The remaining 103 disclosures were made by 90 contractors from among the more than 32,000 contractors doing business with DOD. Many contractors were one-time users, but one large contractor accounted for 23 of the closed cases. Figure 1 shows the annual number of disclosures reported since the program’s inception. Acceptance into the program has its benefits for contractors. For example, a contractor can expect (1) its liability in general to be less than treble damages, (2) action on any suspension to be deferred until after the disclosure is investigated, (3) the overall settlement to be coordinated with government agencies, (4) the disruption from adversarial government investigations to be reduced, and (5) the information may be kept confidential to the extent permitted by law and regulation. The program also benefits the government. For example, DOD commented that the existence of a structured format for addressing contractual and legal violations encourages contractor ethics and internal review programs. The Justice Department pointed out that the program promotes corporate compliance with laws and regulations. According to DOD, the key to deciding if a disclosure is voluntary is whether a contractor was aware of information the government possessed or was about to discover, thus motivating the contractor to make a disclosure. In a 1992 DOD review of the program, DOD noted cases in which it had determined that contractors’ disclosures were eligible for admission into the program, but the Justice Department disagreed and recommended that the disclosures not be admitted into the program. In 1992, when this disagreement was noted, the Justice Department proposed that it and DOD establish a working group to resolve the issue. To date, we were told, this has not occurred. According to officials from the two departments, disagreements continue over whether some disclosures should be admitted into the program. In fact, two of the three cases that were the basis of the concerns reflected in the 1992 review remain in the program as open cases, and the Justice Department still has not concurred with DOD’s acceptance of these disclosures into the program. The disagreement between the two departments revolves around whether disclosures were triggered by knowledge of imminent discovery by the government. In this regard, DOD believes that it is its prerogative, not the Justice Department’s, to accept or reject a contractor’s voluntary disclosure. DOD stated that it did not always agree with the Justice Department on whether a company should be admitted into the program. However, DOD stated that it and the Justice Department have worked well together in resolving the questions on a factual basis and that this cooperation has grown significantly over the last 2 years. DOD stated that the DOD Inspector General staff and representatives of the Defense Procurement Fraud Unit meet every 6 weeks to discuss the status of disclosures. During our review, we were told that these meetings were to resolve cases that had been open for an extended period, not to address whether disclosures should be accepted into the program. Through September 1994, DOD reported recoveries from the program of about $290 million, of which about 38 percent is associated with cases that are still open. The $290 million represents about 17 percent of the Justice Department’s $1.7 billion in reported settlements on DOD procurement fraud cases between fiscal years 1987 and 1994. While the value of the voluntary disclosure program may well extend beyond the amount of dollar recoveries, we note that most disclosures did not result in significant dollar recoveries for the government. Of 129 closed cases, 81 cases, or about 63 percent, had reported recoveries of less than $100,000, of which 52 cases, or 40 percent, had no dollar recoveries. Forty-eight cases had reported recoveries of $100,000 or more, of which 15 cases had reported recoveries of $2 million or more. Figure 2 shows the distribution of DOD-reported dollar recoveries for closed cases. The $290 million attributable to the program is overstated because it includes an amount that should not be considered a recovery from the program, as well as amounts related to disclosures made prior to the formal initiation of the program. The reported recoveries include (1) $75 million representing a contractor’s premature billings of progress payments and (2) recoveries from voluntary disclosure cases that predated the beginning of the program by up to 2 years. One case was closed before the program began. With regard to the progress payments, both the contractor’s disclosure report and the government’s subsequent investigative report showed the contractor prematurely billed the government by about $75 million. The Justice Department commented that the contractor then withheld approximately $75 million in billings at the time of the voluntary disclosure to rectify the premature billings. However, since DOD subsequently paid the contractor in full the amounts due under the contract, we believe the $75 million should not be claimed as a program recovery. DOD considers the submission of a claim for unearned progress payment to be a false claim and thus appropriate for reporting under the program. The Justice Department commented that there was no “recovery” of $75 million and that the government was damaged by the interest lost on the premature payments, the amount of which was included in the final settlement with the contractor. In our view, a recovery properly attributable to the voluntary disclosure program would be the interest cost on the $75 million premature payment. For 14 cases that predated the program, the DOD official responsible for the program told us that in 8 cases, although the disclosures predated the program announcement letter to industry, agreements were signed after the announcement and recoveries were resolved under the program. He said recoveries were made in three other cases after the program began. The DOD official believes, therefore, that these 11 cases were appropriately included in the program. However, he agreed that recoveries related to the three remaining cases should not be attributed to the program and indicated that DOD would reduce its reported recoveries—about $900,000—for these three cases. For closed cases, DOD records show that it took an average of 2.8 years to complete a voluntary disclosure case, with about 25 percent taking over 4 years. DOD records also show that the contractors’ investigation took about 21 percent of the time and that the federal audit/investigation took about 52 percent of the time. Figure 3 shows the time to complete the closed cases. More than half the disclosures made since the program began are still reported as open. As of September 30, 1994, there were 173 open cases that have been open an average of 3.5 years. Twenty-nine of 44 cases disclosed in fiscal year 1990 and 13 cases disclosed in fiscal year 1987, the first full year of the program, were still reported as open. Further, the open case load is growing. The number of open cases at the end of fiscal year 1994 was greater than it was at the end of fiscal year 1990, despite a decline in the number of disclosures over the past 4 fiscal years. A Justice Department official suggested that some open cases may have been completed but not shown as closed in DOD’s records. Between October 1994 and the end of June 1995, only 2 cases were closed while 15 were accepted into the program. A Justice Department official responsible for the program commented that not all contractors fully cooperate with the government and that this is one factor that makes investigations a time-consuming process and delays settlements. The official stated that few companies provide the government all its witness interview memoranda and that fewer still agree to provide the government a “road map” of the cases, believing that they are not obliged to serve as the government’s investigator. According to this official, companies making voluntary disclosures tend to provide more assistance in a government investigation when the potential business and legal risks to the contractor are greater or when they want to give the impression that the company is turning over “a new leaf.” Our review identified two instances of less than full contractor cooperation. In one case, the company official destroyed records related to its disclosure. According to DOD, this company was successfully criminally prosecuted and fined, the official was sentenced to jail, and the company was debarred. The government’s investigation took 13 months, according to DOD information. In the other case, the contractor denied documents to government investigators, and the DOD Inspector General ultimately issued a subpoena to obtain the information. The government’s investigation took about 5 years, according to DOD information. The Justice Department said that the investigation included not only the disclosure but an additional series of allegations made in the related qui tam case, which was filed almost simultaneously with the company’s report. DOD officials considered removing this contractor from the program due to lack of cooperation but did not. The DOD official responsible for the program, however, stated that while there have been instances of less than total, or in a few cases very little, cooperation, they have been the exception rather than the rule. He added that disclosing a wrongdoing, conducting an internal investigation, and providing an internal investigative report without resorting to subpoenas or grand juries, were far more cooperative than would be present in any adversarial investigation. To ensure that each case is processed adequately and expeditiously, DOD guidelines require the investigative agencies to prepare a case progress report every 90 days summarizing the ongoing investigation and discussing case management issues, such as the status of the investigation and the level of contractor cooperation, and to forward the report to the DOD program manager. DOD also requires the investigative agencies to schedule a meeting with other appropriate program officials, such as those from the Justice Department and other DOD criminal investigative agencies, within 14 days of the progress report. The purpose of the meeting is to review the status of the case and determine what more needs to be done on each open investigation. According to the DOD program manager, investigative agencies are not systematically sending in the progress reports, and, in some cases, the reports that are submitted do not meet the program’s reporting requirements. Further, he told us that the meetings are not taking place because staffing is limited and priority is given to new cases over open cases. He also said DOD had not been following up to ensure that the DOD requirements were met and cases were handled expeditiously. According to DOD data, the most frequent violation types disclosed were for contract mischarging and product substitution. Contract mischarging is applying material or labor charges to the wrong contract; product substitution is delivering products other than those specified in the contract. Other disclosures dealt with violations relating to overpricing of contracts negotiated under the Truth in Negotiations Act, false claims or statements, and excessive progress payment. Table 1 shows the number and types of violations disclosed for the closed cases. In 1986, the False Claims Act was amended to increase the qui tam relator’s share of recovery in fraud settlements. Since that time, DOD procurement-related qui tam actions have steadily increased, while voluntary disclosures have decreased. Figure 4 shows the number of DOD-related qui tam actions filed and the number of DOD voluntary disclosures made since 1987. While the increase in qui tam actions may be related to the increase in a relator’s share of the recovery, we found no data to explain the decrease in disclosures. There is little overlap between voluntary disclosures and related qui tam actions. For the 129 voluntary disclosure cases closed since the program began, only 4 involved qui tam actions. In one case we examined, the government benefited because the qui tam action (1) provided a road map essential to the government’s case, (2) identified additional fraudulent activity, and (3) increased the amount of money recovered by the government. According to a DOD official, some contractors claim that the threat of a qui tam action might discourage voluntary disclosures because the company’s investigation creates potential qui tam relators as more employees become aware of the potential fraud. He added that a contractor runs the risk of an employee filing a qui tam action before it can complete its investigation or even adequately define the issue to make a sufficiently complete voluntary disclosure for acceptance into the program. On the other hand, this DOD official remarked that other contractors indicated they would make disclosures in spite of possible qui tam actions. Other reasons cited for a contractor not making a voluntary disclosure include (1) contractor management conflicts between disclosing potential fraud to the government and the contractor’s perceived duty to protect stockholder value; (2) contractor uncertainty of prosecution outcome from disclosing potential fraud; (3) the high cost of internal investigations, which is usually stipulated to be an unallowable cost for government reimbursement purposes; and (4) differences between contractor disclosure policies and its practices. According to an official in the DOD Inspector General’s office, voluntary disclosures and qui tam actions complement each other and qui tams act as a “check and balance” to the program and contractor honesty. In commenting on a draft of this report, DOD emphasized that the program generates positive results and is clearly in the government’s best interest. DOD’s comments are presented in their entirety in appendix I, along with our evaluation of them. The Justice Department said that it is committed to the program and that the program has been remarkably effective in nurturing business honesty and integrity and in bringing good new cases to the government’s attention. It believes the program to be a model for government voluntary disclosure programs. The Justice Department’s comments are presented in their entirety in appendix II, along with our evaluation of them. We reviewed overall statistical information on the program’s accomplishments, as well as information on qui tam actions and their relationship to voluntary disclosures. We also reviewed limited information on one of four qui tam cases. In addition, we talked to experts inside and outside of the government on the program’s merits and on its relationship to qui tam actions. We performed limited tests of the data reviewed and found some inaccuracies. Thus, while we have concerns about the reliability of the data, it represents the only source of comprehensive information on the program’s accomplishments other than individual case files. DOD and Justice Department policies and practices prevented our access to open voluntary disclosure case files. Our access to closed case file information was also limited when, according to Justice Department officials, it contained information covered by rule 6(e) of the Federal Rules of Criminal Procedure, which governs secrecy requirements of grand jury proceedings. As a result, the Justice Department would not provide us with the bulk of several closed case files we initially selected for review. Furthermore, according to the Justice Department, some of the documents in two of three closed cases we selected for initial review were unavailable because of a court-imposed protective order in one case and a confidentiality agreement between the U.S. Attorney’s Office and the company in the other case. We conducted our review from May 1994 to July 1995 in accordance with generally accepted government accounting and auditing standards. Unless you publicly announce its contents earlier, we plan no further distribution of this report until 30 days from its issue date. At that time, we will send copies to the Secretary of Defense; the Attorney General, Department of Justice; the Director, Office of Management and Budget; and other interested congressional committees. Copies will also be made available to others upon request. Please contact me at (202) 512-4587 if you or your staff have any questions concerning this report. The major contributors to this report are listed in appendix III. The following are GAO’s comments on the Department of Defense’s (DOD) letter dated October 13, 1995. “The number of current investigative cases and resulting recoveries of money to the Government and convictions of defense contractors being conducted by the Defense Criminal Investigative Service shows that fraud is still increasing. The Federal Bureau of Investigations statistics shown for the United States substantiate the same trend. Losses due to fraud are approximately $200 billion a year.” Although our report notes that the program represented about 17 percent of the Justice Department’s $1.7 billion in reported settlements on DOD procurement fraud cases between fiscal years 1987 and 1994, actual program recoveries were a matter of disagreement. 3. We modified the report’s text to incorporate DOD’s comments. 4. We continue to disagree with DOD on reporting the $75 million in premature progress payments as a recovery of the program since the amount was ultimately paid to the contractor. 5. We modified the report’s text to incorporate DOD’s comments. 6. We modified the report’s text to incorporate DOD’s comments. 7. We modified the report’s text to incorporate DOD’s comments. The following are GAO’s comments on the Department of Justice’s letter dated October 11, 1995. 1. We do not make the conclusion that the Voluntary Disclosure Program is not a useful or effective means of identifying or combatting fraud. 2. We agree that statistics alone do not tell the whole picture of the potential contribution of the program. We recognize that the program’s value may extend beyond that which can be measured by available statistics and that corporate compliance that comes out of voluntary disclosures can have long-term effects on business honesty and integrity. 3. DOD continues to report two open cases in which the Justice Department did not concur because it believed the contractor was motivated by recognition of imminent detection. 4. While we attempted to work with the Justice Department in obtaining information from closed case files, the length of time it took to obtain information did not allow us to complete our audit in a timely manner. Further, without knowledge of the information withdrawn from the files, we could not effectively evaluate the administration of the program. 5. We have deleted this sentence based on the Justice Department’s comments. 6. For purposes of background and brevity, we summarized the criteria for program acceptance. A full presentation of the criteria does not, in our view, add to the background presentation. 7. We have modified the report based on the Justice Department’s comments. 8. We have modified the report based on the Justice Department’s comments. 9. We have modified the report based on the Justice Department’s comments. 10. Although the government was damaged by the amount of lost interest on the premature payment to the contractor, the $75 million represents the amount of the progress payment and does not include interest lost. 11. We have modified the report based on the Justice Department’s comments. 12. We have modified the report based on the Justice Department’s comments. 13. We have modified the report based on the Justice Department’s comments. 14. We have modified the report based on the Justice Department’s comments. John E. Clary Joe D. Quicksall Ronald J. Salo The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. 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A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the Department of Defense's (DOD) Voluntary Disclosure Program, focusing on the: (1) extent to which defense contractors participate in the program; (2) amount of money that has been recovered under the program; (3) time taken to close disclosure cases; (4) most common type of disclosures; and (5) extent of overlap between voluntary disclosures and qui tam actions. GAO found that: (1) although 48 of the top 100 defense contractors have made voluntary disclosures, the total number of disclosures under the program has been relatively small and dollar recoveries have been modest; (2) from its inception in 1986 through September 1994, DOD reported that, of the thousands of defense contractors, 138 contractors made 325 voluntary disclosures of potential procurement fraud; (3) DOD reported recoveries from these disclosures to be $290 million, about 17 percent of total reported DOD procurement fraud recoveries between fiscal years (FY) 1987 and 1994; (4) GAO's review indicated that DOD's reported recoveries of $290 million were overstated because they included $75 million in premature progress payments and amounts from disclosures made prior to the program; (5) further, DOD accepted some disclosures into the program that the Justice Department believed were triggered by imminent government discovery and thus did not meet the criteria for admission; (6) voluntary disclosure cases took an average of 2.8 years to close, with about 25 percent taking over 4 years; (7) open cases are taking longer; (8) as of September 1994, DOD data showed that open cases averaged 3.5 years, with over half of the cases disclosed in FY 1990 still open; (9) less than full contractor cooperation with the government and low priority given by DOD and other investigative agencies to managing cases expeditiously may be problems in some cases; (10) most disclosures did not result in significant dollar recoveries for the government; (11) of 129 closed cases, 81 cases, or about 63 percent, had reported recoveries of less than $100,000, of which 52 cases, or 40 percent, had no dollar recoveries; (12) forty-eight cases had reported recoveries of $100,000 or more, of which 15 cases had reported recoveries of $2 million or more; (13) there is little overlap between voluntary disclosures and qui tam actions; and (14) of the 129 voluntary disclosure cases closed since the program began, 4 involved qui tam actions. |
Information security is a critical consideration for any organization that depends on information systems and computer networks to carry out its mission or business. It is especially important for government agencies, where the public’s trust is essential. The dramatic expansion in computer interconnectivity and the rapid increase in the use of the Internet are changing the way our government, the nation, and much of the world communicate and conduct business. Without proper safeguards, systems are unprotected from individuals and groups with malicious intent to intrude and use the access to obtain sensitive information, commit fraud, disrupt operations, or launch attacks against other computer systems and networks. These concerns are well founded for a number of reasons, including the dramatic increase in reports of security incidents, the ease of obtaining and using hacking tools, the steady advance in the sophistication and effectiveness of attack technology, and the dire warnings of new and more destructive attacks to come. Computer-supported federal operations are likewise at risk. Our previous reports, and those of agency inspectors general, describe persistent information security weaknesses that place a variety of federal operations at risk of disruption, fraud, and inappropriate disclosure. We have designated information security as a governmentwide high-risk area since 1997—a designation that remains today. Recognizing the importance of securing federal information systems, in December 2002, Congress enacted the Federal Information Security Management Act (FISMA) to strengthen the security of information and systems within federal agencies. FISMA requires each agency to develop, document, and implement an agencywide information security program to provide information security for the information and systems that support the operations and assets of the agency, using a risk-based approach to information security management. Following the stock market crash of 1929, Congress passed the Securities Exchange Act of 1934, which established SEC to enforce securities laws, to regulate the securities markets, and to protect investors. In enforcing these laws, SEC issues rules and regulations to provide protection for investors and to help ensure that the securities markets are fair and honest. This is accomplished primarily by promoting adequate and effective disclosure of information to the investing public. The commission also oversees and requires the registration of other key participants in the securities industry, including stock exchanges, broker-dealers, clearing agencies, depositories, transfer agents, investment companies, and public utility holding companies. SEC is an independent, quasi-judicial agency that operates under a bipartisan commission appointed by the President and confirmed by the Senate. SEC had a budget of about $888 million and staff of 3,865 to monitor and regulate the securities industry in fiscal year 2005. In 2003, the volume traded on U.S. exchanges and NASDAQ exceeded $22 trillion and 850 billion shares. Each year the commission accepts, processes, and disseminates to the public more than 600,000 documents from companies and individuals, including annual reports from more than 12,000 reporting companies. In fiscal year 2005, SEC collected $595 million for filing fees and $1.6 billion in penalties and disgorgements. In addition, the commission uses other systems that maintain sensitive personnel information for its employees, filing data for corporations, and legal information on enforcement activities. SEC relies extensively on computerized systems to support its financial operations and store the sensitive information it collects. Its local and wide area networks interconnect these systems. To support the commission’s financial management functions, it relies on several financial systems to process and track financial transactions such as filing fees paid by corporations and penalties from enforcement activities. According to FISMA, the Chairman of SEC has responsibility for, among other things, (1) providing information security protections commensurate with the risk and magnitude of the harm resulting from unauthorized access, use, disclosure, disruption, modification, or destruction of the agency’s information systems and information; (2) ensuring that senior agency officials provide information security for the information and information systems that support the operations and assets under their control; and (3) delegating to the agency CIO the authority to ensure compliance with the requirements imposed on the agency under FISMA. SEC’s CIO is responsible for developing and maintaining a departmentwide information security program and for developing and maintaining information security policies, procedures, and control techniques that address all applicable requirements. The objectives of our review were to assess (1) the status of SEC’s actions to correct or mitigate previously reported information security and (2) the effectiveness of the commission’s information system controls for ensuring the confidentiality, integrity, and availability of its information systems and information. Our evaluation was based on our Federal Information System Controls Audit Manual, which contains guidance for reviewing information system controls that affect the confidentiality, integrity, and availability of computerized data. Specifically, we evaluated information security controls that are intended to prevent, limit, and detect electronic access to computer resources (data, programs, and systems), thereby protecting these resources against unauthorized disclosure, modification, and use; provide physical protection of computer facilities and resources from espionage, sabotage, damage, and theft; prevent the exploitation of vulnerabilities; prevent the introduction of unauthorized changes to application or system software; and ensure that work responsibilities for computer functions are segregated so that one individual does not perform or control all key aspects of computer-related operations and, thereby, have the ability to conduct unauthorized actions or gain unauthorized access to assets or records without detection. In addition, we evaluated SEC’s information security program. Such a program includes assessing risk; developing and implementing policies, procedures, and security plans; providing security awareness and training; testing and evaluating the effectiveness of controls; planning, implementing, evaluating, and documenting remedial actions to address information security deficiencies; detecting, reporting, and responding to security incidents; and ensuring continuity of operations. To evaluate SEC’s information security controls and program, we identified and examined pertinent SEC security policies, procedures, guidance, security plans, and relevant reports. In addition, we conducted tests and observations of controls in operation and reviewed corrective actions taken by the commission to address vulnerabilities identified during our previous review. We also discussed whether information system controls were in place, adequately designed, and operating effectively with key security representatives, system administrators, and management officials. Although SEC has taken steps to address its information security controls weaknesses, most of the weaknesses persist. Specifically, the commission has corrected or mitigated 8 of the 51 weaknesses that we previously reported as unresolved. For example, SEC has replaced a vulnerable, publicly accessible workstation with a terminal that provides the minimum capabilities needed to accomplish its purpose and a more secure configuration; developed and implemented procedures to ensure that changes made to a major financial system are reviewed, tested, and approved prior to implementation; and hired contractors to appropriately segregate change management and security management functions for a major financial system. While SEC has made some progress in strengthening its information security controls, it has not completed actions to correct or mitigate the remaining 43 of the 51 previously reported weaknesses. These weaknesses include allowing remote access to production servers via unauthorized accounts; permitting inadequate and insecure password storage and configuration; allowing excessive access rights to Windows servers, network system accounts, and sensitive information; and failing to adequately secure access to sensitive computing environments. Failure to resolve these issues will leave SEC’s sensitive data and facilities vulnerable to unauthorized access, manipulation, and destruction. SEC has not effectively implemented information security controls to properly protect the confidentiality, integrity, and availability of its financial and sensitive information and information systems. In addition to the 43 previously reported weaknesses that remain uncorrected, we identified 15 new information security weaknesses during this review. Most of the 58 identified weaknesses pertained to electronic access controls, as illustrated in figure 1. A primary reason for these weaknesses is that SEC has not yet fully implemented its information security program. As a result, weaknesses in controls over its financial and sensitive data increase the risk of unauthorized disclosure, modification, or destruction of data. Protecting the resources that support critical operations from unauthorized access is a basic management objective for any organization. Organizations accomplish this objective by designing and implementing electronic controls that are intended to prevent, limit, and detect unauthorized access to computing resources, programs, and information. Electronic access controls include user accounts and passwords, access rights and permissions, network services and devices, and audit and monitoring of security-related events. Inadequate electronic access controls diminish the reliability of computerized information, and they increase the risk of unauthorized disclosure, modification, and destruction of sensitive information and of disruption of service. A computer system must be able to identify and differentiate users so that activities on the system can be linked to specific individuals. When an organization assigns unique user accounts to specific users, the system distinguishes one user from another—a process called identification. The system must also establish the validity of a user’s claimed identity through some means of authentication, such as a password, that is known only to its owner. The combination of identification and authentication, such as user account/password combinations, provides the basis for establishing individual accountability and for controlling access to the system. Accordingly, agencies (1) implement procedures to control the creation, use, and removal of user accounts and (2) establish password parameters, such as length, life, and composition, to strengthen the effectiveness of account/password combinations for authenticating the identity of users. SEC has not adequately controlled user accounts and passwords to ensure that only authorized individuals are granted access to its systems and data. For example, SEC has not finalized policies and procedures to enforce strong password management or ensure the most appropriate and secure password settings are used. Similarly, it did not complete efforts to develop and implement a policy and process to prevent unauthorized remote access to security accounts. As a result, there is increased risk that unauthorized users could gain authorized user identification and password combinations to claim a user identity and then use that identity to gain access to SEC systems. A basic underlying principle for security computer systems and data is the concept of least privilege, which means that users are granted only those access rights and permissions they need to perform their official duties. User rights are allowable actions that can be assigned to users or groups. File and directory permissions are rules associated with a particular file or directory; they regulate which users can access the file or directory and in what manner. Organizations establish access rights and permissions to restrict legitimate users’ access to only those programs and files that they need to do their work. Assignment of rights and permissions must be carefully considered to avoid giving users unnecessary access to sensitive files and directories. SEC routinely permitted excessive access to the computer systems that support its critical financial and regulatory information. For example, SEC permitted users to modify sensitive information or critical system files and directories, although the users did not need such permissions to perform their job-related duties. Further, the commission did not implement a methodology to ensure that user rights were assigned on the basis of job function on all its servers. As a result, there is increased risk that SEC’s financial and sensitive data and applications may be compromised. Networks are collections of interconnected computer systems and devices that allow individuals to share resources such as computer programs and information. Because sensitive programs and information are stored on or transmitted along networks, effectively securing networks is essential to protecting computing resources and data from unauthorized access, manipulation, and use. Organizations secure their networks, in part, by installing and configuring network devices that permit authorized network service requests, deny unauthorized requests, and limit the services that are available on the network. Devices used to secure networks include (1) firewalls that prevent unauthorized access to the network, (2) routers that filter and forward data along the network, (3) switches that forward information among segments of a network, and (4) servers that host applications and data. Network services consist of protocols for transmitting data between network devices. Insecurely configured network services and devices can make a system vulnerable to internal or external threats, such as denial-of-service attacks. Because networks often include both external and internal access points for electronic information assets, failure to secure these assets increases the risk of unauthorized modification of sensitive information and systems, or of disruption of service. SEC did not securely control network services to prevent unauthorized access to, and ensure the integrity of, SEC’s computer networks, systems, and sensitive information. For example, SEC’s network infrastructure was not securely configured, access to sensitive files on its network devices was not adequately controlled, and SEC workstations were not adequately configured. Further, SEC did not establish procedures for securing external connections to its network or provide guidance for implementing secure wireless networks. The commission’s network security weaknesses could result in unauthorized and inappropriate access to SEC systems and sensitive information. To establish individual accountability, monitor compliance with security policies, and investigate security violations, it is crucial to determine what, when, and by whom specific actions are taken on a system. Organizations accomplish this by implementing system or security software that provides an audit trail that they can use to determine the source of a transaction or attempted transaction and to monitor users’ activities. The way in which organizations configure system or security software determines the nature and extent of information that can be provided by the audit trail. To be effective, organizations should configure their software to collect and maintain audit trails that are sufficient to track security events. SEC did not adequately audit and monitor security events. For example, SEC has not enabled audit trails for two of its financial applications; it has not deployed an effective intrusion detection system; and it does not have a process to analyze security incidents. In addition, at least two of the servers under our review lacked virus protection software. As a result, if a system were modified or disrupted, the commission’s capability to trace or recreate events would be diminished. In addition to electronic access controls, other important controls should be in place to ensure the security and reliability of an organization’s data. These controls include policies, procedures, and control techniques to physically secure computer resources, prevent exploitation of vulnerabilities, appropriately segregate incompatible duties, and prevent unauthorized changes to application software. Weaknesses in these areas increase the risk of unauthorized use, disclosure, modification, or loss of SEC’s financial systems and sensitive information. Physical security controls are important for protecting computer facilities and resources from espionage, sabotage, damage, and theft. These controls restrict physical access to computer resources, usually by limiting access to the buildings and rooms in which the resources are housed and by periodically reviewing the access granted in order to ensure that access continues to be appropriate. At SEC, physical access control measures (such as guards, badges, and locks—used alone or in combination) are vital to protecting the agency’s sensitive computing resources from both external and internal threats. SEC has taken steps to improve its physical security, such as relocating its headquarters operations to a newly constructed building that employs various technologies to control physical access. Further, SEC has recognized the need for physical security enhancements and has included a gated entry and an updated card access system in its future plans. However, SEC did not always effectively protect and control physical access to sensitive work areas in its facilities. For example, we found that many personnel at an SEC facility had unneeded access to the on-site computer room. Further, SEC did not always lock wiring closets and permitted individuals unnecessary access to the data center. Until SEC fully addresses its physical security vulnerabilities, there is increased risk that unauthorized individuals could gain access to sensitive computing resources and data and inadvertently or deliberately misuse or destroy them. Patch management is a critical process that can help to alleviate many of the challenges of securing computing systems. As vulnerabilities in a system are discovered, attackers may attempt to exploit them, possibly causing significant damage. Malicious acts can range from defacing Web sites to taking control of entire systems and thereby being able to read, modify, or delete sensitive information; disrupt operations; or launch attacks against other organizations’ systems. When a software vulnerability is discovered, the software vendor may develop and make a patch or work- around to mitigate the vulnerability. SEC does not have an effective patch management program. For example, SEC has not installed patches for critical vulnerabilities on two audit log servers and a network device. Because SEC has not installed and maintained the latest patches, its computing systems are more vulnerable to attackers taking advantage of outdated, less secure software. Segregation of duties refers to the policies, procedures, and organizational structure that help ensure that no single individual can independently control all key aspects of a process or computer-related operation and thereby gain unauthorized access to assets or records. Often segregation of duties is achieved by dividing responsibilities among two or more individuals or organizational groups. This division of responsibilities diminishes the likelihood that errors and wrongful acts will go undetected, because the activities of one individual or group will serve as a check on the activities of the other. Inadequate segregation of duties increases the risk that erroneous or fraudulent transactions could be processed, improper program changes could be implemented, and computer resources could be damaged or destroyed. Although SEC has taken action to enhance the segregation of incompatible security and change management functions for one of its financial applications, we identified instances in which duties were not adequately segregated to ensure that no individual had complete authority or system access. For example, SEC did not adequately segregate incompatible security and administrative functions within one of its financial applications. Specifically, financial management staff have been assigned roles that allow them to perform both security and systems administration duties for the application. Without adequate segregation of duties or appropriate mitigating controls, SEC is at increased risk that fraudulent activities could occur without detection. It is important to ensure that only authorized and fully tested application programs are placed in operation. To ensure that changes to application programs are necessary, work as intended, and do not result in the loss of data or program integrity, such changes should be documented, authorized, tested, and independently reviewed. In addition, test procedures should be established to ensure that only authorized changes are made to the application’s program code. SEC did not establish and implement effective application change controls. For example, SEC did not finalize procedures to ensure that only authorized changes were made to the production version of application code for all applications. Further, SEC did not appropriately document the authorizations for software modifications, conduct independent reviews of software changes, or adequately control its software libraries. As a result, the risk of unauthorized, untested, or inaccurate application modifications is increased. SEC has made limited progress in developing and implementing the elements of FISMA’s mandated information security program. In response to our prior recommendations, the commission has established a central security management group; appointed a senior information security officer to manage the program; increased the number of security personnel; certified and accredited several major applications; and established a backup data center for service continuity. However, other key elements of an information security program have not been fully or consistently developed, documented, or implemented for SEC’s information systems. A key reason for SEC’s information security controls weaknesses is that the commission has not fully developed or implemented an information security program to ensure that effective controls are established and maintained. Without a strong information security program, SEC cannot protect its information and its information systems. FISMA requires agencies to develop, document, and implement an information security program that includes the following: periodic assessments of the risk and the magnitude of harm that could result from the unauthorized access, use, disclosure, disruption, modification, or destruction of information and information systems; policies and procedures that (1) are based on risk assessments, (2) cost- effectively reduce risks, (3) ensure that information security is addressed throughout the life cycle of each system, and (4) ensure compliance with applicable requirements; security awareness training to inform personnel—including contractors and other users of information systems—of information security risks and their responsibilities in complying with agency policies and procedures; at least annual testing and evaluation of the effectiveness of information security policies, procedures, and practices relating to management, operational, and technical controls of every major information system that is identified in the agencies’ inventories; a process for planning, implementing, evaluating, and documenting remedial action to address any deficiencies in their information security policies, procedures, or practices; procedures for detecting, reporting, and responding to security plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the agency. Identifying and assessing information security risks are essential steps in determining what controls are required. Moreover, by increasing awareness of the risks, these assessments can generate support for the policies and controls that are adopted in order to help ensure that these policies and controls operate as intended. Further, Office of Management and Budget (OMB) Circular A-130, appendix III, prescribes that risk be reassessed when significant changes are made to computerized systems—or at least every 3 years. Although SEC had risk assessments for the systems we reviewed, it did not follow a documented process for risk assessments. Specifically, SEC did not have policies and procedures on how to perform risk assessments. Until the commission’s risk assessment process is completed and institutionalized, risks may not be adequately assessed and countermeasures may not be properly identified. As a result, inadequate or inappropriate security controls may be implemented that do not address the system’s true risk and efforts to implement effective controls later on may be more costly. Another key task in developing, documenting, and implementing an effective information security program is to establish and implement risk- based policies, procedures, and technical standards that cover security over an agency’s computing environment. If properly implemented, policies and procedures can help to reduce the risk that could come from unauthorized access or disruption of services. Because security policies are the primary mechanism by which management communicates its views and requirements, it is important to establish and implement them. SEC had no finalized policies governing its information security program. Since the completion of our review, SEC has finalized SEC Regulation 24- 04, the first level of its policy framework that provides high-level policy, requirements, and governance for security over its information systems. However, policies and procedures for password management, remote access to security accounts, external connections to networks, application change controls, and patch management remain in draft. As a result, SEC has less assurance that its systems and information are sufficiently protected. Another FISMA requirement for an information security program is that it promote awareness and provide required training for users so that they can understand the system security risks and their role in implementing related policies and controls to mitigate those risks. Computer intrusions and security breakdowns often occur because computer users fail to take appropriate security measures. For this reason, it is vital that employees and contractors who use computer resources in their day-to-day operations be made aware of the importance and sensitivity of the information they handle, as well as the business and legal reasons for maintaining its confidentiality, integrity, and availability. FISMA mandates that all federal employees and contractors who use agency information systems be provided with periodic training in information security awareness and accepted information security practice. SEC policy requires that employees and contractors take annual security awareness training. SEC could not ensure that all system users complied with the annual security awareness training requirement. The training contractor who provided information security awareness training supplied SEC with training reports that contained reporting inaccuracies, making it difficult for SEC to determine if its users had complied with the training requirement. After the completion of our review, SEC contracted with a new vendor for security awareness training and is striving to meet its goal of 100 percent compliance for all employees, contractors, and agency detailees. Until SEC can ensure that each employee, contractor, and agency detailee receives annual security awareness training, security lapses due to user activity are more likely to occur. Testing and evaluating systems is a key element of an information security program that ensures that an agency is in compliance with policies and that policies and controls are both appropriate and effective. This type of oversight is a fundamental element because it demonstrates management’s commitment to the security program, reminds employees of their roles and responsibilities, and identifies and mitigates areas of noncompliance and ineffectiveness. Although control tests and evaluations may encourage compliance with security policies, the full benefits are not achieved unless the results improve the security program. Analyzing the results of security reviews provides security specialists and business managers with a means of identifying new problem areas, reassessing the appropriateness of existing controls, and identifying the need for new controls. FISMA requires that the frequency of tests and evaluations be based on risks, but occur no less than annually. SEC lacks a program to test and evaluate the effectiveness of information system controls. SEC conducts security tests and evaluations as part of its certification and accreditation process, which is required every 3 years or when significant changes occur to the system. However, SEC had not completed testing of its security controls in its general support system. SEC’s Inspector General noted in its latest FISMA report that the general support system is a critical security component for all of SEC’s major applications. The effectiveness of the general support system controls is a significant factor in the effectiveness of security controls for its major applications. Since the commission has not tested the security controls in the general support system, it cannot be assured that tests and evaluations are sufficient to assess whether its security policies and controls are appropriate and working as intended. Remedial action plans are a key component described in FISMA. They assist agencies in identifying, assessing, prioritizing, and monitoring the progress in correcting security weaknesses that are found in information systems. According to OMB Circular A-123, agencies should take timely and effective action to correct deficiencies that they have identified through a variety of information sources. To accomplish this, remedial action plans should be developed for each deficiency and progress should be tracked for each. SEC has not developed a reporting and tracking mechanism for its remedial action plans. Further, our review of remedial action plans for five of the applications certified and accredited during fiscal year 2005 noted that some of the control deficiencies had been labeled “waiver granted” and therefore had been exempted from remedial actions. The waivers had been granted based on future plans to replace the application or other cost- based reasons. However, the remedial plans lacked complete justifications, risk mitigation, and cost-benefit analysis for the deficiencies that had been waived. Nevertheless, these applications had been certified and accredited and granted full authority to operate. As a result, SEC did not have assurance that all known information security weaknesses had been mitigated or corrected. Even strong controls may not block all intrusions and misuse, but organizations can reduce the risks associated with such events if they promptly take steps to detect and respond to them before significant damage is done. In addition, accounting for and analyzing security problems and incidents are effective ways for organizations to gain a better understanding of the threats to their information and the costs of their security-related problems. Such analyses can pinpoint vulnerabilities that need to be eliminated so that they will not be exploited again. Problem and incident reports can provide valuable input for risk assessments, can help in prioritizing security improvement efforts, and can be used to illustrate risks and related trends for senior management. SEC does not have a program to handle security incidents. The commission has drafted an incident response program plan that provides general guidance on handling security incidents; however, it lacks a comprehensive program to collect, document, and analyze incident information to determine if trends exist that could be mitigated through user awareness, training, or the addition of technical security controls. As previously reported, SEC has acknowledged the importance of security incident reporting and analysis, however, it does not perform trend analysis of its security incidents. Until SEC formalizes its process for handling security incidents, it remains at risk of not being able to detect or respond quickly to them. Continuity of operations controls should be designed to ensure that, when unexpected events occur, key operations continue without interruption or are promptly resumed, and critical and sensitive data are protected. These controls include environmental controls and procedures designed to protect information resources and minimize the risk of unplanned interruptions, along with a well-tested plan to recover critical operations should interruptions occur. If service continuity controls are inadequate, even relatively minor interruptions can result in lost or incorrectly processed data, which can cause financial losses, expensive recovery efforts, and inaccurate or incomplete financial or management information. SEC accomplished some elements of disaster recovery planning, but it did not complete all the tasks necessary to establish and maintain an effective continuity of operations program. To its credit, SEC set up a backup data center in a separate contractor facility to replicate its operations center functionality and has drafted contingency plans for many of its major applications, so that recovery steps are documented in the event of a disaster. SEC also conducted a partially successful test to validate the sufficiency of the plans and assess SEC’s ability to recover operations. However, SEC successfully tested the recovery of only 12 of 20 of its major applications. Despite SEC’s accomplishments in the disaster recovery area, SEC must test its service continuity plans to ensure its ability to continue and/or recover operations in the event of a disaster. Information security weaknesses—both old and new—continue to impair SEC’s ability to ensure the confidentiality, integrity, and availability of financial and other sensitive data. While the commission has made some progress in addressing our previous recommendations, the many outstanding weaknesses place its systems at risk. Until SEC fully develops, documents, and implements a comprehensive agencywide information security program that includes enhanced policies, procedures, plans, training, and continuity of operations, its facilities and computing resources and the information that is processed, stored, and transmitted on its systems will remain vulnerable to unauthorized access, modification, or destruction. To help establish effective information security over key financial systems, data, and networks, we recommend that the SEC Chairman direct the Chief Information Officer to take the following seven actions to fully develop, document, and implement an effective agencywide information security program: Fully document and implement a process for assessing risks for its information systems. Finalize comprehensive information security policies and procedures. Ensure that all system users comply with annual security awareness training requirements. Institute a testing and evaluation program that includes testing the controls within the general support system. Develop a mechanism to track remedial action plans that incorporates all identified weaknesses and related risks. Establish a program for handling security incidents with detection, response, analysis, and reporting capabilities. Maintain a continuity of operations program that includes fully tested plans for restoring operations. We are also making additional recommendations in a separate report designated for “Limited Official Use Only.” These recommendations address actions needed to correct specific information security weaknesses related to electronic access controls and other information system controls. In providing written comments on a draft of this report, the SEC Chairman agreed with our recommendations. Specifically, he stated that our recommended actions are appropriate and actionable and that SEC’s current efforts are focused on fully implementing them. The Chairman’s comments are reprinted in appendix I of this report. The Chairman’s comments also addressed several achievements in advancing SEC’s information security program, including certifying and accrediting 16 of 20 major applications, implementing a new automated system for tracking plans of action and milestones, and successfully testing continuity of operations planning efforts for 12 major applications. He also highlighted SEC’s annual security awareness training compliance rate exceeding 90 percent and a new computer security incident response team in place to implement and test SEC’s incident response program. The Chairman stated that he has identified information security as the commission’s highest information technology priority and will continue to implement corrective actions. SEC plans to complete the corrective actions for specific weaknesses we identified, as well as implement recommended information security program enhancements to address the agency’s program deficiencies. This report contains recommendations to you. As you know, 31 U.S.C. 720 requires that the head of a federal agency submit a written statement of the actions taken on our recommendations to the Senate Committee on Homeland Security and Governmental Affairs and to the House Committee on Government Reform not later than 60 days from the date of the report and to the House and Senate Committees on Appropriations with the agency’s first request for appropriations made more than 60 days after the date of this report. Because agency personnel serve as the primary source of information on the status of recommendations, GAO requests that the agency also provide us with a copy of your agency’s statement of action to serve as preliminary information on the status of open recommendations. We are sending copies of this report to the Chairmen and Ranking Minority Members of the Senate Committee on Banking, Housing, and Urban Affairs; the Subcommittee on Oversight of Government Management, the Federal Workforce and the District of Columbia, Senate Committee on Homeland Security and Governmental Affairs; House Committee on Financial Services; the Subcommittee on Government Management, Finance, and Accountability, House Committee on Government Reform; and SEC’s Office of Managing Executive for Operations; Office of the Executive Director; Office of Financial Management; Office of Information Technology; and the SEC’s Inspector General. We will also make copies available to others on request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you have any questions regarding this report, please contact me at (202) 512-6244 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are listed in appendix II. In addition to the individual named above, Suzanne Lightman, Assistant Director; Jason Carroll; Lon Chin; West Coile; Anh Dang; Kristi Dorsey; Nancy Glover; Kenneth Johnson; Stephanie Lee; Duc Ngo; Eugene Stevens; Charles Vrabel; and Chris Warweg made key contributions to this report. | The Securities and Exchange Commission (SEC) has a demanding responsibility enforcing securities laws, regulating the securities markets, and protecting investors. In enforcing these laws, SEC issues rules and regulations to provide protection for investors and to help ensure that the securities markets are fair and honest. It relies extensively on computerized systems to support its financial and mission-related operations. Information security controls affect the integrity, confidentiality, and availability of sensitive information maintained by SEC. As part of the audit of SEC's fiscal year 2005 financial statements, GAO assessed (1) the status of SEC's actions to correct or mitigate previously reported information security weaknesses and (2) the effectiveness of the commission's information system controls in protecting the confidentiality, integrity, and availability of its financial and sensitive information. Although SEC has taken steps to strengthen its information security program, most of the previously reported information security controls and program weaknesses persist. Specifically, the commission has corrected or mitigated 8 of the 51 weaknesses that GAO reported as unresolved in last year's report. Among the corrective actions SEC has taken include replacing a vulnerable, publicly accessible workstation and developing and implementing change control procedures for a major application. However, the commission has not yet effectively controlled remote access to its servers, established controls over passwords, managed access to its systems and data, securely configured network devices and servers, or implemented auditing and monitoring mechanisms to detect and track security incidents. Overall, SEC has not effectively implemented information security controls to properly protect the confidentiality, integrity, and availability of its financial and sensitive information and information systems. In addition to the 43 previously reported weaknesses that remain uncorrected, GAO identified 15 new information security weaknesses. Most identified weaknesses pertained to electronic access controls such as user accounts and passwords, access rights and permissions, and network devices and services. These weaknesses increase the risk that financial and sensitive information will be inadequately protected against disclosure, modification, or loss, possibly without detection, and place SEC operations at risk of disruption. A key reason for SEC's information security controls weaknesses is that the commission has not fully developed, implemented, or documented key elements of an information security program to ensure that effective controls are established and maintained. Until SEC implements such a program, its facilities and computing resources and the information that is processed, stored, and transmitted on its systems will remain vulnerable. |
Distinctions between cruise missiles and UAVs are becoming blurred as the militaries of many nations, in particular the United States, add missiles to traditional reconnaissance UAVs and develop UAVs dedicated to combat missions. A cruise missile consists of four major components: a propulsion system, a guidance and control system, an airframe, and a payload. The technology for the engine, the autopilot, and the airframe could be similar for both cruise missiles and UAVs, according to a 2000 U.S. government study of cruise missiles. Figure 1 shows the major components of a cruise missile. Cruise missiles provide a number of military capabilities. For example, they present significant challenges for air and missile defenses. Cruise missiles can fly at low altitudes to stay below radar and, in some cases, hide behind terrain features. Newer missiles are incorporating stealth features to make them less visible to radars and infrared detectors. Modern cruise missiles can also be programmed to approach and attack a target in the most efficient manner. For example, multiple missiles can attack instantaneously from different directions. Furthermore, land attack cruise missiles may fly circuitous routes to get to their targets, thereby avoiding radar and air defense installations. UAVs are available in a variety of sizes and shapes, propeller-driven or jet propelled, and can be straight-wing aircraft or have tilt-rotors like helicopters. They can be as small as a model aircraft or as large as a U-2 manned reconnaissance aircraft (see fig. 2). U.S. policy on the proliferation of cruise missiles and UAVs is expressed in U.S. commitments to the MTCR and Wassenaar Arrangement. These multilateral export control regimes are voluntary, nonbinding arrangements among like-minded supplier countries that aim to restrict trade in sensitive technologies. Regime members agree to restrict such trade through their national laws and regulations, which set up systems to license the exports of sensitive items. The four principal regimes are the MTCR; the Wassenaar Arrangement, which focuses on trade in conventional weapons and related items with both civilian and military (dual-use) applications; the Australia Group, which focuses on chemical and biological technologies; and the Nuclear Suppliers Group, which focuses on nuclear technologies. The United States is a member of all four regimes. Regime members conduct a number of activities in support of the regimes, including (1) sharing information about each others’ export licensing decisions, including certain export denials and, in some cases, approvals and (2) adopting common export control practices and control lists of sensitive equipment and technology into national laws or regulations. Exports of commercially supplied American-made cruise missiles, military UAVs, and related technology are transferred pursuant to the Arms Export Control Act, as amended, and the International Trafficking in Arms Regulations, implemented by State. Government-to-government transfers are made pursuant to the Foreign Assistance Act of 1961, as amended, and subject to DOD guidance. Exports of dual-use technologies related to cruise missiles and UAVs are transferred pursuant to the Export Administration Act of 1979, as amended, and the Export Administration Regulations, implemented by Commerce. Bureaus in two U.S. agencies are responsible for the initial enforcement of export control laws. The Bureau of Immigration and Customs Enforcement (ICE) in the Department of Homeland Security conducts investigations enforcing the Arms Export Control Act, which is administered by the State Department. ICE combines the enforcement and investigative arms of the Customs Service, the investigative and enforcement functions of the former Immigration and Naturalization Service, and the Federal Protective Service as part of the Department of Homeland Security. ICE shares responsibility with Commerce’s Bureau of Industry and Security for enforcing the Export Administration Act. ICE and the Bureau of Industry and Security use enforcement tools such as investigations of purported violations of law and regulation and interdictions of suspected illicit shipments of goods. Investigations can result in criminal prosecutions, fines, or imprisonment or in export denial orders, which bar a party from exporting any U.S. items for a specified period of time. The Arms Export Control Act, as amended in 1996, requires the President to establish a program for end-use monitoring of defense articles and services sold or exported under the provisions of the act and the Foreign Assistance Act. This requirement states that, to the extent practicable, end-use monitoring programs should provide reasonable assurance that recipients comply with the requirements imposed by the U.S. government on the use, transfer, and security of defense articles and services. In addition, monitoring programs, to the extent practicable, are to provide assurances that defense articles and services are used for the purposes for which they are provided. The President delegated this authority to the Secretaries of State and Defense. The proliferation of cruise missiles and UAVs poses a growing threat to U.S. national security. Both can be used to attack U.S. naval interests, the U.S. homeland, and forces deployed overseas. Cruise missiles and UAVs have significant military capabilities, including surveillance and attack, which the United States has demonstrated during military engagements in Afghanistan and Iraq. In addition, U.S. government projections show that the numbers of producers and exporters of cruise missiles and UAVs will increase and that more countries of concern will possess and begin to export them. The growing availability of these weapons, and of related components and technology that are not readily controllable, makes it easier for countries of concern and terrorists to acquire or build at least rudimentary cruise missile or UAV systems. Although cruise missiles and UAVs provide important capabilities for the United States and its friends and allies, in the hands of U.S. adversaries they pose substantial threats to U.S. interests. First, anti-ship cruise missiles threaten U.S. naval forces deployed globally. Second, land-attack cruise missiles have a potential in the long-term to threaten the continental United States and U.S. forces deployed overseas. Finally, UAVs represent an inexpensive means of launching chemical and biological attacks against the United States and allied forces and territory. Cruise missiles pose a current and increasing threat to U.S. naval vessels. For example, there are more than 100 existing and projected missile varieties (including sub- and supersonic, high and low altitude, and sea- skimming models) with ranges up to about 185 miles or more. We reported in 2000 that the next generation of anti-ship cruise missiles—most of which are now expected to be fielded by 2007—will be equipped with advanced target seekers and stealthy design. These features will make them even more difficult to detect and defeat. Land-attack cruise missiles pose a long-term threat to the U.S. homeland and U.S. forces deployed overseas. Because land attack cruise missiles suitable for long-range missions require sophisticated guidance and complicated support infrastructures, they have historically been found almost exclusively in superpower arsenals. According to an unclassified summary of a national intelligence estimate from December 2001, several countries are technically capable of developing a missile launch mechanism to station on forward-based ships or other platforms so that they can launch land-attack cruise missiles against the United States. Technically, cruise missiles can be launched from fighter, bomber, or even commercial transport aircraft outside U.S. airspace. According to the National Air Intelligence Center, defending against land attack cruise missiles will strain air defense systems. Moreover, cruise missiles are capable of breaking through U.S. defenses and inflicting significant damage and casualties on U.S. forces, according to the Institute for Foreign Policy Analysis’ October 2000 study. UAVs pose a longer-term threat as accurate and inexpensive delivery systems for chemical and biological weapons and are increasingly sought by nonstate actors, according to U.S. government and other nonproliferation experts. For example, the U.S. government reported its concern over this threat in various meetings and studies. The Acting Deputy Assistant Secretary of State for Nonproliferation testified in June 2002 that UAVs are potential delivery systems for WMD, and are ideally suited for the delivery of chemical and biological weapons given their ability to disseminate aerosols in appropriate locations at appropriate altitudes. He added that, although the primary concern has been that nation-states would use UAVs to launch WMD attacks, there is potential for terrorist groups to produce or acquire small UAVs and use them for chemical or biological weapons delivery. At least 70 nations possess some type of cruise missile, mostly short-range, anti-ship missiles armed with conventional, high-explosive warheads, according to a U.S. government study. Estimates of the total number of cruise missiles place the world inventory at a minimum of 75,000. Countries that export cruise missiles currently include China, France, Germany, Israel, Italy, Norway, Russia, Sweden, United Kingdom, and the United States. Nations that manufacture but do not yet export cruise missiles currently include Brazil, India, Iran, Iraq, North Korea, South Africa, and Taiwan. None of these nonexporting manufacturing countries is a member of the Wassenaar Arrangement, and only Brazil and South Africa are in the MTCR. The number of cruise missile exporters is expected to grow with producers such as India and Taiwan making their missiles available for export. Currently, at least 12 countries are believed to be developing land-attack cruise missiles; some of these new systems will be exported. France, for example, signed a deal with the United Arab Emirates (UAE) to export a type of cruise missile. By 2005, six countries of concern will have acquired land-attack capabilities, up from only three in 2000, according to the National Air Intelligence Center. Furthermore, cruise missile inventories are projected to increase through 2015 and one to two dozen countries probably will possess a land-attack cruise missile capability by this date, according to an unclassified National Intelligence Estimate. While both land-attack and anti-ship cruise missile inventories are projected to increase, land-attack cruise missile inventories are expected to experience a significantly higher percentage of growth. According to defense industry sources, interest has picked up dramatically from countries all over the world for acquiring and developing even the simplest UAV technology and is expected to continue, further diffusing this technology. Forty-one countries operate about 80 types of UAV, primarily for reconnaissance. Currently, some 32 nations are developing or manufacturing 250 models of UAVs. Several countries involved in key aspects of the UAV industry are not members of the MTCR. For example, 13 non-MTCR countries develop and manufacture UAVs. Countries that pose a threat of WMD proliferation concern, such as China, Russia, and Pakistan, are among the 32 countries developing and expected to export UAVs. Cruise missiles and UAVs can be acquired in several ways, including purchase of complete systems and conversion of existing systems into more capable weapons. Acquisition of commercially available dual-use technologies has made development of new systems and conversion of existing systems more feasible. Purchasing complete missile systems provides the immediate capability of fielding a proven weapon. Complete cruise missiles can be acquired from a variety of sources. For example, China and Russia have sold cruise missiles to Iran, Iraq, Libya, North Korea, and Syria. In addition, France has widely exported the Exocet, now in service in more than 29 countries. Israel, Italy, Norway, Sweden, the United Kingdom, and the United States have also exported anti-ship cruise missiles. Various government and academic studies have raised concerns that the wide availability of commercial items, such as global positioning system receivers and lightweight engines, allows both countries and nonstate actors to enhance the accuracy of their systems, upgrade to greater range or payload capabilities, and convert certain anti-ship cruise missiles into land-attack cruise missiles. Thus, less capable and expensive systems could be more easily improved to attack targets not currently accessible, especially on land. Although not all cruise missiles can be modified into land-attack cruise missiles because of technical barriers, specific cruise missiles can and have been. For example, a 1999 study outlined how the Chinese Silkworm anti-ship cruise missile had been converted into a land- attack cruise missile. Furthermore, the Iraq Survey Group reported in October 2003 that it had discovered 10 Silkworm anti-ship cruise missiles modified to become land-attack cruise missiles and that Iraq had fired 2 of these missiles at Kuwait. Many issues concerning modification of cruise missiles also apply to UAVs, according to one industry group. Larger UAVs are more adaptable to change. Although several experts said that it is more expensive and difficult to modify an existing aircraft into a UAV than to develop one from scratch, some countries, such as Iraq, developed programs to convert manned aircraft into UAVs. Some experts also expressed concerns over adding autopilots to small aircraft to turn them into unmanned UAVs that could deliver chemical or biological weapons. The U.S. government generally uses two key nonproliferation tools—- multilateral export control regimes and national export controls—to address cruise missile and UAV proliferation, but both tools have limitations. The United States and other governments have traditionally used multilateral export control regimes, principally the MTCR, to address missile proliferation. However, despite successes in strengthening controls, the growing capability of countries of concern to develop and trade technologies used for WMD limits the regime’s ability to impede proliferation. The U.S. government uses its national export control authorities to address missile proliferation but finds it difficult to identify and track commercially available items not covered by control lists. Moreover, a gap in U.S. export control regulations could allow subnational actors to acquire American cruise missile or UAV technology for missile proliferation or terrorist purposes without violating U.S. export control laws or regulations. The United States has other nonproliferation tools to address cruise missile and UAV proliferation—diplomacy, sanctions, and interdiction of illicit shipments of items—but these tools have had unclear results or have been little used. The United States and other governments have used the MTCR, and, to some extent, the Wassenaar Arrangement, as the key tools to address the proliferation of cruise missiles and UAVs. While the United States has had some success in urging these regimes to focus on cruise missiles and UAVs, new suppliers who do not share regime goals limit the regimes’ ability to impede proliferation. In addition, there has been less consensus among members to restrict cruise missiles and UAVs than to restrict ballistic missiles. The MTCR is principally concerned with controlling the proliferation of missiles with a range of 300 kilometers and a payload of 500 kilograms or with any payload capable of delivering chemical or biological warheads. MTCR members seek to restrict exports of sensitive technologies by periodically reviewing and revising a commonly accepted list of controlled items, such as lightweight turbojet and turbofan engines, or materials and devices for stealth technology usable in missiles. The Wassenaar Arrangement seeks to limit transfers of conventional arms and dual-use goods and technologies that could contribute to regional conflict. Military UAVs below MTCR capability levels of 300 kilometers range and 500 kilograms payload are included on the Wassenaar Munitions List. DOD officials noted that MTCR attempts to impede the proliferation of UAVs capable of delivering WMD, while Wassenaar covers conventional weapons and items with a military function. In recent years, the increased awareness of the threat of chemical and biological weapons and terrorists has increased members’ interest in cruise missile and UAV controls, according to State. MTCR control lists were revised between 1997 and 2002 to adopt six of eight U.S. proposals to include additional items related to cruise and UAV technologies. Members agreed in 2002 to adopt (1) expanded controls on small, fuel-efficient gas turbine engines, (2) a new control on integrated navigation systems, and (3) a new control on UAVs designed or modified for aerosol dispensing. At the September 2003 MTCR Annual Plenary, members agreed to add to the control list complete UAVs designed or modified to deliver aerosol payloads greater than 20 liters. In the Wassenaar Arrangement, the United States and other members during 2003 made several proposals for new controls related to UAVs and short-range cruise missiles and their payloads. Once changes are officially accepted, MTCR and Wassenaar members are expected to incorporate the changed control lists into their own national export control laws and regulations. While including an item on a control list does not preclude its export, members are expected to more carefully scrutinize listed items pending decisions on their export. They are also expected to notify other members when denying certain export licenses for listed items. Despite the efforts of these regimes, nonmembers such as China and Israel continue to acquire, develop, and export cruise missile or UAV technology. The growing capability of nonmember supplier countries to develop technologies used for WMD and trade them with other countries of proliferation concern undermines the regimes’ ability to impede proliferation. For example, China has sold anti-ship cruise missiles to Iran and Iraq (see fig. 3). Israel also reportedly sold the Harpy UAV to India, according to a Director of Central Intelligence report in 2003. In addition to the limitations posed by non-member suppliers, some nonproliferation experts and foreign government officials noted that MTCR’s effectiveness has been limited because there has been less consensus among MTCR and Wassenaar members to restrict cruise missiles and UAVs than to restrict ballistic missiles. MTCR members have not always agreed with each others’ interpretation of the MTCR guidelines and control lists concerning cruise missiles. Specifically, members have had different views on how to measure the range and payload of cruise missiles and UAVs, making it difficult to determine when a system has the technical characteristics that require more stringent export controls to apply under MTCR guidelines. For example, cruise missiles can take advantage of more fuel-efficient flight at higher altitudes to gain substantially longer ranges than manufacturers and exporting countries advertise. Even with the new definition of range that the MTCR adopted in 2002, different interpretations remain among members over whether particular cruise missiles could be modified to achieve greater range. In one case, the United States and France disagreed about France’s proposed sale of its Black Shaheen cruise missile to the United Arab Emirates, according to French and U.S. government officials and nonproliferation experts (see fig. 4). In a second case, members have raised questions about Russia’s assistance to India, a nonmember, to develop the Brahmos cruise missile project and called for further discussion of the system’s technical capabilities. In October 2002, we reported on other limitations that impede the ability of the multilateral export control regimes, including MTCR and the Wassenaar Arrangement, to achieve their nonproliferation goals. For example, we found that MTCR members may not share complete and timely information, such as members’ denied export licenses, in part because the regime lacks an electronic data system to send and retrieve such information. The Wassenaar Arrangement members share export license approval information but collect and aggregate it to a degree that it cannot be used constructively. Both MTCR and the Wassenaar Arrangement use a consensus process that makes decision-making difficult and lack a means to enforce compliance with members’ political commitments to regime principles. We recommended that the Secretary of State establish a strategy to work with other regime members to enhance the effectiveness of the regimes by implementing a number of steps, including (1) adopting an automated information-sharing system in MTCR to facilitate more timely information exchanges, (2) sharing greater and more detailed information on approved exports of sensitive transfers to nonmember countries, (3) assessing alternative processes for reaching decisions, and (4) evaluating means for encouraging greater adherence to regime commitments. U.S. ICE and Commerce authorities have had difficulty identifying and tracking dual-use exports in transit that could be useful for cruise missiles and UAV development because such exports have legitimate civilian uses. As a result, U.S. enforcement tools have been limited in conducting investigations of suspected exports of illicit cruise missile and UAV dual- use items. Moreover, a gap in U.S. export control regulations could allow missile proliferators to acquire unlisted American cruise missile or UAV dual-use technology without violating the regulations. ICE officials said that it is difficult to conduct Customs enforcement investigations of possible export violations concerning certain cruise missile or UAV dual-use technologies. First, parts or components that are not on control lists are often similar to controlled parts or components, enabling exporters to circumvent the controls entirely, according to ICE officials. Because ICE inspectors are not engineers and shipping documents do not indicate the end product for the component being shipped, determining what the components can do is problematic. Second, countries seek smaller UAVs than those controlled. ICE officials said that buyers who cannot get advanced UAVs instead try to obtain model airplanes and model airplane parts, which might substitute for UAVs and their components. Third, ICE officials noted that circumventing the export control law is easy because the U.S. government has to prove both the exporter’s knowledge of the law and the intent to violate it. As of October 2003, Customs had completed two investigations related to UAVs, and had nine others open, as well as one open case related to cruise missiles. The two cases related to UAVs, both involving suspected diversions of items to Pakistan, resulted in one finding of no violation and one guilty plea. As a result, two defendants received prison terms of 24 and 30 months, respectively, with 2 years of supervised release. Commerce officials also indicated that there are challenges to enforcing export controls on dual-use goods related to cruise missile or UAV development. They stated that some investigations were not pursued because the technical parameters of the items exported were below the export control thresholds for missile technology. Nonetheless, Commerce officials noted that exported items below these parameters could be changed after export by adding components to improve the technology. For example, software exported without a license could receive an upgrade card that would make it an MTCR-controlled item. As of October 2003, Commerce had completed 116 investigations related to missile proliferation, but not specifically to cruise missiles or UAVs. Furthermore, the Secretary of Commerce in 2003 identified other challenges for the enforcement of controls on dual-use goods related to missile development. First, it is difficult to detect and investigate cases under the “knowledge” standard set by the “catch-all” provision. Second, some countries do not yet have catch-all laws or have different standards for catch-all, which complicates law enforcement cooperation. Third, identifying illegal exports and re-exports of missile-related goods requires significant resources. Nonetheless, the Secretary stated that United States has the ability to effectively enforce end-use and end-user controls on missile technology and that multilateral controls provide a strong framework for cooperative enforcement efforts overseas. A gap in U.S. export control regulations could allow missile proliferators or terrorists to acquire U.S. cruise missile or UAV dual-use technology without violating U.S. export control laws or regulations. The Export Administration Regulations (EAR) establish license requirements for items not listed in the regulations on the Commerce Control List, as well as for items that are listed. License requirements for items not listed are based on the exporter’s knowledge of the end user or end uses to which the item would be applied. For missile controls, an exporter may not export or re- export an item if the exporter knows that the item (1) is destined to or for a missile project listed in the regulations or (2) will be used in the design, development, production or use of missiles in or by a country listed in the regulations, whether or not that use involves a listed project. However, this condition on exports does not apply to activities that are unrelated to the 12 projects or 20 countries listed in the regulation. This section of the regulations was intended to apply to national missile proliferation programs, according to Commerce officials, and not to nonstate actors such as certain terrorist organizations or individuals. Finally, this section of the regulations does not apply to exports of dual-use items for missiles with less than 300 kilometers range and 500 kilograms payload because the regulatory definition of a missile excludes missiles below MTCR range and payload thresholds. However, such missiles with lesser range or payload could be sufficient for terrorist purposes. The case of a New Zealand citizen obtaining unlisted dual-use items to develop a cruise missile illustrates this gap in U.S. export controls. In June 2003 this individual reported that he purchased American components necessary to construct a cruise missile to illustrate how a terrorist could do so. Because the New Zealand citizen is not on a list of prohibited missile projects, terrorist countries, or terrorists, there is no specific export control requirement that an American exporter apply to the U.S. government for a review of the items before export, according to Commerce officials. According to Commerce licensing and enforcement officials, they have no legal recourse in this or similar cases, as there is no violation of U.S. export control law or regulations. The Commerce officials said that they would need to wait until the New Zealander used the weapon improperly before action under export control law or regulations could be taken. It would be the New Zealand government’s responsibility to address any illicit action resulting from such transfers of U.S. items, according to other Commerce officials. One department official stated that not all export control loopholes can be closed and that U.S. export controls cannot fix defects in other countries’ laws. Another Commerce official explained that current catch-all controls assume that terrorists would not attempt to acquire illicit arms in friendly countries, such as NATO allies. Commerce officials explained that proliferators seeking a rudimentary, rather than state-of-the-art cruise missile, would be able to construct such a weapon of components not listed on the Commerce Control List. For these items, Commerce must directly link the items to a WMD program to apply the catch-all controls; otherwise, no action can be taken, according to the officials. They remarked that catch-all controls were added to give licensing officers more flexibility in reviewing items. However, exporters adept in covering up direct links to a WMD program could continue to divert dual-use missile-related items, according to the Commerce officials. The United States has other nonproliferation tools to address cruise missile and UAV proliferation: diplomacy, sanctions, and interdiction of illicit shipments of items. The United States used diplomacy to address suspected cases of proliferation of cruise missiles and UAVs in at least 14 cases. U.S. efforts to forestall transfers of items succeeded in about one- third of these cases. The United States issued diplomatic action in at least 14 cases to inform foreign governments of proposed or actual transfers of cruise missile or UAV items. The U.S. government successfully halted transfers in five cases, did not successfully halt a transfer in two cases, did not know the results of its actions or action was still in process in six cases, and claimed partial success in one other case. Of nine cases involving MTCR items, six of the nine countries demarched were MTCR members and three were not. Under several U.S. laws that authorize the use of sanctions when the U.S. government determines that missile proliferation has occurred, the U.S. government used sanctions twice between 1996 and 2002 for violations related to exports of cruise missiles. In these two cases, the United States sanctioned a total of 18 entities in 5 countries. However, a State official did not know whether the entities ceased their proliferation activities as a result. Although the Acting Deputy Assistant Secretary of State for Nonproliferation identified interdiction as one tool used to address proliferation of cruise missile and UAV technology, U.S. and foreign government officials knew of few cases of governments’ interdicting such shipments. To date, the United States reported using interdiction once to stop illicit shipments of cruise missile or UAV technology. ICE officials referred to only one case of an interdiction of a propeller for a Predator UAV destined for Afghanistan. Commerce officials knew of no cases where Commerce had been involved in interdiction of cruise missile or UAV dual-use technology. Foreign governments reported no known cases of interdiction of suspect cruise missile or UAV technology exports. The U.S. government announced discussions in June 2003 with 11 foreign governments to increase the use of interdiction against all forms of WMD and missile proliferation. A meeting in Paris of these governments participating in the Proliferation Security Initiative announced a statement of interdiction principles on September 4, 2003. These principles include a commitment to undertake effective measures for interdicting the transfer or transport of WMD, delivery systems, and related materials to and from states and nonstate actors of proliferation concern; adopt streamlined procedures for rapid exchange of relevant information concerning suspected proliferation activity; and review and work to strengthen relevant national legal authorities and international law and frameworks to accomplish these objectives. Post-shipment verification (PSV) is a key end-use monitoring tool used by U.S. agencies to confirm that authorized recipients of U.S. technology both received transferred items and used them in accordance with conditions of the transfer. However, State and Commerce seldom conduct PSVs of transferred cruise missiles, UAVs, and related items; State’s program does not monitor compliance with conditions when checks are made. Furthermore, Defense officials were not aware of any end-use monitoring for more than 500 cruise missiles transferred through government-to- government channels, although officials are considering conducting such checks in the future. Similarly, other supplier countries place conditions on transfers, but few reported conducting end-use monitoring once items were exported. The Arms Control Export Act, as amended in 1996, requires, to the extent practicable, that end-use monitoring programs provide reasonable assurance that recipients comply with the requirements imposed by the U.S. government in the use, transfer, and security of defense articles and services. In addition, monitoring programs are to provide assurances that defense articles and services are used for the purposes for which they are provided. Accordingly, under State’s monitoring effort, known as the Blue Lantern program, State conducts end-use monitoring of direct commercial sales of defense articles and services, including cruise missiles, UAVs, and related technology. According to Blue Lantern program guidance, a PSV is the only means available to verify compliance with license conditions once an item is exported. Specifically, a PSV is used (1) to confirm whether licensed defense goods or services exported from the United States actually have been received by the party named on the license and (2) to determine whether those goods have been or are being used in accordance with the provisions of that license. Despite these requirements, we found that State did not use PSVs to assess compliance with cruise missile or UAV licenses having conditions limiting how the item may be used. These licenses included items deemed significant by State regulations. Based on State licensing data, we identified 786 licenses for cruise missiles, UAVs, or related items from fiscal years 1998 through 2002. Of these, 480 (61 percent) were licenses with conditions, while 306 (39 percent) were licenses without conditions. These 786 licenses included one for a complete state-of-the-art Predator B UAV (see fig. 5), and 27 for supporting Predator technical data, defense services, and parts. The licenses also included 7 for supporting technical data, defense services, and parts for the highly advanced Global Hawk UAV. We found that State did not conduct PSVs for any of the 480 licenses with conditions and conducted PSVs on only 4 of 306 licenses approved without conditions. Each license reviewed through the post-shipment checks involved transferred UAV-related components and equipment. Three of the licenses receiving checks resulted in unfavorable determinations because a company made inappropriate end-use declarations or the end user could not confirm that it had received or ordered the items. State added that it has many other sources of information besides PSV checks on the misuse and diversion of exported articles. These sources include intelligence reporting, law enforcement actions, embassy reporting, and disclosures of U.S. companies. A State licensing official stated that few post-shipment Blue Lantern checks have been conducted for cruise missiles, UAVs, and related items because many are destined for well-known end users in friendly countries. However, over fiscal years 1998 through 2002, 129 of the 786 licenses authorized the transfer of cruise missile and UAV-related items to countries such as Egypt, Israel, and India. These countries are not MTCR members, which indicates that they might pose a higher risk of diversion. In addition, over the last 4 years, State’s annual end-use monitoring reports to Congress recognized an increase in the incidence of West European- based intermediaries involved in suspicious transactions. State noted in its 2001 and 2002 reports that 23 and 26 percent, respectively, of unfavorable Blue Lantern checks for all munitions items involved possible transshipments through allied countries in Europe. In contrast to State’s guidance, State officials said that the Blue Lantern program was never intended to verify license condition provisions on the transfer of munitions such as cruise missile and UAV-related items. Instead, State officials explained that the program seeks to make certain only that licensed items are being used at the proper destination and by the proper end user. A State official further said that the compliance office is not staffed to assess compliance with license conditions and has not been managed to accomplish such a task. In commenting on a draft of this report, State emphasized the importance of Blue Lantern pre-license checks in verifying controls over the end user and end use of exported items and said that we did not include such checks in our analysis. We reviewed the 786 cruise missile and UAV licenses to determine how many had received Blue Lantern pre-license checks, a possible mitigating factor reducing the need to conduct a PSV. We found that only 6 of the 786 licenses from fiscal years 1998 through 2002 that State provided us had been selected for pre-license checks. Of these, four received favorable results, one received an unfavorable result, and one had no action taken. Under the Arms Control Export Act, as amended in 1996, the Department of Defense also is required to monitor defense exports to verify that foreign entities use and control U.S. items in accordance with conditions. The amended law requires an end-use monitoring program for defense articles and services transferred through the Foreign Military Sales program. Monitoring programs, to the extent practicable, are required to provide reasonable assurances that defense articles and services are being used for the purposes for which they are provided. The Defense Security Cooperation Agency (DSCA) is the principal organization through which Defense carries out its security assistance responsibilities, including administering the Foreign Military Sales program. Under this program, the United States transfers complete weapons systems, defense services, and related technology to eligible foreign governments and international organizations from Defense stocks or through Defense-managed contracts. Bilateral agreements contain the terms and conditions of the sale and serve as the equivalent of an export license issued by State or Commerce. From fiscal years 1998 through 2002, DSCA approved 37 agreements for the transfer of more than 500 cruise missiles and related items, as well as one transfer of UAV training software. The agreements authorized the transfer of Tomahawk land-attack cruise missiles, Standoff land-attack missiles, and Harpoon anti-ship cruise missiles, as well as supporting equipment such as launch tubes, training missiles, and spare parts. Approximately 30 percent of cruise missile transfers were destined for non-MTCR countries. Figure 6 shows the destinations of transferred cruise missiles. Defense’s end-use monitoring program, called Golden Sentry, has conducted no end-use checks related to cruise missile or UAV transfers, according to the program director. DSCA guidance states that government- to-government transfers of defense items, including cruise missiles, are to receive routine end-use monitoring. Under routine monitoring, Security Assistance Officers and/or military department representatives account for the end use of defense articles through personal observation in the course of other assigned duties. However, the program director stated that he was unaware of any end-use monitoring checks, routine or otherwise, for transferred U.S. cruise missiles over the period of our review. In addition, a past GAO report found problems with monitoring of defense items and recommended that DSCA issue specific guidance to field personnel on activities that need to be performed for the routine observation of defense items. Nonetheless, Defense’s Golden Sentry monitoring program is not yet fully implemented, despite the 1996 legal requirement to create such an end-use monitoring program. DSCA issued program guidance in December 2002 that identified the specific responsibilities for new end-use monitoring activities. In addition, as of November 2003, DSCA was conducting visits to Foreign Military Sales recipient countries to determine the level of monitoring needed and was identifying weapons and technologies that may require more stringent end-use monitoring. The program director stated that he is considering adding cruise missiles and UAVs to a list of weapon systems that receive more comprehensive monitoring. The Export Administration Act, as amended, provides the Department of Commerce with the authority to enforce dual-use controls. Under the act, Commerce is authorized to conduct PSV visits outside the United States of dual-use exports. The Export Administration Regulations indicate that a transaction authorized under an export license may be further limited by conditions that appear on the license, including a condition that stipulates the need to conduct a PSV. Commerce can conduct a PSV by applying a condition to a license that requires U.S. mission staff residing in the recipient country to conduct a PSV, or it can send a safeguards verification team from Commerce headquarters to the country to conduct a PSV. Based on Commerce licensing data, we found that Commerce issued 2,490 dual-use licenses between fiscal years 1998 and 2002 for items that could be useful in developing cruise missiles or UAVs. Of these, Commerce selected 2 percent of the licenses, or 52 cases, for a PSV visit and completed visits to 1 percent of the licenses. Specifically, Commerce designated PSVs as a license condition for 28 licenses, and completed 5. Commerce designated PSVs as part of a safeguards team for 24 cases, and completed all of them. Of these 24 checks, 23 resulted in favorable determinations, while 1 was unfavorable. Commerce guidance for selecting PSVs and pre-license checks establish criteria based on technologies and countries that require a higher priority for conducting PSVs and pre-license checks. The guidance identifies 19 specific missile technology categories from the Commerce Control List involving particularly sensitive commodities as choke points for the development of missiles and indicating a priority for PSV or pre-license selection. For example, items such as software and source code to improve inertial navigation systems, as well as lightweight turbojet and turbofan engines, are included as choke point missile technologies. In addition, the guidance identifies 20 countries of missile diversion concern that may also warrant a pre-license check or PSV. The guidance further identifies 12 specific countries or destinations that have been used repeatedly, and are likely to be used again, as conduits for diversions of sensitive dual-use commodities or technology. The guidance states that other factors might mitigate the need to select a license for a PSV. We applied Commerce’s guidelines to the 2,490 cruise missile or UAV- related licenses and identified 20 that met the criteria to receive a PSV or a pre-license check. However, Commerce selected only 2 of these 20 licenses. All 20 licenses were for choke point missile technology useful for cruise missile or UAV development. Some of these licenses were for countries of missile diversion concern, such as India, while others were for transshipment countries, such as Singapore. Figure 7 shows the destinations for items in the 20 licenses and the percentage of licenses for each destination. We found that Commerce selected 2 of the 20 licenses for a PSV. One PSV resulted in a favorable determination, while the other had not been completed at the time of our review. Even though the 20 licenses met guidance criteria, few of these licenses had been selected for PSVs. A Commerce official explained that licenses might not be selected for a PSV because many factors might mitigate the need for a PSV for a particular license even though it meets the selection criteria. However, Commerce officials could not explain which factors lessened the need for a PSV for the remaining 18 licenses. Other supplier countries have established export control laws and regulations, which also place conditions on transfers and can authorize agencies to conduct end-use monitoring of sensitive items. For example, government officials from the United Kingdom, France, and Italy stated that their respective governments might add conditions for cruise missile and UAV-related items, as well as for other exports. While national export laws authorize end-use monitoring, none of the foreign government officials reported any PSV visits for cruise missile or UAV-related items. The national export control systems of other cruise missile and UAV supplier countries that responded to our request for information apply controls differently from the United States for missile-related transfers. Government officials in France, Italy, and the United Kingdom stated that their respective governments generally do not verify conditions on cruise missile and UAV transfers and conduct few post-shipment verification visits of such exports. The South African government was the only additional supplier country responding to a written request for information that reported it regularly requires and conducts PSVs on cruise missile and UAV transfers. Officials in the United Kingdom stated that the U.K. government seeks to ensure compliance with license conditions, but it has no institutional system for conducting PSVs for British exports. Although defense attaches keep their eyes open for cases of misuse of an item, the officials did not know whether any PSV visits had been done for transfers of British cruise missiles or UAVs. A U.K. government official said that occasionally embassy officials may conduct PSVs on other British equipment. For example, a PSV may be undertaken to confirm that British tanks are not being used by Israel to conduct operations in Gaza. However, the official added that such actions are neither required nor routine. Italian government officials stated that all armament transfers include conditions that the end user cannot retransfer to other countries or users without prior permission from the government. Additionally, some export licenses require an import delivery certificate as a condition to certify that an item has been imported. For those licenses, the government of Italy allows firms fixed periods of time to provide required documents. If the recipient does not send a required delivery certificate, then a PSV would be conducted to verify whether the end user received the items. According to French officials, France does not conduct explicit PSV visits. Instead, its officials observe end-use conditions during technical or military-to-military contacts. Specifically, French officials stated that when missiles or any other highly technological goods are sold contact between the government and the recipient provides opportunities to ensure the disposition of the exported item. According to South African government officials, requirements for PSV visits may be applied to licenses for cruise missile and UAV-related technology. Furthermore, South Africa conducts regular end-use verifications to selected end users of non-MTCR countries and may initiate other ad hoc visits as required by the South African control authorities. In addition, government-to-government agreements require end-use certificates containing delivery verification information and include authorizations for end-use verification visits, as well as non-retransfer, non-modification, and non-reproduction clauses. South African government officials also stated that each clause must be fully verified and authenticated. The continued proliferation of cruise missiles and UAVs poses a growing threat to the United States, its forces overseas, and its allies. Most countries already possess cruise missiles, UAVs, or related technology, and many are expected to develop or obtain more sophisticated systems in the future. The dual-use nature of many of the components of cruise missiles and UAVs also raises the prospect that terrorists could develop rudimentary systems that could pose additional security threats to the United States. Since this technology is already widely available throughout the world, the United States works in concert with other countries through multilateral export control regimes to better control the sale of cruise missiles, UAVs, and related technologies. Even though the effectiveness of these regimes is limited in what they can accomplish, the United States could achieve additional success in this area by adopting our previous recommendations to improve the regimes’ effectiveness. U.S. export controls may not be sufficient to prevent cruise missile and UAV proliferation and ensure compliance with license conditions. Because some key dual-use components can be acquired without an export license, it is difficult for the export control system to limit or even track their use. Moreover, current U.S. export controls may not prevent proliferation by nonstate actors, such as certain terrorists, who operate in countries that are not currently restricted under missile proliferation regulations. Furthermore, the U.S. government seldom uses its end-use monitoring programs to verify compliance with the conditions placed on items that could be used to develop cruise missiles or UAVs. Thus, the U.S. government does not have sufficient information to know whether recipients of these exports are effectively safeguarding equipment and technology in ways that protect U.S. national security and nonproliferation interests. The challenges to U.S. nonproliferation efforts in this area, coupled with the absence of end-use monitoring programs by several foreign governments for their exports of cruise missiles or UAVs, raise questions about how nonproliferation tools are keeping pace with the changing threat. A gap in dual-use export control regulations could enable individuals in most countries of the world to legally obtain without any U.S. government review U.S. dual-use items not on the Commerce Control List to help make a cruise missile or UAV. Consequently, we recommend that the Secretary of Commerce assess and report to the Committee on Government Reform on the adequacy of the Export Administration Regulations’ catch-all provision to address missile proliferation by nonstate actors. This assessment should indicate ways the provision might be modified. Because the departments have conducted so few PSV visits to monitor compliance with U.S. government export conditions on transfers of cruise missiles, UAVs and related dual-use technology, the extent of the compliance problem is unknown. While we recognize that there is no established or required number of PSV visits that should be completed, the small number completed does not allow the United States to determine the nature and extent of compliance with these conditions. Thus, we recommend that the Secretaries of State, Commerce, and Defense, as a first step, each complete a comprehensive assessment of cruise missile, UAV, and related dual-use technology transfers to determine whether U.S. exporters and foreign end users are complying with the conditions on the transfers. As part of the assessment, the departments should also conduct additional PSV visits on a sample of cruise missile and UAV licenses. This assessment would allow the departments to gain critical information that would allow them to better balance potential proliferation risks of various technologies with available resources for conducting future PSV visits. We provided a draft of this report to the Secretaries of Commerce, Defense, and State for their review and comment. We received written comments from Commerce, Defense, and State that are reprinted in appendixes II, III, and IV. DOD and State also provided us with technical comments, which we incorporated as appropriate. Commerce did not agree that the limited scope of the current catch-all provision should be called a gap in U.S. regulations but agreed to review whether the existing catch-all provision sufficiently protects U.S. national security interests. Commerce said that it believes that the export control system effectively controls items of greatest significance for cruise missiles and UAVs and are on the Commerce Control List. It stated that our report is ambiguous as to whether the gap relates to items listed on the control list or to items that are not listed, as they are not considered as sensitive for missile proliferation reasons. Commerce also stated that we should explain the basis for suggesting that noncontrolled items are sensitive and should be placed on the MTCR control list, if that is our position. Our references to the gap in the regulations refer to dual-use items that are not listed on the Commerce Control List and we have made changes to the draft to clarify this point. Furthermore, we are not suggesting that unlisted items should be added to the MTCR control list to deal with the issue we identified in the New Zealand example. As we recommend, the vehicle to address this gap would be an expansion of Commerce’s catch-all provision whereby license reviews would be required when the exporter knows or has reason to know that the items might be used by nonstate actors for missile proliferation purposes. In commenting on our draft report’s recommendation to require an export license review for any item that an exporter knows or has reason to know would be used to develop or design a cruise missile or UAV of any range, Commerce agreed to review whether the existing provision sufficiently protects U.S. national security interests. We have modified our recommendation to reflect the need for an assessment of the catch-all provision’s scope and possible ways to modify the provision to address the gap. State disagreed with our findings and conclusions concerning its end-use monitoring program. State said that our report was inaccurate in suggesting that State does not monitor exports to verify compliance with export authorizations and noted that we did not discuss the importance of pre-license checks to verify end use and end user restrictions. It said that our report was misleading and inaccurate to suggest that State does not monitor exports to verify compliance with export authorizations. State said that the most important restrictions placed on export authorizations involve controls over the end user and the end use of the article being exported. State also said that it uses many tools in the export licensing process to verify these restrictions and that the Blue Lantern program’s pre- and post-license checks are only one of these tools. State said that pre-license checks verify the bond fides of end users, as well as the receipt and appropriate end use of defense articles and services, including UAV- and missile-related technologies. It also questioned why our analysis did not include pre-license checks as part of State’s efforts to ensure compliance with arms export regulations. We agree that pre-license checks are critical to ensure that licenses are issued to legitimate, reliable entities and for specified programs or end uses in accordance with national security and foreign policy goals. We also agree that they augment controls and checks used during the licensing process to determine the legitimacy of the parties involved and the appropriate end use of the export prior to license approval. However, such checks cannot confirm the appropriate end user or end use of an item after it has been shipped and received by the recipient. Regarding other tools in the export licensing process to verify conditions, we asked State for additional information that would indicate what other actions, besides PSV checks, State took. State officials said that some license conditions required follow-up action—such as forms or reports—either by State officials, exporters, or end users. We asked for examples of such follow-up action related to licenses for cruise missiles, UAVs, or related technology. A State official said that, after querying the relevant licensing teams, State officials did not identify any licenses requiring follow-up action and that there is no system, formal or otherwise, that would document follow-up actions that had been taken. In response to State’s comments, we added information on Blue Lantern pre-license checks to the report, information that further demonstrates the limited monitoring that State conducts on cruise missile and UAV-related transfers. We reviewed the 786 cruise missile and UAV licenses to determine how many had received Blue Lantern pre-license checks, a possible mitigating factor reducing the need to conduct a PSV. These included 129 licenses to non-MTCR countries, such as Egypt, Israel, and India, which present a higher risk of misuse or diversion. We found that only 6 of the 786 licenses that State provided us had been selected for pre-license checks. Of these, 4 received favorable results, 1 received an unfavorable result, and 1 had no action taken. Commerce and DOD partially agreed with our second recommendation to complete a comprehensive assessment of cruise missile, UAV and related dual-use technology transfers. However, both departments raised concerns over the resources needed to conduct such a comprehensive assessment and sought further definition of the scope of the transfers to be assessed as the basis for interagency action and additional resources for monitoring. DOD suggested that a random sample of cases could achieve results equivalent to that of a comprehensive assessment. It agreed to conduct a greater number of PSVs in order to (1) provide the U.S. government with a high level of confidence over time that exporters and end users are complying with export license conditions and (2) allow the U.S. government to determine whether adequate resources are devoted to license compliance issues. We clarified our recommendation so that a comprehensive assessment could include a sampling methodology so long as it provided each agency with a high level of confidence that the sample selected accurately demonstrated the nature and extent of compliance with conditions. State disagreed with our recommendation and said that the absence of evidence in our report of misuse or diversion does not warrant such an extensive effort. Nonetheless, State said that in conjunction with steps taken to improve the targeting of Blue Lantern checks and increase the number conducted annually, it would pay special attention to the need for additional pre- and post-shipment checks for cruise missile- and UAV-related technologies. Since State conducted no PSV checks for any of the 480 licenses for cruise missile or UAV-related licenses with conditions that we reviewed and only 6 pre-license checks for the 786 licenses, the need for State to assess its monitoring over cruise missile and UAV licenses is a recommendation we strongly reaffirm. As arranged with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days after the date of this letter. At that time, we will send copies of this report to appropriate congressional committees and to the Secretaries of Commerce, Defense, and State. Copies will be made available to others upon request. In addition, this report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-8979 or at [email protected]. A GAO contact and staff acknowledgments are listed in appendix V. To determine the nature and extent of cruise missile and UAV proliferation, we reviewed documents and studies of the Departments of Commerce, Defense, Homeland Security, and State, the intelligence community, and nonproliferation and export controls specialists in academia and the defense industry. These included the Unclassified Report to Congress on the Acquisition of Technology Relating to Weapons of Mass Destruction and Advanced Conventional Munitions, 1 January through 30 June 2002; the Director of Central Intelligence worldwide threat briefing on The Worldwide Threat in 2003: Evolving Dangers in a Complex World 11 February 2003; and the DOD UAV Roadmap for 2000 to 2025 and 2002 to 2025. We also reviewed databases of the UAV Forum and UVONLINE. Also, we reviewed plenary, working group, and information exchange documents of the MTCR. We met with officials of the Departments of Commerce, Defense, Homeland Security, and State, the intelligence community, and with nonproliferation and export controls specialists in academia in Washington, D.C., and officials of the National Air Intelligence Center in Dayton, Ohio. We also met with representatives of private companies Adroit Systems Inc., EDO, Boeing, MBDA, Lockheed Martin, and with the industry associations National Defense Industrial Association (NDIA) and the Aerospace Industries Association in Washington, D.C. In addition, we received a written response from NDIA to a list of detailed questions. Also, we met with representatives of the Defense Manufacturing Association, SBAC, Goodrich, BAE Systems, and MBDA in London, United Kingdom; and of the European Unmanned Vehicle Systems Association (EURO UVS) in Paris, France. In addition, we attended two conferences of the Association for Unmanned Vehicle Systems International (AUVSI) in Washington, D.C., and Baltimore, Maryland. To examine how the U.S. and other governments have addressed proliferation of cruise missile and UAV risks, we analyzed the documents and studies noted above and met with officials and representatives of the previously mentioned governments and nonproliferation and export controls specialists in academia. We also reviewed relevant documents and data to determine how the U.S. and other governments have used export controls, diplomacy, interdiction, and other policy tools. Based on this information, we conducted analyses to determine how each tool had been employed and with what results. To evaluate the end-use controls used by the U.S. and other governments, we obtained documents and met with officials from the Departments of Commerce, Defense, and State. We also reviewed arms transfer data from DOD and export licensing data from State and Commerce databases to assess what cruise missile and UAV technology the United States exported, how the U.S. government selected licenses to receive post- shipment monitoring, and how it applied end-use post-shipment controls. Moreover, we reviewed applicable U.S. export control laws and regulations. We performed qualitative and quantitative analyses of selected export licenses to determine the extent and frequency of applied license conditions and end-use checks related to cruise missile and UAV transfers. To determine the completeness and accuracy of the Defense and State data sets, we reviewed related documentation, interviewed knowledgeable agency officials, and reviewed internal controls. The State database system is not designed to identify all cruise missile or UAV commodities transferred. Therefore, the team developed a list of search terms based on consultations with State officials concerning which terms would likely capture all transfers involving cruise missiles, UAVs, and related technology. State provided the criteria we used to determine what State- licensed exports were cruise missile or UAV-related. State officials queried their licensing database to search for specific category codes and 12 keywords. The resulting report that State provided to us contained 400 pages with 1,300 entries. While we have high confidence that our analysis allowed us to capture most of the relevant cases, it is possible that a few relevant State cases might have been missed. We also assessed the reliability of the Commerce data by performing electronic testing of required data elements and by interviewing agency officials knowledgeable about the data. We determined that the data elements were sufficiently reliable for the purposes of this engagement. We also interviewed officials of the governments of France, Italy, and the United Kingdom, and met with representatives of the point of contact for the MTCR in Paris, France. In addition, we received written responses to questions we provided to the governments of Israel, Japan, South Africa, and Switzerland. Russia and Canada provided a response too late to be included in this report. We requested the same information from the government of Germany, but received no response. Our ability to address two objectives was impaired by a Department of State delay in assisting our efforts to collect responses to written questions from foreign governments. State agreed to facilitate this effort 4 months after our initial request for assistance and only after we reduced the number of countries to receive our questions from 16 to 7 and reduced the number of questions. Given this delay, governments had less time to respond to our questions than we had originally planned. Thus, we could not fully assess how other governments address the proliferation risks of cruise missiles, UAVs, and related technology and apply end-use controls on their exports of these items. We performed our work from October 2002 to November 2003 in accordance with generally accepted government auditing standards. The following are GAO’s comments on the Department of Commerce letter dated November 14, 2003. 1. Commerce said that our report does not distinguish among the varying threats posed by different types of cruise missiles and UAVs. Our report does make distinctions between the threats posed by anti-ship cruise missiles to U.S. naval forces, land-attack cruise missiles to the U.S. homeland and forces deployed overseas, and UAVs as potential delivery systems for chemical and biological weapons. As our report stated, the potential for terrorist groups to produce or acquire rudimentary cruise missiles or small UAVs using unlisted dual-use items is an emerging threat that needs to be better addressed. 2. Commerce said that agreement was finalized at the September 2003 MTCR Plenary to add a new category of UAVs to the MTCR control list. We have added information to the report to take this into account. 3. Commerce said that our report does not discuss action taken at the September 2003 MTCR Plenary to include a catch-all provision in the regime guidelines that could strengthen MTCR disciplines and address some of the concerns of our report. While helpful, the practical impact of this change is negligible. Nearly all MTCR members currently have catch-all controls in their national export control authority. Furthermore, as Commerce pointed out, the U.S. catch-all controls have limited scope and do not address the type of situation presented in the New Zealand example. 4. We believe that our explanation was clear as to how we applied Commerce’s guidance to select licenses that met Commerce’s listed criteria for receiving a PSV. As clearly noted in our report, we first started with the 2,490 dual-use licenses with commodity categories that Commerce had identified as relevant to cruise missile and UAV items. Second, we selected those licenses having only commodity categories identified in Commerce guidance as chokepoint technologies. Third, we matched these licenses to a recipient country identified as a country of missile proliferation concern or as a conduit country. This analysis resulted in 20 licenses. When we found that two of the 20 licenses we identified had been selected for a PSV, we asked Commerce officials to explain which of the other variables (information about the parties to the transaction, proposed end use, previous licensing history, etc.) mitigated the need for a PSV. As we reported, Commerce officials could not explain which factors lessened the need for a PSV for the remaining 18 licenses. 5. Commerce stated that there is ambiguity in our report as to whether the gap relates to items listed on the Commerce Control List or to items that are not listed because they are not considered as sensitive for missile proliferation reasons. Our references to the gap in the regulations refer to dual-use items that are not listed on the Commerce Control List. We have made changes to the draft to clarify this point. 6. Commerce stated that if it is GAO’s position that noncontrolled items are sensitive and should be placed on the MTCR control list, then we should explain the basis for this position. We are not suggesting that unlisted items should be added to the MTCR control list to deal with the issue we identified in the New Zealand example. As indicated in our recommendation, the vehicle to address this gap would be an expansion of Commerce’s catch-all provision whereby license reviews would be required when the exporter knows or has reason to know that items not on the Commerce Control List might be used by nonstate actors for missile proliferation purposes. 7. Commerce states that the United States and MTCR members effectively control the items of greatest significance for cruise missiles and UAVs that pose concerns for U.S. national security. We agree that MTCR covers items of greatest significance for cruise missiles and UAVs that pose concerns posed by national missile programs. However, Commerce needs to recognize the potential for nonstate actors, particularly terrorists, to legally acquire unlisted items for use in missile proliferation. 8. Commerce acknowledges that its enforcement authority is limited concerning items not listed on the Commerce Control List and entities not named on the terrorist lists. Nonetheless, it asserts that it could take specific actions if it learned that U.S. items had been shipped to proliferators or terrorists that were developing weapons with these components. However, it is not clear how this information would come to Commerce’s attention because current regulations do not require, or inform, an exporter to seek a license review in this type of situation. 9. Commerce agrees to consider whether the catch-all provision sufficiently protects U.S. national security interests. We agree that such a review in consultation with the Technical Advisory Committees and interagency community would be an important first step in identifying the sufficiency of the provision to cover nonstate actors and ways to modify it to address the gap. Consequently, we have modified our recommendation accordingly. 10. The gap that we identified in our report is in the catch-all provisions. We are not suggesting that additional items be added to the control lists. Currently, the catch-all regulations require an exporter to submit a license application when he knows or has reason to know that an unlisted item would be used for missile proliferation purposes. However, this provision applies only to specific missile proliferation projects or countries identified on a narrow list in the regulations. The New Zealand citizen was not covered under the catch-all provisions. The following are GAO’s comments on the Department of State letter dated November 19, 2003. 1. State said that it has conducted over 1,200 Blue Lantern checks on exports of all types and developed derogatory information in almost 200 cases over the past 3 years. However, these checks and cases involved both pre-license checks and PSVs and included more than cruise missile or UAV items, according to State’s most recent end-use monitoring report. For example, 428 checks initiated by State in fiscal year 2002—of which 50 checks resulted in unfavorable determinations—included firearms and ammunition, electronics and communications equipment, aircraft spare parts, bombs, spare parts for tanks and military vehicles, and night vision equipment. 2. State also said that the Blue Lantern program (1) effectively verifies the end use and end users of export applications when questions arise, (2) has deterred diversions, (3) helped disrupt illicit supply networks, (4) helped State make informed licensing decisions, and (5) ensured exporter compliance with law and regulations. State added that the historical context of assessing the parties to the export weighs into every licensing decision and its importance cannot be discounted. We agree that the Blue Lantern program can have a positive impact when State has the information needed to allow it to act. This statement affirms our point that it is important to obtain such information through improved monitoring, particularly PSVs. However, given the limited number of either pre- or post-shipment Blue Lantern checks focused to date on cruise missile and UAV-related transfers, we question whether sufficient information has been obtained in this area. 3. State said that it was unclear why our report’s analysis excluded pre- license checks as part of State’s efforts to ensure compliance with arms export regulations. As noted above, we did ask for such information and learned that State conducted few pre-license checks for its cruise missile and UAV transfers. While we agree with State that pre-license checks are critical to providing assurances that licenses are issued to legitimate, reliable entities and for specified programs or end uses, they obviously cannot verify that exports are received by the legitimate end user or used in accordance with the terms of the license after shipment. We agree that seeking and receiving assurances prior to licensing and shipment is a critical function that might mitigate the need for a PSV check in many cases. However, State implies that pre- license and other actions of the licensing process mitigated the need to conduct PSV checks for all but 4 of its 786 licenses for cruise missile, UAV, or related technology. These included 129 licenses to non-MTCR countries, such as Egypt, Israel, and India. 4. State said that our report did not articulate the criteria we used to determine what exports are UAV-related. State provided the criteria we used to determine what State-licensed exports were cruise missile or UAV-related. State officials queried their licensing database to search for specific category codes and 12 keywords. The resulting report that State provided to us contained 400 pages with 1,300 entries. We have added this information to our Scope and Methodology section to clarify that State provided us with these criteria, the data generated from applying the criteria, and information on Blue Lantern pre-license and PSV checks for these licenses. In addition to the individual named above, Jeffrey D. Phillips, Stephen M. Lord, Claude Adrien, W. William Russell IV, Lynn Cothern, and Richard Seldin made key contributions to this report. | Cruise missiles and unmanned aerial vehicles (UAV) pose a growing threat to U.S. national security interests as accurate, inexpensive delivery systems for conventional, chemical, and biological weapons. GAO assessed (1) the tools the U.S. and foreign governments use to address proliferation risks posed by the sale of these items and (2) efforts to verify the end use of exported cruise missiles, UAVs, and related technology. The growing threat to U.S. national security of cruise missile and UAV proliferation is challenging the tools the United States has traditionally used. Multilateral export control regimes have expanded their lists of controlled technologies, but key countries of concern are not members. U.S. export control authorities find it increasingly difficult to limit or track unlisted dual-use items that can be acquired without an export license. Moreover, a gap in U.S. export control authority enables American companies to export certain dual-use items to recipients that are not associated with missile projects or countries listed in the regulations, even if the exporter knows the items might be used to develop cruise missiles or UAVs. American companies have in fact legally exported dualuse items with no U.S. government review to a New Zealand resident who bought the items to build a cruise missile. The U.S. government seldom uses its end-use monitoring programs to verify compliance with conditions placed on the use of cruise missile, UAV, or related technology exports. For example, State officials do not monitor exports to verify compliance with license conditions on missiles or other items, despite legal and regulatory requirements to do so. Defense has not used its end-use monitoring program initiated in 2002 to check the compliance of users of more than 500 cruise missiles exported between fiscal years 1998 and 2002. Commerce conducted visits to assess the end use of items for about 1 percent of the 2,490 missile-related licenses we reviewed. Thus, the U.S. government cannot be confident that recipients are effectively safeguarding equipment in ways that protect U.S. national security and nonproliferation interests. |
Congress enacted GPRA in part to inform congressional decision making by providing objective information on the relative effectiveness and efficiency of federal programs and spending. In addition to requiring executive agencies to develop strategic and annual performance plans, and measure and report on progress toward goals, GPRA also emphasized efficiency. According to the statute, GPRA was intended, among other things, to address problems of waste and inefficiency in federal programs, and to improve congressional decision making by providing objective information on the relative efficiency and effectiveness of federal programs and spending. OMB plays an important role in the management of the federal government’s performance, and specifically GPRA implementation. Part of OMB’s overall mission is to ensure that agency plans and reports are consistent with the President’s budget and administration policies. OMB is responsible for receiving and reviewing agencies’ strategic plans, annual performance plans, and annual performance reports. To improve the quality and consistency of these documents, OMB issues annual guidance to agencies for their preparation, including guidelines on format, required elements, and submission deadlines. In addition, GPRA requires OMB to prepare the overall governmentwide performance plan, based on agencies’ annual performance plan submissions. The PMA and PART of the prior administration also included an emphasis on improving government efficiency, with requirements for agencies to develop program-level efficiency measures and show annual improvements in efficiency. In August 2001, the Bush Administration launched the PMA with the stated purpose of ensuring that resources entrusted to the federal government were well managed and wisely used. OMB developed criteria called “standards of success” to measure progress in five management initiatives under the PMA, as well as a scorecard to track agency progress under each initiative. Criteria to receive and maintain the highest rating score (green status) for the performance improvement initiative included that an agency’s annual budget and performance documents include at least one efficiency measure for each program and that program performance and efficiency improvements be identified each year. PART, which was launched in 2002 as a component of the PMA, included assessment of the extent to which programs were tracking progress toward and achieving efficiency improvements. PART consisted of a set of questions developed to assess various types of federal executive branch programs, and addressed four aspects of a program: purpose and design, strategic planning, program management, and program results/accountability. While there were references to efficiency in several different sections of the 2007 and 2008 PART guidance, two PART questions focused specifically on development of program-level efficiency measures with annual targets for improvement: “Does the program have procedures (e.g., competitive sourcing/cost comparisons, information technology (IT) improvements, appropriate incentives) to measure and achieve efficiencies and cost effectiveness in program execution?” In order to receive a “yes” response for this question, a program was to have regular procedures in place to achieve efficiencies and cost effectiveness, and had to have at least one efficiency measure with baseline and targets. Evidence could include efficiency measures, competitive sourcing plans, IT improvement plans designed to produce tangible productivity and efficiency gains, or IT business cases that documented how particular projects improved efficiency. “Does the program demonstrate improved efficiencies or cost effectiveness in achieving program goals each year?” In order to receive a “yes” response for this question, a program had to demonstrate improved efficiency or cost effectiveness over the prior year, including meeting its efficiency target(s) in the question above. About 90 percent of all programs that received a PART assessment, including those in our selected review, developed at least one performance measure as an efficiency measure. However, we found that about half of the approved measures either did not contain typical elements of an efficiency measure, or were unclear. As table 1 below indicates, we analyzed a sample of the efficiency measures that were developed for PART, and, to the extent possible, placed them into one of the three categories shown in the table. (In some cases, the available information on the measure was insufficient for us to place it into one of the three categories, so we labeled these measures as “unclear.”) As figures 1 and 2 below illustrate, our analysis of the 36 efficiency measures from our selected programs and a random sample of the remaining efficiency measures indicates that about half of the efficiency measures contained typical elements by including both an input and an output or outcome. As illustrated in figure 1, for the 21 selected programs (listed in appendix II), we determined that 58 percent of the efficiency measures included both elements and 42 percent did not. In its guidance to programs, OMB stated that, although both output and outcome-oriented efficiency measures were acceptable, outcome efficiency measures were preferred. Because we obtained more in-depth information on the selected programs’ measures, we further analyzed whether those that included both elements were output- or outcome-oriented and found most to be output- oriented. Figure 2 summarizes estimates for the remaining 1,355 efficiency measures, based on a random sample of 100 of those measures. We estimate that 48 percent of the measures included both elements, 26 percent did not, and the remaining 26 percent were unclear. Of those that did not contain both elements, the missing element was most often an input. In general, as indicated in table 1, the absence of these typical elements can result in measures that do not truly capture efficiency. Nevertheless, some of the information captured in these measures could still be of value to program officials for helping improve efficiency. For example, one measure from our selected programs—average time to correct/mitigate higher priority operations and maintenance deficiencies at certain facilities in the Bureau of Reclamation—did not contain an input element. However, program officials told us this was an important measure because it helped them prioritize which ongoing preventive maintenance projects they should repair first by categorizing repairs needed according to the likely costs of delaying the repairs. For example a category 1 deficiency should normally be repaired immediately (within to 6 months) to avoid escalating the cost of repair; a category 2 deficiency should be repaired in a few years. In contrast, a category 3 deficiency is normally repaired only if there is time and funding remaining after repairing category 1 and 2 deficiencies. In another example, the National School Lunch Program (NSLP) used a measure which was labeled an efficiency measure, but which did not hav the typical ratio of inputs to outputs or outcomes. Instead, the measure focused on reducing the error rate in making program payments. Progra officials characterized the measure as a process measure, rather than an output or outcome-based efficiency measure. An official said that out of s $7 billion in total program payments, errors worth $2 billion occur in term of under and over payments, for a net cost to the program of $1 billion. An official said that if they were able to reduce overall overpayments due to various types of error, it could save millions of dollars. Officials said this measure has been important in helping them take corrective actions to reduce the number of payments made in error. Among the selected programs, for the efficiency measures that contained an input, the type of information used to express the input varied in terms of both availability for use and completeness. Most of the efficiency measures we reviewed captured inputs in terms of cost, but a few us amount of staff resources or time spent to produce an output or outcome as a proxy for cost. For example, the Department of Labor Energy Employees Occupational Illness Compensation program’s efficiency measure was the average number of decisions per full-time equivalent (FTE), which we determined used information on work hours as estima by FTEs as the input. While FTE information is often readily available ted and can be a useful proxy for cost, it does not necessarily reflect total cost because, for example, it would neither distinguish between higher and lower cost FTEs, nor would it include other costs, such as contractors, training, equipment, or facilities. In addition, dollar cost information can vary in how completely it captures the cost of producing outputs or outcomes. “Cost” generally can be thought of as the value of resources that have been, or must be, used or sacrificed to attain a particular objective, which, in the case of an efficiency measure, would be a unit of output or outcome. “Full cost” is generally viewed as including both direct costs (costs that can be specifically identified with a cost object, such as an output) and indirect costs (costs of resources that are jointly or commonly used to produce two or more types of outputs but are not specifically identifiable with any of the outputs). Managerial cost accounting (MCA) information can provide a more complete picture of the cost involved in producing program outputs or outcomes by recognizing resources when they are used and determining the full cost of producing government goods and services, including both direct and indirect costs. According to the Statement of Federal Financial Accounting Standards No. 4 (SFFAS 4), Managerial Cost Accounting Concepts and Standards for the Federal Government, which sets forth the fundamental elements for MCA in government agencies, costs may be measured, analyzed, and reported in many ways and can vary depending upon the circumstances and purpose for which the measurement is to be used. Our analysis of the cost information used by the selected programs showed that most of the measures used budgetary information, such as appropriations or obligations, for the cost element. Of the 18 efficiency measures from our selected programs that had both typical elements, and had cost as the input, 14 measures (78 percent) used a form of budgetary information. We have previously reported that using budgetary information, such as appropriations or obligations, may not completely capture the full cost of producing program outputs or outcomes because of differing time frames and account structures. With regard to timing, appropriations provide agencies legal authority to obligate funds for a given fiscal year or beyond. Consequently, agency outlays (payments against obligations for goods and services received) representing the resources used to produce a program’s outputs or outcomes in a given year may flow from obligations made in a prior year’s appropriation. Therefore a given year’s appropriations or obligations may not represent the resources actually used to produce a program’s outputs or outcomes in that year. With regard to account structures, appropriations accounts developed over the last 200 years were oriented in different ways in response to specific needs. For example, some appropriations accounts reflect items of expense, such as salaries or construction, while others reflect organizations, processes, or programs. Further, program-oriented account structures may cover multiple programs or may exclude some indirect resources used by the programs. Though budgetary information may not completely cover the cost of producing program outputs or outcomes, several program officials said it was the most complete information available to them and best met the needs of Congress. For example, the Department of Labor Job Corps program, which used budgetary information in its efficiency measure, divided its request in the fiscal year 2010 Job Corps Congressional Budget Justification into three categories: operations, construction, and administration. However, the program’s efficiency measure—cost per participant in the Job Corps program—was based entirely on the operations category, which encompassed 92 percent of the program’s fiscal year 2010 request, meaning the measure did not capture the remaining 8 percent of construction- or administration-related costs that were also associated with program participation. A study commissioned by the Job Corps recommended that all direct costs associated with Job Corps appropriations be included in the measure if full costs were to be determined. This would include actual expenditures (i.e., outlays rather than appropriations or obligations) for Job Corps appropriations provided for operations, construction, and direct administrative costs. Program officials indicated they did not believe including the additional costs would provide useful information because there were relatively few opportunities to find efficiencies in the construction or administration categories. Additionally, a Department of the Interior Wildland Fire Management budget official told us that while they had access to more complete cost data, this information was not necessarily accurate or easy to obtain because it had to be collected from five different entities with different cost accounting systems. They also preferred to use budgetary information because it helped to justify their appropriations request to Congress. Program officials noted that each of their three efficiency measures was based on obligations data. Relative to time or budgetary information, some agencies have sought to develop more complete cost information by using MCA systems capable of accumulating and analyzing both financial and nonfinancial data in order to determine, among other things, the unit cost of producing program outputs or outcomes. Such systems are also capable of recognizing resources when they are used and determining the full cost of producing government goods and services, including both direct and indirect costs. However, in earlier work we found that only 3 of the 10 Chief Financial Officer (CFO) Act agencies we reviewed had implemented MCA systems entitywide: Interior, the Social Security Administration, and Labor. Transportation had made significant progress in implementing MCA entitywide and three agencies—Agriculture, Health and Human Services, and Housing and Urban Development—planned to implement MCA systems when upgrading their overall financial management systems. The three remaining agencies we reviewed—Education, the Treasury, and Veterans Affairs—had no plans to implement MCA departmentwide, although Veterans Affairs was initiating a review to explore opportunities to do so. Consequently, we recommended that individual agencies commence or improve the development of entity-wide MCA systems as a fundamental component of their financial management system, as required by SFFAS 4 and the Federal Financial Management Improvement Act of 1996. For this report, of the five agencies we reviewed, we selected three— Interior, Labor, and Transportation—because we previously reported they had either implemented MCA systems entitywide, or were planning to do so. Nevertheless, we did not find widespread use of MCA system data for the efficiency measures we reviewed either in these agencies or in the other two agencies—Education and Agriculture—that did not have entitywide MCA systems. Of the 18 efficiency measures from our selected programs that included typical elements, four measures (22 percent) used a distinct MCA system to determine costs. Those programs that relied on MCA data produced outputs, such as the Student Aid Administration program (student aid disbursements), the Federal Aviation Administration’s (FAA) Air Traffic Organization Terminal (take offs and landing operations) and Technical (maintenance and modernization of equipment needed to provide air traffic services) programs, and the Department of the Interior’s Fisheries program (pounds of trout per dollar). In addition, legislation was enacted in the 1990s, which resulted in both Federal Student Aid (FSA) and FAA developing MCA systems to improve performance.37, 38 Of the remaining 14 efficiency measures, officials from several of those programs told us they used budgetary information because they either did not have access to an MCA system, the system they could access produced poor data, or the information would not be useful for congressional decision making. For example, the Department of Education did not have a departmentwide MCA system, though it is now considering creating such a system in response to a prior recommendation we made. Also, officials with the Department of Transportation CFO office told us that the department had taken a decentralized approach in which some of their operating administrations—such as the FAA and Federal Transit Administration— had developed and were using their own MCA system. In addition, although the Department of Labor’s CFO had developed an MCA system and made it available to its agencies and programs, officials from the five Department of Labor programs we reviewed indicated that they did not use it for their efficiency measures because, in their opinions, the system was either not useful, not sufficiently developed for their needs, did not capture all the program’s costs, or captured a different type of funding than was used for the efficiency measure. Finally as indicated previously, a Department of the Interior Wildland Fire budget official told us that cost information for their program was neither easy to access nor was it as useful for budget justification purposes. The Higher Education Amendments of 1998, which amended the Higher Education Act of 1965, established a performance-based organization for the delivery of federal student financial assistance, after which Federal Student Aid, the one Department of Education program office with an operational MCA system, independently developed its MCA system. Pub. L. No. 105-244, title I, § 101(a), 112 Stat. 1581, 1604–610 (Oct. 7, 1998), codified at 20 U.S.C. § 1018. PBOs are discrete units, led by a Chief Operating Officer, that commit to clear objectives, specific measurable goals, customer service standards, and targets for improved performance, see GAO-06-653T. The Federal Aviation Reauthorization Act of 1996 required that FAA develop a cost accounting system that accurately reflects the investment, operating and overhead costs, revenues, and other financial measurement and reporting aspects of its operations. Pub. L. No. 104-264, § 276(a)(2), 110 Stat. 3213, 3248 (Oct. 9, 1996), codified at 49 U.S.C. § 45303(e). In addition, in 1997, the National Civil Aviation Review Commission (the “Mineta Commission”) recommended that FAA establish a cost accounting system to support the objective of FAA operating in a more performance-based, business-like manner. The selected programs that had measures with both elements of a typical efficiency measure reported mixed results under PART in terms of gains and losses in efficiency. As previously indicated in figure 2, 21 of the 36 efficiency measures developed by the programs selected for our review had both of the elements of a typical efficiency measure. As can be seen in table 2, 8 of the 21 efficiency measures (representing seven different programs), showed an improvement in efficiency between the baseline and most current year. Ten of the efficiency measures (representing seven programs) showed a decrease in efficiency over the reported periods. Three measures (representing two programs) had only baseline data. We have previously reported that agencies can use performance information to make various types of management decisions to improve programs and results. The same is true for performance measures that track efficiency—managers need to use the information to help them identify actions needed to bring about improved efficiency. Our review of selected programs that had measures with both elements of a typical efficiency measure found variety in terms of whether officials reported using efficiency measures. We also found no clear relationship between efficiency gains or losses and whether program officials reported using or not using efficiency measures. Officials from three of the seven programs that reported efficiency gains described using their efficiency measures, while officials for three additional programs with efficiency gains said they did not use the efficiency measures. Officials for the other program with efficiency gains reported mixed pictures, saying they did not use the efficiency measure but found some value in the measure or its components. A similar mix was found among programs that reported net losses in efficiency, with officials for three programs using the efficiency measures and officials for four programs not using them. One example of a program that showed a net gain over time for its efficiency measure and for which officials reported using the data was the Department of Education’s Student Aid Administration program. Reducing costs was one of the primary objectives of the program. Their efficiency measure—direct administrative unit costs to originate and disburse student loans and Pell Grants—showed a gain in efficiency from 2006 to 2008. The agency provides federal assistance to eligible students by partnering with postsecondary schools, financial institutions, and guaranty agencies (state and nonprofit agencies that guarantee loans against default). Program officials told us they used information from this measure to establish targets for reduced unit costs for their lending transactions. For example, they reported using the data to negotiate a lower cost for the origination of direct student loans by a sole-source contractor. FSA used a contractor to originate the loans made directly to students. The contract allowed for a certain quantity of loan originations for a set price, up to a maximum number of loans each year. According to program officials, the sharp reduction in credit availability due to the financial crisis beginning in 2008 led to an increase in demand for FSA direct loans. FSA had projected that demand for direct student loans in the 4th quarter of fiscal year 2009 would exceed the contract maximum by 3 million loans. The contractor proposed a price of $8.9 million for the additional loans, arguing that the added volume would require higher infrastructure costs associated with greater call center capacity. FSA officials told us they analyzed historical data for their efficiency measure and found that the unit cost to originate loans decreased as volume increased. They used this analysis to challenge the contractor’s bid and succeeded in lowering the agreed price to $4.9 million. Officials reported that legislation, federal cost accounting standards, and our previous recommendations all contributed to pressure to track unit costs and try to lower administrative costs. Consequently, the agency had developed a number of cost models, which facilitated their developing the efficiency measure for PART. The Department of the Interior’s Fisheries program provides an example in which the efficiency measure showed a net loss but officials said they used the efficiency measure data to make management decisions. The efficiency measure tracked the efficiency (pounds per dollar) of producing healthy rainbow trout for recreation. For the first 4 years examined, fiscal years 2004 through 2007, the efficiency measure varied slightly, indicating that overall efficiency was relatively stable. For fiscal year 2008, however, the measure fell, indicating a significant drop in efficiency. Officials attributed this drop to a 31 percent increase in feed, energy, and utility costs that was experienced throughout the country in 2008 and was beyond their control. Several fishery stations reported 40 percent increases in feed costs in just 1 year. Officials told us that having information about the decline in efficiency was valuable because it led individual stations to look for opportunities to lower other costs of production that were within their control. For example, program managers said they used their efficiency measure data to help them decide to phase out the production of inefficient (more costly) strains of trout. In addition, they said they used the measure to help manage the losses resulting from diseased trout that could not be sold by shifting production from one fishery to another that did not have a problem with disease. Officials said they thought it was easier for programs that directly produced products or provided services to develop and use efficiency measures. They said they had a relatively easy time of developing their efficiency measure because they directly produce a product (i.e., rainbow trout). The Department of the Interior’s Wildland Fire Management Program reported mixed efficiency results. Of their three efficiency measures, two showed a net loss and one showed a net gain. Even though the results were mixed, officials said they used the data to establish ranges of acceptable cost estimates for contract or grant proposals and to identify outliers. Officials said their efficiency measures, which tracked numbers of wildland acres treated or moved to a better condition class (to reduce the likelihood of wildland fires) per million dollars, enabled them to identify unusually high or low costs when evaluating proposals from field units for funding treatments. They could identify a proposal that did not fall within the normal range of prior projects in terms of costs, do further analysis, and ask for explanations from field staff to better understand why the proposal was outside the norm. Program officials also said they used a tool called Ecosystem Management Decision Support (EMDS) to help prioritize projects and allocate funding for future years. They said EMDS takes into account various factors, including past performance and efficiency. For example, fuel treatments that demonstrated greater efficiency would be given higher priority for funding under EMDS, other factors being equal. While FAA’s Air Traffic Organization Technical Operations program’s efficiency measure showed a net gain, officials said they did not use it to make major decisions. ATO Technical Operations is responsible for maintaining and modernizing equipment needed in the national airspace system to deliver air traffic services. It fields, repairs, and maintains a huge network of complex equipment, including radars, instrument landing systems, radio beacons, runway lighting, and computer systems. The efficiency measure, unit cost for providing ATO Technical Operations services, is the “total labor obligations for the Technical Operations' Service Unit” divided by the total hours of operational availability (or equipment “uptime”). Officials said the measure was used as a baselining effort, and no decisions have been made as a result. Officials explained that they cannot significantly influence labor costs because of a labor agreement that requires ATO to maintain 6,100 direct employees. Officials said they have used data for the denominator of the efficiency measure, on the hours of operational availability. Equipment needs to be available continuously, and currently is about 99.7 percent of the time. Officials said they have not done the marginal cost analysis to determine whether it would be cost-effective to try to increase equipment uptime, but they have broken the data down by location and looked for outliers and tried to address impediments to operational availability at certain locations. They also said that while they have not used the efficiency measure to make any management decisions, it has been valuable in helping to orient staff to think about costs of operations and how to go about looking for efficiency improvements. Lastly, the Department of Labor’s Occupational Safety and Health Administration (OSHA) program reported a net loss for the efficiency measure and told us they did not use the data. Officials said the current efficiency measure—inspections per Compliance Safety and Health Officer—was only a “back room calculation” and was not something they promoted or used to make decisions within the organization. They said they did not evaluate the performance of staff based on the number of inspections they conducted, because doing so could lead to a perverse effect of rushing through inspections in order to complete them more quickly, resulting in poorer quality inspections. In addition, officials said they did not believe anyone used the OSHA efficiency measure other than for reporting purposes. Officials from all of the selected programs we reviewed identified one or more challenges related to developing or using efficiency measures. The challenges cited were not new; we have reported on similar types of challenges in our prior work on PART and performance measurement issues in general. Challenges related to OMB’s guidance and technical assistance for efficiency measures specifically included: a program definition that did not correspond well to program operations; an emphasis on developing outcome-oriented efficiency measures; achieving required annual improvement targets for efficiency; and inconsistencies and limitations in OMB’s guidance and technical assistance. In addition, officials described the difficulty of trying to compare the relative efficiency of programs (or units within programs) that have significantly different objectives, activities, or cost data. We previously reported that determining the appropriate program or unit of analysis for a PART assessment was not always obvious, and what OMB determined was useful did not necessarily match agency organization or planning elements. We found that OMB sometimes aggregated separate programs into one for the purposes of a PART assessment, and in other cases disaggregated programs. Aggregating programs sometimes made it difficult to create a limited, but comprehensive, set of performance measures for programs with multiple missions, and agency officials noted that difficulties could arise when unrelated programs and programs with uneven success levels were combined for PART. At the same time, disaggregating a program too narrowly could distort its relationship to other programs involved in achieving a common goal, and sometimes ignored the interdependence of programs by artificially isolating programs from the larger contexts in which they operated. While OMB, in response to one of our recommendations, expanded PART guidance on how a unit of analysis was to be determined, problems related to defining programs for PART remained. An OMB staff member acknowledged to us that OMB often combined what agencies considered and managed as separate programs in order to identify a program for PART. According to some program officials, the way in which OMB grouped their activities into a program for the PART assessment was not useful, and so the resulting program-level efficiency measure developed for PART was not useful. Officials from the National Highway Traffic Safety Administration (NHTSA) within the Department of Transportation told us that the way OMB and the department defined their program for the PART assessment was a key challenge to developing a useful efficiency measure. Officials said that NHTSA’s mission and operations are organized along two major programmatic lines: highway and motor vehicle safety. In contrast, for purposes of PART and development of the required efficiency measures, NHTSA was organized into two programs that received separate PART assessments: Operations and Research, and Grant Management. As a consequence, officials said the efficiency measure developed for the Operations and Research program was not meaningful. They said they were revising their efficiency measures and planned to develop one for each of the programmatic areas. In previous work, we identified challenges involved in developing useful results- or outcome-oriented performance measures for some programs, such as those geared toward long-term health outcomes and research and development. We reported that many of the outcomes for which federal programs are responsible are part of a broader effort involving federal, state, local, nonprofit, and private partners, and that it is often difficult to isolate a particular program’s contribution to an outcome. However, we also reported on how selected agencies that had limited control over the achievement of their intended objectives addressed the challenge by employing various strategies, such as including intermediate outcomes within their direct control along with far-reaching or end outcomes. In a previous review of PART, we reported that OMB had taken steps to clarify PART guidance on using outcome and output performance measures, and had accepted administrative efficiency measures instead of outcome-level efficiency measures for some programs. However, we also reported that agencies had mixed success in reaching agreement with OMB in these areas. As mentioned above, of the 21 measures from selected programs that had typical elements of an efficiency measure, 13 contained outputs, and 8 contained outcomes. While OMB’s PART guidance described efficiency measures as including both outcome- and output-level impacts, it stated that the best efficiency measures captured outcomes. Further, program officials told us that OMB pressed some programs to have efficiency measures that captured outcomes instead of outputs. Similar to findings from our prior work, some officials we interviewed for this review said it was difficult for their programs to interpret outcome- level efficiency measure information, because factors other than program funding affected the outcome of the program. For example, the purpose of the Forest Service’s Watershed program is to restore, enhance, and maintain watershed conditions, including soil, water, air, and forest and rangeland vegetation within the national forests and grasslands. Management of these physical and biological resources provides a foundation for healthy, viable ecosystems. The Watershed program received a “Results Not Demonstrated” rating from the OMB 2006 PART assessment process because it lacked long-term, outcome-based performance and efficiency measures to track the performance of land management activities on national forest and nonfederal watersheds, or demonstrated water quality improvement over time. Basically, the Forest Service was unable to track how watershed projects were prioritized, identify the benefits associated with restoration projects, and determine whether those projects improved watershed condition. Officials said they had previously proposed the unit cost of watershed improvement projects as an efficiency measure under PART, but OMB rejected it partly because it was an output- rather than an outcome-level measure. According to Forest Service documents, factors beyond its control affect watershed conditions, and it is difficult to demonstrate the impact of program activities on watersheds and try to determine the most cost-effective way to improve the outcome. The agency’s ability to improve the condition of watersheds depends on many factors, including what percentage of the land affecting the watershed is privately owned as opposed to owned by the Forest Service and past impacts—for example, an official said that lands that were previously mined may be more difficult to restore. Officials said that the cost of trying to improve some watersheds would exceed available funds, and in some cases passive restoration, or doing nothing and letting natural processes return, could improve conditions as rapidly as any program interventions could. Forest Service officials said they reached agreement with OMB to develop an outcome-oriented efficiency measure based on the cost of improving or maintaining the condition of watershed acres. According to a 2008 report prepared by the Forest Service, in order to be able to relate costs to outcomes, program officials explained that they will need to develop a consistent approach for assessing watershed condition and a system that would enable them to track changes in watershed conditions and relate these changes to Forest Service management activities. Following implementation of this approach, the agency would be able to track improvements in program outcomes and relate changes to cost. OMB’s PMA and PART guidance required programs to set annual improvement targets for their efficiency measures. We previously reported that in some programs, long-term outcomes are expected to occur over time through multiple steps, and that it can take years to observe program results. For these programs, it can be difficult to identify performance measures that will provide information on annual progress toward program results. Along these lines, some program officials we interviewed told us it was not reasonable to expect annual improvements in efficiency for some programs because it might take several years for an increase in efficiency to be realized as a result of some intervention or investment, or because a technological advance might result in a one-time cost savings that would not continue to be achieved over time. For example, the Plant and Animal Health Monitoring and Surveillance programs of Agriculture’s Animal and Plant Health Inspection Service, which protects the health and value of agriculture and natural resources through early detection of pest and disease outbreaks, had an efficiency measure that tracked the value of damage prevented or mitigated by the program per dollar spent. Program officials told us that it was difficult to show improvements in efficiency every year. They said that as a science-based program, it took time to develop new technologies that improved efficiency, and the effect might be a one-time improvement in efficiency that would not result in continued additional efficiency gains over time. Similarly, officials from the Department of the Interior’s Endangered Species program stated that the timeframe needed to achieve results in terms of conservation and recovery of an endangered species is longer than an annual or even 5-year timeframe. They said it is difficult to associate additional funding with a defined outcome in a given year. Officials from the Department of Labor’s Center for Program Planning and Results acknowledged that their office and OMB strongly encouraged agencies and programs to show annual improvements for efficiency measures, which led to some friction in setting targets for out-years for some programs. They said that pressure to show annual improvements in efficiency resulted in some programs revising targets for the efficiency measures every year because they could not achieve the annual targets. An official said that there was a lot of focus on numerical annual targets for efficiency measures, and because some programs cannot realistically see improvements in efficiency in a 1-year time period, monitoring trends would be better. As we previously reported, OMB staff had to exercise judgment in interpreting and applying the PART tool to complex federal programs, and were not fully consistent in interpreting the guidance. In prior reviews of PART, we identified instances in which OMB staff inconsistently defined appropriate measures, in terms of outcomes versus outputs, for programs. We reported that some program officials said that OMB staff used different standards to define measures as outcome oriented. We also reported that OMB took steps to try to encourage consistent application of PART in evaluating government programs, including pilot testing the assessment instrument, clarifying guidance, conducting consistency reviews, and making improvements to guidance based on experience. OMB also issued examples of efficiency measures it identified as exemplary and expanded the guidance on efficiency measures. While officials for some programs we interviewed told us that OMB assistance and feedback under PART were valuable in developing useful efficiency measures, officials for other programs cited inconsistencies and limitations in OMB’s PART guidance and technical assistance that made the development of acceptable and useful efficiency measures more challenging. For example, officials for Agriculture’s Plant and Animal Health Monitoring programs said they worked with the department and OMB representatives to discuss efficiency measures and obtain feedback on proposed measures. Officials said feedback obtained was useful and allowed them to consider options they had not previously identified, and in some cases they incorporated the advice. Officials said that the efficiency measure tracking the value of damage prevented and mitigated per program dollar spent was a direct result of an OMB recommendation. However, officials for other programs said that PART guidance and OMB technical assistance and feedback provided to programs on efficiency measures were insufficient or inconsistent. For example, officials for the Department of the Interior’s Endangered Species program, which lacked an efficiency measure that had been approved by OMB, said they believed that OMB’s review of proposed efficiency measures was inconsistent. Officials said that OMB rejected a proposed output-level efficiency measure for the Endangered Species program and pushed for an outcome- level measure, but approved a similar measure for another program in a different federal department. Similarly, officials for the Forest Service Watershed program in Agriculture, which did not have any of its proposed efficiency measures accepted by OMB for the PART assessment, stated that lack of consistency on OMB’s part in defining acceptable efficiency measures complicated the process for them. They said OMB rejected a measure they proposed, but approved a similar measure for another agency. Further, officials for OSHA in the Department of Labor indicated that they worked with two OMB analysts who were not as familiar with their agency as the current analyst and created rework. Overall, they did not believe the process they undertook with OMB to develop an efficiency measure was fruitful. Officials we interviewed from the Department of Education’s Office of Federal Student Aid indicated that they eventually wanted to use data for the Student Aid Administration program’s efficiency measure (direct administrative unit costs for origination and disbursement of student aid), to compare the costs of similar activities performed by different contractors. However, we previously reported that challenges can result from the difficult but potentially useful process of comparing the costs of programs related to similar goals. We have also reported that in order to effectively compare a program to alternative strategies for achieving the same goals, comprehensive data on the program and comparable data on alternatives need to be available. In our prior work on human services programs, we reported that OMB officials recognized that programs are different and it may not be possible to compare costs across programs, especially when costs are defined differently due to programmatic differences. Officials from some selected programs we reviewed questioned whether it was reasonable to use efficiency measures for comparative analysis of performance across programs when the objectives, activities, or costs of the programs differed significantly. For example, an official from the Department of Labor’s Job Corps program said it was not appropriate to compare their program’s performance to that of other department employment and training programs in terms of the efficiency measure, which tracked cost (appropriations) per participant. According to the program’s PART assessment, the program's purpose is to assist eligible disadvantaged youth (ages 16-24) who need and can benefit from intensive education and training services to become more employable, responsible, and productive citizens. Participants have characteristics, such as being a school dropout, homeless, or in need of intensive counseling to help them participate successfully in school or hold a job, that are barriers to employment. Program officials said that Job Corps is quite different from other employment and training programs run by the department because it involves removing participants from a negative environment and placing them in a totally different, primarily residential, environment. Such a model involves higher operating costs associated with providing participants intensive services in a residential setting for up to 2 years, which would make it appear less efficient when compared to nonresidential programs.59, 60 As another example, officials for the Endangered Species program at the Department of the Interior questioned whether it made sense to try to compare the efficiency of efforts to protect different species. The program works with states, tribes, other federal agencies, nongovernmental organizations, academia, and private landowners to promote the conservation and prevent extinction of over 1,300 endangered or threatened species. As noted in the program’s strategic plan, each species has inherent biological constraints which create challenges to its recovery. Officials told us that they work with vastly different species in different regions, many factors affect the complexity of their work, and each case is unique. We previously reported that species are ranked by priority, but rankings do not reflect how much funding is needed to protect a species. The Job Corps program hired a contractor to propose an alternative efficiency measure to try to capture the unique outcomes of the program. The contractor study proposed an outcome-level efficiency measure (“cost per successful program outcome”), but cautioned against comparison with other programs because estimates for other programs might not reflect full costs, and because comparisons could be misleading if program objectives were not identical. Hei Tech Services, Inc., Job Corps Cost Measure: Selecting a Cost Measure to Assess Program Results (Dec. 1, 2008). In a prior review of PART, Labor officials told us that participants could remain in the Job Corps program for up to 2 years, which they considered adequate time to complete education or vocational training, and which generally resulted in higher wages, according to studies. However, they said that since costs per participant increased the longer a student remained in the program, Job Corps appeared less efficient compared with other job training programs. (GAO-06-28). Officials told us that the cost of an intervention, such as building a fence, could be much cheaper for one species in a particular region than for another species in a different location. The head of the department’s Office of Planning and Performance Management in the Office of the Secretary said that because the effort to save some species is so much more complicated and expensive than for others, it is not meaningful to simply compare the “cost per unit” or efficiency of saving different species without considering other factors such as the time frame involved, and the scope and level of treatment needed. For example, he suggested that it was not reasonable to try to compare the cost of saving the polar bear to the cost of saving a species of plant. As stated above, OMB’s approach to improving the efficiency of federal programs under PMA and PART focused on requiring individual programs to develop efficiency measures, identify procedures to achieve efficiencies, and achieve annual gains in efficiency. In prior reports, we concluded that PART’s focus on program-level assessments could not substitute for GPRA’s focus on thematic goals and department- and governmentwide crosscutting comparisons. Through our review of literature, we identified a variety of strategic and crosscutting approaches that government, nongovernment, and business organizations have used in their efforts to improve efficiency. For example, the United Kingdom and some state governments provide some important insights into such governmentwide efficiency efforts. These approaches share a common theme that performance can be maintained or even improved while reducing unnecessary costs associated with outmoded or wasteful operations, processes, and purchases. These approaches to efficiency improvement differ from OMB’s approach under PMA/PART in that they can be applied at government- or agencywide levels in addition to being applied within specific programs. Officials from some selected programs provided examples of additional efforts they were undertaking to improve efficiency, some of which can be aligned with these broader approaches we identified in the literature. Broadening the application of these approaches beyond the program level could help to identify even greater opportunities for improvements in the efficiency of federal government operations. GPRA’s planning and reporting requirements can provide a framework for agencies to take a more strategic approach to improving federal government efficiency. Governmentwide reviews have been conducted in the United Kingdom (UK) and by some state governments in the U.S. to help identify and implement strategic approaches to improve efficiency. Such reviews have been ordered by executive leadership to address a wide range of government activity. Reviews have been broad in scope, and initiatives undertaken to improve efficiency have been crosscutting and could be applied across processes, services, and organizations rather than just at the program level as required for federal agencies under OMB’s PART approach. In the UK in 2004, Her Majesty’s (HM) Treasury published a first of its kind, government-wide efficiency review that examined government processes, identified opportunities for cutting costs and improving services, and developed proposals to deliver sustainable efficiencies in the use of resources within both central and local government. The review focused on improving government efficiency in areas such as procurement, funding, regulation, citizen services, and administration. The efficiency review proposed strategies to improve efficiency that were adopted by HM Treasury in the UK’s 2004 budget. HM Treasury actively supported departments in their individual efficiency programs. HM Treasury negotiated efficiency goals with each department and created a centralized efficiency team managed by the Office of Government Commerce to help departments achieve efficiency gains. HM Treasury brought in outside expertise, including senior figures from the private and public sector, to support and work with departments. Additional specialist change agents were employed to assist departments with trying to achieve efficiency improvements in areas such as e-government, human resources, IT, finance, construction, and commodity procurement. Change agents addressed problems created by highly fragmented markets that crossed departmental boundaries. To assist departments in financing efficiency improvement programs, HM Treasury created a £300 million Efficiency Challenge Fund that provided departments with matching funds for efficiency improvement programs. Funds were approved based on objective criteria such as the ratio of expected savings to matching funds, probability of achieving savings, evidence that alternative funds were not available, and progress in delivering efficiency gains. In a final review of the completed efficiency program in November 2008, HM Treasury reported that the program led to £26.5 billion in annual efficiency gains (60 percent of which were direct cost savings while the remainder represented increased levels of public service rather than immediate cash savings). These final results have not been audited, although portions of earlier reported efficiency gains were reviewed by the UK National Audit Office (NAO) with mixed results. In 2007, more than halfway through implementing the efficiency program, the NAO reviewed a sample of the reported efficiency gains and found that some had a significant risk of inaccuracy. Nevertheless, NAO concluded at the time that of the £13.3 billion ($21.2 billion) reported gains, 26 percent (£3.5 billion ($5.6 billion)) fairly represented efficiencies achieved, 51 percent (£6.7 billion ($10.7 billion)) appeared to represent improvements in efficiency but had associated measurement issues and uncertainty, and 23 percent (£3.1 billion ($4.9 billion)) had potential to represent improvements in efficiency, but the measures used either had not yet demonstrated efficiency or the reported gains could be substantially incorrect. NAO cited measurement problems arising from longstanding weaknesses in departments’ data systems and from trying to measure savings in areas with complex relationships between inputs and outputs. Despite the caveats identified by NAO in trying to verify the reported efficiency gains, NAO reported that “the efficiency program made important contributions and there is now a greater focus on efficiency among senior staff.” In the U.S., several state governments initiated a variety of governmentwide reviews. For example, Arizona initiated an efficiency review in 2003 to try to find ways to improve customer service, reduce cost, and eliminate duplication while drawing heavily on internal state resources and experts in state government to manage the effort. The Arizona review investigated potential savings in 12 statewide, or crosscutting, issues that affected multiple agencies and offered the greatest potential for efficiency savings. In 2004, California initiated an ongoing review, the California Performance Review, with four major components: executive branch reorganization, program performance assessment and budgeting, improved services and productivity, and acquisition reform. Iowa Excellence is another governmentwide effort designed to improve customer service and cut costs in state government. Iowa agencies examined their performance using Malcolm Baldrige National Quality Program criteria. The state governmentwide review efforts share these beneficial features: serving as an effective method of cost-saving analysis, helping with prioritizing services to citizens, and providing a targeted goal for the administration of state governments that may contribute to improved government efficiency and effectiveness. Solving the daunting fiscal challenges facing the nation will require rethinking the base of existing federal spending and tax programs, policies, and activities by reviewing their results and testing their continued relevance and relative priority for a changing society. Such a reexamination offers the prospect of addressing emerging needs by weeding out programs and policies that are outdated or ineffective. Those programs and policies that remain relevant could be updated and modernized by improving their targeting and efficiency through such actions as redesigning allocation and cost-sharing provisions, consolidating facilities and programs, and streamlining and reengineering operations and processes. While significant efficiency gains can be achieved by restructuring outmoded government organizations and operations to better meet current needs, we have reported that such restructurings can be immensely complex and politically charged. All key players must be involved in the process—Congress, the President, affected executive branch agencies, their employees and unions, and other interested parties, including the public. The fundamental restructuring of the health care system for veterans in the mid-1990s and the Department of Defense (DOD) Base Realignment and Closure (BRAC) process demonstrate the significant efficiencies that can result from reexamining the base of federal programs. In the mid-1990s, the U.S. Department of Veterans Affairs (VA), recognizing that its health care system was inefficient and in need of reform, followed the lead of private sector health care providers and began reorganizing its system to improve efficiency and access. In 1995, VA introduced substantial operational and structural changes in its health care system to improve the quality, efficiency of, and access to care by reducing its historical reliance on inpatient care. VA shifted its focus from a bed-based, inpatient system emphasizing specialty care to one emphasizing primary care provided on an outpatient basis. To support VA’s restructuring efforts, Congress enacted legislation in October 1996 that eliminated several restrictions on veterans’ eligibility for VA outpatient care, which allowed VA to serve more patients. VA also phased in a new national resource allocation method, the Veterans Equitable Resource Allocation (VERA) system, as part of a broader effort to provide incentives for networks and medical centers to improve efficiency and serve more veterans. Networks that increased their patient workload compared with other networks gained resources under VERA; those whose patient workloads decreased compared with other networks lost resources. As we reported, VA recognized that VERA networks were responsible for fostering change, eliminating duplicative services, and encouraging cooperation among medical facilities. We reported that increased efficiency resulting from increased outpatient care, staff reductions and reassignments, and integrations at the medical centers resulted in savings. For example, from fiscal year 1996 to 1998, the VA reduced staff by approximately 16,114 (8 percent), resulting in estimated annual savings of $897 million. In some cases, however, improvements in efficiency did not save money because hospitals reinvested funds to enhance or offer new services. The military base realignment and closure experience provides another example of the efficiencies that can be gained by reexamining outmoded government structures and operations to meet current operating needs. In the late 1980s, changes in the national security environment resulted in a defense infrastructure with more bases than DOD needed. To enable DOD to close unneeded bases and realign other bases, Congress enacted legislation that instituted BRAC rounds in 1988, 1991, 1993, 1995, and 2005. A special commission established for the 1988 round made realignment and closure recommendations to the Senate and House Committees on the Armed Services. For the succeeding rounds, special BRAC Commissions were set up, as required by legislation, to make specific recommendations to the President, who in turn sent the commissions’ recommendations to Congress. While the statutory requirements vary across the BRAC rounds, those in the 2005 round stipulate that closure and realignment decisions must be based upon selection criteria, a current force structure plan, and infrastructure inventory developed by the Secretary of Defense. Further, the selection criteria were required to be publicized in the Federal Register to solicit public comments on the criteria before they were finalized. A clear authorization was mandated by Congress involving both the executive and legislative branches of government while recognizing and involving those affected by the government’s actions. With the completion of the recommended actions for the first four BRAC rounds by 2001, DOD had significantly reduced its domestic infrastructure through the realignment and closure of hundreds of bases and had reportedly generated billions in net savings or cost avoidances during the process. While DOD’s focus for the four BRAC rounds through 1995 was largely on eliminating excess capacity, the Secretary of Defense at the outset of the BRAC 2005 round—the fifth such round taken on by the department— indicated its intent to reshape DOD’s installations and realign DOD forces to meet defense needs for the next 20 years and eliminate excess physical capacity—the operation, sustainment, and recapitalization of which diverts resources from defense capability. Both DOD and the BRAC Commission reported that their primary consideration in making recommendations for the BRAC 2005 round was military value, which includes considerations such as an installation’s current and future mission capabilities. As such, many of the BRAC 2005 recommendations involve complex realignments that reflect operational capacity to maximize warfighting capability and efficiency. We have reported that the fifth round, BRAC 2005, will be the biggest, most complex, and costliest BRAC round ever, in part because, unlike previous rounds, the Secretary of Defense viewed the 2005 round as an opportunity not only to achieve savings but also to assist in transforming the department. For example, DOD is consolidating facilities and programs through a BRAC action to relocate five training centers from across the United States into a single medical education and training center at one installation. Although anticipated savings resulting from implementing BRAC 2005 recommendations, which the department could use for other defense programs, remain an important consideration in justifying the need for this round, our calculations using DOD’s fiscal year 2010 BRAC budget estimates have shown that estimated savings DOD expects to generate over the 20-year period ending in 2025 have declined from the BRAC Commission’s estimate of $36 billion to $10.9 billion in constant fiscal year 2005 dollars. Process improvement methods can increase product quality and decrease costs, resulting in improved efficiency. Process improvement methods can involve examining processes and systems to identify and correct costly errors, bottlenecks, or duplicative processes while maintaining or improving the quality of outputs. There are numerous process methods that use different tools and techniques. For example, Six Sigma is a data-driven approach based on the idea of eliminating defects and errors that contribute to losses of time, money, opportunities, or business. The main idea behind Six Sigma is to measure the defects in a process and then devise solutions to eliminate them, helping an organization approach a high quality level. Another method is Business Process Reengineering (BPR), which redesigns the way work is done to better support the organization’s mission and reduce costs. Reengineering starts with a high-level assessment of the organization’s mission, strategic goals, and customers. As a result of the strategic assessment, BPR identifies, analyzes, and redesigns an organization’s core business processes with the aim of achieving dramatic improvements in critical performance measures, such as cost, quality, service, and speed. A 2009 study conducted by the American Productivity and Quality Center (APQC) identified a variety of methods, including Six Sigma and Business Process Re-engineering, which have been used by organizations to focus on process improvement. The study included a survey of 281 small-to-large-sized enterprises with annual gross revenue of $4.2 trillion to identify current process-focused practices and learn about process effectiveness. Survey respondents identified various efficiency related improvements resulting from their process improvement approaches, such as streamlined processes, improved customer satisfaction, quality improvements, and improved decision making. In relation to process improvement, modernizing processes through investments in technology can generate efficiency gains. Our prior work indicates that the federal government can help streamline processes and potentially reduce long-term costs by facilitating technology enhancements. For example, as shown in figure 3, growth in electronic filing has allowed the Internal Revenue Service (IRS) to reduce staff years used to process paper tax returns. As electronic filing increased between fiscal years 1999 and 2006, IRS reduced the number of staff years devoted to total tax return processing by 34 percent. We have also reported that processing is more accurate and costs are lower to IRS as a result of electronic filing—IRS saves $2.71 for every return that is filed electronically instead of on paper. The President’s 2011 Budget described a variety of initiatives the administration intends to undertake to streamline existing IT infrastructure, improve the management of IT investments, and leverage new IT to improve the efficiency and effectiveness of federal government operations. In June 2009, the U.S. Chief Information Officer (CIO) launched the IT Dashboard, which allows the American people to monitor IT investments across the federal government. The IT Dashboard displays performance data on nearly 800 investments that agencies classify as major. The performance data used to track the 800 major IT investments include schedule, cost, and the agency CIO’s assessment of the risk of the investment‘s ability to accomplish its goals. Beginning in January 2010, the U.S. CIO began holding TechStat Accountability Sessions—face-to-face, evidence-based reviews of IT programs, undertaken with OMB and agency leadership, to improve overall performance. According to the U.S. CIO’s Web site on TechStat, in some cases this review process is leading to projects being eliminated. The administration has also indicated it intends to: consolidate data centers to reduce costs and increase efficiency; pursue “cloud computing,” which will enable agencies to share information technology services and software rather than purchase or develop their own; continue to pursue various “e-government” initiatives, which are expected to deliver services more efficiently both within across agency lines; and employ federal enterprise architectures and supporting segment architectures to streamline processes and modernize services, in many cases across agency lines. In addition to these IT initiatives, the Administration has also placed emphasis on reducing errors in payments. Executive Order 13520, signed in November 2009, requires, among other things, publishing information about improper payments on the Internet, including targets for reduction and recovery, and assigning a senior official to be accountable for reducing and recovering improper payments at relevant agencies. The executive order also lays out steps intended to lead to enhanced accountability of contractors and incentives and accountability provisions for state and local governments for reducing improper payments. Consistent with OMB’s PART guidance for programs to identify procedures to improve efficiency, officials from several of the selected programs we reviewed said they had modernized information technology to reduce costs and improve services. Officials from the Department of Labor’s Job Corps program said they reduced Federal Telecommunication Costs through the use of voice over Internet protocol and other improvements in technology, while expanding the use of video conferencing and e-learning to improve customer service. As a result of these efforts, officials reported cutting communication costs by $1 million. Officials for the Department of the Interior’s Endangered Species program said they used information technology to reduce errors due to hand entry of data. They said that by eliminating manual entry of data, errors were reduced, which resulted in more accurate information and increased efficiency. Such methods are consistent with PART guidance to identify procedures, such as information technology improvements, to improve efficiency. However, the program-level focus of the PART process would not necessarily lead to an examination of efficiency improvements to be gained by improving the processes and systems outside a program’s purview. Government processes and systems can involve multiple programs within and across federal agencies. For example, we previously reviewed the cost of administering seven key human services programs and found that the federal government may help balance administrative cost savings with program effectiveness and integrity by simplifying policies and facilitating technology improvements. Simplifying policies— especially those related to eligibility determination processes and federal funding structures—could save resources, improve productivity, and help staff focus more time on performing essential program activities. By helping states facilitate technology enhancements across programs, the federal government can help streamline processes and potentially reduce long-term costs. As another example, we have reported that the federal agencies that share responsibility for detecting and preventing seafood fraud—the Department of Homeland Security’s Customs and Border Protection, the Department of Commerce’s National Marine Fisheries Service, and the Department of Health and Human Services’ Food and Drug Administration—have not taken advantage of opportunities to share information that could benefit each agency’s efforts to detect and prevent seafood fraud, nor have they identified similar and sometimes overlapping activities that could be better coordinated to use limited resources more efficiently. For example, each agency has its own laboratory capability for determining seafood species and uses different methodologies for creating standards for species identification. The result is that neither the laboratories nor the data developed in them are shared. We have recommended that agencies take a strategic approach to spending that involves a range of activities—from using “spend analysis” to develop a better picture of what an agency is spending on goods and services, to taking an organization-wide approach for procuring goods and services. We found that private sector companies have adopted these activities to help leverage their buying power, reduce costs, and better manage suppliers of goods and services. By strategically managing costs, government can improve efficiency in the same way as private sector organizations examined in our prior work. “Spend analysis” is a tool that provides information about how much is being spent for goods and services, identifies buyers and suppliers, and helps identify opportunities to leverage buying power to save money and improve performance. To obtain this information, organizations use a number of practices involving automating, extracting, supplementing, organizing, and analyzing procurement data. Organizations then use these data to institute a series of structural, process, and role changes aimed at moving away from a fragmented procurement process to a more efficient and effective process in which managers make decisions on an organizationwide basis. Spend analysis allows for the creation of lower-cost consolidated contracts at the local, regional, or global level. As part of a strategic procurement effort, spend analysis allows companies to monitor trends in small and minority-owned business supplier participation to try to address the proper balance between small and minority business utilization, in addition to pursuing equally important corporate financial savings goals for strategic sourcing. Spend analysis is an important component of the administration’s plans to improve government procurement. Along these lines, OMB issued memoranda in July and October of 2009 instructing agencies to increase competition for new contracts. The administration also set a net savings target of $40 billion to be achieved by agencies through improved contracting practices in fiscal year 2010 and 2011. The October memorandum provided agencies guidelines for increasing competition for contracts and structuring contracts to achieve the best results at the least cost to the taxpayer. Specifically, the memorandum recommends the use of spend analysis to identify the agency’s largest spending categories, analyze and compare levels of competition achieved by different organizations within the agency, determine if more successful practices may exist for obtaining greater marketplace competition for a given spending category. Among the programs we reviewed, officials from the Job Corps program reported that they achieved improvements in efficiency by using some elements of a strategic spending approach. For example, Job Corps officials indicated that the program has avoided approximately $1 million in utility costs by purchasing energy from utilities using competitive bids in deregulated markets. When an area of the country became deregulated, the program would analyze the utility prices and quantities of electricity or natural gas used by the Job Corps centers in the area. If prices in the deregulated market looked favorable, the energy contracts for the centers would be placed out for bid to all eligible energy suppliers. Job Corps would select the bid with the best price and terms and set up a contract to purchase energy from them for a fixed period of time (usually 1 or 2 years). When the contracts came to an end, the process would be repeated. If the prices on the deregulated market were not favorable at that time, then the centers could revert back to the local utilities for their energy. Job Corps also conducted energy audits to identify problem areas and propose solutions to reduce energy costs at facilities where energy usage was above the benchmark. Job Corps reportedly reduced energy costs through investments in energy saving projects, training of staff and students to control energy use, and using an online system to review and analyze billing and procurement of energy in deregulated markets. The administration has not clearly indicated whether it will continue to emphasize measuring efficiency at the program level as it did under PART. Rather, in describing its approach to performance and management in the President’s budget, the Administration stated that GPRA and PART increased the production of measurements in many agencies, resulting in the availability of better measures than previously existed; however, these initial successes have not led to increased use. To encourage senior leaders to deliver results against the most important priorities, the administration tasked agencies with identifying and committing to a limited number of priority goals, generally three to eight, with high value to the public. The goals were to have ambitious, but realistic, targets to achieve within 18 to 24 months without need for new resources or legislation, and well-defined, outcome-based measures of progress. Further, in the coming year, the Administration will ask agency leaders to carry out a similar priority-setting exercise with top managers of their bureaus to set bureau-level goals and align those goals, as appropriate, with agencywide priority goals. These efforts are not distinct from the goal-setting and measurement expectations set forth in GPRA, but rather reflect an intention to translate GPRA from a reporting exercise to a performance improving practice across the federal government. By making agencies’ top leaders responsible for specific goals that they themselves have named as most important, the Administration has stated that it hopes to dramatically improve accountability and the chances that government will deliver results on what matters most. To complement the renewed focus on achieving priority outcomes, the Administration has also proposed increased funding to conduct program evaluations to determine whether and how selected programs are contributing to desired outcomes. The Administration intends to take a three-tiered approach to funding new program initiatives. First, more money is proposed for promoting the adoption of programs and practices that generate results backed up by strong evidence. Second, for an additional group of programs with some supportive evidence but not as much, additional resources are allocated on the condition that the programs will be rigorously evaluated going forward. Third, the approach encourages agencies to innovate and to test ideas with strong potential— ideas supported by preliminary research findings or reasonable hypotheses. We have previously reported on how program evaluations can contribute to more useful and informative performance reports through assisting program managers in developing valid and reliable performance reporting and filling gaps in needed program information, such as establishing program impact and reasons for observed performance and addressing policy questions that extend beyond or across program borders. In addition to program evaluations that determine program impact or outcomes, we have identified cost-effectiveness analysis as a means to assess the cost of meeting a single goal or objective, which can be used to identify the least costly alternative for meeting that goal. In addition cost- benefit analysis aims to identify all relevant costs and benefits, usually expressed in dollar terms. Given the challenges program managers we interviewed cited in developing and using outcome-based efficiency measures, such evaluations might fill gaps in understanding the cost of achieving outcomes and allow for cost comparisons across alternative program strategies intended to produce the same results. GPRA’s focus on strategic planning, development of long-term goals, and accountability for results provides a framework that Congress, OMB, and executive branch agencies could use to promote and apply various approaches to achieving efficiency gains in federal agencies. Congress enacted GPRA in part to address waste and inefficiency in federal programs. Agencies could use strategic plans as a vehicle for identifying longer-term efficiency improvement goals and strategies for achieving them. They could use annual performance plans to describe performance goals designed to contribute to longer-term efficiency goals, and annual performance and accountability reports to monitor progress toward achieving annual or longer-term efficiency goals. GPRA could provide a framework that would balance efforts to improve efficiency with overall improvements in outcomes. GPRA was intended to provide a balanced picture of performance that focused on effectiveness as well as efficiency. Officials from some selected programs identified a risk that focusing on reducing costs to improve efficiency could potentially have negative effects on the quantity or quality of outputs or outcomes. For example, officials for the Smaller Learning Communities program at the Department of Education said their outcome-level efficiency measures, which tracked the cost per student demonstrating proficiency or advanced skills in math or reading, could result in unintended negative consequences such as providing motivation for grantees to cut costs by lowering teacher salaries, lower proficiency standards so that more students would be classified as proficient, or engage in “creaming” (focus only on those students most likely to achieve gains). OMB’s PART guidance included recognition that efforts to improve efficiency can involve risk to quality, outcomes, or other factors such as customer satisfaction. The PART guidance included as an example how reducing processing time to be more efficient could result in increased error rates. OMB recommended that programs assess risks associated with efficiency improvement efforts and develop risk management plans if needed. Similarly, in the United Kingdom’s governmentwide efficiency program, departments could only report improvements in efficiency if they could also demonstrate that the quality of public services was not adversely affected by the reforms. Under GPRA, agencies’ plans and performance measures are expected to strike difficult balances among competing demands, including program outcomes, cost, service quality, customer satisfaction, and other stakeholder concerns. Therefore agencies could mitigate the risk to program outcomes and quality associated with taking a narrow cost-cutting approach by developing GPRA goals, strategies, and performance measures that clearly balance these competing demands. We have previously reported that OMB could use the provision of GPRA that calls for OMB to develop a governmentwide performance plan to address critical federal performance and management issues, including redundancy and other inefficiencies in how we do business. It could also provide a framework for any restructuring efforts. This provision has not been fully implemented, however. OMB issued the first and only such plan in February 1998 for fiscal year 1999. Further, as the focal point for overall management in the executive branch, OMB could provide guidance and management and reporting tools to increase federal agencies’ focus on efficiency improvements. OMB’s main vehicle for providing guidance on the development of agency strategic plans and performance plans and reports, OMB Circular A-11, Section 6 (Preparation and Submission of Strategic Plans, Annual Performance Plans, and Annual Program Performance Reports), makes no reference to establishing long-term goals for efficiency gains or describing strategies for how performance outcomes can be achieved more efficiently. References to efficiency in the guidance primarily pertain to the inclusion of program-level efficiency measures in agency budget justifications. OMB could also support mechanisms to share information and encourage agency efforts to improve efficiency. OMB has previously developed or contributed to mechanisms for sharing information and encouraging improvements to federal programs in the past, such as Web sites to share information, highlight success, and identify best practices for initiatives. For example, www.results.gov had information on best practices related to PMA initiatives, and www.expectmore.gov provided information on PART assessments and improvement plans. OMB’s own Web site contained information and examples of what it considered to be high- quality PART performance measures; discussion papers on measurement topics, such as how to effectively measure what a program is trying to prevent; and strategies to address some of the challenges of measuring the results of research and development programs. OMB recently launched a collaborative wiki page which is intended to provide an online forum for federal managers to share lessons learned and leading practices for using performance information to drive decisionmaking. OMB has sponsored various management councils, such as the President’s Management Council and the Performance Improvement Council, which include representatives of agencies and serve as forums for information sharing among agencies and with OMB. We have also reported that OMB has hosted standing working groups and committees comprised of agency and OMB staff, and has hosted workshops to address important issues and identify and share best practices. For example, OMB helped form a subgroup among agency officials responsible for the PMA budget and performance integration initiative to share lessons learned and discuss strategies to address challenges of developing efficiency measures in the grant context. The prior Administration’s approach to improving efficiency under PMA and PART focused on measuring and achieving efficiency gains at the program level. The approach involved requiring each program to develop at least one efficiency measure and demonstrate annual gains in efficiency, as well as to have regular procedures in place for achieving improvements in efficiencies. Although most programs that received a PART assessment developed an efficiency measure, not all of these measures included both elements of a typical efficiency measure—an input as well as an output or outcome. The absence of these typical elements can result in measures that do not truly capture efficiency. Nevertheless, other forms of measures intended to improve efficiency, such as those focused on reducing costly error rates, could still provide useful information. Officials for some selected programs we reviewed indicated that the efficiency measures reported for PART were useful and described ways in which they used data for efficiency measures, such as to evaluate proposals from field units, lower the cost of a contract, or make decisions to shift production. Other officials we interviewed did not find the measures useful for decision making. Officials for all of the programs described challenges to developing and using efficiency measures that were similar to challenges we previously reported on in prior work on PART and performance measures in general. For example, in one case the way OMB defined the program boundaries did not line up well with how managers ran the activities, which resulted in measures that were not useful for decision making. Some program officials indicated it was not always feasible to meet the requirement to demonstrate annual gains in efficiency, given that improvement could take multiple years to achieve. Some officials cited inconsistencies and limitations in the guidance and technical support from OMB on how to develop and use efficiency measures. OMB has not clarified whether programs should continue to collect and use efficiency measure data established for PART. Such clarification is necessary to help guide any refinements, as needed, to the current process, as well as broader issues. While tracking efficiency at the program level can be useful, this approach can miss opportunities to seek efficiencies on a larger scale, such as efforts that cross traditional program and agency boundaries. The experiences of private and public sector entities in implementing strategic and crosscutting approaches to improving efficiency can provide insights for federal agencies. For example, process improvement and modernization of systems can be undertaken both within and across organizational boundaries to increase quality, reduce waste, and lower costs. Analyzing spending and procurement strategies to leverage buying power and improve performance can identify opportunities to reduce the cost of producing agency outputs and outcomes. Broader, governmentwide reviews and analysis of restructuring opportunities that involve a wider scope of government activity can be used to identify strategic, crosscutting approaches to improving efficiency that emphasize the need to maintain or improve other key dimensions of performance. Such approaches have the potential to yield significant gains in efficiency that would be difficult to achieve by individual programs working in isolation. The current Administration has begun to identify some important opportunities for crosscutting efficiencies in its proposed information technology initiatives and procurement reforms and has tasked agencies with establishing agency cost reduction goals and asked federal employees to submit their suggestions for cost savings. Efforts to improve efficiency can take multiple years to accomplish and can require changes in strategy and collaboration within and across organizational lines. Furthermore, efficiency can only be improved if other performance dimensions, such as the quality or quantity of agency outputs and outcomes, are maintained or improved as resources are reduced; or conversely, if quality and quantity of outputs/outcomes are improved with a given level of resources. The Administration has signaled its intent to make greater use of program evaluation to determine which programs are producing desired results. Program evaluations can also be used to determine the cost of achieving outcomes, an approach that could aid in identifying the most cost-effective program designs. Continuing to build on the experiences and lessons learned from prior initiatives, with a concerted focus on specific levels of governments— governmentwide, agency, and program—could help to identify, introduce, and sustain additional efficiency gains on a more systematic and systemic basis at these same levels. The planning and reporting requirements of GPRA could serve as a framework for developing agency or across-agency strategies for improving efficiency and tracking results. By implementing the governmentwide performance plan provision of GPRA, OMB could provide further impetus to identifying efficiency goals to be achieved by consolidating operations or restructuring programs on a governmentwide basis. Further, OMB’s A-11 guidance on preparing agency strategic and performance plans could place greater emphasis on improvements in efficiency. OMB has multiple management groups and information- sharing mechanisms, including a new wiki, which could be used to identify and share successful approaches to improving efficiency, whether applied at the program or other levels of government. We recommend that the Director of OMB take the following four actions: Evolve toward a broader approach that emphasizes identifying and pursuing strategies and opportunities to improve efficiency at each of the governmentwide, agency, and program levels. At the governmentwide level, OMB should look for additional opportunities to consolidate or restructure duplicative or inefficient operations that cut across agency lines. One vehicle for doing this is the GPRA-required governmentwide performance plan. At the agency level, OMB should clarify its A-11 guidance to agencies on establishing efficiency goals and strategies in their agency-level GPRA strategic and performance plans, and reporting on the results achieved in performance reports. Guidance should stress the importance of looking for efficiencies across as well as within components and programs and maintaining or improving key dimensions of performance such as effectiveness, quality, or customer satisfaction, while also striving for efficiency gains. At the program level, OMB should clarify whether agencies are to continue developing and using program-level efficiency measures. If so, OMB should provide enhanced guidance and technical support to agencies that addresses how to develop and use efficiency measures to improve efficiency and mitigate the challenges we identified. Collect and disseminate information on strategies and lessons learned from successful efforts to improve efficiency by federal agencies, other governments, and the private sector. Possible vehicles for collection and dissemination of this information include good practices guides, workshops, Web sites, wikis, and management councils, such as the President’s Management Council and the Performance Improvement Council. We provided a draft of this report for review to OMB and the Departments of Agriculture, Education, the Interior, Labor, and Transportation. In oral comments, OMB representatives indicated that OMB concurred with our recommendations, adding that they thought the report will be useful as they revise their guidance to agencies on how to address efficiency improvements. OMB also provided technical comments which we incorporated where appropriate. In their written comments (see app. IV), Interior also concurred with our recommendations, but urged caution with regard to the recommendation that OMB provide additional guidance on the use of efficiency measures by agencies and programs. In particular, Interior cautioned against inviting standardized direction that would have agencies comparing efficiency across and within programs, considering the inherent differences in scope, complexity, and quality of outputs and outcomes. Interior indicated it seeks maximum flexibility for federal managers in using efficiency measures when they make sense and can be used to drive to the desired goals for the program. The Departments of Education and Labor provided technical comments, which we incorporated where appropriate. The Departments of Agriculture and Transportation did not provide comments. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from the date of this letter. At that time, we will send copies of this report to the appropriate congressional committees; the Secretaries of Agriculture, Education, the Interior, Labor, and Transportation; the Director of OMB; and other interested parties. The report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-6543 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix V. The objectives of our review were to examine: (1) the types of efficiency measures reported through the Program Assessment Rating Tool (PART) for agency programs overall, and particularly for selected programs in five selected agencies, focusing on the extent to which they included typical elements of an efficiency measure; (2) for selected programs, the extent to which programs reporting efficiency measures through PART have shown efficiency gains and how programs have used efficiency measures for decision making; (3) for selected programs, the types of challenges to developing and using efficiency measures they have faced; and (4) other strategies that can be used to improve efficiency. To address these objectives, we selected five departments from those on which we had reported in 2007 concerning implementation of a managerial cost accounting system (MCA). Because we wanted to include agencies with variety in the types of cost data available, we selected some departments that had—and some that had not—developed an MCA system. The Departments of the Interior, Labor and Transportation were selected because these were the only departments out of the 10 agencies we reviewed at the time that had implemented—or had made significant progress in implementing—MCA departmentwide. To compare and contrast findings from these departments, we selected two other departments that had not implemented an MCA system. The United States Department of Agriculture was selected because the department indicated in our 2007 report that it planned to implement an MCA system the next time it upgraded its financial management system. The Department of Education was selected because it indicated it had no plans to implement an entitywide MCA system. After choosing the departments, we selected 21 programs to review from the set of all programs that had a received a PART assessment by the Office of Management and Budget (OMB). PART was developed to assess and improve program performance so that the federal government could achieve better results. According to OMB, a PART review helped identify a program’s strengths and weaknesses to inform funding and management decisions aimed at making the program more effective. A PART review included program-level performance information and efficiency measures for the programs. The PART data we received from OMB contained 1,396 efficiency measures which were associated with 937 programs that received a PART assessment. Within the five departments, we selected the 21 specific programs for review to represent a diverse array of functions and operations within the federal government, as indicated by the PART program type. Of the seven PART program types, we selected five for inclusion in this study, excluding research and development and credit. Additional criteria were that the selected programs have relatively large fiscal year 2008 funding levels, and variety in the number of efficiency measures associated with the programs. For the first objective regarding the extent to which efficiency measures included typical necessary elements, we first identified the elements and developed a definition by conducting a literature review as well as expert interviews. We then performed various degrees of analysis on (1) all efficiency measures for all programs represented in the PART database, (2) all of the measures for our selected programs, and (3) a random sample of 100 efficiency measures taken from the PART database. The following describes the analysis we conducted on each of these three populations: Analysis on the complete PART database: The analysis we conducted on all PART efficiency measures resulted in a set of summary statistics, such as the fiscal year 2008 total funding by PART program type, the mean amount of funding each program received within the program types, the number of programs for each PART program type, the number of programs that had between zero and eight efficiency measures, and the number of programs in each selected department by PART program type. Analysis of PART measures selected with certainty from 21 programs in five departments: For the 21 programs we selected, we conducted a more detailed analysis on the 36 associated efficiency measures. However, any findings based on this analysis cannot be generalized beyond these particular measures. We performed a content analysis review of these measures, which was based upon the PART efficiency measure data; our review of applicable documents concerning the measures and programs, such as the programs’ PART assessments; and interviewing program officials to discuss the measures and programs. For each of these measures, we identified whether certain attributes were present, and the documents we reviewed and interviews we conducted aided in this effort at times. The fields from the PART database we used to assess each efficiency measure were the agency and program name, the text for each efficiency measure and, when present, the more detailed efficiency measure explanation. Using this information, we determined whether each of the measures included the program’s inputs (such as cost or hours worked by employees) as well as its outputs or outcomes. When we identified a measure as having an output or outcome element, we distinguished between the two. We also analyzed whether there was either a time or cost attribute to each measure. For each of these attributes, the potential answers were “Yes,” “No,” or “Unclear.” To determine whether an efficiency measure had these attributes, we defined each term for this particular exercise. We defined an input as a resource, such as cost or employee time, used to produce outputs or outcomes. We defined outputs as the amount of products and services delivered by a program. We defined outcomes as the desired results of a program, such as events, occurrences or changes in conditions, behaviors or attitudes. We defined a measure to have an attribute of time or cost when the measure appeared to include some type of attribute of time (e.g., “hours worked by employees,” “per month,” “annually,” or “within three months,”) or cost, respectively. We conducted our coding by having three team members independently code each of the 36 efficiency measures without each knowing how the other two coders assessed each measure. Afterward, the three coders discussed and reconciled any differences and reached agreement in all incidents. Finally, we determined whether the cost element was based on budgetary information or MCA information. Analysis of a random sample from the PART database: This analysis involved selecting a random sample of 100 efficiency measures from the remaining 1,355 efficiency measures in the PART database. Estimates based on the sample can be generalized to estimate characteristics of the remaining population of 1,355 efficiency measures. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 10 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. As a result, we are 95 percent confident that each of the confidence intervals in this report will include the true values in the study population. Unless otherwise noted, all percentage estimates have 95 percent confidence intervals of within plus or minus 10 percentage points of the estimate itself. The analysis we conducted on these measures was similar to the analysis we conducted for the selected programs, meaning we analyzed and determined if each measure had an input, output or outcome, time or cost attribute and used the same definition and coding procedures. However, because we did not have in-depth information from interviews or program documents concerning these measures, in some cases we were unable to conclude whether certain efficiency measures included necessary elements and consequently, classified about a quarter of the sample as unclear. Also, because of the lack of detailed information on the measures, we could not distinguish between outputs and outcomes expressed for these measures. Simultaneously with the content analysis of the efficiency measures, for the second and third objectives, on how selected agencies/programs used efficiency measures and the extent to which they reported efficiency gains, and what challenges or constraints to developing and using efficiency measures they faced, we reviewed program Web sites, PART assessments, other documents provided by program officials, and interviewed program officials identified by the departments as knowledgeable about the particular program and its efficiency measure(s). These interviews consisted of asking agency officials a similar set of questions with topics such as how the efficiency measure(s) was developed and used, associated challenges, and alternative methods for evaluating efficiency. For the two programs that did not have any efficiency measures in PART, we asked questions such as whether they had other efficiency-related measures they tracked internally which were unrelated to PART, whether there had been prior attempts to develop an efficiency measure, and whether they had experienced specific challenges to developing and using efficiency measures. In addition to interviewing program officials, we also interviewed at least one official in each of the five departments who was responsible for performance measurement at the departmentwide level. These interviews also had a similar set of questions and were specific to departmentwide performance measurement issues, such as whether the department had its own guidelines or guidance pertaining to developing and using efficiency measures, how results for program-level efficiency measures get reported within the agency, and how program efficiency measures were used. Also at the department level, we interviewed officials associated with each of the five departments’ Chief Financial Officer (CFO) offices, asking questions about the role the CFOs office played, if any, in developing efficiency measures for programs and inquiring about the development and use of a managerial cost accounting system. In addition to interviewing department and program officials, we interviewed OMB officials on several occasions about the approach to efficiency under PART and discussed, among other topics, the training and guidance OMB provided, and any lessons learned from the agencies’ efforts to develop and use efficiency measures. OMB also provided us with documents detailing the history of the PART program. Finally, to determine whether a selected program’s efficiency measure indicated a gain or loss, we reviewed the efficiency measure data that were reported in the program’s PART assessment and subtracted the initial year of data from the latest year available. To verify the accuracy of the data, we asked program officials to confirm the data and when necessary, to provide us with the most recent data. To address the fourth objective regarding the approaches agencies can employ to improve efficiency, we interviewed program officials for the selected programs to learn about the approaches they use to evaluate efficiency and also conducted a two-stage literature review to determine alternative approaches. The first stage of the literature review consisted of examining GAO publications, Congressional Research Service reports, the Internet, and various databases for general information on strategic approaches to efficiency. We also participated in a business process management research report with the American Productivity and Quality Center (APQC), studying how organizations maintain quality across processes and products as well as meet customer requirements in the face of pressure to cut costs. Using information derived from the first literature review and the APQC report, we identified the broad set of approaches to improving efficiency. In our literature search, we looked for examples and ideas that used a broad array of strategies to seek improvements or affect efficiency from prior reports we have published and what other institutions that have done work on the subject. For this objective, we refer to 18 different pieces of literature from our comprehensive literature search. In conducting the literature review, we did not attempt to identify all potential alternative approaches that could lead to efficiency improvements but focused on approaches that appeared consistent with the broad definition of efficiency improvement that was used in this report. Furthermore, in addition to the interviews with program officials and the literature review, we interviewed experts on performance and efficiency measures, who discussed definitions, uses, and insights of efficiency measures. Among the experts, we interviewed officials in the United Kingdom’s National Audit Office, which assessed the reliability of the efficiency gains reported by United Kingdom agencies as part of the United Kingdom’s 2004 government-wide efficiency review. We also interviewed officials with the Office of the Auditor General of Canada, which is conducting a study on ways to improve the efficiency of that country’s tax administration system. Restore, enhance, and maintain watershed conditions including soil, water, air, and forest and rangeland vegetation within the national forests and grasslands. Management of these physical and biological resources provides a foundation for healthy, viable ecosystems. Provides nutritionally balanced, low-cost or free lunches for public and nonprofit private schools. The program seeks to safeguard the health and well-being of the nation's children and support domestic agricultural production. Assists in protecting plant and animal resources from pests and diseases through ongoing monitoring and surveillance. Provides rapid detection, analysis, and reporting of pests and diseases to minimize potential losses. Awards formula grants to state education agencies which, in turn, manage statewide competitions and award subgrants to local education agencies and community-based organizations. These grants support the creation of community learning centers that provide academic enrichment opportunities during nonschool hours for children, particularly students who attend high- poverty and low-performing schools. This program focuses on enrichment in core academic subjects, extracurricular enrichment, as well as literacy and other educational services to the families of participating children. Provides competitive grants to local education agencies to increase academic achievement in large high schools through the creation of smaller, more personalized learning environments. Provides financial assistance to postsecondary students and their families through administering federal student aid grants and loans. Ensures the operation and maintenance of reclamation facilities, delivers water to irrigators and municipal users, and provides storage to help mitigate flooding. The program also addresses issues such as water conservation, runoff from irrigated fields, and project financial management. Manages and extinguishes fires on Department of the Interior lands and on other lands under fire protection agreements. The three largest program activities are fire preparedness, fire suppression, and hazardous fuels reduction (i.e., removal of small trees and brush that exacerbate fire risks). Protects threatened or endangered species and conserves their habitats. Lists species needing protection, consults on federal projects, awards grants, and works with partners on recovery actions. Works to conserve and restore native aquatic species populations and their habitat and support recreational fishing. Reclaims and restores land and water degraded by coal mining activities conducted before 1977. Reclamation fees on current coal production fund the program, which has expanded to provide oversight over the 23 states and three Indian Tribes that carry out the program. Serves those who have contracted illness due to exposure to toxic substances or radiation while working at nuclear weapons and related covered facilities. Provides lump-sum compensation and health benefits to eligible Department of Energy nuclear weapons workers, or the survivors of such workers. Provides intensive education and training services to disadvantaged youth ages 16-24. These services are intended to help eligible youth obtain jobs, seek further education, or enter the military. The program serves approximately 60,000 youth nationwide through 122 centers, most of which are residential. Works to ensure, for every working person in the nation, safe and healthful working conditions. Implements the Occupational Safety and Health Act of 1970 by setting and enforcing standards, outreach and education, cooperative programs and compliance assistance. Unemployment Insurance Administration State Grants Assists states in operating their unemployment insurance programs, which provide temporary income support to unemployed workers. States determine eligibility for benefits, which are financed through state-levied taxes. The Department of Labor funds the administrative expenses of these state programs. Provides competitive grants to fund training, employment, and other services to help economically disadvantaged farmworkers and their families. Through these services, the program seeks to help them achieve economic self- sufficiency by strengthening their ability to gain stable employment. Provides air traffic control services to guide aircraft in and out of airports across the country. Maintains and modernizes equipment needed in the national airspace system to deliver air traffic services. It fields, repairs, and maintains a network of complex equipment, including radars, instrument landing systems, radio beacons, runway lighting, and computer systems. Provides financial support for locally planned and operated public transit through competitive, discretionary capital investment grant transit projects including commuter rail, light rail, heavy rail, bus rapid transit, trolleys and ferries. Provides financial grants and technical assistance to states to construct, maintain, and improve the performance of the nation's highway system in accordance with federal policy goals. Advances highway safety through research and regulations concerning vehicle technologies and human behavior. Focuses on researching vehicle and behavioral safety countermeasures, issuing vehicle safety regulations, and investigating vehicle defects. PART program name and number of efficiency measures millions) Forest Service: Watershed (0) National School Lunch Program (NSLP) (3) Plant and Animal Health Monitoring Programs (2) Value of damage prevented or mitigated by the monitoring and surveillance programs per dollar spent Improved efficiency through the use of targeted samplings versus the use of random sampling 21st Century Community Learning Centers (3) Smaller Learning Communities (6) PART program name and number of efficiency measures millions) Student Aid Administration (1) Bureau of Reclamation Water Management—Operation and Maintenance (1) Fish and Wildlife Service— Endangered Species (0) Fish and Wildlife Service— Fisheries (1) Office of Surface Mining—State Managed Abandoned Coal Mine Land Reclamation (2) Wildland Fire Management (3) Energy Employees Occupational Illness Compensation Program (1) Occupational Safety and Health Administration (1) Unemployment Insurance Administration State Grants (1) Fiscal year 2009 funding level (dollars in millions) Workforce Investment Act— Migrant and Seasonal Farmworkers (1) Transportation Federal Aviation Administration (FAA) Air Traffic Organization— Technical Operations (2) Transportation FAA Air Traffic Organization— Terminal Programs (2) Transportation Highway Infrastructure (3) Transportation National Highway Traffic Safety Administration—Operations and Research (1) In addition to the individual named above, Elizabeth Curda, Assistant Director; Charlesetta Bailey; James Cook; Anne Inserra; Eric Knudson; Ricardo Sanchez; and Jeremy Williams made key contributions to the report. Cynthia Grant; Peter Grinnell; Carol Henn; Donna Miller; A.J. Stephens; Jay Smale; Jessica Thomsen; and John Warner also provided significant assistance. | Given record budget deficits and continuing fiscal pressures, the federal government must seek to deliver results more efficiently. The prior Administration sought to improve efficiency under the Program Assessment Rating Tool (PART) by requiring programs to have at least one efficiency measure and procedures for improving efficiency, and show annual efficiency gains. The current administration has also emphasized efficiency in some initiatives. GAO was asked to examine (1) the types of PART efficiency measures and the extent to which they included typical elements of an efficiency measure; (2) the extent to which selected programs showed gains and how they used efficiency measures for decision making; (3) the challenges selected programs faced in developing and using efficiency measures; and (4) other strategies that can be used to improve efficiency. GAO analyzed the 36 efficiency measures in 21 selected programs in 5 agencies and a generalizable sample from the other 1,355 measures governmentwide, reviewed documents and interviewed officials from selected programs, reviewed literature on efficiency, and interviewed experts. Under PART, most programs developed an efficiency measure. However, according to GAO's analysis, 26 percent did not include both typical efficiency measure elements--an input (e.g., labor hours or costs) as well as an output or outcome (e.g., the product, service, or result produced). Most frequently missing was the input (69 percent). For example, a measure developed by the National Nuclear Safety Security Administration considered the number of information assets reviewed for certification without considering costs of review. This could result in measures that do not capture efficiency. GAO has previously recommended agencies improve cost information for decision making, but they are in various stages of implementation. However, alternative forms of measurement, such as reducing costly error rates, could still be useful. Of the efficiency measures GAO reviewed that had both typical elements, a similar number reported gains and losses. Officials for some programs stated that the efficiency measures reported for PART were useful, and described ways in which they used the data, such as to evaluate proposals from field units, lower the cost of a contract, or make decisions to shift production. Others did not find the efficiency measures useful because, for example, the program lacked control over key cost drivers, such as contractually required staffing levels, or because of concern that raising output could lower quality. Officials for all of the programs reviewed described challenges to developing and using program-level efficiency measures and performance measures in general. Challenges included interpreting outcome-level efficiency information, such as the cost of improving or maintaining the condition of watershed acres, when factors other than program funding, such as past impacts from mining, affected conditions as well; achieving required annual efficiency gains in cases where a program intervention takes years to implement; and inconsistent or limited guidance and technical assistance from the Office of Management and Budget (OMB) to agencies on how to measure efficiency. A variety of approaches have been used to improve efficiency, including governmentwide reviews, agency restructurings, process and technology improvements, and strategic spending approaches. The Administration has some initiatives along these lines, such as information technology and procurement reforms. The Government Performance and Results Act (GPRA) provides a framework for planning future efficiency gains while maintaining or improving effectiveness and quality of outputs or outcomes. OMB, as the focal point for management in the executive branch, provides guidance and supports information-sharing mechanisms, such as the Performance Improvement Council, which could also be used to create a more strategic and crosscutting focus on agency efforts to improve efficiency. OMB has not clearly indicated whether programs should continue measuring efficiency nor has it emphasized efficiency in its GPRA guidance to agencies. |
The controversy over patients’ rights escalated in the 1970s, coinciding with dramatic advances in medical technology. The early legal cases concerned the “right to die,” testing what medical treatment can be administered in the face of a patient’s desire to die naturally, without artificial, life-prolonging equipment. In the Quinlan case, for example, the court held that the Constitution guarantees individuals the right to direct their own medical care. Over time, the right to die concept came to be seen as part of a patient’s right to self-determination, including a recognition that some patients prefer that all possible treatments and procedures be used to treat them. PSDA, which became effective in December 1991, applies to most institutional providers and prepaid plans that participate in Medicare or Medicaid. These include hospitals, nursing homes, home health care providers, hospices, and health maintenance organizations, but not providers of outpatient services or emergency medical teams.Specifically, the provider or organization is required to provide to all adult patients, residents, and enrollees written information on their rights under state law to make decisions concerning medical care, including the right to execute an advance directive, as well as maintain the policies of the provider regarding implementation of advance directives; document in the medical record whether the individual has an advance educate the staff and the community about advance directives; not condition the provision of care, or otherwise discriminate, on the basis of whether a patient has an advance directive; and ensure compliance with state law respecting advance directives. In addition, PSDA requires that HHS conduct a public education campaign about advance directives and oversee provider compliance. An advance directive sets out an individual’s preferences about treatment should the person become incompetent or unable to communicate these preferences to medical personnel. In addition to directing physicians to withdraw or withhold life-sustaining procedures, advance directives may be used to record a patient’s wish to receive all available medical treatment. (See app. I for examples of advance directive forms.) There are essentially two types of advance directives: living wills and health care powers of attorney. A living will is a document that informs health care providers of the kind of medical care the individual wants provided or withheld. Living wills can be nonspecific statements, scenario- and treatment-specific statements, or include value profiles. Under state laws, a living will typically takes effect when the patient (1) is diagnosed as close to death from a terminal illness or is permanently comatose and (2) cannot communicate his or her wishes for medical care. In general, once a physician receives a living will, he or she either must honor its instructions or transfer the patient to another physician who will honor them. State laws on living wills typically exempt physicians from liability for complying with advance directives and prescribe minimal penalties for physicians who refuse to follow them. As discussed in appendix II, states have imposed requirements on what medical conditions can make a living will operative. A health care power of attorney is a document that identifies a health care agent as decisionmaker for the patient. The health care agent has decision-making authority when the individual is terminally ill or permanently comatose. In addition, the agent may be given the authority to make any other kind of health care decisions regardless of the condition of the patient, thereby giving the agent broader decision-making authority than typically specified in a living will. Under state law, a health care power of attorney typically becomes operative when a physician decides the patient is unable to make a decision. Advance directives are not universally supported. A number of groups have expressed concerns about the ethics of patient self-determination laws and the laws’ potential effects. They are concerned that a lower standard of care for all patients, active euthanasia, or discrimination against people with disabilities could result. Some physicians also have raised concerns about advance directives. Some believe that such documents will reduce their authority over treatment decisions and could produce an adversarial physician-patient relationship. More generally, physicians may oppose any extension of legal regulation into medical practice. Institutional providers and HHS generally appear to be complying with most of the act’s requirements. Limited data indicate that most providers offer information to patients about executing an advance directive, but problems may occur in documenting whether a patient actually has one. HHS, through the Health Care Financing Administration (HCFA), has complied with most PSDA provisions. However, it has not conducted a required mailing to Social Security beneficiaries about advance directives. Under PSDA, Medicare and Medicaid hospitals, nursing facilities, and other providers must inform patients of their decision-making rights, distribute state-specific information about advance directives, and inquire and document whether a patient has an advance directive. Information on the degree to which providers fulfill these requirements is limited. Few surveys have looked specifically at compliance with advance directive requirements. These sources indicate that most health care institutions comply with the requirement to develop and distribute information on advance directives. However, it also appears that fewer facilities meet the requirements that the existence of an advance directive be documented in an individual’s medical record and that an organization provide for community education on advance directives. In early 1992, the HHS Office of the Inspector General (OIG) conducted a survey of the institutional implementation of PSDA. OIG concluded that most of the facilities sampled were complying with the administrative requirements of the act. All, or almost all, facilities had (1) developed written policies and procedures about advance directives; (2) developed written materials on advance directives and provided them to each adult patient on admission or when commencing services; (3) provided materials to patients, including an explanation of state law; and (4) educated staff about advance directives. At about three-quarters of the facilities, the materials provided to the patient clearly state that a patient does not have to have an advance directive to receive treatment. Approximately two-thirds of the facilities had planned or provided community education on advance directives. However, the report also concluded that “performance in clearly and consistently documenting the existence of an advance directive in the chart needed improvement.” At 15 percent of the facilities, more than half of the charts had missing or incomplete documentation on whether a patient had an advance directive. The report noted that personnel in many sampled facilities attributed chart documentation problems to confused or disoriented patients, emergency room admissions, or pregnant patients not qualified to implement an advance directive under state law. Additional information on compliance is available from accreditation surveys performed by the Joint Commission on Accreditation of Healthcare Organizations (JCAHO). While JCAHO’s standards pertaining to advance directives are somewhat different than the PSDA requirements, they overlap on most of the requirements. Results from 514 hospitals surveyed from January through May 1994 showed that almost all hospitals were complying with the standards common to PSDA and JCAHO. According to a JCAHO official, these results are similar to those for the 1992 and 1993 surveys. Furthermore, HCFA officials we spoke with believe that, based mainly on self-reported information, nearly all Medicare and Medicaid facilities are complying with PSDA’s administrative and documentation provisions. Similarly, officials in HCFA’s Office of Managed Care noted that, to their knowledge, almost no health plans have been found noncompliant with PSDA requirements. Compliance is determined through providers’ written assurances to state survey agencies or routine on-site validation surveys. PSDA requires HHS to take several actions to ensure provider compliance and to educate the general public. HCFA incorporated PSDA requirements into Medicare contracts and survey protocols for prepaid plans, home health agencies, nursing homes, and skilled nursing facilities. HCFA also released state Medicaid manual instructions containing guidelines for implementing PSDA provisions. In addition, PSDA requires HHS to provide technical assistance to the states and to conduct a public education campaign on advance directives. As shown in table 1, HHS has fulfilled some but not all of these responsibilities. HCFA prepared and distributed a brochure and videos to provider organizations and groups that work with Medicare beneficiaries and also placed brochures in information displays at targeted locations. However, HHS did not mail information about advance directives to all Social Security beneficiaries as mandated. A HCFA representative we spoke with explained that HHS had not been appropriated the funds needed to comply with this provision. He estimated that such a mailing would cost HHS several million dollars. HCFA also did not fully assist states in developing documents describing state-specific laws or help states ensure that providers receive documents that are to be distributed. According to a HCFA official, there was no need to duplicate efforts of private organizations that had developed summaries of state laws regarding advance directives and made them available to providers and state agencies. In fact, we found that the American Bar Association and Choice In Dying (a national, not-for-profit advocacy group concerned with the rights and needs of the dying, their families, caregivers, and health care providers) prepared state-specific information on advance directives that would meet this need. The underlying assumption of PSDA is that individuals will prepare advance directives if given sufficient information. Despite improved public awareness of patient self-determination issues, however, the number of individuals completing formal advance directives has been estimated at between 10 and 25 percent (with some estimates as low as 5 percent) of the adult population. Discomfort with the subject of death and dying is not typically the reason people fail to complete advance directives. Rather, a number of social factors, particularly poor communication among individuals, physicians, and family members, present barriers to developing the required documents. Noting that only 50 percent of the population completes an estate will, a leading researcher we spoke with predicted that the proportion completing an advance directive will likely never be any greater than that. There are no recent nationally representative studies on how many Americans have completed advance directives. However, researchers have conducted many small studies on discrete populations, such as nursing home residents or hospital patients. These studies are consistent in their finding that completion rates are one-third to one-half awareness rates. These proportions vary depending on the sex, age, and health of the population surveyed. A representative of Choice In Dying told us that most people who complete advance directives are white, middle- to upper-class, educated, older females. A 1993 study by the HHS OIG found that only 18 percent of hospital patients had advance directives, compared with almost 50 percent of patients in a nursing facility. The OIG study also reported that only 9 percent of patients under 30 had a directive, while 35 percent of patients over 75 had one. Table 2 shows the results of several studies that measured the public’s familiarity with and completion of advance directives. Individuals may not complete advance directives for a number of reasons. How a patient learns of advance directives may be an important factor. Many experts with whom we spoke believe that to improve completion rates, patients must discuss advance directives with their physicians or health care agents. This communication would ideally occur before a patient reached a state that made the necessity of end-of-life planning imminent to allow adequate time for thoughtful and in-depth discussions. Although the importance of communication is understood, the frequency of discussions between patients and physicians on advance directives has not significantly increased. According to a 1991 Harvard study, one of the most frequently cited barriers to completing an advance directive was the patient’s expectation that the physician would take the initiative. Other studies have shown that some patients may not want to initiate such discussions because they have not established a personal relationship with the physician or they feel that such a discussion may present the physician with a conflict of interest. However, many health care providers assume patients will bring up the issue. Physicians are often reluctant to discuss end-of-life care because they (1) lack the knowledge or the training on how to formulate advance directives; (2) believe directives are unnecessary for young, healthy patients; (3) are not compensated for the time it takes to carefully discuss the topic; or (4) feel death is not an appropriate outcome of care. As one study noted, “The notion of shared medical decision making is a relatively recent phenomenon, and physicians traditionally have placed greater value on protecting patient welfare than respecting patient rights.” Another possible barrier is that PSDA requires providers and organizations to discuss advance directives at the time a patient is admitted to a medical facility or comes under the care of a home health agency or hospice. Providers, researchers, and interest groups agree that admission is not a particularly good time for people to first think about their end-of-life treatment preferences, although it may be an appropriate time to reconsider them. Hospitals and nursing homes, in particular, find that such timing could be problematic, since newly admitted patients are often ill, traumatized, or simply overwhelmed. Furthermore, hospitals generally use nurses, social workers, patient representatives, and clergy to distribute a limited amount of information on advance directives such as forms and brochures. One medical ethicist we spoke with suggested that this could pose a problem if medical questions or issues arise that the people providing the information cannot respond to appropriately. A number of other issues may also present barriers to developing advance directives. Some individuals misunderstand advance directives, believing that they are only relevant for older people or those in poor health. For others, social impediments may interfere. For example, individuals may not have family members or friends who can serve as surrogate decisionmakers or may fear that family members would be upset by the discussion or the document. In addition, individuals who have difficulty gaining access to the health care system may be suspicious of advance directives, fearing that if they express a preference to terminate care under certain conditions, it will be used to limit other or all types of care. The provider groups we spoke with generally supported advance directives. Yet, advance directives may not always be implemented as patients intend. Although providers generally are legally required to implement a patient’s advance directive, it is not clear that they always do so. In one study, for example, patient care as expressed in living wills was provided 75 percent of the time. A variety of factors affects whether an advance directive actually controls end-of-life care decisions, including the availability or specificity of a living will, family wishes, physicians’ attitudes, and legal issues. Although advance directives may be effective in designating proxy decisionmakers, there is evidence that health care agents may not accurately express the patients’ wishes. Furthermore, some patients may want their physicians or agents to override their advance directives in some cases or at least interpret them with broad discretion. Experts agree that the effectiveness of an advance directive is contingent upon the patient’s discussions of end-of-life treatment preferences with those who may need to make such medical decisions, be they providers or health care agents. Better communication with patients may help physicians in interpreting living wills and improve the accuracy of proxy assessment of patient treatment wishes. The patient’s advance directive may not be followed simply because it is not available when needed. PSDA does not require that the provider keep a copy of the patient’s directive with the patient’s chart. In fact, the 1992 OIG survey of facilities found that only 60 percent of patients with advance directives had copies with their medical charts. Similarly, in its 1994 hospital survey, JCAHO found that only 79 percent of hospitals fully met its standard that “any advance directive(s) is in the patient’s medical record and is reviewed periodically with the patient or surrogate decision maker.” It is not unusual for a patient to keep the only copy in a safe deposit box. In addition, the directive may not accompany a patient who is transferred from one institution to another. In one study, an advance directive was with the nursing home chart for 74 percent of the patients transferred to a hospital, but the document was successfully delivered to the hospital and incorporated into the hospital record for only about one-third of the cases. (Staff at the nursing home suggested staff turnover as a cause.) Simply having advance directives available is not necessarily enough to make these documents effective. One study indicated that physicians are often not aware of patients’ advance directives. Only one-third of the physicians providing care to terminally ill patients with advance directives knew that the directives were in the patients’ charts on day 10 of their hospital stays. Some physicians do not treat the documents as important. Some advance directives may not be followed because how they should be interpreted is unclear. Living wills may specify conditions that cannot easily be translated into medical terms. For example, “heroic measures” may or may not include cardiopulmonary resuscitation, and “no hope of recovery” may actually mean “very remote chance” since absolute certainty is impossible. Similarly, the definition of “terminal” can be subject to interpretation or the care being given may be said to be only palliative. Such linguistic or medical vagueness commonly found in predrafted forms may cause physicians to disregard the document. Another problem is that an individual with an advance directive may not have previously discussed specific treatment preferences with a designated health care agent. A study of discharged hospital patients found that although 73 percent had general discussions with their agents, only 33 percent had discussions about specific end-of-life interventions, such as mechanical ventilation. Some studies have shown that proxy assessments, and even physician predictions, of patient preferences vary, but are sometimes no better than chance. One study found “the only predictor of accurate surrogate decision making was specific discussion between patient and surrogate about life support.” In addition, many people are not clear in their own minds what they would want. Medical decisions can be particularly complicated. Anticipating all the possible facts and variables is a daunting, if not impossible, task. That is why some ethicists focus on the importance of discussing values rather than specific instructions. Even if a patient has an advance directive, physicians still consult the family. Although it is contrary to law, physicians sometimes do not implement an advance directive if it conflicts with the family’s wishes. This is most likely to occur if the treatment is somewhat controversial, such as the withdrawal of artificial nutrition and hydration. For example, a study of tube feeding found that family opinion was the most influential factor affecting the physician’s recommendation and that most physicians said they would follow family preferences even when contrary to the living will. Similarly, a physician may try to influence the family or other health care agent’s decision. Family members may not be assertive enough about their rights to continually question and assert themselves with the physician. “The evidence suggests that physicians generally still consider it their responsibility to make treatment decisions that they believe are in the patient’s best interest and that patient preferences should be ignored if they are inconsistent with the physician’s view of the patient’s best interests. In other words, it appears that end-of-life decisions are frequently driven by the physician’s values rather than the patient’s values.” Examples of this predominance of physicians’ values are becoming more evident. A recent study at the University of Pennsylvania Medical Center found that 39 percent of ICU doctors surveyed had ended life-sustaining treatment on the basis of medical futility without the consent—or sometimes the knowledge—of the patient or family. In addition, 3 percent said they had made similar decisions over the objection of a patient’s family, and 34 percent “declined to withdraw” life support despite a family’s wishes. Physicians’ ethical views may also influence implementation of advance directives. Although some experts hold that there is little or no legal or ethical distinction between withholding and withdrawing treatment, be it “ordinary” or “extraordinary” care, a significant proportion of providers do see a distinction. Similarly, some state statutes allow the termination of artificial nutrition and hydration only when explicit statements are present in the directive. However, many providers believe that such care should always be continued, even if other life supports, such as ventilation and dialysis, are stopped. Concern over litigation may be an issue for both the facility and the direct provider. For example, nursing homes and home care agencies, which are closely regulated, are especially concerned about litigation. Physicians may be apprehensive about being sued by a family member who wants a different level of care provided than specified in the patient’s directive. While this concern is largely unfounded, deviating from the directive leaves a physician susceptible to being sued by other family members, insurers, or other patient advocates. With the exception of the mailing to Social Security recipients, HHS and most institutional providers appear to be complying with PSDA’s provisions. Although they have not done as much as many legal and health care experts feel they should have to educate the public about advance directives, there is some question about the effectiveness of such activities. First, few people have chosen to exercise this form of self-determination in spite of public and private efforts to encourage its use. Second, even in cases of completed advance directives, the lack of appropriate discussions with physicians and health care agents about specific preferences may diminish the documents’ effectiveness. As a result, some experts in the field are rethinking how best to ensure that patients’ wishes for end-of-life care are known and acted on. Although PSDA does not impose a deadline for compliance, HHS, because of the related costs, has not mailed information about advance directives to Social Security recipients as required under the law. For that reason, we recommend that the Secretary of Health and Human Services analyze whether such a mailing would be a cost-effective way of further meeting the needs addressed by the Congress in PSDA and, if not, seek a legislative amendment repealing the requirement. The Secretary of Health and Human Services acknowledged that not every Social Security recipient was sent a mailing on advance directives, noting that such a mailing could cost $4 million to $6 million. She believes, however, that “a substantive number of activities have been undertaken to provide such information.” For example, HCFA plans to distribute the 1996 Medicare handbook containing specific information about PSDA and advance directives to approximately 40 million beneficiaries. While we recognize that HHS has taken an alternative approach to providing information to recipients, these activities are not consistent with the legislative mandate. If HHS believes that its public education campaign activities fully satisfy the needs addressed by the Congress in PSDA, the Secretary should specifically seek legislative relief from the requirement to conduct a mass mailing to Social Security beneficiaries, as we recommend. We are sending copies of this report to the Secretary of Health and Human Services, interested congressional committees, and others. Copies will also be made available to others on request. If you or your staff have any questions about this report, please call me at (202) 512-7119. Major contributors are listed in appendix III. Some experts and interest groups believe that a good advance directive combines medical care instructions and a designation of a health care agent who can “resolve apparent uncertainties.” Three samples of advance directives are shown in this appendix. All three have sections for assigning a health care power of attorney and personal preferences for medical treatment, and two have a section on patient wishes about organ donation. The instructions accompanying two of these forms state that any or all of the sections may be completed. Figure I.1 is the form included in the Uniform Health-Care Decisions Act of 1993. (For further discussion of the act, see app. II.) This form does not refer to specific treatments except for artificial nutrition and hydration and relief from pain. It does, however, provide room to list additional preferences. Figure I.2 is the medical directive form developed by Linda L. Emanuel and Ezekiel J. Emanuel. The medical directive portion includes various scenarios and treatment options; individuals indicate whether they want specific treatments and under what conditions. The patient may also check off a general statement for each scenario without specifying treatments. Figure I.3 is a values history form from the University of New Mexico. The stated intent of the form is to assist people in thinking and writing about what is important about their health. The first section provides an opportunity to discuss values, wishes, and preferences about issues such as personal relationships, overall attitude toward life, and thoughts about illness. The second portion of the form includes sections to identify which written legal documents have been completed and where they are located, and to express wishes concerning specific medical procedures. The packet also includes a copy of a New Mexico living will and a form to assign power of attorney. 4. Optional Form. The following form may, but need not, be used to create an advance health-care directive. The other sections of this govern the effect of this or any other writing used to create an advance health-care directive.An individual may complete or modify all or any part of the following form: You have the right to give instructions about your own health care. care decisions for you.This form lets you do either or both of these things.It also lets you express your wishes regarding donation of organs and the designation of your primary physician. If you use this form, you may complete or modify all or any part of it.You are free to use a different form. You also have the right to name someone else to make health- Part 1 of this form is a power of attorney for health care. Part 1 lets you name another individual as agent to make health- care decisions for you if you become incapable of making your own decisions or if you want someone else to make those decisions for you now even though you are still capable. alternate agent to act for you if your first choice is not willing, able, or reasonably available to make decisions for you. Unless related to you, your agent may not be an owner, operator, or employee of at which you are receiving care. You may also name an your agent may make all health-care decisions for you. has a place for you to limit the authority of your agent. You need not limit the authority of your agent if you wish to rely on your agent for all health-care decisions that may have to be made. If you choose not to limit the authority of your agent, your agent will have the right to: Unless the form you sign limits the authority of your agent, This form a) consent or refuse consent to any care, treatment, service, or procedure to maintain, diagnose, or otherwise affect a physical or mental condition; b) select or discharge health-care providers and institution; c) approve or disapprove diagnostic tests, surgical procedures, programs of medication, and orders not to resuscitate; and d) direct the provision, withholding, or withdrawal of artificial nutrition and hydration and all other forms of health care. Part 2 of this form lets you give specific instructions about any aspect of your health care. express your wishes regarding the provision, withholding, or withdrawal of treatment to keep you alive, including the provision of artificial nutrition and hydration, as well as the provision of pain relief. Space is also provided for you to add to the choices you have made or for you to write out any additional wishes. Choices are provided for you to Part 3 of this form lets you express an intention to donate your bodily organs and tissues following your death. Part 4 of this form lets you designate a physician to have primary responsibility for your health care. After completing this form, sign and date the form at the end. It is recommended but not required that you request two other individuals to sign as witnesses. completed form to your physician, to any other health-care providers you may have, to any health-care institution at which you are receiving care, and to any health-care agents you have named. You should talk to the person you have named as agent to make sure that he or she understands your wishes and is willing to take the responsibility. You have the right to revoke this advance health-care directive or replace this form at any time. I designate the following individual as my agent to make health-care decisions for me: (name of individual you choose as agent) (address) (city) (state) (zip code) (home phone) (work phone) If I revoke my agent’s authority or if my agent is not willing, able, or reasonably available to make a health-care decision for me, I designate as my first alternate agent: (name of individual you choose as first alternate agent) (address) (city) (state) (zip code) (home phone) (work phone) If I revoke the authority of my agent and first alternate agent or if neither is willing, able, or reasonably available to make a health-care decision for me, I designate as my second alternate agent: (name of individual you choose as second alternate agent) (address) (city) (state) (zip code) (home phone) (work phone) 2) My agent is authorized to make all health-care decisions for me, including decisions to provide, withhold, or withdraw artificial nutrition and hydration and other forms of health care to keep me alive, except as I state here: (Add additional sheets if needed.) 3) WHEN AGENT’S AUTHORITY BECOMES EFFECTIVE: authority becomes effective when my primary physician determines that I am unable to make my own health-care decisions unless I mark the following box.If I mark this box , my agent’s authority to make health-care decisions for me takes effect immediately. 4) My agent shall make health-care decisions for me in accordance with this power of attorney for health care, any instructions I give in Part 2 of this form, and my other wishes to the extent known to my agent.To the extent my wishes are unknown, my agent shall make health-care decisions for me in accordance with what my agent determines to be in my best interest. my personal values to the extent known to my agent. In determining my best interest, my agent shall consider If a guardian of my person needs to be appointed for me by a court, I nominate the agent designated in this form. available to act as guardian, I nominate the alternate agents whom I have named, in the order designated. 5) If that agent is not willing, able, or reasonably If you are satisfied to allow your agent to determine what is best for you in making end-of-life decisions, you need not fill out this part of the form.If you do fill out this part of the form, you may strike any wording you do not want. 6) I direct that my health-care providers and others involved in my care provide, withhold, or withdraw treatment in accordance with the choice I have marked below:a) Choice Not To Prolong Life I do not want my life to be prolonged if (i) I have an incurable and irreversible condition that will result in my death within a relatively short time, (ii) I become unconscious and, to a reasonable degree of medical certainty, I will not regain consciousness, or (iii) the likely risks and burdens of treatment would outweigh the expected benefits, ORb) I want my life to be prolonged as long as possible within the limits of generally accepted health-care standards. 7) Except as I state in the following space, I direct that treatment for alleviation of pain or discomfort be provided at all times, even if it hastens my death: 9) (If you do not agree with any of the optional choices above and wish to write your own, or if you wish to add to the instructions you have given above, you may do so here.)I direct that: (Add additional sheets if needed.) DONATION OF ORGANS AT DEATH (OPTIONAL) 10) Upon my death (mark applicable box) a) I give any needed organs, tissues, or parts, OR b) I give the following organs, tissues, or parts only c) My gift is for the following purposes (strike any of the following you do not want) (i) (ii) Therapy (iii)Research (iv) Education (OPTIONAL) 11) I designate the following physician as my primary physician: (name of physician) (address) (city) (state) (zip code) (phone) If the physician I have designated above is not willing, able, or reasonably available to act as my primary physician, I designate the following physician as my primary physician: (name of physician) (address) (city) (state) (zip code) (phone) * 12) A copy of this form has the same effect as the original. 13) Sign and date the form here: (date) (sign your name) (address) (print your name) (city) (state) (print name) (print name) (address) (address) (city) (state) (city) (state) ___________________________ (signature of witness) ___________________________ (signature of witness) (date) (date) Although the Patient Self-Determination Act (PSDA) and the U.S. Supreme Court’s landmark right-to-die decision, Cruzan v. Director, Missouri Dept. of Health, were significant developments at the federal level, they came well after states had begun to grapple with the legal issues related to end-of-life decisions. State law, in fact, is generally considered the most reliable source of guidance on advance directives. As a result, medical personnel and others may reasonably assume that an advance directive may only be used if a state statute permits. However, several legal experts with whom we spoke suggested that many statutory limitations on the scope of advance directives may be unconstitutional. When PSDA was passed in November 1990, 46 states had laws providing a statutory basis for some type of advance directive. Between 1990 and 1995, 45 states amended or enacted laws dealing with advance directives. As of March 1995, 46 states had laws providing for both living wills and appointments of health care agents. Of the remaining five states, two have laws providing only for living wills and three only for appointments of health care agents. The requirements and application of state living will and health care agent statutes vary significantly. Although health care agent statutes in 49 states permit an agent to make decisions when a patient is permanently unconscious, living will statutes in only 38 states include permanent unconsciousness as a qualifying condition. (Nancy Cruzan, whose care was at issue in the Cruzan case, was characterized not as terminally ill but as permanently unconscious.) Similarly, only about two-thirds of the states have statutory language permitting living wills or health care agents to withhold or withdraw artificial nutrition and hydration. Also, 34 states have living will statutes that explicitly forbid the withholding or withdrawal of life support from pregnant patients, and 14 states forbid health care agents from making such a decision. Table II.1 shows the variation among state living will and health care agent statutes. Although state legislation related to end-of-life decisions is widespread, there are legal issues that, at least in many states, remain largely unsettled: Are advance directives written in one state valid in another? Must an advance directive be in writing? Does a living will apply to emergency medical services? Who makes decisions if a patient has not designated a health care agent? Are advance directives binding on all physicians and institutions? What about “futile” treatment or assisted suicide? Some individuals are concerned that an advance directive that complies with the requirements of one state may not be honored in another state. Although we could not document such a problem, evidence suggests that an advance directive should be honored in any state, regardless of where it was originally executed. The statutes of 29 states explicitly recognize the validity of living wills that are in accord with either laws of their own state or another state. Similarly, 29 state statutes recognize the powers of health care agents appointed by documents executed in other states. Even beyond state statutes, a living will should be valid in any state because Cruzan and a long tradition of state courts have found that the constitutional right to refuse medical treatment is not lost upon incapacity. Just as a competent person has the right to refuse unwanted medical treatment in any state, an incompetent person’s previously articulated wish should also be honored in any state. On the other hand, we are unaware of any court that has held there is a constitutional right to appoint a health care agent although, in her concurrence in Cruzan, Justice O’Connor speculated that there may be such a right. Thus, an agent who attempts to exercise authority in one of the 22 states without a reciprocity provision in its health care agent statute is more apt to encounter some justifiable resistance. Courts have consistently held that a clearly and convincingly expressed oral statement of an individual’s treatment wishes should be honored. However, in part because PSDA defines “advance directive” to include only written instructions, medical personnel may erroneously assume that an incompetent individual’s previously expressed wishes must be in writing to have legal effect. Some states include a detailed form in their statute for use in drafting an advance directive, which may reinforce the belief that only written instructions are valid. However, if a patient’s clearly expressed treatment wishes generally must be followed even if they are not in writing, it should not matter whether written instructions follow the detailed form included in a state law. The PSDA definition of advance directives states that the form directives take may be specified by state statute or precedents set in court decisions. Legal experts we consulted said that clearly expressed treatment wishes should be honored whether or not they are in writing or follow a statutorily prescribed format; but until clarified in statute, confusion about the validity of oral instructions or what constitutes a valid advance directive is apt to continue. Another issue is the potential conflict between advance directive statutes and laws involving the provision of emergency medical services. In an emergency, it may not be clear that an individual has an advance directive. Even when emergency medical technicians are presented with a valid advance directive, they are frequently unwilling to comply unless they have authorization specifically applicable to them because they are generally required to administer life-saving procedures. This has resulted in seriously ill patients being resuscitated against their stated wishes and over the objections of their families. To address this issue, 25 states authorize nonhospital do-not-resuscitate orders. (Such orders, however, cover a narrower spectrum of treatments than typical living wills.) In Virginia, for example, certain individuals may complete a form ordering emergency medical technicians not to revive them. In Oregon, individuals who are terminally ill or permanently unconscious, and only those individuals, can wear bracelets saying “no CPR” (cardiopulmonary resuscitation). Most people believe that in the absence of a written advance directive, their family or partner will decide their final care. As of March 1995, 25 states have statutes providing for surrogate decision-making in the absence of an advance directive. These laws typically establish a hierarchy of related persons (similar to the order of inheritance) who, if the patient has not designated an individual to act as his or her health care agent, may make health care decisions for the incompetent patient. In states with surrogate decision-making laws, families are expected to make decisions consistent with the patients’ wishes. In some states, however, families have no legal right to make end-of-life decisions unless patients have explicitly given them that right. In Cruzan, the Court rejected the argument that the Constitution compels the state to accept the substituted judgment of close family members and to permit them to make medical decisions for an incompetent patient. This gives rise to concern that in states without surrogate laws, there may be a reluctance to rely on the guidance of family members when making end-of-life decisions about a patient. In legal terms, any provision of unwanted medical care is generally considered to be an assault on the patient. Yet, if a physician morally objects to the withholding or withdrawal of life-sustaining treatment from a particular patient, he or she cannot be compelled to be involved in that patient’s care. (Such a physician cannot abandon a patient until a new physician agrees to take over the patient’s care.) Similarly, a health care institution may refuse to honor a living will or the decision of a health care agent if it has established policies based on religious beliefs or moral convictions. PSDA requires both individual providers and health care institutions to inform patients upon admission if they cannot implement an advance directive as a matter of conscience. Although patients may be able to choose another physician who will honor their advance directive, they may have little meaningful choice about what organization will provide their medical care, especially in the event of an emergency. Legal experts we consulted suggested that provider organizations should be required to arrange an appropriate transfer when they are unwilling, as a matter of conscience, to implement an individual’s advance directive. Even so, transfers may not always be practical. Other provider organizations may be reluctant to admit an individual for the sole purpose of withholding life-sustaining treatment, and some communities may have only one hospital or nursing home. At least one court has held that when a transfer is not possible, the provider must comply with a patient’s clearly stated wishes regarding treatment. Although advance directives are frequently thought of as instruments only for facilitating the refusal of treatment, they can also be used to ensure that individuals receive all possible treatment. Yet, a conflict may arise when medical treatment requested in a living will or by a health care agent is considered futile (unnecessary or of no benefit) by the provider. Medical professionals may also disagree about when a medical treatment is truly futile. Some states have begun to address this issue through case law or statute. For example, Maryland’s 1993 advance directives law states that physicians do not have to provide treatment that is “medically ineffective or ethically inappropriate.” Another issue centers on states’ limiting the use of advance directives to only incapacitated individuals who are terminally ill or in a permanent vegetative state. Since a competent person always has the right to refuse treatment, some legal experts have suggested that an incompetent individual in any medical condition should be free to refuse treatment through living wills or health care agents. At some point, however, the line blurs between the right to refuse treatment and suicide, raising the issue of assisted suicide. Thirty-two states have laws that explicitly criminalize assisted suicide and 11 criminalize assisted suicide through the common law, while in 7 states the law concerning assisted suicide is unclear. Although a few states have considered allowing assisted suicide, there is no clear consensus on the issue. In 1994, Oregon became the first state to have an assisted suicide statute that specifically allows terminally ill patients to obtain lethal prescriptions. But this law, the result of a ballot initiative, has been blocked until a court can rule on its constitutionality. In 1995, a federal appeals court upheld as constitutional the state of Washington’s prohibition on physician-assisted suicide, overturning a lower court ruling. Recognizing the benefits of more uniformity among state advance directive laws, the National Conference of Commissioners on Uniform State Laws approved the model Uniform Health-Care Decisions Act(UHCDA) in 1993. Although UHCDA has been adopted in only one state, New Mexico, many states have enacted laws containing substantially similar provisions. (According to one legal expert we spoke with, by the time UHCDA was passed, most states already had advance directive laws that incorporate many UHCDA provisions.) Widespread adoption of UHCDA would not only lessen state variations discussed earlier, but could clarify a number of unsettled legal issues, including the following: An advance directive that complies with UHCDA would be valid regardless of where executed or communicated, which would ease concerns about portability. The appointment of a health care agent would have to be in writing, but an individual instruction, authorized in lieu of a living will, could be oral or written. Uncertainties about surrogate decision-making would be lessened by establishing a hierarchy for identifying an appropriate surrogate, including selection of a nonfamily member if no family member is available. Health care providers could decline to comply with a living will or other health care decision for reasons of conscience. Organizational providers could decline to comply only if the decision were contrary to a policy expressly based on reasons of conscience and the policy had been communicated in a timely fashion to the patient or person authorized to make health care decisions for the patient. An individual would not have to be terminally ill or in a permanent vegetative state for an advance directive to take effect. The authority of a health care agent would be effective whenever an individual lacks capacity unless otherwise specified in the instrument appointing the agent. Providers would not have to provide medically ineffective health care or care contrary to generally accepted medical standards. Rosamond Katz, Assistant Director, (202) 512-7148 Anita Roth, Evaluator-in-Charge, (410) 965-8964 Craig Winslow, Senior Attorney, (202) 512-8225 The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (301) 258-4097 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the implementation of the Patient Self-Determination Act (PSDA), and the effectiveness of advance directives in ensuring a patient's desired care. GAO found that: (1) health care institutions and the Department of Health and Human Services (HHS) are generally complying with most PSDA requirements; (2) most health care providers inform patients of their right to have an advance directive, but fewer consistently document whether the patient actually received an advance directive; (3) HHS has incorporated PSDA provisions into Medicare and Medicaid provider requirements, expanded the Medicare handbook, and engaged in a limited public education campaign, but HHS has not informed Social Security recipients about advance directives as required by PSDA; (4) only 10 to 25 percent of Americans have documented their end-of-life choices or appointed a health care agent to do so; and (5) an advance directive decision takes into consideration the availability or specificity of a living will, family wishes, physicians' attitudes, and legal issues. |
Ports comprise many different stakeholders, both public and private. Port authorities also may have jurisdiction over some or all of the geographical area of a port. The port authority can be an agency of the state, county, or city in which the port is located. In most ports in North America, the actual task of loading and unloading goods is carried out by private operators who lease space or equipment from the port authority. (In some ports, the port authority also manages some of these stevedoring activities.) The percentage of the port area over which the port authority has jurisdiction, and the level of involvement of the port authority in the port’s operations, is different from port to port. This variability in port authority jurisdiction and operational involvement has direct consequences for portwide disaster preparedness. Even though a port authority may have a thorough disaster plan in place, that plan may not be binding on any of the private operators in the port. The stakeholders involved at any given port can vary but, in general, they include port authorities, private-sector operators doing business within the port, government agencies, and information-sharing forums. Table 1 summarizes these basic participants and their roles. These various stakeholders interact in a variety of ways. The port authority provides a limited governance structure for the port. Many port authorities lease piers, or “terminals,” and equipment to stevedoring companies and shipping lines that are responsible for the actual loading and transport of cargo. Some port authorities also operate cargo terminals alongside the private operators. Figure 3 depicts the main elements of a typical port. Individual ports may not include all of these elements, or may include some not depicted here. Several federal agencies provide support to ports in natural disaster planning, response, and recovery (see table 2). These agencies have different missions that relate to port operations, including natural disaster planning and response. For example, the Coast Guard is the agency responsible for most federal oversight related to portwide safety and security. It plays the primary role in coordinating efforts for homeland security efforts. FEMA plays a role in homeland security planning and also administers several assistance programs for disaster preparation and recovery. The Maritime Administration plays a general role in coordinating efforts to strengthen the maritime system and also has the ability to provide maritime assets that could be used to support homeland security interests. These vessels are part of the country’s National Defense Ready Reserve Fleet, including ships and barges, which could be used for housing, power generation, or the movement of water and other supplies. The terrorist attacks of September 11, 2001, prompted additional federal efforts to address a broad spectrum of emergencies. The Homeland Security Act of 2002 required DHS to develop a comprehensive National Incident Management System (NIMS). NIMS is intended to provide a consistent framework for incident management at all jurisdictional levels regardless of the cause, size, or complexity of the situation and to define the roles and responsibilities of federal, state, and local governments, and various first responder disciplines at each level during an emergency event. To manage all major incidents, NIMS has a standard incident management system, called the Incident Command System, with five functional areas—command, operations, planning, logistics, and finance and administration. NIMS also prescribes interoperable communications systems and preparedness before an incident happens, including planning, training, and exercises. In December 2004, DHS issued the National Response Plan (NRP), intended to be an all-discipline, all-hazards plan establishing a single, comprehensive framework for the management of domestic incidents where federal involvement is necessary. The NRP includes planning assumptions, roles and responsibilities, concept of operations, and incident management actions. The NRP also includes a Catastrophic Incident Annex, which provides an accelerated, proactive national response to a “catastrophic incident,” defined as any natural or man-made incident, including terrorism, resulting in extraordinary levels of mass casualties, damage, or disruption severely affecting the population, infrastructure, environment, economy, national morale, or government functions. Developing the capabilities needed to deal with large-scale disasters is part of an overall national preparedness effort that should integrate and define what needs to be done, where, based on what standards, how it should be done, and how well it should be done. Along with the NRP and NIMS, DHS has developed the National Preparedness Goal. Considered as a group, these three documents are intended to guide investments in emergency preparedness and response capabilities. The NRP describes what needs to be done in response to an emergency incident, either natural or man-made, the NIMS describes how to manage what needs to be done, and the National Preparedness Goal describes how well it should be done. The National Preparedness Goal is particularly useful for determining what capabilities are needed, especially for a catastrophic disaster. The interim goal addresses both natural disasters and terrorist attacks. It defines both the 37 major capabilities that first responders should possess to prevent, protect from, respond to, and recover from disaster incidents and the most critical tasks associated with these capabilities. An inability to effectively perform these critical tasks would, by definition, have a detrimental impact on effective protection, prevention, response, and recovery capabilities. The Maritime Infrastructure Recovery Plan (MIRP), released by DHS in April 2006, applies these disaster preparedness documents to the maritime sector. The MIRP is intended to facilitate the restoration of maritime commerce after a terrorist attack or natural disaster and reflects the disaster management framework outlined in the National Response Plan. The MIRP addresses issues that should be considered by ports when planning for natural disasters. However, it does not set forth particular actions that should be taken at the port level, leaving those determinations to be made by the port operators themselves. The 9/11 Commission pointed out that no amount of money or effort can fully protect against every type of threat. As a result, what is needed is an approach that considers the relative risks these various threats pose and determines how best to use limited resources to prevent threats, where possible, and to respond effectively if they occur. While the Homeland Security Act of 2002 and Homeland Security Presidential Directive 7 call for the use of risk management in homeland security, little specific federal guidance or direction exists as to how risk management should be implemented. In previous work examining risk management efforts for homeland security and other functions, we developed a framework summarizing the findings of industry experts and best practices. This framework, shown in figure 4, divides risk management into five major phases: (1) setting strategic goals and objectives, and determining constraints; (2) assessing the risks; (3) evaluating alternatives for addressing these risks; (4) selecting the appropriate alternatives; and (5) implementing the alternatives and monitoring the progress made and results achieved. Recent natural disasters—particularly Hurricanes Katrina, Wilma, and Rita in 2005—challenged affected ports on several fronts, according to port authority officials. Since 1998, hurricanes have damaged buildings, cranes, and other equipment owned by seven of the port authorities we interviewed. Ports also reported damage to utility systems and experienced delays in water, sewer, and power restoration. Port authorities cited clearing waterways and debris removal as another difficulty. In the case of Hurricane Katrina, some ports, such as Gulfport and New Orleans, have not yet returned or took about 6 months to return to predisaster operational levels, respectively. Separate from the physical impact of the disasters, challenges occurred with personnel, communications and coordination issues and, according to port authority officials, these challenges proved more difficult than anticipated. In some cases, personnel had evacuated the area, and port officials were unsure when staff would be able to return to work. Given that many phone lines were down, there were delays in restoring phone service and, in most cases, ports did not have communications alternatives in place. Some port authorities also reported difficulties in working with local, state, and federal entities during the recovery process, including coordinating re- entry to the port of port personnel and filing for FEMA disaster recovery assistance. Even though most ports anticipated and had plans in place to mitigate infrastructure damage from natural disasters, over half of the port authorities we contacted reported that the disasters created infrastructure challenges. Twelve of the 17 ports we reviewed had experienced a hurricane or earthquake since 1998, and among those 12 port authorities, 7 reported challenges in restoring infrastructure (see fig.2). While we were unable to review a complete list of disaster assistance estimates, some port authorities were able to provide specific dollar amounts for repair damage to buildings, cranes, or other equipment. For instance, the Port of Miami reported spending more than $6 million on repairs as a result of Hurricanes Katrina, Wilma, and Rita, including damage to facilities, signage, sea wall and storm drainage system. Likewise, The Port of Houston reported spending $200,000 for facility repairs following Hurricane Rita. Ports were still faced with these repair costs even though a majority of the port plans we reviewed included infrastructure damage mitigation. As a way to work around the damaged structures, ports also utilized temporary trailers for administrative and operational functions. For example, this occurred at the Port of Port Arthur, where the strategy of reserving backup equipment with appropriate vendors was included in that port’s Hurricane Readiness Plan. Besides the repair costs involved, another indication of the significance of damage to infrastructure was the effect on port operations. In several cases, tenants left the port and moved elsewhere. For example, Port of New Orleans officials said that because they are unsure if departed tenants at the port will return, they have been reluctant to replace three severely damaged container cranes. Operations have been even more curtailed at the Port of Gulfport, also because of Hurricane Katrina. Port authority officials report that they have been able to repair only 3 of their 12 warehouses, which limited their ability to accommodate storage for some of their major operators. These operators have since moved their operations to other nearby ports, such as Pascagoula, Mississippi, or Mobile, Alabama. Besides damage to buildings, cranes, and other equipment involved specifically in moving cargoes, port authorities also reported damages to their utility systems, including water, sewer, and power. For example, following Hurricane Katrina, the Port of Port Arthur was without power for approximately 2 weeks. Because of a lack of on-site generators, port officials limited port operations to daylight hours only. The power outage also limited operation of certain hangar doors that required electrical power to be opened. Ports with damage to water and sewer included Gulfport, where 2 months were needed to restore its sewer and water capacity. Similarly, the Port of Pascagoula had three damaged water wells as a result of Hurricane Katrina. Port officials told us one of those wells was still not operational almost a year later. While some ports included backup water and power resources in their contingency utility plans, officials at one port said their backup resources may not be adequate to address long-term or extensive outages. In fact, 10 of the 17 ports we reviewed did not have plans for utility system restoration. The lack of anticipation of these vulnerabilities was particularly apparent for ports affected by Hurricanes Katrina, Wilma, and Rita; only 4 of the 10 ports impacted by those storms had planned for utility challenges. For example, Port of New Orleans officials said their supply of 5 to 10 days of water and 3 to 5 days of power through generators was not enough to sustain them through the outages caused by Hurricane Katrina. While many ports indicated that several federal agencies were eventually able to effectively aid in clearing the waterways and restoring aids to navigation, ports’ experiences varied. Their experiences also demonstrated that rapid clearing of waterways is key to reestablishing port operations and emphasizes the need for ports to coordinate and arrange for debris removal and restoring aids to navigation ahead of time. Following are some examples: Following Hurricane Katrina, the Port of Gulfport had to remove large amounts of debris, such as tree limbs that were hanging and leaning over roads, as well as containers, cargo, and other equipment that winds had scattered into the roadways. Port officials said that clearing these obstructions was essential to re-establishing port operations. Immediately after the hurricane, the local Navy construction battalion (called Seabees) volunteered to assist the port by clearing roads with their large bulldozers, which enabled supplies and cargo to move in and out of the port. The Seabees also cleared boat ramps so that Coast Guard search and rescue vessels could safely enter the waterway. Port officials estimated that, over a period of 3 weeks, the Seabees cleared about 30 percent of the debris in the port area. After the Seabees were called to other duties, Port of Gulfport officials hired a contractor to remove the remaining debris at a cost of about $5 million. Port of Gulfport officials said that they applied for FEMA reimbursement of these costs. Further, they explained that the use of and planning for existing federal resources for debris removal, such as the Navy Seabees, could have saved even more time and possibly federal dollars that would later be paid to the port in the FEMA reimbursement process. Inside the port area, the Port of Mobile experienced challenges with debris removal that federal agencies such as the Corps or the Coast Guard were not responsible for removing. These challenges may have caused additional delays in restoring port operations. For instance, port officials explained that storm surge waters from Katrina loosened several oil rigs in the Gulf, one of which made its way into the port’s pier area and damaged several piers. They said the port is currently in litigation to resolve who will pay for the damages. Port of Mobile officials also estimated that dredging expenses, including the removal of branches, sand, and silt from pier areas will be more than $7.5 million. Because the rig obstruction and other pier damages were not in the federal waterway or jurisdiction, Port of Mobile officials said they were only able to receive limited assistance from federal agencies in resolving their internal damage issues. Officials of eight port authorities we contacted reported challenges related to personnel, communications, or coordination with port stakeholders as a result of hurricanes since 1998 and, in conversations with us, they indicated that these challenges were more difficult than anticipated. Port plans we reviewed addressed some of these types of vulnerabilities to natural disasters. However, ports still identified such vulnerabilities as a significant obstacle to their ability to return to predisaster operational levels. Several ports cited examples about how their personnel had evacuated and, for numerous reasons, were unable to return to work. For example, several Port of Gulfport employees lost their homes during Hurricane Katrina and had no local living arrangements for themselves or their families. Likewise, the Port of New Orleans said its operations were stifled by the lack of personnel and labor in both Hurricane Katrina and Hurricane Rita. At the Port of Port Arthur, lack of power for area homes kept employees from retuning immediately, causing temporary delays in port operations. Port authorities also did not anticipate the extent to which their communications systems would be impacted. High winds and flooding from the hurricanes rendered phone lines out of service. With phones lines down, port authorities were unable to get in touch with their staff or other port stakeholders to share information. For instance, we learned that approximately 50 percent of phones at the Port of Mobile were out of service for about 2 to 4 weeks. Other ports, including New Orleans, Pascagoula, and Port Arthur, also experienced phone outages and reported limitations in cell phone reception. Ports also identified coordination challenges with local, state, and federal stakeholders while planning for and recovering from natural disasters. At the local level, one coordination problem port officials experienced was in re-entering the port after the storm. For example, in Gulfport, port officials were denied entry to port property for the first 2 weeks following Hurricane Katrina. Similarly in Houston, law enforcement agencies blocked roads for access back into Houston after the Hurricane Rita evacuation. In some cases, port officials did not have the proper credentials required by local police and other emergency management officials to be allowed roadway access through the city to their port. In other instances, we found that ports experienced varied levels of coordination with local emergency management agencies, especially regarding planning efforts. For example, Mobile County Emergency Management officials affirmed that they have a close working relationship with the Port of Mobile, where they have helped the port conduct risk assessments and emergency planning activities, and where they coordinate with port officials on other plans involving safety, security, and the environment. Conversely, Port of Gulfport and Harrison County Emergency Management officials in Mississippi said they had limited contact and coordination regarding emergency recovery. One county emergency management official said that although the agency has made efforts to share planning documents with the port, the agency is required to work through the Mississippi Emergency Management Agency and follow any guidance in the state emergency plan to request resources from or provide assistance to the port. At the federal level, one coordination issue reported by port stakeholders involved difficulties in coordinating with FEMA for recovery resources. Some local emergency management officials and port officials that we interviewed expressed concerns about the level of interaction with FEMA officials before an incident occurs. For example, Port of Jacksonville officials said they would like to see FEMA take a more active role in the disaster planning process, such as participation on the AMSC at the local level or coordinating with the Florida State Department of Community Affairs at the state level. Similarly, Port of Los Angeles officials said effective communication with FEMA is essential and that they would like to communicate more clearly with FEMA about reimbursement policies before a disaster takes place. In fact, in November 2006, port officials from Los Angeles and Oakland held a joint meeting with FEMA and the California Office of Emergency Services to discuss the current federal and state regulations and practices regarding disaster relief fund and reimbursement policy. Port stakeholders also expressed concerns about coordinating with FEMA after an incident occurred, including inconsistencies in information and difficulty in appropriately completing FEMA forms and other documents required for reimbursement. At the county emergency management level, one agency official cited an inconsistency of the interpretation of FEMA policies and changing personnel as some of the challenges in working with FEMA. This official suggested that interacting with FEMA officials more frequently before a disaster would help the port authority better understand which personnel to contact in an emergency situation. The official said this coordination problem became obvious during the Hurricane Katrina recovery effort when, after the port had made several requests, FEMA did not send a representative to the area. Port officials in Gulfport also found it difficult to reconcile their damages using FEMA’s cost estimate process. To resolve the paperwork confusion, the Port of Gulfport hired an outside company to deal with FEMA directly and to handle all reimbursement-related issues on their behalf. While Port of Gulfport officials recognized that FEMA’s attention to detail was an effort to prevent fraud and abuse, they also said FEMA staff could have done a better job in providing guidance about the reimbursement process. Besides having coordination challenges with FEMA, we learned that several ports were unclear about resources that were available for recovery from the Maritime Administration. Immediately following Hurricane Katrina, the Gulf area was in need of critical resources such as power, water, and personnel. However, due to infrastructure damages around the area, it was difficult to get these resources into ports. As such, The Maritime Administration provided, with the concurrence of the Department of Defense, ready reserve vessels for FEMA’s use. These ready reserve vessels are strategic sealift assets usually used for defense purposes that could be used for command and control, housing, power generation, or the movement of water and other supplies. We found that ports’ knowledge about these assets and how to request them was limited. For example, port authority officials at one port turned down the Maritime Administration’s offer for a housing vessel. The port determined that the deep draft and large size of the vessel might impede commercial traffic and block other vessels from entering their port. Port officials reached this determination without the knowledge that smaller vessels for the same purpose could have been provided by the Maritime Administration. The vessel offered by the Maritime Administration, however, was instead deployed to the Port of New Orleans area to house first responders. Many port authorities have taken steps to address the challenges resulting from recent natural disasters. Individually, they have taken such steps as upgrading communications equipment, adding backup communications approaches and power equipment, and creating alternative sites for administrative operations and storage of computer data. Collectively, they have shared best practices for disaster planning and response, most notably through an industry-wide publication with detailed planning steps and guidelines. Port authorities that were not directly impacted by recent disaster events have also taken steps to revise their planning efforts, including greater coordination with other port stakeholders. Many port authorities have adapted or improved existing stakeholder forums to assist in facilitating port planning for natural disasters. At the federal level, agencies such as the Maritime Administration have taken steps to assist ports in identifying federal resources available for disaster response and recovery. As a result of the lessons learned from recent natural disasters, port authorities report taking many steps to mitigate vulnerabilities. One mitigation tactic reported by many port authorities is to add equipment and develop redundant systems to help during any recovery efforts. The most frequent redundancy added was in creating communications alternatives. Various port authorities reported purchasing communications equipment that does not necessarily rely on traditional land lines for calling, such as analog pagers, wireless handheld devices, CB radios, and satellite phones. They also integrated more sophisticated communications hardware and software programs. Some ports, such as Houston and San Diego, implemented 1-800 phone numbers to receive calls from port personnel. As an additional precaution, the Port of Houston utilizes call centers located out of state in areas that are less likely to have been impacted by the same storm. In another effort to route calls out of the impacted area, the Port of New Orleans has also been assigned phone numbers with alternative area codes. Besides making improvements to communications systems, many port authorities took steps related to power and administrative operations. Seven port authorities reported purchasing or arranging for alternative power supplies that could be used during an outage. For example, the Port of New Orleans purchased generators after the 2005 hurricane season. Ports also recognized the need for administrative and information technology location alternatives. Four port authorities reported changing their alternative administrative sites since recent storms. Port authorities also told us that they have changed the way they back up and store their electronic data and equipment. For example, the Port of New Orleans previously had its alternative work site only 3 miles away from its regular operations location. Since both operations sites could be susceptible to the same disaster event, Port of New Orleans officials have partnered with the Port of Shreveport, Louisiana, almost 200 miles away, to use Shreveport’s facilities as an alternate operations site if the Port of New Orleans is out of business for more than 5 days. Further, the two ports have prepared a mutual agreement, which includes cost sharing efforts for information technology infrastructure upgrades at the Port of Shreveport, to better accommodate New Orleans’ needs in a disaster. Another mitigation tactic by ports has been the sharing of best practices and lessons learned from recent natural disasters. Through efforts by the AAPA, a nationwide industry group, ports from across the U.S. and Canada participated in the development of an industry best practices document. In developing this document, AAPA organized various working groups, which included port officials from ports that had been affected by recent natural disasters, as well as ports that had not been affected. Acting as a forum for port officials to share their experiences with natural disasters, these working groups were able to develop a manual focused on port planning and recovery efforts. Vetted by AAPA members, the manual includes planning for emergency operations, communications, damage assessments, insurance and FEMA claims processes, coordinating with federal agencies, and overall emergency planning objectives. Another industry group, the GICA, has worked closely with the Corps, Coast Guard and other maritime agencies to implement new practices for a more efficient response to maritime related incidents. Many of these efforts have been implemented as result of recent hurricanes. For example, a special Logistics Support Center is set up during response times for the sole purpose of assisting the Corps and Coast Guard with contracting special equipment, including water, fuel and crane barges, towing vessels, pumps, and generators. Regarding clearing the waterways, GICA barge members have provided knowledgeable waterway operators and state-of-the-art boats to assist Coast Guard personnel in conducting channel assessments immediately following a storm. In an effort to restore aids to navigation, GICA contacts also towed 50 temporary buoys and supplied aircraft for aerial surveillance of the waterways. Moreover, the Corps, Coast Guard, and GICA formed the Gulf Coast Inland Waterways Joint Hurricane Team to develop a protocol for storm response. Finalized in July 2006, the Joint Hurricane Response Protocol is an effort to more fully develop lessons learned from previous hurricane seasons and waterways management practices, with the goal of implementing an effective restoration of Gulf Coast maritime commerce following future storms. Ports that have not experienced problems as a result of recent disasters but that are nonetheless susceptible to disaster threats have also responded to these lessons learned by other ports. For example, the Port of Tacoma hired a consultant to assist in developing a business continuity plan. The Port of Jacksonville has also undertaken a comprehensive enhancement to its continuity of operations plan. Likewise, as a result of lessons learned from the Loma Prieta Earthquake in Oakland, the Port of Los Angeles developed more stringent seismic building codes. Additionally, Port of Savannah officials told us that they, too, have changed their prehurricane crane operations based on lessons learned from hurricanes in the Gulf region. We found several examples of port efforts to improve stakeholder coordination, including utilizing existing forums to coordinate disaster planning, as well as realigning and enhancing their current plans. Regarding the use of existing forums, port authorities in both New Orleans and Mobile said they were using their AMSC to coordinate response and recovery efforts. Moreover, GAO has previously reported that in the wake of Hurricane Katrina, information was shared collaboratively through AMSCs to determine when it was appropriate to close and then reopen the port. Port-specific coordination teams, such as those at the Port of Houston, have also used their lessons learned to improve coordination for natural disaster planning. Houston’s port coordination teams are an outgrowth of the port’s relationships with other maritime stakeholders in the Houston-Galveston Navigation Safety Committee, which includes a wide variety of waterway users and operators. In another example, the Port of Oakland works closely with the City Disaster Council on emergency planning and participates in various exercises with city, county, and state officials. We also found several examples of how ports have aligned their local planning with the national planning structure and have identified various ways to enhance their current coordination plans. The national structure, which includes NIMS and NRP, is designed to provide a consistent framework and approach for emergency management. Port plans that we reviewed, in particular those from ports in hurricane impacted areas, have identified the importance of adapting to this national structure and emergency response system. For example, the Port of Mobile’s emergency operations plan explains that the complexity of incident management and the growing need for stakeholder coordination has increased its need for a standard incident management system. Therefore, the Port of Mobile’s emergency operations plan outlines the use of an incident management framework from which all agencies can work together in an efficient and effective manner. Some port authorities making changes have not experienced any significant impact from recent disasters. For instance, Port of Jacksonville officials reported that Hurricane Katrina impacts in the Gulf region prompted them to revise their disaster preparedness plans, including reorganizing the plans to reflect NIMS language and alignment with NRP guidelines. Similarly, Port of San Diego officials said they hired a consultant to assist them with drafting their emergency response and business continuity plan. San Diego’s plan prioritized risks, clarified roles and responsibilities of key departments, and laid out directions on how to better coordinate with local emergency management officials during a disaster event. Since the 2005 hurricane season, federal agencies have also taken steps to help port authorities strengthen ports’ ability to recover from future natural disasters. These efforts have focused on increased coordination and communication with stakeholders and also on building stakeholders’ knowledge about federal resources for port recovery efforts. The efforts primarily involve four federal agencies that in some fashion work directly with ports—the Maritime Administration, the Coast Guard, FEMA and the U.S. Army Corps of Engineers. Efforts for those four agencies are as follows: Maritime Administration Efforts: The Maritime Administration has taken two main steps: developing an approach for activating maritime assets in disaster recovery, and updating a risk management guidebook. During the 2005 hurricane season, the Maritime Administration emerged as a critical resource for the Gulf area by providing vessels from the nation’s National Defense Ready Reserve Fleet to enable recovery operations and provide shelter for displaced citizens. Since that time, FEMA developed a one-time plan—the Federal Support Plan, which was cited specifically for the 2006 Hurricane Season and specific to the federal government’s response efforts in the State of Louisiana. The Maritime Administration contributed to this plan by identifying government and commercial maritime capabilities that could be employed in response to a disaster. According to Maritime Administration officials, while the information is focused on the Gulf area, it could be easily adapted to other areas in the United States if a disaster occurred. To date, the Maritime Administration is completing the process of identifying needs and capabilities and plans to provide a directive regarding capabilities to its regional offices in June 2007. However, no strategy exists for communicating this information to ports. The Maritime Administration is also currently updating its publication titled Port Risk Management and Insurance Guidebook (2001). This publication is the Maritime Administration’s “best practices” guide for port risk management. Developed primarily to assist smaller ports in conducting risk management, it includes information on how ports can obtain insurance coverage, facilitate emergency management and port security, and apply risk management. The Maritime Administration began updating the guidebook after the 2005 hurricane season. According to officials from the Maritime Administration, ports are actively using this guidebook, especially since many of the contributors are port directors and risk managers at the ports. While these efforts demonstrate the Maritime Administration’s increased involvement in assisting ports in planning for future disasters, we also observed that Maritime Administration regions vary in their level of communication and coordination with ports. According to a Maritime Administration official, the Gulf and East Coast regions have been working with FEMA regional offices to quickly activate needed assets in case of a disaster. However, while the Gulf and East Coast regions have been strengthening these relationships, other regions may not have the same level of coordination. We found, in general, port authorities’ interaction with the Maritime Administration was limited for natural disaster planning, and the ports we spoke to said they usually did not work directly with the agency in disaster planning. This view was echoed by Maritime Administration officials who said that the relationship between the agency’s regional offices and the ports in their respective areas varied across the country. Coast Guard efforts: Coast Guard efforts in natural disaster planning varied considerably from port to port and were most extensive in the Gulf. While in general, the Coast Guard was considered successful in its missions during the 2005 hurricane season, its officials said they were taking additional steps in improving planning for recovery efforts with port stakeholders based on their experiences with recent natural disasters. For example, at the Port of Mobile, Coast Guard officials said that participating in an actual Incident Command Systememergency centers has been as helpful as exercises and, since the 2005 hurricane season, they have utilized such a unified command at least 10 times in preparation for potential hurricane landfalls in the region. At other ports, the Coast Guard had a more limited role in assisting ports in planning for natural disasters. Even at ports that had not experienced substantial damage from a recent natural disaster, however, Coast Guard units were applying lessons learned from other ports’ experiences and increasing their level of involvement. For example, the Port of Houston sustained minimal damage from Hurricane Rita; however, Coast Guard officials said that they identified areas where they could make improvements. The Coast Guard at the Port of Houston leads a recovery planning effort through port coordination teams, which include stakeholders such as the port authority, Coast Guard, and private operators, working together during disaster recovery efforts. These teams are all-hazards focused and are activated differently for terrorist incidents or natural disasters. Coast Guard officials said that although the teams were successful in planning for Hurricane Rita, there were areas for improvement, including outreach and training with port stakeholders and communication. Further, Coast Guard officials at the Port of Tacoma said that other ports’ experiences with recent natural disasters has generated interest in them becoming more involved in the planning and coordination of natural disasters. They also indicated they were interested in adapting, in some form, a planning forum similar to the Port of Houston’s port coordination teams. FEMA efforts: While state and local emergency management agencies assist in facilitating FEMA disaster planning at the port level, FEMA has several efforts under way to improve its assistance to ports for disaster recovery. For instance, FEMA officials said that through the Public Assistance Program, FEMA is able to provide assistance to ports that are eligible applicants after a major disaster or emergency. Based on lessons learned from Hurricane Katrina, FEMA is also reviewing and updating its policies and guidance documents associated with this program. To administer the program, FEMA will coordinate closely with federal, state, and local authorities (including emergency management agencies) through its regional offices. Officials also said that through planning, training, and exercise activities sponsored by DHS, they hope to have greater opportunities to interact and coordinate with port authorities and other local agencies before disasters occur. Further, officials agree that coordination with their local counterparts is an important part of emergency management and disaster recovery efforts. U.S. Army Corps of Engineers efforts: Although the U.S. Army Corps of Engineers generally does not conduct natural disaster planning with ports, staff at the district level have made some efforts to increase their level of involvement in this process, particularly in the Gulf region. For example, district U.S. Army Corps of Engineers staff have (1) organized and chaired yearly hurricane planning forums to which all ports in the region are invited; (2) organized prestorm teleconferences for port stakeholders, National Oceanic and Atmospheric Administration, U.S. Navy, and in some instances, the media; (3) participated in the Coast Guard’s Partner Emergency Action Team, which specifically address disaster preparedness; (4) geographically aligned with the Coast Guard to better facilitate coordination during an emergency; and (5) implemented informational training on planning for hurricanes to ports and other maritime stakeholders. Many of these improvements were implemented as a result of Hurricane Ivan (2001) and the hurricanes from the 2005 season. However, the extent of the U.S. Army Corps of Engineers participation in natural disaster planning with ports varies. For instance, U.S. Army Corps of Engineers representatives in Savannah said they do not play a significant role in the port’s natural disaster planning for recovery efforts. Similarly in Jacksonville, U.S. Army Corps of Engineers officials explained that their primary natural disaster recovery duty at the Port of Miami is to repair the federal channel and they do not participate in the port authority’s disaster planning efforts. However, the Jacksonville U.S. Army Corps of Engineers does cooperate with the Coast Guard’s Marine Safety Office in Jacksonville in the development of their hurricane preparedness plan. For this effort, it assisted in determining what vessels could remain in port during a hurricane and what vessels would be required to leave. Most port authorities we reviewed conduct planning for natural disasters separately from planning for homeland security threats. Federal law established security planning requirements that apply to ports. Similar requirements do not exist with regard to natural disaster planning. The ports we contacted used markedly different approaches to natural disaster planning, and the extent and thoroughness of their plans varied widely. A few ports have integrated homeland security and natural disaster planning in what is called an all-hazards approach, and this approach appeared to be generating benefits and is in keeping with experts’ recommendations and with the newest developments in federal risk management policy. A consequence of the divided approach was a wide variance in the degree to which port stakeholders were involved in natural disaster planning and the degree to which port authorities were aware of federal resources available for disaster recovery. For homeland security planning, federal law provides for the establishment of AMSCs with wide stakeholder representation, and some ports are using these committees or another similar forum with wide representation in their disaster planning efforts. DHS, which through the Coast Guard oversees the AMSCs, provides an example of how to incorporate a wider of scope of committee activity. Of the ports we visited, more than half developed plans for natural disasters separately from plans that address security threats. This is likely due to the requirement that port authorities carry out their planning for homeland security under the federal framework created by the Congress in the Maritime Transportation Security Act (MTSA), under which all port operators are required to draft individual security plans identifying security vulnerabilities and approaches to mitigate them. Under the Coast Guard’s implementing regulations, these plans are to include such items as measures for access control, responses to security threats, and drills and exercises to train staff and test the plan. The plans are “performance- based”; that is, the security outcomes are specified, but the stakeholders are free to identify and implement appropriate solutions as long as these solutions achieve the specified outcomes. Because of the similarities in security and natural hazard planning these plans can be useful for guiding natural disaster response. MTSA also provided the Secretary of Homeland Security with the authority to create AMSCs at the port level. These committees—with representatives from the federal, state, local, and private sectors—offer a venue to identify and deal with vulnerabilities in and around ports, as well as a forum for sharing information on issues related to port security. The committee assists the Coast Guard’s COTP in developing an area maritime security plan, which complements the facility security plans developed by individual port operators. The plan provides a framework for communication and coordination among port stakeholders and law enforcement officials and identifies and reduces vulnerabilities to security threats throughout the port area. In contrast, port authority and operator natural disaster planning documents are generally not required by law and vary widely. According to one member from the AAPA, ports will have various interrelated plans, such as hurricane readiness plans, emergency operations plans, engineering plans, and community awareness and emergency response plans. Taken as a whole, the distinct plans for a particular port may represent the port’s risk management approach to disaster planning. In addition, port natural disaster plans are not reviewed by the Coast Guard. Representatives of the Coast Guard at locations we visited confirmed they do not review port authority or port operator planning documents pertaining to natural disaster planning. For example, officials at the Port of Oakland and the Port of Tacoma said they do not review the port or port stakeholders planning documents for natural disaster planning. Coast Guard officials at the Port of Savannah also noted that they do not review the hurricane plans for port operators. They contended that they do not have the expertise to advise the operators on how to protect or restart their particular operations. Moreover, natural disaster plans developed by port authorities generally do not apply to the port’s private operators. Only in one case did a port authority state that it required its private operators to draft a natural disaster plan. We found that the thoroughness of natural disaster plans varied considerably from port to port. For instance, the Port of Mobile had a relatively thorough plan. The Port of Mobile was affected by three major hurricanes in 2005-2006. Roughly a year after Hurricane Katrina, the Alabama State Port Authority completed an extensive emergency operations plan, based on an analysis that considered natural, man-made, and security-related hazards. The operations plan describes preparedness, response, recovery, and mitigation procedures for each identified threat, establishes requirements for conducting exercises, and establishes a schedule for regular plan reviews and updates. In contrast, the Port of Morgan City does not have a written plan for preparing for natural disaster threats but instead relies on port personnel to assess disaster risk and prepare appropriately. Following a disaster, the port authority relies on senior personnel to direct recovery efforts as needed. In the absence of uniform federal guidance for port disaster planning, some local governments have instituted local planning requirements. The differences in these local guidelines account for some of the variation in the content and thoroughness of port disaster plans. For example, the Miami-Dade County Emergency Management Office helps to coordinate disaster preparedness for all county agencies, including the Port of Miami. As such, the port submits its hurricane plans and continuity of operations plan to the office each year for review, which provides a certain level of quality assurance. By comparison, the Port of Los Angeles found local seismic building codes were insufficient to reach the desired level of preparedness, so the port developed its own seismic codes to guide infrastructure construction and repair. In contrast to the disjunctional planning for both natural disasters and security at ports, industry experts encourage the unified consideration of all risks faced by the port. Unified disaster preparedness planning requires that all of the threats faced by the port, both natural and man-made, be considered together. This is referred to as an all-hazards approach. Experts consider it to offer several advantages: Application of planning resources to both security and natural disaster preparedness. Because of the similarities between the effects of terrorist attacks and natural or accidental disasters, much of the planning, personnel, training, and equipment that form the basis of protection, response, and recovery capabilities are similar across all emergency events. As we have previously reported, the capabilities needed to respond to major disasters, whether the result of terrorist attack or nature, are similar in many ways. Unified risk management can enhance the efficiency of port planning efforts because of the similarity in recovery plans for both natural and security-related disasters. One expert noted that responding to a disaster would likely be the same for a security incident and a natural disaster incident from an operational standpoint. Efficient allocation of disaster-preparation resources. An all-hazards approach allows the port to estimate the relative impact of mitigation alternatives and identify the optimal mix of investments in these alternatives based on the costs and benefits of each. The exclusion of certain risks from consideration, or the separate consideration of a particular type of risk, gives rise to the possibility that risks will not be accurately assessed or compared, and that too many or too few resources will be allocated toward mitigation of a particular risk. Port risk management experts noted that, in the absence of an all-hazards risk management process, it is difficult to accurately assess and address the full spectrum of threats faced by a port. At the federal level, the Congress has introduced various elements of an all-hazards approach to risk management and assistance to ports. Examples are as follows: Single response approach to all types of emergency events. NIMS and NRP, which were implemented by DHS, provide a unified framework for responding to security and natural disaster events. NIMS is a policy document that defines roles and responsibilities of federal, state, and local first responders during all types of emergency events. The NRP is designed to integrate federal government domestic prevention, protection, response, and recovery plans into a single operational plan for all-hazards and all-emergency response disciplines. Using the framework provided by NIMS, the NRP describes operational procedures for federal support to emergency managers and organizes capabilities, staffing, and equipment resources in terms of functions that are most likely to be needed during emergency events. In addition, along with the NRP and NIMS, DHS has developed the National Preparedness Goal, as required by Homeland Security Presidential Directive 8. Considered as a group, these three documents are intended to guide investments in emergency preparedness and response capabilities for all hazards. An inability to effectively perform these critical tasks would, by definition, have a detrimental impact on effective protection, prevention, response, and recovery capabilities. Broadened focus for risk mitigation efforts. Security and Accountability for Every Port Act, passed in October 2006, contains language mandating that the Coast Guard institute Port Security Training and Exercise Programs to evaluate response capabilities of port facilities to respond to acts of terrorism, natural disasters, and other emergencies. Officials from the DHS Preparedness Directorate’s Grants and Training Office also noted that the criteria for the Port Security Grant Program is beginning to reflect the movement toward all-hazards planning in the future. DHS officials stated that the program may evolve to focus more on portwide risk management, rather than on risk mitigation for particular assets. Furthermore, grant applications that demonstrate mitigation of natural hazard risks in addition to security risks may be more competitive. Other officials noted that while the program may focus more on all hazards in the future, it will remain focused on security priorities for now. Another agency-level movement toward the all-hazards approach is occurring in the Coast Guard’s improvement of a computer tool it uses to compare security risks for targets throughout a port, including areas not under the jurisdiction of a local port authority. This tool, called the Maritime Security Risk Assessment Model (MSRAM), provides information for the U.S. Coast Guard COPT to use in deciding the most efficient allocation of resources to reduce security risks at a port. The Coast Guard is developing an all-hazards risk assessment and management system, partially fed by MSRAM, which will allow comparison of risks and risk- mitigation activities across all goals and hazards. The Coast Guard directs the Area Maritime Security Committee to use MSRAM in the development of the Area Maritime Security Plan. Given that the Coast Guard is enhancing the MSRAM with a tool that will incorporate natural hazards, the risks addressed in the Area Maritime Security Plan could likely include both natural and security threats in the future. An all-hazards approach is in many ways a logical maturation of port security planning, which saw an aggressive homeland security expansion in the wake of the terrorist attacks of September 11, 2001. One expert in seismic risk management we spoke with said port officials he contacted indicated that they were not focused on natural disaster risk because, in their view, the federal government wanted them to focus on security risks instead. At some ports, hurricanes or earthquakes may be a greater threat than terrorism, and a case can be made that overall risk to a port might be more effectively reduced through greater investment in mitigating these risks. While federal law provides guidance on addressing security risks through MTSA and its implementing regulations, it does not provide similar guidance pertaining to mitigation of natural disaster threats. Our previous work on risk management has examined the challenges involved in comparing risk across broader threat categories. A risk management framework that analyzes risks based on the likelihood that they will occur and the consequences of their occurrence is a useful tool for ensuring that program expenditures are prioritized and properly focused. In light of the competition for scarce resources available to deal with the threats ports face, a clear understanding of the relative significance of these threats is an important step. Two port authorities we reviewed have begun to take an all-hazards approach to disaster planning by developing planning documents and structures that address both security risks and natural disasters, and officials at both ports said this approach yielded benefits. At the Port of Houston, the Coast Guard used its authority to mandate the creation of port coordination teams by creating teams that include all port stakeholders and combine planning and response efforts for both security and natural disaster threats. This unified approach to risk management has allowed the port to respond efficiently to disasters when they occur, according to port officials. In particular, they said, the organization of the team changes to match the nature of the threat. For security threats, the teams are organized geographically and do not require that the entire port close down, thereby appropriately matching resources to the threat being faced. For natural disasters, the teams are organized functionally because of the more dispersed nature of the threat. Following the 2005 hurricane season, the Port of Mobile convened a task force to reorganize its disaster planning to address both security incidents and natural disasters. The task force, which recently completed its emergency operations plan, included the Port Authority Police Chief; Harbormaster; Environmental, Health and Safety Manager; and representatives of the port’s rail, cargo, intermodal and development divisions. A member of the county emergency management agency also served on the task force to provide expert guidance on emergency response planning. Port stakeholders in other ports that had not moved to an all-hazards approach also said preparedness and response practices for security incidents and natural disasters are sufficiently similar to merit combined planning. Officials in several ports said that although they are required to allocate certain resources to security risk mitigation, overall risk to the port would be more effectively reduced if they had the flexibility to allocate some of those resources to mitigating natural disaster risk. We have previously reported that, for homeland security planning, the AMSCs established under federal law have been an effective coordination tool. These committees have provided a structure to improve the timeliness, completeness, and usefulness of information sharing between federal and nonfederal stakeholders. Port stakeholders said that the committees were an improvement over previous information-sharing efforts because they established a formal structure for communicating information and new procedures for sharing information. Stakeholders stated that, among other things, the committees have been used as a forum for sharing assessments of vulnerabilities, providing information on illegal or suspicious activities, and providing input on Area Maritime Security Plans. Stakeholders, including private operators, said the information sharing had increased their awareness of security issues around the port and allowed them to identify and address security issues at their facilities. Likewise, Coast Guard officials said the information they received from nonfederal participants had helped in mitigating and reducing risks. In contrast to the regulatory requirements for the establishment of AMSCs, there are no nationwide federal mandates for all-hazards planning forums that involve a broad spectrum of stakeholders in disaster planning. In the absence of any consistent requirement or approach, we found substantial variation in the maturity of, and participation in, natural disaster planning forums at ports. As table 3 shows, the level of activity and the participants varied considerably. Some ports utilized their AMSC for both types of planning, while others conducted natural disaster planning efforts primarily within the local area’s broader emergency management forums, and still others conducted their planning piecemeal, with various entities meeting separately and not in one coordinated forum. The Port of Savannah provides an example of how separate planning for natural disasters and security can lead to a lack of coordination and information-sharing. While officials from the local emergency management agency said they reviewed and provided comments on the Georgia Port Authority’s most recent Hurricane Plan and Draft Emergency Operations Plan, this had not traditionally been the case over the past several years. According to a representative from the emergency management agency, if the port is not sharing its emergency operations plans, it makes it difficult for responders in the local area to understand what is happening within the port in terms of planning for natural disasters. Additionally, while the local EMA is enjoying an ongoing productive dialogue with port representatives in developing the Emergency Operations Plan and working on port safety and security issues, they are not having the same level of success with port representatives responsible for hurricane planning. Even so, officials said that they had seen marked improvement in the area of portwide cooperation and involvement among stakeholders. Port authorities’ lack of familiarity with FEMA’s programs is another example of the gaps that exist. We found that port authorities’ understanding of FEMA’s assistance was dependent on their relationship with the local or state emergency management office—a stakeholder that is not necessarily involved in the forums where the port’s natural disaster planning occurs. We discussed three FEMA programs with officials from our seven case study ports: the Public Assistance Program, Hazard Mitigation Grant Program and the Predisaster Mitigation Grant Program (see table 4 for brief descriptions). These programs provide ports with funds for disaster mitigation efforts before and after disaster events and assist ports in avoiding costly damages. Of the three programs, port authorities were most knowledgeable about, and most involved with, the Public Assistance Program, although even with this program, some port authorities reported encountering challenges with the process during the 2005 hurricane season. Their knowledge and participation in the two hazard mitigation grant programs was dependent on their involvement with the emergency planning office. FEMA officials told us that no ports have applied as an applicant or subapplicant for the Predisaster Mitigation Program, and only a few had received assistance through the Hazard Mitigation Grant Program since 1998. AAPA officials made the same point—that many ports are unaware, unsure how to navigate or do not understand the resources that are available to them for disasters. In its new best practices manual for natural disaster planning, AAPA included a section regarding various federal resources available, including FEMA. The 2005 hurricane season emphasized the need for ports to plan for other threats in addition to security. Since the terrorist attacks of September 11, 2001, the country has focused on enhancing its security measures, and ports in particular have been targeted due to their vulnerability and their criticality to the U.S. economy. While ports have long prepared to some degree for hurricanes and earthquakes, the hurricanes of 2005 highlighted key areas in which natural disaster planning was often inadequate. Even ports that were not directly impacted by the hurricanes recognized their own vulnerabilities and took additional actions. As ports continue to revise and improve their planning efforts, available evidence indicates that, if ports take a system-wide approach, thinking strategically about using resources to mitigate and recover from all forms of disaster, they will be able to achieve the most effective results. The federally established framework for ports’ homeland security planning appears to provide useful elements for establishing an all-hazards approach and adopting these elements appears to be a logical starting point for an all-hazards approach for port authorities. In particular, greater coordination between stakeholders appears important to ensure that available federal resources can be most effectively applied. A forum for sharing information and developing plans across a wide range of stakeholders, as occurs with a port’s AMSC, is critical for ensuring that local stakeholders can use federal resources effectively. This is especially the case for mitigation grants administered by the Federal Emergency Management Agency and the Maritime Administration’s communication of information regarding making ships and other maritime resources available for disaster recovery. To help ensure that ports achieve adequate planning for natural disasters and effectively manage risk to a variety of threats, we are recommending that the Secretary of the Department of Homeland Security encourage port stakeholders to use existing forums for discussing all-hazards planning efforts and include appropriate representatives from DHS, the port authority, representatives from the local emergency management office, the Maritime Administration, and vessel and facility owner/operators. To help ensure that ports have adequate understanding of maritime disaster recovery resources, we recommend that the Secretary of the Department of Transportation direct the Administrator of the Maritime Administration to develop a communication strategy to inform ports of the maritime resources available for recovery efforts. We provided a draft of this report to DHS, DOT, and DOD for their review and comment. In DHS’s letter, the department generally agreed existing forums provide a good opportunity to conduct outreach to and participation by stakeholders from various federal, state, and local agencies and, as appropriate, industry and nongovernmental organizations. However, the department said it did not endorse placing responsibility for disaster contingency planning on existing committees in ports and said these responsibilities should remain with state and local emergency management planners. Our recommendation was not to place responsibility for such planning within port committees, but rather to use these existing forums as a way to engage all relevant parties in discussing natural disaster planning for ports. The problem we found at various locations we visited was that all parties have not been involved in these efforts. In our view, these committees represent a ready way to accomplish this task. While we understand Coast Guard’s concern with diluting existing statutorily mandated port-related committees, we found during the course of our fieldwork that some ports were already using existing port committees effectively to plan for all hazards. Further, we believe that the unique nature of ports and their criticality to goods movement warrants that all ports be encouraged to have a specific forum for all-hazard planning. DHS’s letter is reprinted in appendix II. DHS officials provided technical comments and clarifications, which we incorporated as appropriate to ensure the accuracy of our report. In general, DOT agreed with the facts presented in the report. Department officials provided a number of comments and clarifications, which we incorporated as appropriate to ensure the accuracy of our report. The department generally concurred with GAO’s recommendation. Additionally, DOD generally agreed with the facts presented in the report. Department officials provided some technical comments and clarifications, which we incorporated as appropriate to ensure the accuracy of our report. We will send copies of this report to the interested congressional committees, the Secretary of Transportation, and other interested parties. We also will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff has any questions about this report, please contact me at (202) 512-6570 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. This report, initiated under the Comptroller General’s authority to examine government operations, examines (1) the challenges port authorities have experienced as a result of recent natural disasters, (2) the efforts under way to address challenges from these disasters, and (3) the manner in which port authorities prepare for disasters and the effect of this approach on their ability to share information with port stakeholders and access federal resources. To address these objectives, we focused much of our work on 17 U.S. ports. We focused primarily on commercial ports and various commercial aspects of these ports. The main criteria we used to select ports for study were as follows: Size of port, based on the value of imported cargo. To ensure a varied size of ports, we selected ports that were among the top 50 in size, but within these 50, we chose ports whose total cargo values were greater than and less than the average cargo value for all 50 top ports. Experience with recent natural disasters. We focused our efforts primarily—but not exclusively—on ports that had some degree of experience with a natural disaster since 1998. Based on Department of Homeland Security (DHS) guidance about the most significant disaster threats and potential hazards, we limited our focus to ports that have hurricane or seismic threats. In particular, we included a number of ports affected by the 2005 hurricane season—primarily hurricanes Katrina, Wilma, and Rita. In all, 10 of the 17 ports we selected were affected by hurricanes that year. Operational type. We chose ports that reflected a range of operating types, including those that (1) manage port operations and provide all services, (2) act as a landlord and lease operations and facilities to tenants, and (3) conduct limited operations in the port and lease facilities to others. Region of the United States. We selected ports from the East, Gulf, and West Coasts. There is an overrepresentation of Gulf region ports to ensure adequate coverage of hurricane affected ports. In making our selections, we used information from the Maritime Administration, including port demographics operational, legal type, and region from the Public Port Finance Survey Report and Maritime Administration waterborne statistics which report the top 50 ports in terms of total cargo value. We determined that what we found at those ports is not generalizable to all U.S. ports. We used disaster data from Federal Emergency Management Agency (FEMA) to assess how many natural disasters had affected the counties in which each port was located. Based on our review of data documentation, we determined that the data we used in applying our criteria for port selection were sufficiently reliable for our purposes. We took two approaches to reviewing these ports—site visits and telephone interviews. We conducted site visits at seven ports, as follows: Tacoma, Washington Houston, Texas Oakland, California Gulfport, Mississippi Mobile, Alabama Miami, Florida Savannah, Georgia During these visits, we gathered information from various maritime stakeholders, including officials from port authorities, emergency management agencies, the U.S. Coast Guard, the U.S. Army Corps of Engineers, and the Maritime Administration. Although we talked to four private operators, we excluded interviewing other private operators because their roles and responsibilities vary greatly from port to port and because their efforts for natural disasters, unlike their efforts for homeland security, are not subject to federal requirements or guidelines. We designed our case study interview questions to provide insight on (1) general governance and operations of the port, (2) impacts from recent natural disasters, (3) lessons learned from previous natural disasters, (4) risk management procedures, and (5) stakeholder collaboration. We conducted telephone interviews with officials at 10 ports, as follows: Freeport, Texas Jacksonville, Florida Los Angeles, California Morgan City, Louisiana New Orleans, Louisiana Pascagoula, Mississippi Port Arthur, Texas Richmond, Virginia San Diego, California Wilmington, North Carolina At these ports, we limited our telephone interviews to port authorities only. These semi-structured interviews addressed the same topics as the case study but focused more on damages and lessons learned as a result of recent natural disasters. For both sets of ports, we also reviewed numerous planning documents from port stakeholders including emergency preparedness plans, disaster recovery plans, hurricane operations, hurricane manuals, seismic guidelines, and business continuity plans. To assess the challenges port authorities experienced as a result of recent natural disasters, we used the interviews we conducted and the documents we obtained from officials at the 17 ports. To determine the efforts under way to address these challenges, we reviewed information from our interviews with and documents from American Association of Port Authorities (AAPA) officials and various federal agencies. In particular, we reviewed the Emergency Preparedness and Continuity of Operations Planning: Manual for Best Practices that was developed through several working groups coordinated by the AAPA. The working groups provided a forum for port officials across the United States and Canada to share their experience in planning for the impacts of recent natural disasters and to share their best practices. We conducted interviews with the Chair of the working groups and other AAPA officials to gather more information about the working group’s procedures and vetting process. Additionally, we interviewed various regional and headquarter officials of the Maritime Administration, U.S. Coast Guard (Coast Guard), Department of Transportation, U.S. Army Corps of Engineers, FEMA, and DHS. We reviewed the following federal risk management plans: The draft appendix for maritime resources for the Federal Support Plan. The appendix is part of a one-time joint planning document between the Department of Transportation and FEMA for the state of Louisiana (2006 Hurricane Season). The Maritime Administration, an agency within the Department of Transportation, developed this appendix to assist in future recovery efforts by identifying resources, protocols, and organizations for maritime resources. The Port Risk Management and Insurance Guidebook, developed by the Maritime Administration. This publication is a best practices guide for port risk management, including information on how ports obtain insurance coverage and facilitate emergency management. To determine how port authorities plan for natural disasters and the effects of that approach on information-sharing among port stakeholders and access to federal resources, we reviewed port and federal disaster planning documents collected from various port stakeholders at each of the seven ports we visited in person. In order to gain an understanding of best practices for such planning efforts, we interviewed academic, industry, and government experts. In particular, we interviewed risk management experts from the following organizations: Georgia Institute of Technology’s Port Seismic Risk Management Team conducted damage assessments at seven ports in south Louisiana in October 2005 immediately following Hurricane Katrina. ABS Consulting has worked with a variety of clients including the Coast Guard, Maritime Administration, and FEMA and thus helped develop several port risk management tools. The Office of Grants and Training at DHS administers both Port Security and Homeland Security Grants. The Coast Guard has expertise in utilizing the Maritime Security Risk Assessment Model (MSRAM) to assess security risk and has plans to incorporate natural disaster risks into the model. We also reviewed related laws and mandates that provide federal oversight to ports—namely the Maritime Transportation Security Act of 2002 and its implementing regulations and other applicable law. We also reviewed the Puget Sound area maritime security plan and attended an Area Maritime Security Committee meeting at the Port of Houston-Galveston. To determine steps that federal agencies were taking with regard to all- hazards risk management, we reviewed (1) the Security and Accountability for Every Port Act (SAFE Port Act), which addresses risk mitigation of transportation disruptions, including disruptions caused natural disasters and (2) policy documents including the National Response Plan and the National Incident Management System. We also reviewed a presentation on the Coast Guard’s MSRAM. Our work, which we conducted from December 2005 through February 2007, was conducted in accordance with generally accepted government auditing standards. In addition to the individual named above, Sally Moino, Assistant Director; Casey Hanewall; Lindsey Hemly; Christoph Hoashi-Erhardt; Bert Japikse; Erica Miles; Sara Ann Moessbauer; Jamilah Moon; Sharon Silas; Stan Stenerson; and Randall Williamson made key contributions to this report. | U.S ports are significant to the U.S. economy, handling more than 2 billion tons of domestic and import/export cargo annually. Since Sept. 11, 2001, much of the national focus on ports' preparedness has been on preventing potential acts of terror, the 2005 hurricane season renewed focus on how to protect ports from a diversity of threats, including natural disasters. This report was prepared under the authority of the Comptroller General to examine (1) challenges port authorities have experienced as a result of recent natural disasters, (2) efforts under way to address these challenges, and (3) the manner in which port authorities plan for natural disasters. GAO reviewed documents and interviewed various port stakeholders from 17 major U.S. ports. Ports, particularly those impacted by the 2005 hurricane season, experienced many different kinds of challenges during recent natural disasters. Of the 17 U.S. ports that GAO reviewed, port officials identified communications, personnel, and interagency coordination as their biggest challenges. Many port authorities have taken steps to address these challenges. Individually, ports have created redundancy in communications systems and other backup equipment and updated their emergency plans. Collectively, the American Association of Port Authorities developed a best practices manual focused on port planning and recovery efforts, as well as lessons learned from recent natural disasters. Even ports that have not experienced problems as a result of recent disasters, but are nonetheless susceptible to disaster threats, have responded to lessons learned by other ports. Additionally, federal maritime agencies, such as the U.S. Coast Guard, the Maritime Administration, and the U.S. Army Corps of Engineers have increased their coordination and communication with ports to strengthen ports' ability to recover from future natural disasters and to build stakeholders' knowledge about federal resources for port recovery efforts. Most port authorities GAO reviewed conduct planning for natural disasters separately from planning for homeland security threats. Unlike security efforts, natural disaster planning is not subject to the same type of specific federal requirements and, therefore, varies from port to port. As a result of this divided approach, GAO found a wide variance in ports' natural disaster planning efforts including: (1) the level of participation in disaster forums, and (2) the level of information sharing among port stakeholders In the absence of appropriate forums and information sharing opportunities among ports, some ports GAO contacted were limited in their understanding of federal resources available for predisaster mitigation and postdisaster recovery. Other ports have begun using existing forums, such as their federally mandated Area Maritime Security Committee, to coordinate disaster planning efforts. Port and industry experts, as well as recent federal actions, are now encouraging an all-hazards approach to disaster planning and recovery. That is, disaster preparedness planning requires that all of the threats faced by the port, both natural (such as hurricanes) and man-made (such as terror events), be considered together. The Department of Homeland Security, which through the Coast Guard oversees the Area Maritime Security Committees, provides an example of how to incorporate a wider scope of activity for ports across the country. Additionally, the Maritime Administration should develop a communication strategy to inform ports of the maritime resources available for recovery efforts. |
In January 2004, the President announced a new “Vision for Space Exploration” calling for human and robotic missions to the Moon, Mars, and beyond. Over the next two decades, NASA plans to spend over $100 billion to develop a number of new capabilities, supporting technologies, and facilities that are critical to enabling space exploration missions. Development of the critical capabilities and technologies will be largely dependent on NASA contractors, who constitute more than two-thirds of NASA’s workforce. According to NASA officials, 87 percent of NASA’s $16.6 billion budget for fiscal year 2006 was spent on work performed by its contractors. Since 1990, we have designated NASA’s contract management as a high- risk area. This is based primarily on NASA’s lack of a modern integrated financial management system that can provide reliable information on contract spending and performance as well as NASA’s lack of emphasis on end results, product performance, and cost control. For example, our most recent high-risk report stated that while NASA has taken actions to improve its contract management function, it continues to face considerable challenges in implementing its contracts effectively. NASA is organized under four mission directorates—Aeronautics Research, Exploration, Science, and Space Operations—each of which covers a major area of the agency’s research and development efforts. The agency is composed of NASA headquarters, 10 field centers, and the contractor-operated Jet Propulsion Laboratory. NASA and other federal agencies can choose among numerous contract types for acquiring goods and services that can differ in part according to the nature of the fee that agencies offer to the contractor for achieving or exceeding specified objectives or goals. According to the FAR, a CPAF contract is appropriate to use when it is difficult to measure key elements of performance. It is widely used to procure nonroutine services such as the development of new systems. Typically, award-fee contracts emphasize several aspects of contractor performance, such as schedule performance, technical performance, and cost control. Because development and administration of award-fee contracts involve substantially more effort over the life of a contract than other types of contracts, the FAR and NASA’s Award Fee Contracting Guide specify that the expected benefits of using an award-fee contract must exceed the additional administrative effort and cost involved. The theory behind CPAF contracts is that although the government assumes most of the cost risk, it retains control over most or all of the contractor’s potential profit as leverage. On CPAF contracts, the award fee is often the only source of potential fee for the contractor. According to the NASA FAR Supplement and NASA’s Award Fee Contracting Guide, these contracts can include a base fee of anywhere from 0 to 3 percent of the estimated value of a nonservice contract. However, NASA’s regulations and guide do not allow the use of a base fee on service contracts. Table 1 shows the percentage of award fee available on the contracts we examined. (See app. II for a description of these contracts.) NASA relies heavily on CPAF contracts. This contract type accounted for 48 percent of obligated contract dollars and 7.7 percent of contract actions from fiscal years 2002 through 2004. By comparison, between fiscal years 1999 and 2003, award-fee contracts accounted for 13 percent of the contract dollars and 3.4 percent of contract actions at the Department of Defense (DOD). A CPAF contract includes an estimate of the total cost of what is being contracted for, may include a fee with a possible base amount fixed at the inception of the contract, and includes an award amount that is intended to motivate excellence in contract performance. The award fee is paid based upon the government’s periodic judgmental evaluations of contractor performance. When developing evaluation plans, NASA’s award-fee guide indicates that evaluation plans may include outcomes, outputs, inputs, or a combination of these elements. NASA’s guide expresses a preference for outcome factors. It notes that while it is sometimes valuable to consider input and output factors when evaluating contractor performance, outcome factors are better indicators of success relative to the desired result. An outcome factor is an assessment of the results of an activity compared to its intended purpose. Outcome-based factors are the least administratively burdensome type of performance evaluation factor, and should provide the best indicator of overall success. Outcome- based factors should therefore be the first type of evaluation factor considered for use, and are often ideal for nonroutine efforts. An output factor is the tabulation, calculation, or recording of activity or effort and can be expressed in a quantitative or qualitative manner. Output factors may be more desirable for routine efforts, but are administratively more burdensome than outcome factors due to the tabulation, calculation, or recording requirements. When output factors are used, care should be taken to ensure that there is a logical connection between the reported measures and the program’s mission, goals, and objectives. Input factors refer to intermediate processes, procedures, actions, or techniques that are key elements influencing successful contract performance. These may include testing and other engineering processes and techniques; quality assurance and maintenance procedures; subcontracting plans; purchasing department management; and inventory, work assignment, and budgetary controls. For CPAF contracts, NASA personnel conduct periodic, typically semiannual evaluations of contractor’s performance against the criteria specified in a performance evaluation plan. During the course of the evaluation period, performance monitors track contractor performance, and once the period is over they assess the performance and report to the performance evaluation board (PEB). The PEB considers the reports as well as any other pertinent information and prepares a report for the fee determination official (FDO) with findings and recommendations. The contractor is given an opportunity to provide a self-assessment of its performance during the evaluation period, which is often a written report. The FDO may meet with the PEB to discuss the report, after which a final determination is made in writing as to the amount of fee to be paid. The FDO provides the determination to the contracting officer and a copy of the related document to the contractor. When discussing award-fee contracts, it is important to acknowledge the acquisition environment in which they are used. Award fees are intended to motivate excellent contractor performance, which should result in excellent program outcomes. However, award fees should not be used to make up for factors internal or external to the acquisition environment that hinder the success of acquisition outcomes. These factors may include inadequate resources and financial management systems, lack of knowledge prior to starting the acquisition, or unsound acquisition practices. We have reported that in some cases, NASA’s failure to define requirements adequately and develop realistic cost estimates resulted in projects costing more, taking longer, and achieving less than originally planned. The persistence of these problems in NASA contract management is not only indicative of undisciplined processes or practices such as these, but may also reflect the fact that the design, development, and production of major space systems are extremely complex technical processes that must operate within complex budget and political processes. Even properly run programs can experience problems that may arise from unknowns, such as technical obstacles and changes in circumstances. Only a few things need to go wrong to cause major problems, and many things must go right for a program to be successful. The NASA FAR Supplement and NASA’s Award Fee Contracting Guide address many of the issues and problems identified by NASA on the use of award-fee contracts and provide criteria for appropriately using such contracts. Much of the guidance on award-fee contracting was issued in response to weaknesses in CPAF contracting practices identified by NASA internal reviews and NASA’s Office of Inspector General in the early 1990s. Those weaknesses included the awarding of excessive fees with limited emphasis on acquisition outcomes (end results, product performance, and cost control); rollover of unearned fee; use of base fee; and the failure to use both positive and negative incentives. NASA updated its award-fee guide in 1994, 1997, and 2001 to explain and elaborate on its award-fee policy. The 2001 revision also reflects the FAR’s additional emphasis on using performance-based contracts. NASA’s award-fee guide emphasizes tying fees to outcome factors. The guide states that outcome-based factors are the least administratively burdensome type of evaluation factor and should provide the best indicator of overall success. The award-fee guide warns against micromanaging performance and diluting the emphasis of criteria by spreading the potential award fee over a large number of performance evaluation factors. Instead, the guide recommends selecting broad performance evaluation factors, such as technical factors, project management, and cost control supplemented by a limited number of subfactors under these factors. Cost control is required to be a key performance evaluation factor in award-fee performance evaluation plans, largely because of past performance issues in which contractors were paid millions of dollars in fees on contracts that were experiencing hundreds of millions of dollars in cost overruns. The NASA FAR Supplement states that cost control shall be no less than 25 percent of the total weighted evaluation factors when explicit evaluation factor weightings are used. The NASA FAR Supplement states that emphasis on cost control should be balanced against other performance requirement objectives, and the contractor should not be incentivized to pursue cost control to the point that overall performance is significantly degraded. NASA’s regulations prohibit rolling over unearned fee to subsequent evaluation periods for service contracts. For such contracts, each interim evaluation and the last evaluation are final. Another key element of the current award-fee regulations is an increased emphasis on overall contractor performance and the end product, rather than on incremental progress. NASA requires conducting interim evaluations on end item contracts until final product delivery to monitor performance prior to contract completion and establish the basis for making interim payments. At the end of the contract, a final evaluation is conducted and the contractor’s total performance is evaluated against the award-fee plan to determine total earned award fee. For example, the contractor may be evaluated and paid an interim fee once every 6 months until the product is delivered. During the final evaluation, the contractor’s performance is evaluated to determine total earned award fee. The final evaluation may result in the contractor retaining the fee previously awarded or receiving additional or less fee than previously awarded and thus refunding a portion of the fee to the government. The final evaluation provides NASA the opportunity to make an award-fee decision based on actual quality, total cost, and ability to meet the contract schedule at the point the final product is delivered. Further, under the award-fee policy in effect prior to the 1994 and subsequent revisions to the guidance, base fee was allowed on all CPAF contracts. NASA’s current regulations prohibit the use of base fee on service contracts and restrict the use of base fee on end item contracts, such as for hardware. When base fee is used, it is not to exceed 3 percent of estimated contract costs and it should only be paid if the final award-fee evaluation is satisfactory or better. We note that base fee, which was paid on two of the three end item contracts we reviewed, did not exceed 3 percent, and none of the seven service contracts included base fee. Another issue addressed by NASA’s regulations is the use of both positive and negative performance incentives in its CPAF contracts. The NASA FAR Supplement provides that award-fee contracts with primary deliverables of hardware and with a total estimated cost and fee of greater than $25 million require both kinds of incentives based on measurements of hardware performance against objective criteria. Performance incentives are separate and distinct from award fee and measure contractor performance up to delivery and acceptance. Performance incentives are designed to reward contractors when performance of delivered hardware is above minimum contract requirements. For example, if the government establishes a specified level of objective performance for a product that the contractor exceeds, the contractor can be paid a performance incentive in addition to the award fee already paid. If the contractor just meets this measure, it cannot receive an additional performance incentive and keeps the award fee already paid. If the contractor fails to meet the measure, however, it must pay a negative performance incentive fee that reduces or eliminates the entire award fee. To address inconsistencies among NASA centers in how they evaluate contractor performance, the current award-fee regulations also provide a uniform rating system to be used for all NASA award-fee contracts. It includes adjectival ratings as well as a numerical scoring system of 0-100. Scores of 61-70 percent are considered satisfactory, and the regulations specify that contractors receiving a rating of less than 61 percent will not receive any fee. A contractor is not to be paid any base fee or award fee for less than satisfactory overall performance. NASA’s award-fee guide encourages the use of performance-based contracts for the procurement of services and supplies. The guide states that constructing performance-based contracts that clearly define performance requirements, include easily understood performance standards, and have an objective incentive mechanism will result in contractors having a clearer understanding of the government’s expectations and will ultimately facilitate enhanced contractor performance. Finally, because of the cost and administrative burden associated with administering award-fee contracts, the FAR and NASA’s award-fee guide specify consideration of the costs and benefits of using a CPAF contract before committing to this contract type. Through an evaluation of the administrative costs versus the expected benefits, the contracting officer should be able to assess whether the benefits the government gains through a CPAF contract will outweigh the additional costs of overseeing and administering the contract. The award-fee guide provides an example of how to calculate the administrative cost and states that benefits could be measured in dollars saved through cost control or enhanced technical capability. Although the revisions in NASA’s regulations and guidance on award-fee contracts address many weaknesses previously identified, the contracts that we reviewed did not always demonstrate use of award fees by the centers in the way that NASA prefers as outlined in its guidance. Some performance evaluation plans or reports included input evaluation factors, which are not the best indicators of success relative to the desired result, although they are allowed by the guidance. Other contracts included numerous subcategories for evaluating the contractor that can lessen the importance of any particular subcategory and reduce the leverage of the award fee on any particular criterion. Also, although the FAR and NASA’s award-fee guide calls for a consideration of the costs and benefits of using cost-plus-award-fee contracts because of the cost and administrative burden involved, we found no examples of a documented analysis of costs and benefits. Finally, NASA officials expressed satisfaction with the results of the contracts based on their evaluations of contractor performance against criteria established in the award-fee plan. Those evaluations would indicate generally good performance. However, that performance did not always translate into desired program outcomes. NASA paid a majority of the available award fee on all of the contracts we reviewed, including those end item contracts that did not deliver a capability within initial cost, schedule, and performance parameters. That disconnect raises questions as to the extent NASA is achieving the effectiveness it sought through the establishment of guidance on the use of award fees. Further, NASA has not evaluated the overall effectiveness of award fees in promoting program outcomes and does not have metrics in place for measuring their effectiveness in achieving program outcomes. Some performance evaluation subfactors included in performance evaluation plans or reports were not outcome oriented. NASA’s award-fee guide states that while it is sometimes valuable to consider input and output factors when evaluating contractor performance, it is NASA’s preference when feasible to tie fees to evaluation factors that are based on outcomes because outcome-based factors provide the best indicator of overall success. The award-fee guide recommends selecting broad performance evaluation factors, such as technical factors, project management, and cost control, and cautions that factors related to intermediate processes, procedures, and actions may cause the contractor to divert its attention from the overall desired outcome. The guide states that those types of factors, while allowed, are not always true indicators of the contractor’s performance and should be relied on with caution. Further, with service contracts, input factors may be of little or no value as a basis for evaluation. While the contracts we reviewed generally used outcome factors as part of the evaluation of performance, some supporting subfactors that formed the basis of the ratings for performance measured compliance with process or input factors that may not provide the best indicators of success relative to the desired results. For example, a part of the award fee on the Mechanical System Engineering Services (MSES) contract was to be awarded for program and business management performance. There were five subfactors under this primary performance factor. Two of these subfactors, program planning and organizational management and business management were input subfactors. These two input subfactors measure contractor processes or inputs, but do not focus on final results. Subfactors in the Landsat-7 contract included input subfactors such as responsiveness of the contractor’s corporate management, quality and effectiveness of the contractor’s scheduling system, and prudent utilization of manpower and timely removal of manpower upon completion of tasks. The NASA award-fee guide cautions that spreading the potential award fee over a large number of performance evaluation factors dilutes emphasis on any particular performance evaluation criterion, increases the prospect of any one item being too small and thus overlooked, and increases the administrative burden. It encourages broad performance evaluation factors such as technical factors, project management, and cost control, which should be supplemented by only a limited number of subfactors describing significant evaluation elements over which the contractor has effective management control. Our analysis showed that a large number of subfactors were used to evaluate contractor performance for some contracts. For example, the Jet Propulsion Laboratory (JPL) contract, which includes both service and product deliverables defined in task orders under the contract, uses three primary performance evaluation factors for measuring contractor performance—programmatic, scientific, and engineering; institutional management; and support to outreach initiative programs. Although the JPL performance evaluation plan characterizes award-fee subfactors as representing major areas of emphasis during the performance period, the award-fee subfactors used to support the broad performance evaluation factors were numerous—96 subfactors were used to evaluate the contractor’s performance in fiscal year 2004, and 108 subfactors were used in fiscal year 2005. The Engineering and Technical Support for Life Sciences contract used three broad performance evaluation factors also—technical performance, schedule performance and contract management, and cost control—but evaluated the contractor on numerous supporting subfactors identified as tasks or subtasks in the contractor performance evaluation reports. For example, on one task order under this contract, performance evaluation reports for various evaluation periods showed as many as 50 different subtasks used to evaluate the contractor’s performance for the primary evaluation criteria: (1) technical performance and (2) schedule performance and contract management. The Landsat-7 contract also included a number of subfactors. Contractor performance under this contract was evaluated in several different areas each time the performance evaluation board met. Technical performance and program management were grouped together in one primary performance evaluation factor, and business management and cost performance were grouped together in the other primary performance evaluation factor. There were 9 subfactors under technical performance and 12 subfactors under program management, including quality and effectiveness of the contractor’s scheduling system. Under business management and cost performance, 17 evaluation subfactors and elements were to be considered, including compliance with general contract provisions and clauses and weekly scheduling of teleconferences to determine schedule status. In addition to the number of subfactors that fell under the two primary performance evaluation factors, there were nine additional evaluation criteria, including resourcefulness, communication, and responsiveness. Although the FAR and NASA’s award-fee guide require consideration of the costs and benefits of using a CPAF contract before committing to this contract type to determine whether the benefits outweigh the additional cost and administrative burden of managing the contract, we found no instances where a documented cost-benefit analysis had been done for any of the contracts under our review. According to the guidance, since award- fee contracts require additional administrative effort, they should be used only when the contract values, performance period, and expected benefits are sufficient to warrant that additional management effort. Careful selection of the most appropriate contract type and careful tailoring should prevent a situation in which the burden of administering the award fee is out of proportion to the improvements expected in the quality of the contractor’s performance and in overall management. In addition, CPAF contracts can be particularly costly and burdensome for NASA to administer because of contract reporting and review requirements. Major cost drivers include the number of award-fee periods, performance monitors, and performance evaluation board members necessary for implementing the award-fee process. For example, according to NASA’s Award Fee Contracting Guide’s conservative estimate, it would cost about $387,000 to administer the award-fee process over the life of a 5-year contract. The guide notes that the estimate does not represent all associated administrative cost that might arise. Although NASA procurement officials acknowledged that formal cost-benefit analyses were not prepared, some officials referred to determination and findings statements or acquisition strategy meeting documents associated with specific contracts as providing some evidence of consideration given to whether or not CPAF contracts should be used. While NASA officials expressed satisfaction with the results of the contracts, in some cases there appeared to be a disconnect between the fee paid and program results. NASA paid most of the available fee on all of the contracts we reviewed—including on projects that showed cost increases, schedule delays, and technical problems. The total estimated value of the 10 contracts we reviewed was more than $31 billion. NASA paid between 80 and 99 percent of the maximum award fee possible on these contracts. The average was 90 percent, which equated to almost a billion dollars in total award fees paid under the 10 contracts. Table 2 shows the percentage of award fee paid for each of the 10 contracts we reviewed. NASA officials expressed satisfaction with contract results, which was further evidenced by its evaluations of contractor performance against criteria established in the award-fee plan. While NASA’s evaluations would indicate generally good performance, such performance did not always translate into desired program outcomes. That disconnect raises questions as to the extent NASA is achieving the effectiveness it sought through the establishment of guidance on the use of award-fees. On the end item contracts we reviewed, although there were some periods in which NASA paid a lesser percentage of the available fee, NASA ultimately paid more than 90 percent of the available fee based on its evaluation of contractor performance against criteria in the award-fee plan even when those contracts did not deliver capability within initial cost, schedule, and performance parameters. For example: The prime contractor for the International Space Station (ISS) has received 92 percent of the total award fee available—$425.3 million— although the cost increased by 131 percent, from $5.6 billion to $13 billion, in part due to increased contract scope and delays caused by the Columbia accident, but also contractor cost overruns. In addition, the contractor estimates that it will incur an additional $76 million in overruns by the time the contract is completed. Further, the completion date for space station assembly under the prime contract was delayed by 8 years. In some cases these delays were caused by actions not within the control of the contractor, such as problems with the shuttle program and actions by the international partners. The contractor for the Earth Observing System Data and Information System (EOSDIS) Core System (ECS) was paid 97 percent of the available award fee—$103.2 million—despite a delay in the completion of the contract by more than 2 years and an increase in the cost of the contract from $766 million to $1.2 billion. Technical problems, schedule delays, and cost control problems led to a major restructuring of the contract. The Landsat-7 contractor was paid 99 percent of the available award fee or more than $17 million. The original contract was managed by the Air Force but was subsequently transferred to NASA and rebaselined. The cost of the contract when transferred to NASA and rebaselined was $342.7 million. The Landsat-7 launch was delayed by 9 months and although the original scope of the work under the contract was significantly reduced, the cost of the contract increased. By the time the contract was complete, costs had risen 20 percent to $409.6 million. While some NASA officials pointed out that problems encountered on these contracts were at times outside the control of the contractor, difficulties such as these with achieving program results have resulted in NASA contract management being considered a high-risk area by GAO. We did not review these contracts to determine responsibility for undesirable results and therefore make no conclusion as to whether the fee paid was appropriate on each particular contract. However, the high fees paid on contracts where programs experienced disappointing results raise questions as to the effectiveness of award fees as a tool for obtaining desired program outcomes. For the service contracts we reviewed, NASA officials reported that they were satisfied with the results and quality of services provided. While we could not assess these contracts against cost, schedule, and performance outcomes as we could with the end item contracts, we did assess the award-fee criteria used in these contracts against NASA guidance. Here we found instances of process and input-oriented subfactors and the inclusion of numerous subfactors in evaluating performance. Further, we found no evidence that a cost-benefit analysis had been performed prior to choosing the contract type. Taken together, this is not the preferred approach according to NASA guidance, which raises questions as to the degree to which performance outcomes—getting the quality of service desired—was actually the basis for judging contractor performance and awarding fee. NASA views CPAF contracts as a viable and often preferred mechanism for acquiring the types of goods and services that the agency procures. NASA’s satisfaction with the results of these contracts is evidenced by the level of fee paid on all of the contracts we reviewed and is based on NASA’s evaluation of compliance with criteria contained in its award-fee plans. However, the agency has not evaluated the overall effectiveness of award fees in promoting desired outcomes. As noted, NASA developed its new policies on award-fee contracts because the agency and its Office of Inspector General found that it was paying excessive fees with limited emphasis on acquisition outcomes. However, according to NASA officials, the agency has not completed any assessments of the effectiveness of award fees since the award-fee policy was restructured in the 1990s, nor has it developed metrics or performance measures to conduct such evaluations. Further, NASA lacks an agencywide system with the capability of compiling and aggregating award-fee information and for identifying trends and outcomes. According to NASA officials, even NASA’s modern Integrated Enterprise Management Program (IEMP) will not provide this capability. Thus, NASA cannot meaningfully judge how well award fees are improving or can improve contractor performance and program outcomes. NASA could better link its award fees to desired results by making greater use of outcome factors, its preferred criteria for evaluating award fee contracts. While NASA has established policies and guidance that provide an appropriate framework for their use, the agency has not always used award fees as preferred by its guidance. To the extent that NASA uses input evaluation factors and numerous subfactors for evaluating performance, NASA may be diluting the leverage of award fees in achieving desired results. Our review raises questions as to the extent NASA is achieving the effectiveness it sought through the establishment of guidance on the use of award fees. However, NASA has not evaluated the overall effectiveness of its implementation of award fees. We are making the following three recommendations to increase the likelihood that the award fees NASA pays incentivize high performance from its suppliers. We recommend that the NASA Administrator reemphasize to the NASA centers the importance of tying award-fee criteria to desired outcomes and limiting the number of subfactors used in evaluations. To ensure that cost-plus-award-fee contracts are used only when their benefits outweigh the costs, we recommend that the NASA Administrator direct the centers to consider costs and benefits in choosing this contract type by requiring documentation explaining how the perceived benefits will offset the additional cost associated with its administration as required by the FAR. Finally, we recommend that the NASA Administrator require the development of metrics for measuring the effectiveness of award fees, establish a system for collecting data on the use of award-fee contracts, and regularly examine the effectiveness of award fees in achieving desired acquisition outcomes. In commenting on a draft of this report, NASA concurred with our recommendations and indicated that it would reemphasize its current guidance as recommended, address the issues raised by the report in training, and cover those issues in its internal reviews of procurement operations at the individual Space Centers. In terms of our recommendation to develop metrics for measuring the effectiveness of award fees and establish a system for collecting data on the use of award- fee contracts, NASA concurred and indicated it would explore the best way to develop and use metrics for evaluating the effectiveness of award fees and set up a system for collecting data on award-fee contracts. NASA said it planned to contact the Department of Defense to obtain information on its process, since DOD is also developing such a data collection system and metrics for measuring the effectiveness of award fees. NASA also provided technical comments on the draft, which have been incorporated as appropriate. As agreed with your office, unless you announce its contents earlier, we will not distribute this report further until 30 days from its date. At that time, we will send copies to interested congressional committees and the NASA Administrator. We will also make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions concerning this report, please contact me at (202) 512-4841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Key contributors to this report are acknowledged in appendix IV. Our objectives were to determine (1) the extent the National Aeronautics and Space Administration’s (NASA) guidance addresses the problems previously identified with the use of award-fee contracts and (2) whether NASA follows its guidance in using award fees to achieve desired outcomes. We selected 10 NASA cost-plus-award-fee (CPAF) contracts to review. Our selection was based on contract data from the Federal Procurement Data System. We extracted information on all NASA contracts active between fiscal years 2002 and 2004 that were coded as CPAF. To ensure the validity of the database from which we drew our contracts, we confirmed the contract type of each of the 10 contracts we selected through NASA contracting officers and contract documentation. The contracts we selected were the top 10 dollar value contracts active from fiscal years 2002 through 2004. These contracts account for about $7.6 billion, or 44 percent, of obligated cost-plus-award-fee-dollars for the 3-year period. To determine the extent NASA’s guidance addresses the problems previously identified with the use of award-fee contracts and whether NASA follows its guidance in using award fees to achieve desired outcomes, we interviewed responsible program and procurement officials at NASA headquarters and six NASA centers. We also reviewed the Federal Acquisition Regulation (FAR), the NASA FAR Supplement, and NASA’s Award Fee Contracting Guide. We conducted a literature review and examined previous reports, studies, and analyses done by GAO, NASA, the NASA Inspector General, or others that included information related to NASA’s use of award fees and other relevant issues. Additionally, we reviewed contract files, obtained information from program and contracting officials through the use of a structured questionnaire, and discussed the application of award-fee criteria with NASA officials involved in the award-fee process. The contract documents we reviewed contained information related to the development and implementation of the award fee. This information included the basic contract and statement of work, acquisition planning documents, award- fee modifications, performance evaluation plan documentation describing fee criteria for specific evaluation periods, contractor self-assessments, performance evaluation board reports, and fee determination documents. We used this information to corroborate and supplement the information provided by NASA officials in response to structured questionnaires we prepared and interviews we conducted. We e-mailed the questionnaires and received written responses for all 10 of the contracts. We conducted structured interviews with contracting and program officials concerning the development, implementation, and effectiveness of the award-fee structure for some of the contracts. To accomplish our work, we visited NASA headquarters in Washington, D.C. We also visited and held teleconferences with Goddard Space Flight Center in Greenbelt, Maryland, responsible for managing 3 of the contracts we reviewed; Johnson Space Center in Houston, Texas, responsible for managing 3 of the contracts; and Marshall Space Flight Center in Huntsville, Alabama, responsible for managing 1 of the contracts. We held teleconferences with officials at the Jet Propulsion Laboratory in Pasadena, California; Kennedy Space Center in Cape Canaveral, Florida; and Ames Research Center in Moffett Field, California, responsible for managing 1 contract each under our review. Our work was conducted from August 2005 through October 2006 in accordance with generally accepted government auditing standards. NAS5-60000 was an end item hardware cost-plus-award-fee contract between NASA and Hughes Applied Information Systems Incorporation. Raytheon Information Systems Company acquired Hughes in December 1999 and became the prime contractor. The contract, currently closed, was managed by Goddard Space Flight Center. The 10-year research and development contract was awarded in March 1993 for the development and operation of the Earth Observing System Data and Information System Core System. The period of performance on the contract actually ended in April 2005, and the contract has since been closed. According to Goddard Space Flight Center procurement officials, the desired program outcome or objective of the contract was to develop a technically capable system to process data from NASA’s satellites at a reasonable cost. Procurement officials stated that the Earth Observing System Data and Information System Core System, a state-of-the-art data-processing system, is currently dedicated to the processing and dissemination of NASA Earth Science satellite data. NAS15-10000 is an end item hardware cost-plus-award-fee contract between NASA and the Boeing Company. The contract, currently active, is managed by the Johnson Space Center. A letter contract was awarded in November 1993 and was definitized in January 1995 as a cost-plus- incentive-fee award-fee contract. In October 1999, during a restructuring of the contract, the cost-plus-incentive-fee award-fee contract was converted to a cost-plus-award-fee contract. The contract was extended in December 2003, partially because of the Columbia accident. This planned 10-year contract is for the design, development, manufacture, and on-orbit assembly of the U.S. on-orbit segment of the International Space Station. The contract also included provisions for a level of effort that included (1) sustaining engineering, (2) multi-element integrated testing, (3) logistics and maintenance–post production support, (4) technical definition of contract changes, and (5) other engineering support. According to Johnson Space Center procurement officials, the desired program outcomes or objectives of this contract are (1) completion of the U. S. on- orbit segment, delivery, and on-orbit acceptance of the space station; (2) sustaining engineering of the U.S. on-orbit segment hardware and software and common hardware and software provided to international partners/participants and payloads; (3) post-production support of the U.S. on-orbit segment hardware and common hardware provided to the international partners/participants; and (4) space station end-to-end subsystems management for the majority of the subsystems and specialty engineering disciplines. NAS5-32633 was an end item hardware cost-plus-award-fee contract between NASA and Lockheed Martin Missiles and Space. The contract, currently closed, was managed by Goddard Space Flight Center. The research and development contract was initially awarded by the Air Force in October 1992 and transferred to NASA in May 1994. The contract was for the design, development, fabrication, integration, test, and pre- and post-launch support of the Landsat-7 spacecraft. Landsat-7 was launched in April 1999; the contract was completed in 2005. The purpose of the Landsat-7 satellite is to obtain continuous remotely sensed, high-resolution imagery of the earth’s surface for environmental monitoring, disaster assessment, land use and regional planning, cartography, range management, and oil and mineral exploration. According to Goddard Space Flight Center procurement officials, the desired program outcome or objective of the contract was to develop an operational satellite that met the science requirements of users and the laws requiring the data be obtained at a reasonable cost. NAS8-60000 was a cost-plus-award-fee service contract between NASA and Computer Sciences Corporation. The contract, managed by the Marshall Space Flight Center, was in the process of being closed as of June 2006. It was awarded in May 1994, and covered a 2-year period of performance, but included options to extend the period of performance for an additional 6 years—through April 30, 2002. The contract was extended three times, with the period of performance ending on March 30, 2004. The primary purpose of the contract was to provide services in the area of program information system mission services. The contractor’s responsibilities were to manage, be responsible for, and provide information services to meet requirements of the Information Systems Services Office and its customers. According to Marshall Space Flight Center procurement officials, the desired program outcome or objective of the contract was to provide services including operating and maintaining existing equipment and software; gathering, analyzing, defining, and documenting systems requirements; and planning, designing, developing, acquiring, integrating, testing, and implementing new systems or enhancements to existing systems. NAS2-14263 was a cost-plus-award-fee service contract between NASA and Lockheed Martin Engineering and Science Company, defined under task orders. The contract, managed by Ames Research Center, was in the process of being closed as of June 2006. Its period of performance ended in September 2003. The 5-year research and development contract was awarded in May 1995 for the provision of engineering and technical support services for Ames Research Center life sciences. The work to be performed included engineering and technical support for life sciences projects, including space shuttle life sciences payloads, other life science payloads, the Space Station Biological Research Project, ground-based life sciences research, and advanced life support technology development. According to Ames Research Center procurement officials, the desired program outcome or objective of the contract was to achieve support for space life science projects, life sciences research, and related technology. NAS9-19100 was a cost-plus-award-fee service contract between NASA and Lockheed Martin with indefinite delivery, indefinite quantity task orders; performance-based; and level-of-effort provisions. Following the merger of Lockheed and Martin in 1995, NASA consolidated two existing contracts to form NAS9-19100 with an effective date of October 1, 1996. The contract, managed by Johnson Space Center, was in the process of being closed as of June 2006. The period of performance ended in January 2005. The contract included requirements related to hardware, government- furnished crew equipment, facilities, laboratory maintenance, life sciences, flight hardware, and support for the science and engineering requirements of the Space Shuttle Program and the International Space Station Program. According to Johnson Space Center procurement officials, the desired program outcomes or objectives of the contract were to provide engineering and science support to all engineering directorates at Johnson Space Center as well as support both the science and engineering requirements of the shuttle and space station programs. NAS9-98100 was a cost-plus-award-fee service contract between NASA and Lockheed Martin Space Operations Company, with task orders and level- of-effort provisions. The contract, which was in the process of being closed as of June 2006, was managed by the Johnson Space Center. It was awarded on September 25, 1998, with a basic 5-year period of performance and an option for an additional 5-year period. NASA chose not to exercise the option for the second 5-year period of performance. The contract required (1) developing an integrated operations approach to spacecraft design, operations, and data processing that minimized cost and the support infrastructure required to conduct space operations; (2) obtaining a highly capable and accountable contractor that would be responsible for providing space operations mission and data services; and (3) providing a contract and management structure that would enable outsourcing, commercialization, or privatization of some or all service under the contract. According to Johnson Space Center procurement officials, the desired program outcomes or objectives of the contract were to (1) provide excellent quality and reliable mission and data services at a significantly reduced cost; (2) move end-to-end mission and service responsibility and accountability to industry; (3) implement an integrated architecture that reduces overlap, eliminates unnecessary duplication, and reduces life cycle costs; (4) define streamlined processes that minimize intermediaries required to define requirements and deliver services; and (5) adopt private sector commercial practices and services. NAS10-99001 is a cost-plus-award-fee service contract between NASA and Space Gateway Support. The contract, currently active, is managed by Kennedy Space Center. The contract was awarded on October 1, 1998, for a basic 5-year period of performance and included an option for an additional 5 years. NASA exercised that option on October 1, 2003. The purpose was to provide for base operations support at NASA’s Kennedy Space Center and the Air Force’s Cape Canaveral Air Force Station, as well as specific requirements at Patrick Air Force Base and Florida Annexes into one consolidated contract. In addition to NASA and the Air Force, other primary customers include the Navy, Department of Interior, Spaceport Florida, and commercial customers such as Boeing, Lockheed Martin, Orbital Science, and Astrotech. According to Kennedy Space Center procurement officials, the desired program outcomes or objectives of the contract are to (1) enhance safety for the public and on-site workforce; (2) provide protection of human, national, and environmental resources; (3) provide high-quality and responsive service to customers; (4) reduce the cost of doing business for NASA and the Air Force; (5) provide flexibility to respond to new requirements and unplanned events; (6) improve supportability and reliability through innovative methodologies and concepts; (7) provide common support practices and systems; and (8) increase small business subcontracting goals. NAS5-01090 is a cost-plus-award-fee service contract between NASA and Swales and Associates, with a line item for indefinite delivery, indefinite quantity task orders. The contract, currently active, is managed by Goddard Space Flight Center. NAS5-01090 was awarded in January 2001 with a period of performance of 5 years and 30 days. According to Goddard Space Flight Center procurement officials, the period of performance was extended and was currently scheduled to end on August 15, 2006. The purpose of the contract is to provide engineering services for the study, design, development, fabrication, integration, testing, verification, and operations of space flight and ground system hardware and software, including development and validation of new technologies to enable future science missions. According to Goddard Space Flight Center procurement officials, the desired program outcomes or objectives of the contract were to obtain high-quality performance, desired results, and output. NAS7-03001 is a cost-plus-award-fee contract between NASA and the California Institute of Technology, a private nonprofit educational institution, which establishes the relationship for the operation of the Jet Propulsion Laboratory (JPL) federally funded research and development center. The contract, currently active, is a 5-year research and development contract awarded in November 2002 for the operation and management of JPL. The contract allows for extension or decrease to the initial period of performance in 3- or 9-month increments. JPL is a NASA- owned facility as well as an operating division of Caltech. Caltech has operated JPL as a federally funded research and development center since 1959 to meet certain government research and development needs, which, according to the contract, could not be met as effectively by existing government resources or normal contractor relationships. The contract includes both service and product deliverables, which are defined in task orders issued under the contract. The contract encompasses a large number of discrete programs and projects—approximately 500 active task orders. According to NASA procurement officials, the desired program outcomes or objectives of the contract are specific performance requirements defined in task orders issued under the contract. The contract encompasses support of exploration of the solar system, including earth-based investigations, investigations and studies to support NASA missions in the fields of earth science and astrophysics and astrobiology, as well as development of supporting fundamental technologies. In addition to the individual named above, Thomas Denomme, Assistant Director; James Beard; Shirley Johnson; Julia Kennon; Heather Barker Miller; Kenneth Patton; Sylvia Schatz; and Robert Swierczek made key contributions to this report. | Cost-plus-award-fee contracts accounted for almost half of the National Aeronautic and Space Administration's (NASA) obligated contract dollars for fiscal years 2002-2004. Since 1990, we have identified NASA's contract management as a high-risk area--in part because of a lack of emphasis on end results. Congress asked us to examine (1) the extent NASA's guidance on award fees addresses problems previously identified with the use of award-fee contracts and (2) whether NASA follows its guidance in using award fees to achieve desired outcomes. We reviewed the top 10 dollar value award-fee contracts active from fiscal years 2002 through 2004. NASA guidance on the use of cost-plus-award-fee (CPAF) contracts provides criteria to improve the effectiveness of award fees. For example, the guidance emphasizes outcome factors that are good indicators of success in achieving desired results, cautions against using numerous evaluation factors, prohibits rollover of unearned fee, and encourages evaluating the costs and benefits of such contracts before using this contract type. However, NASA does notalways follow the preferred approach laid out in its guidance. For example, some evaluation criteria contained input or process factors, such as program planning and organizational management. Moreover, some contracts included numerous supporting subfactors that may dilute emphasis on any specific criteria. Although the Federal Acquisition Regulation and NASA guidance require considering the costs and benefits of choosing a CPAF contract, NASA did not perform such analyses. In some cases there appears to be a significant disconnect between program results and fees paid. For example, NASA paid the contractor for the Earth Observing System Data and Information System Core System 97 percent of the available award fee despite a delay in the completion of the contract by over 2 years and an increase in the cost of the contract of more than 50 percent. NASA officials expressed satisfaction with the results of the contracts we reviewed, and this was further evidenced by the extent of fee paid. NASA's satisfaction was based on its evaluations of contractor performance against criteria established in the award-fee plan. While NASA's evaluations would indicate generally good contractor performance, that performance did not always translate into desired program outcomes. That disconnect raises questions as to the extent NASA is achieving the effectiveness it sought through the establishment of guidance on the use of award fees. NASA has not evaluated the overall effectiveness of award fees and does not have metrics in place for conducting such evaluations. |
The Army Reserve is composed primarily of citizen soldiers who balance the demands of a civilian career with military service on a part-time basis. During the Cold War, it was expected that the Army Reserve would be a force to supplement active forces in the event of extended conflict. However, since the mid-1990s, the Army Reserve’s citizen soldiers have been continuously mobilized to support operations worldwide, including those in Bosnia and Kosovo. In today’s strategic environment, the Army Reserve’s role has evolved to a complementary force, continuously supplying specialized skills for combat support and combat service support for Operations Enduring Freedom (Afghanistan) and Iraqi Freedom. Rather than the historical part-time employment in the Army Reserve, some Army Reserve personnel have now been involuntarily activated for over a year. The members of the Army Reserve fall into three major categories: the Ready Reserve, the Standby Reserve, and the Retired Reserve. (See fig. 1.) Members of all three categories are subject to mobilization in the event of national emergency. The Army's Ready Reserve includes about 310,000 members and is made up of two subcategories: the Selected Reserve, which has about 197,500 members, and the Individual Ready Reserve, which comprises about 112,500 members. The Selected Reserve includes soldiers who are assigned to units and participate in at least 48 scheduled drills or training periods each year and serve on active duty for training at least 14 days each year; soldiers who voluntarily serve on extended tours of active duty; and soldiers assigned on an individual basis to various headquarters where they would serve if mobilized and train on a part- time basis to prepare for mobilization. Members of the Individual Ready Reserve include individuals who were previously trained during periods of active service, but have not completed their service obligations; individuals who have completed their service obligation and voluntarily retain their reserve status; and personnel who have not completed basic training. Most of these members are not assigned to organized units, do not attend weekend or annual training, and do not receive pay unless they are called to active duty. The Army's Standby Reserve represents about 1,030 personnel who maintain their Army affiliation without being in the Ready Reserve. Standby Reserve personnel have been designated key civilian employees who have responsibilities that would keep them from being mobilized, such as members of the Congress, or have temporary hardships or disabilities that prevent them from participating in reserve activities. These personnel can be mobilized if necessary to fill manpower needs in specific skills. The Army Retired Reserve comprises all reserve officers and enlisted personnel who receive retired pay on the basis of active or reserve service and may be ordered to active duty in emergency situations. Currently, about 747,000 personnel are in the Retired Reserve. The majority of the reserve forces mobilized for current operations have been members of the Selected Reserve, who are members of units and attend monthly drills. Some members of the Individual Ready Reserve and Retired Reserve have also been mobilized to provide specialized skills. In addition to personnel in these categories, the Army Reserve relies on a small number of full-time personnel to provide the day-to-day administrative, training, and maintenance tasks that units need to be able to attain readiness for their missions and deploy. The Army Reserve full- time support personnel are equal to about 13 percent of the authorized number of reservists. The Army Reserve is headed by the Chief, Army Reserve who is the principal advisor to the Chief of Staff of the Army for all Army Reserve matters. Among other duties, the Chief, Army Reserve provides reports to the Secretary of Defense and the Congress, through the Secretary of the Army, on the state of the Army Reserve and the ability of the Army Reserve to meet its missions; manages the full-time support program; justifies and executes the personnel, operation and maintenance, and construction budgets for the Army Reserve; and participates in formulation and development of Army policies. The Army Reserve is a part of the total Army, which also includes the active Army and the Army National Guard. The Chief of Staff of the Army is charged with integrating reserve component matters into Army activities and provides strategic guidance to the Army Reserve on transformation. The Chief of Staff of the Army, as senior military leader of the Army, participates in the development of Army plans, policies, programs, and activities and supervises their execution. The Secretary of the Army, as the senior official of the Department of the Army, is responsible for its effective and efficient functioning. Reserve forces may be called to active duty under a number of mobilization authorities. As shown in table 1, two authorities enable the President to mobilize forces, but with size and time limitations. Full mobilization, which would enable the mobilization of forces for as long as they are needed, requires a declaration by the Congress. The Office of the Secretary of Defense implements the activation of reservists under mobilization authority. The Assistant Secretary of Defense for Reserve Affairs, who reports to the Under Secretary of Defense for Personnel and Readiness, is responsible for providing policy, programs, and guidance for the mobilization and demobilization of the reserve components. On September 14, 2001, President Bush declared that a national emergency existed as a result of the attacks on the World Trade Center in New York and the Pentagon in Washington, D.C., and he invoked the partial mobilization authority. On September 20, 2001, DOD issued mobilization guidance that among other things directed the services as a matter of policy to specify in initial orders to Ready Reserve members that the period of active duty service would not exceed 12 months. However, the guidance allowed the service secretaries to extend orders for an additional 12 months or remobilize reserve component members under the partial mobilization authority as long as an individual member’s cumulative service did not exceed 24 months under the President’s partial mobilization authority. Since September 11, there have been six separate rotations of troops to support Operation Enduring Freedom and four rotations of troops to support Operation Iraqi Freedom, which began in 2001. The Army has identified the personnel and units that are expected to deploy in 2005 in the seventh rotation of forces for Operation Enduring Freedom and the fifth rotation for Operation Iraqi Freedom. To address the continuing demand for ground forces, in 2004, the Army extended the time that reservists must be deployed overseas for missions related to Operation Iraqi Freedom in Iraq or Operation Enduring Freedom in Afghanistan. The Army’s current guidance is that soldiers should serve 12 months with their “boots on the ground” in the theater of operations, not including the time spent in mobilization and demobilization activities, which could add several more months to the time a Reserve member spends on active duty. The Army’s Forces Command identifies the Army units and personnel to be deployed to meet the requirements of the combatant commanders. The Army Reserve has provided ready forces for ongoing military operations since September 11, 2001, by transferring personnel and equipment to deploying units; however, it is running out of personnel who can be mobilized under current policies and equipment that meets deployment standards for three key reasons. First, the Army Reserve is having difficulty continuing to support ongoing operations because its units are not routinely resourced with all the personnel and equipment needed to deploy. Therefore, to meet combatant commanders’ requirements that deploying units have all the personnel they require for their missions and have equipment that is compatible with other units in the theater of operations, the Army Reserve has had to transfer uniformed personnel and equipment from nonmobilized units to prepare mobilized units. This has left nondeploying units with shortages in personnel and equipment, which hampers their ability to train for future missions. Second, based on data provided by the Army Reserve, about 40 percent of Army Reserve personnel have already been mobilized once and under personnel policies cannot be mobilized again. This, in addition to emerging recruiting issues that contribute to the availability of personnel, has led to a smaller pool of reservists eligible for deployment and is making it more difficult for the Army Reserve to provide trained and ready personnel with the specific grades and skills needed for future operations. Third, the Army Reserve has been experiencing increasing shortages of the full-time support staff who maintain equipment, train personnel, and conduct the day-to-day administration of nonmobilized and returning units. This hampers the Army Reserve’s ability to maintain unit readiness. These challenges, when viewed collectively and in view of emerging recruiting challenges, threaten the Army Reserve’s ability to provide ready units for ongoing operations and prepare units for future missions. To provide the ready forces required to meet mission requirements since September 11, 2001, the Army Reserve has had to transfer personnel and equipment from nonmobilized units to mobilized units—a practice that has left nonmobilized units with shortages of resources and challenges the Army Reserve to continue to support near-term operations. The Army Reserve, like the National Guard, has been structured according to a “tiered resourcing” approach. Under tiered resourcing, the Army has accepted some operational risks to save money by funding Army Reserve units to maintain fewer personnel and less equipment than they would need in the event of a deployment. Instead, units train at lower states of readiness with the expectation that there would be sufficient time to add the required personnel and equipment prior to a deployment. Units anticipated to be needed earlier in an operation are provided a larger portion of their required personnel and equipment, while units that are not likely to be needed until later during an operation, if at all, are given lower levels of resources. This strategy effectively supported the types of operations that were anticipated before September 11, 2001, but in the current environment combatant commanders have required that Army Reserve units deploy with all the personnel and equipment they needed for their missions. While the Army Reserve has met these requirements, it has done so by transferring resources from nonmobilized units, which has impaired its ability to train for future missions. It has used this approach because its personnel and equipment levels have not increased significantly since September 11, 2001, despite the high pace of operations. In addition, the overall number of personnel in the Army’s Selected Reserve has declined as recruiting and retention issues have emerged. Senior Army Reserve officials have expressed concern that without change in the policies, the Army Reserve will soon be unable to continue to provide forces with the necessary skills and grades to support Army operations. To meet combatant commander requirements for fully manned units, the Army Reserve has had to transfer large numbers of personnel from nonmobilizing units to provide specifically required capabilities and to prepare mobilizing units for deployment. From September 11, 2001, through March 2005, the Army Reserve mobilized about 118,270 soldiers from the Selected Reserve. Of the total number of soldiers mobilized, approximately 53,000 (45 percent) were transferred from nonmobilized units to fill shortages in mobilized units and to provide personnel to fill specialized requirements, such as medical teams, that did not require an entire unit. Over 50 percent of the requests for Army Reserve personnel have been for groups of six soldiers or less. As a result of these personnel transfers, existing shortages in nonmobilized units are growing, which limit these units’ ability to conduct training and require them to receive significant infusions of personnel from other units if they are alerted for mobilization. Additionally, the pool of reservists from which to fill requirements for certain skills and grades is decreasing. Under tiered resourcing, Army Reserve units have generally been assigned about 80 to 85 percent of the personnel they require to perform their assigned missions, under the assumption that the shortages could be filled before the units would deploy. Additionally, some personnel assigned to units may not be deployable for personal reasons, such as unfulfilled training requirements, health problems, or family situations. However, for Operation Iraqi Freedom, combatant commanders requested that the Army mobilize Army Reserve units with 100 percent of the required personnel. Therefore, to support the first rotation of Army Reserve troops for Operation Iraqi Freedom in March 2003, the Army Reserve had to transfer about 20 percent of the required personnel from nonmobilized units. These initial transfers worsened existing personnel shortages in nonmobilized units and increased the numbers of personnel that had to be transferred when these units were subsequently mobilized. To meet the combatant commander’s personnel requirements during the second rotation of troops for Operation Iraqi Freedom in 2004, about 40 percent of the required personnel were transferred from other units. Beginning in fall 2004, combatant commanders have required that Army Reserve units mobilize with 102 percent of their required personnel so that casualties or other personnel losses during the mobilization process or during deployment can be replaced from within the unit. This requirement means that units will require even more personnel to be transferred to them before they deploy and will increase personnel shortages in remaining units even further. According to Army Reserve officials, units mobilizing in the near future may have to receive over half of their required personnel from outside the units. As current conflicts have continued, the Army Reserve has experienced recruitment shortfalls and lost personnel from resignations and retirement. Although the Army Reserve is authorized to have 205,000 personnel in its Selected Reserve, the number of participating members was about 197,000 in February 2005. The number of members had decreased to about 196,000 in March 2005. As the number of Army Reserve personnel available for mobilization continues to decrease, the personnel who remain do not necessarily have the ranks or skills needed to fulfill combatant commander requirements. For example, captains are the Army Reserve’s unit-level leaders, responsible for filling key command and staff positions. In 2001, the Army Reserve lacked about 42 percent of the 14,996 captains it required, and as of January 2005, this percentage had increased to about 52 percent. The Army Reserve attributes the shortage of captains to fewer officers transferring to the Army Reserve from the active Army. Similarly, the number of warrant officers—the Army Reserve’s technical experts and pilots—has also been decreasing. In September 2003, the Army Reserve lacked 28 percent of its required 2,730 warrant officers, and as of February 2005, it lacked 37 percent. In order to meet requirements with these shortages, the Army Reserve has had to fill requirements by assigning personnel in other grades who may not have as much training and experience as these officers. Furthermore, the Army Reserve is experiencing increasing shortages of personnel who have certain skills that have been in high demand since September 11, 2001. For example, there has been a large requirement for truck drivers to support current military operations. Of the over 11,200 truck drivers assigned to the Army Reserve, over 8,690 have already been mobilized since September 11, 2001, leaving only about 2,510 (or 22 percent) still available for deployment. As table 2 shows, over 70 percent of enlisted personnel in some occupations have already been deployed and are no longer eligible for deployment. While some of these skills have been in high demand across the Army, some, such as civil affairs, reside primarily in the Army Reserve and sometimes in small numbers of critical personnel. While new recruits are constantly entering the Army Reserve, training them with specialized skills, such as intelligence analysis, takes time. As the pool of Army Reserve personnel considered available for deployment continues to decrease, the Army Reserve is becoming increasingly challenged to find qualified soldiers to perform key functions needed to support ongoing operations. Since September 11, 2001, the Army Reserve has mobilized its units with the most modern and highest quantity of equipment it has had available, but increasing shortages threaten the Army Reserve’s ability to continue to meet equipment requirements in the near term. As with personnel, Army Reserve units are not generally allotted all of the equipment they need to deploy; they receive a percentage based on the mobilization sequence of war plans, with those units expected to deploy first receiving priority for equipment. Since September 11, combatant commanders have required deploying units to have 90 percent of their required equipment, even though Army Reserve units are typically maintained with less than 80 percent of their equipment requirement. In order to meet equipment requirements, the Army Reserve has had to fill shortages from other sources within the Army Reserve. According to our analysis, the Army Reserve transferred 235,900 pieces of equipment worth about $765 million from September 13, 2001 through April 5, 2005. As figure 2 shows, individual (49 percent) and unit (23 percent) equipment represented the two largest categories of equipment transferred. In the fiscal year 2006 National Guard and Reserve Equipment Report, the Army Reserve reported that in February 2005 it had about 76 percent of the equipment it requires. However, this estimate includes equipment items that are older than those used by the active component, such as previous generations of trucks and older models of night vision goggles, rifles, and generators. The Army Reserve does not generally receive new equipment at the same time as the active Army. When the active Army receives newer, modern equipment items, it often passes the older equipment to the Army Reserve. While these items are considered substitutes for newer items for some purposes, such as training, combatant commanders barred many of them from current operations because the Army cannot provide logistics support for the older items in theater. Therefore, the equipment Army Reserve units have that is acceptable for deployment is lower than the overall figure indicates. For example, Army Reserve units often train with older less capable versions of radios than their active duty counterparts have, so deploying Army Reserve units have had to be supplied with the new radios after they deployed. In addition, Army Reserve units have far fewer than the overall average for some equipment items. For example, the Army Reserve has less than half of its requirement of night vision goggles, and a portion of the goggles it has are not the most modern type. While units can be provided additional equipment from the Army after they deploy, these units do not have much time to train with new equipment prior to conducting actual operations. Moreover, continuing equipment shortages in nondeploying units also result in loss of training opportunities and increase the number of equipment items that must be transferred to prepare units for mobilization. As the Army Reserve struggles to continue to provide the required equipment to its mobilized units, its existing equipment inventory is aging more quickly than originally planned due to high use and a harsh operational environment. According to the 2006 National Guard and Reserve Equipment Report, equipment is being used in theater at rates five times higher than under peacetime conditions, and several major equipment items, including some light and light-medium truck fleets and engineering equipment, are nearing or past their anticipated lifetime use. The report noted that higher use is resulting in increased costs for parts and maintenance as well as a reduction in overall unit readiness. Additionally, according to the report, the Army Reserve estimates that currently as much as 44 percent of its equipment needs servicing. This includes equipment returned from the first rotation of troops in support of Operation Iraqi Freedom, about one-fourth of which still requires maintenance before it can be reused. Moreover, returning Army Reserve units are being required to leave certain equipment items, such as vehicles that have had armor added to them, in theater for continuing use by other forces, which further reduces the equipment available for training and limits the Army Reserve’s ability to prepare units for mobilizations in the near term. The Army Reserve’s ability to continue to provide ready forces in support of ongoing operations is further affected by current DOD and Army personnel policies, which affect the number of reserve personnel eligible for deployment. As we have reported previously, the availability of reserve component forces to meet future requirements is greatly influenced by DOD’s implementation of the partial mobilization authority under which personnel serving in Operations Iraqi Freedom and Enduring Freedom were mobilized and by the department’s personnel policies. Specifically, we reported that the policies that affect mobilized reserve component personnel were focused on the short-term needs of the services and reserve component members rather than on long-term requirements and predictability of deployment. Army Reserve personnel serving in Operations Iraqi Freedom and Enduring Freedom have been activated under a partial mobilization authority, which enables the secretary of a military department, in a time of national emergency declared by the President or when otherwise authorized by law, to involuntarily mobilize reservists for up to 24 consecutive months. However, DOD’s policy implementing the mobilization authority is that any soldier who has served 24 cumulative months during the current conflicts is ineligible for any further activation unless the President signs an additional executive order or that soldier volunteers for additional duty. Time for pre- and postmobilization activities and accrued leave days are also counted toward time served on a reservist's "24-month clock" under this policy. While the DOD policy limits the time a reservist can serve on active duty to 24 months, Army policy states that reservists who have been mobilized for Operations Iraqi Freedom or Enduring Freedom will serve no more than 12 months in the theater of operations. Thus, under this policy, an Army reservist who completes an in-theater rotation of 12 months, along with pre-and postmobilization activities (adding an average of 6 months to mobilization), serves about 18 months of the 24 months allowed under the DOD policy. In addition, because these deployments cannot be less than 12 months under Army policies, the Army Reserve considers these reservists ineligible to deploy again. As figure 3 shows, as of March 2005, about 43 percent of Army Selected Reserve personnel have been mobilized since September 11, 2001, and are not eligible to be remobilized under current DOD and Army policies. Only about 16 percent, or 31,300 personnel, are considered eligible for mobilization. The other 41 percent are ineligible or not available at this time for a variety of reasons, including the nature of their current assignments—such as providing recruiting and retention support, training for mobilizing units, and other critical duties; lack of required training; or various medical and administrative issues, such as pregnancy or pending separations. Those soldiers who complete the required training or resolve medical and family issues may become available for mobilization in the future. In a December 2004 memorandum, the Chief, Army Reserve reported to the Chief of Staff of the Army that the Army Reserve’s ability to provide ready personnel was impaired by the DOD’s implementation of mobilization authorities and the Army’s deployment policies, among other issues. He noted that the overall ability of the Army Reserve to continue to provide ready forces was declining quickly. He reiterated similar concerns during testimony to the House Committee on Armed Services’ Subcommittee on Military Personnel, in February 2005. Senior DOD officials maintained that the military services have enough personnel available to meet requirements, and the policies have not changed since then. Another significant challenge the Army Reserve faces in continuing to provide support for near-term operations is that it has not been authorized all of the full-time support staff it needs to perform critical readiness duties at home. These personnel play a key role in maintaining Army Reserve unit readiness and participating in mobilization/deployment planning and preparation by performing the day-to-day equipment maintenance, administrative, recruiting and retention, and training tasks for the Army Reserve force. These staff fall into three categories: reservists who have been selected to serve on extended active duty, civilian employees, and active Army personnel. Based on a pre-September 11, 2001, analysis, the Army Reserve identified a requirement for about 38,000 full-time support personnel during peacetime, which equates to about 18.5 percent of the 205,000 members it is authorized by law. These personnel are needed to perform ongoing equipment maintenance, administrative, recruiting and retention, and training tasks. However, the Army Reserve is only authorized about 26,350 full-time support personnel, or about 68 percent of its full-time requirement and 12.8 percent of the authorized number of reservists. The Army Reserve’s full- time staffing is the lowest proportion of all the reserve components. By comparison, in 2004, the Army National Guard was authorized full-time support equal to 15 percent of its end strength, and the Air Force Reserve was authorized full-time support equal to about 22 percent of its end strength. Moreover, the Army Reserve’s authorized full-time support does not take into consideration recent increases in the pace of operations. The Army Reserve has not been authorized all of the full-time support staff it requires because, under the tiered resourcing planning strategy, it was assumed that Army Reserve units would not need to deploy quickly, and thus the risk associated with lowered unit readiness was acceptable. While the Army Reserve has not been authorized the full-time personnel necessary to meet its requirements, the number of full-time personnel available for day-to-day activities is being further reduced because of the ongoing requirements for active duty and reserve personnel. First, some full-time civilian employees, called military technicians, must as a condition of employment be members of Army Reserve units. According to Army Reserve data, as of May 2005, about 1,100 (14 percent) of the Army Reserve’s military technicians were deployed in support of current operations, in some instances resulting in a gap in support for day-to-day operations in nonmobilized units. In addition, in March 2005, the Army announced its decision to reassign 223 (about 88 percent) of the 254 active Army staff who perform critical training and readiness support positions in the Army Reserve because these soldiers are needed in the active component. In announcing the planned reduction, the Army noted that the planned decrease will reduce premobilization training; threaten the Army Reserve's ability to activate units at required levels of capability; and reduce or limit support for approval of training plans, oversight of readiness reports, and annual assessments of personnel, equipment, and training. The Army Reserve is in the process of determining ways to mitigate the loss of the active Army personnel. The Army and Army Reserve have taken several steps to plan and implement a number of initiatives to address the readiness challenges described above and improve deployment predictability for soldiers, but they have not yet made decisions on the numbers and types of units the Army Reserve will need in the future and several key decisions about the Army Reserve’s structure and funding have not yet been finalized. One of the Army Reserve’s primary initiatives is to transition to a rotational force model, which would enable reservists to know in advance when they might be expected to deploy to overseas operations and would break the cycle of unanticipated and ad hoc transfers of personnel from nondeploying units to deploying units. While the Army Reserve plans to begin implementing its rotational force model with the return of currently deployed units, it is awaiting several Army decisions concerning the structure, number, and types of Army Reserve support units the Army will require for its new modular force and how the Army Reserve’s rotational force model will be funded. The Army Reserve is also undertaking a number of other initiatives designed to make the most efficient and effective use of its personnel— including reducing its force structure to provide remaining units with all the personnel they are authorized, increasing full-time support, establishing a process for centrally managing soldiers who are ineligible for deployment, and changing the command and control of some units—but these initiatives are not all linked by a detailed management plan. While the Army’s Campaign Plan defines overall goals to improve readiness of Army units, including Army Reserve units, it does not describe the personnel, units, and equipment the Army Reserve will need under the Army’s modular structure and rotational force generating model. Until the Army determines these future requirements for the Army Reserve and integrates the various initiatives under way in a detailed plan, the Army and Army Reserve will not be in a position to determine their needs, so the Secretary of Defense and the Congress will not have assurance that the current problems of degrading readiness and unpredictable deployments will be fully and efficiently addressed. The initiative to transform the Army Reserve into a rotational force, within which units are provided a predictable cycle for conducting individual and unit training followed by potential mobilization, involves a major change in the way the Army planned to train and use Army Reserve forces in the past. The Army Reserve has completed significant planning on its rotational force model, and its plan appears to address the critical issue of providing forces continuously without undue stress on reservists. However, the Army Reserve is awaiting several key decisions by the Department of the Army before it can implement the model, and full implementation could take several years. At present, Army Reserve units are assigned to missions based on war plans and, under tiered resourcing, are maintained at varying levels of readiness based on when they are expected to be needed to deploy in accordance with war plans. Units that are not expected to be needed early in existing war plans are not expected to be ready to deploy without significant time following the outbreak of a war to improve their readiness with additional personnel and equipment. However, current military operations associated with the Global War on Terrorism have called for units and personnel earlier and for longer periods than anticipated in previous war plans and have raised issues about the impact of unforeseen deployments of Army Reserve forces on reservists, their families, and their employers. In July 2003, the Secretary of Defense issued a memorandum to the Army directing it to develop a plan that would enable the service to better predict when personnel and units might expect to be mobilized. The Secretary's objective was to limit a reservist's involuntary call-up to active duty to 1 year in every 6 years. The Army’s 2004 Campaign Plan assigned responsibility to the Army Reserve for developing a method to meet this objective. When the plan was issued in April 2004, the Army Reserve had already begun developing a proposal for a new rotational force generation model based on cyclical readiness, called the Army Reserve Expeditionary Force model. As shown in figure 4, under the Army Reserve Expeditionary Force model, reserve forces would be divided into 10 groups called packages, each containing several units with the range of capabilities that might be needed to conduct military operations. Army Reserve units would move through the phases of the cycle and be ready to serve as a standby deployable force during the fifth year of the 5-year cycle. Train–individual and unit Validate Standby Train-individual and unit Validate Standby The Army Reserve designed the Army Reserve Expeditionary Force model with the intention of keeping units and packages intact and on a predictable schedule. In addition, unlike the tiered resourcing strategy based on when units would be needed for combat operations under existing war plans, the plan assigns priority based on when units will be ready and available for deployment. It also reflects an assumption that in the future the United States will be less able to predict and plan for specific threats, so the services will have to maintain a certain portion of their active and reserve forces ready at all times to conduct a range of potential military operations should the need arise. The Army has included the rotational concept in the Army Campaign Plan and intends to implement it across the Army. We believe that the concept is a step toward balancing the need for a continuing supply of ready units with the need for more predictability of deployments, but plans are in the preliminary stages and implementation issues, such as training standards and funding needs, have yet to be decided. Under the Army Reserve Expeditionary Force model, Army Reserve units would not be expected to have all the personnel and equipment they would need to complete their missions until they were in the later phases of the model. During the beginning phases of the cycle, units would begin to receive new or replacement equipment and additional personnel and begin other administrative, logistical, or personnel activities necessary to increase their level of readiness. During the next phases, individuals would receive training to develop the skills needed for their specific occupations, and units would train together on unit tasks. For example, truck drivers would be initially expected to improve their individual ability to drive a particular truck. After achieving a specific level of driving proficiency, they would train with the other drivers and learn how to drive in a truck convoy. Over the training period, units would have access to all the modern equipment they would need to deploy, so there would be no need for large-scale, unscheduled transfers of equipment to ready mobilizing units. At the end of the training phase, units would undergo a validation process to determine whether they would be capable of mobilizing in support of Army operations. Units in the final phase of the Army Reserve Expeditionary Force model would be trained, manned, and equipped to perform their missions, so the time needed to mobilize these units would be significantly reduced compared to current operations. In addition to the improved ability to provide ready forces, the Army Reserve expects the Army Reserve Expeditionary Force model to improve the quality of life for its members by enabling soldiers, their families, and thier employers to better predict when a reservist could be mobilized. The planned rotational model is intended to meet the Secretary of Defense’s goal of limiting involuntary mobilizations, although under the model proposed by the Army Reserve, units could be mobilized once every 5 years rather than every 6 years, the Secretary’s original goal. The Army Reserve’s current force rotational planning model would enable it to inform reservists of their deployment eligibility schedules several years ahead of a possible deployment so they could make family and career plans. According to the Army Reserve Expeditionary Force plans, if requests for forces exceed those that are within their deployment time frame, the Army Reserve could accelerate training for forces nearing the final phases of the model. This would mean earlier deployment than anticipated for some forces. However, according to Army Reserve analysis, no historical deployments since World War II have required more forces than would be contained in 4 of the planned 10 Army Reserve Expeditionary Force packages. While the Army agrees with the Army Reserve’s concept of the rotational force model and intends to implement the concept for the active forces as well as Army Reserve and Army National Guard forces, Army and Army Reserve officials have not come to agreement on the specifics of how the Army Reserve model will be implemented. Key issues currently under discussion are the number of packages that should be created and the duration of the rotational cycle. Although the Army Reserve proposal would create 10 force packages and establish a rotational cycle of between 5 and 6 years, some Army officials advocate creating 12 force packages and a 6-year cycle that would comply with the Secretary of Defense’s initial guidance. Army Reserve officials noted that the model could be adjusted to accommodate a deployment cycle of 6 years. However, the Army Reserve proposal advocates creating 10 packages rather than 12 packages because each package could contain a larger percentage of the force. Likewise, Army and Army Reserve officials have not agreed on a plan for how the Army Reserve would provide additional forces if the Army Reserve Expeditionary Force model cannot provide enough deployable forces to meet operational requirements. Army officials anticipate that final plans for the Army Reserve’s rotational model will be approved in midsummer 2005 and will detail the rotational cycle and the number of expeditionary packages the Army Reserve will need to build. However, even if all the planning decisions were finalized in the near future and the Army Reserve could begin implementation immediately, full implementation will likely take several years to complete because the rotational concept is based on the sequential flow of units through the model, and the first units would not reach readiness until at least 2010. While the Army Reserve intends to implement its Army Reserve Expeditionary Force model with troops returning in 2005 from military operations overseas, continued demands for units and individuals may make it difficult for the Army Reserve to adhere to the model and avoid having to take deployment-eligible reservists out of their units’ rotational cycles to meet immediate needs for personnel. Further, the Army and Army Reserve have not fully estimated the costs associated with the Army Reserve’s rotational model and programmed funding to begin the process of resetting and reconstituting returning forces as they enter the rotational model. As of May 2005, Army Reserve planning officials were still in the process of reviewing what equipment, training, and personnel will be required for both the units rotating through the model and the support structure that will be required for those units once the model is implemented. Army Reserve officials explained that they cannot begin to develop funding requirements until the Army determines the units the Army Reserve will need. If funding requirements are not carefully estimated and included in the Army’s budget, the model’s eventual effectiveness in providing a more orderly and predictable process for supporting overseas operations may be diminished. The Army has recognized that it needs to become more flexible and capable of achieving a wide range of missions. To this end, in fiscal year 2004, the Army began to reorganize its active duty combat forces from a force structure organized around divisions to one that is based on more flexible modular brigades. However, as we have previously reported, the design of the modular units is still evolving and not all the equipment required is fully known or funded. The Army has not completed planning for how active and Army Reserve component combat support and combat service support units will be organized to support the new modular brigade combat teams. The Army is currently completing a review of its force structure—called the Total Army Analysis—to determine the number and type of units it needs to meet the goals of the National Defense Strategy. Previously conducted Total Army analyses did not include an assessment of the support forces that would be needed under the Army's modularity initiative. In 2004, the Army began another review to determine what active and reserve support units it will need to support its new multifunctional modular brigades. The Army plans to use the results of the analysis to compile a detailed list of the numbers and types of units the Army Reserve will need to provide in support of the modular combat forces. As of March 2005, the Army was still analyzing the results of the process and was continuing to assess the requirements for support forces. Until the results are released, the Army Reserve cannot identify the numbers and types of units that it will need to support the Army requirements in each of the rotational packages. In addition, the Army and Army Reserve have not yet developed detailed estimates for the Army Reserve’s reorganization into modular units. The Army Campaign Plan assumes that supplemental resources the Congress provides to the Army to fund the Global War on Terrorism will be available to pay some of the costs of the modular conversion for reserve component support units. However, until the Army completes all of its force structure designs for support brigades, the Army Reserve will not have a total picture of its personnel and equipment requirements and will not have all the information it needs to evaluate funding requests for modularity. The Army and the Army Reserve have other initiatives under way for the purposes of improving readiness and capability. However, these initiatives are in varying stages of planning and implementation. While all the transformational initiatives seek to improve the Army Reserve’s ability to provide ready forces, they have not been coordinated as part of a comprehensive plan that would establish goals for initiatives, coordinate their objectives and time frames, and set funding priorities. Moreover, the Army has not determined the personnel, units, and equipment the Army Reserve will need to transform to a modular, rotational force and effectively support Army operations in the future. In July 2003, the Secretary of Defense directed the services to begin to rebalance the capabilities that reside in the active and reserve forces to better meet the continued high demand for personnel with certain skills in support of ongoing operations. Key objectives of this initiative are to improve unit readiness and increase services' ability to meet the requirements of continuous operations by eliminating units with low- demand skills and moving personnel into units with high-demand skills. It also aims to provide units with more of the required personnel by ensuring that all personnel assigned to units are eligible to deploy. When the initiative is fully implemented in 2009, the rebalancing will result in force structure changes affecting about 34,000 Army Reserve positions and 236 Army Reserve units. Although intended to increase the Army Reserve’s readiness and capability, this rebalancing effort was begun before the Army began its modular restructuring effort. The two initiatives—rebalancing and modular restructuring—have not been coordinated within a management framework that is needed in light of the potential impact of major organization changes. Senior Army Reserve leaders have raised concerns that because the initiatives are not well integrated, the Army Reserve may be eliminating some of the types of units that it will eventually need to supplement the modular support brigades. To increase units’ readiness by assigning only deployable personnel, the Army Reserve is also establishing a process to centrally manage soldiers who are not eligible for deployment because they are untrained, awaiting administrative discharge, pending medical evaluations for continued service, or in the process of voluntarily moving between units. Until this initiative is fully implemented some soldiers will remain assigned to units where they occupy positions, but because they are not eligible for mobilization, they do not contribute to unit readiness. By accounting for these soldiers centrally in a separate “Trainees, Transients, Holdees, and Students” account, as exists in the active Army, the Army Reserve anticipates that it can relieve units of a major administrative responsibility and enhance overall unit readiness. The Army Reserve has begun implementing this initiative and estimated that at the end of June 2004 about 12.8 percent of its assigned strength met the requirements for assignment to one of the four categories. The Army Reserve expects the number of personnel in this account to eventually level off at about 10 percent of the number of soldiers it is authorized, or about 20,000 soldiers. Recognizing the need for more full-time support staff, in fiscal year 2001, the Army started to implement an initiative to increase the number of full- time support positions for reservists on active duty and civilians by 4,551 positions by the end of fiscal year 2011. When complete, the planned increase would bring the number of full-time support staff for the Army Reserve to 28,806 personnel, about 14 percent of the Army Reserve’s end strength. However, planned increases would not provide the Army Reserve’s peacetime requirement for full-time support, even as the high pace of current operations has increased demands for the training, administrative, and maintenance skills full-time staff provide. Moreover, the Army Reserve will lose the full-time support of about 223 active duty Army soldiers because they are needed in the active component, which will offset some of the benefit of increases in reservist and civilian full-time support. The Army Reserve has not yet developed a management plan to offset these risks in the near term or address the increasing shortage of full- time support staff due to deployments. Another initiative is designed to address the readiness problem that is created when personnel are transferred out of some units to provide capabilities to other units in the active or reserve component. The Army Reserve’s Individual Augmentee initiative is designed to provide a pool of volunteer soldiers, trained in high-demand specialties, who are ready to mobilize quickly as individuals rather than units. According to the Army Reserve, it is currently working to implement this initiative and has established a goal of 3,000 to 9,000 Individual Augmentee positions by the end of 2007. The Army Reserve is also in the process of changing the command and control of some of its units to better focus on soldier and unit readiness. For example, the Army Reserve plans to reduce the number of commands charged with readiness activities and establish a training command in order to clarify responsibilities and standardize training. In addition, the Army Reserve is implementing plans to transfer some installation and facility support activities to the Army so that Army Reserve readiness personnel can focus on training programs. Furthermore, the Army Reserve is in the process of establishing a consolidated medical command and a consolidated intelligence command to more effectively manage these specialized skills. While the Army Reserve expects these actions to support the goals of the Army Campaign Plan, the details of how that will be accomplished are not specified in that plan. While the Army’s acceptance of military risk in maintaining the Army Reserve in peacetime with fewer people and less equipment than it needed for its mission was an effective strategy for containing costs during the Cold War, the security environment has changed dramatically since the September 11, 2001, terrorist attacks, and that strategy is no longer viable. Threats are no longer as predictable, so the services will need to maintain more forces ready to deploy as needed. In addition, operations related to the Global War on Terrorism are expected to last a long time and require the continuing support of the Army Reserve. The Army and Army Reserve’s previous tiered readiness policy has created the need for wholesale transfers of personnel among units to meet wartime requirements and degraded the Army Reserve’s ability to continue to provide forces for ongoing operations. In particular, the Army Reserve is running out of personnel who are eligible to mobilize under current personnel policies and who have the grades and skills required for current operation. The current operations are not expected to end soon, and without change, the Army Reserve will not be able to provide the personnel and units needed for future rotations of Operations Enduring Freedom and Iraqi Freedom, or other needs. The Army’s Campaign Plan sets out overall goals for improved readiness of Army units, including Army Reserve units, but it does not describe the personnel, units, and equipment the Army Reserve will need under the Army’s modular structure and rotational force generating model. Without a clear indication of what the Army Reserve will look like in the future, the Army and Army Reserve cannot be sure that the changes they are undertaking in the short term will enable it to achieve the desired end state of a flexible and ready force and ensure that funding is targeted to priority activities. While the Army and Army Reserve have various initiatives under way to improve Army Reserve readiness over time, not all of these initiatives are being integrated and coordinated to ensure they most efficiently achieve overall goals. Lacking a mechanism that coordinates and synchronizes initiatives that are in various stages of implementation, the Army and Army Reserve cannot be sure that all of the separately developed initiatives work together in timing and scope to achieve readiness goals efficiently and set funding priorities for various activities. For example, without information on the types of units that the Army Reserve will need under modularity, the Army Reserve cannot be sure that its other rebalancing efforts are not eliminating the types of units that will be needed in the future when additional costs would be generated and delays incurred to re-create them. The Army Reserve’s key initiative of establishing a rotational force cannot be fully implemented until the Army finalizes decisions concerning how the Army Reserve will fit into the Army’s planned transformation to a modular force and funding needs and sources have been determined. Until these decisions are finalized and an implementation plan is agreed upon that details how the Army Reserve can ready units and individuals to meet requirements on an ongoing basis, the Army Reserve will have to continue transfers from its dwindling levels of personnel and equipment. We recommend that the Secretary of Defense direct the Secretary of the Army, in consultation with the Chief of Staff of the Army; the Chief, Army Reserve; and the Under Secretary of Defense for Personnel and Readiness, to define the end state of the units, personnel, skills, and equipment the Army Reserve will need to fit into the Army's modular force and develop a detailed plan to ensure that the ongoing diverse initiatives collectively support the desired outcome of improved readiness and predictable deployments within current and expected resource levels. The plan should, at a minimum, include an assessment of the types and numbers of units that the Reserve needs in its force structure to support future Army and joint missions, a process for coordinating the implementation steps and time frames of a method of assessing the progress and effectiveness of the initiatives, a reassessment of the Army Reserve’s requirement for full-time staffing support given its new operational role, and identification of resources needed to implement each of the Army’s and the Army Reserve’s initiatives to improve the Army Reserve's readiness. We recommend that the Secretary of Defense direct the Secretary of the Army, in conjunction with the Chief of Staff of the Army; the Chief, Army Reserve; and the Under Secretary of Defense for Personnel and Readiness, to develop an implementation plan for a force rotation model for the Army Reserve that describes the types and numbers of units that should be available for deployment the funding the Army Reserve will need to support its transition to a the readiness levels for each phase of the rotation, including a description of the associated levels of personnel and equipment and the strategy for providing them, and how readiness will be evaluated. The Assistant Secretary of Defense (Reserve Affairs) provided written comments on a draft of this report. The department agreed with our recommendations. The department’s comments are reprinted in their entirety in appendix II. In addition, the department provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the Chairmen and Ranking Minority Members, House and Senate Committees on Armed Services, and other interested committees. We are also sending a copy to the Director of the Office of Management and Budget, the Secretary of the Army, the Chief of Staff of the Army, and the Chief, U.S. Army Reserve, and we will make copies available to others upon request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have questions, please contact me on (202) 512-4402 or by e-mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Major contributors to this report are included in appendix III. To assess whether the Army Reserve has provided forces required by the combatant commanders since September 11, 2001, and the challenges it faces in sustaining near-term operations, we analyzed the Department of the Army’s Manpower and Reserve Employment of Reserve Component Forces & Effect of Usage report data for fiscal years 1986 through 2003 and discussed the sources and uses of the information with officials from the Office of the Secretary of Defense for Reserve Affairs. We obtained information on personnel mobilized and remaining from the Army Reserve’s Personnel Division. We analyzed data generated by the Total Army Personnel Data Base - Reserves and provided by the U.S. Army Reserve Command on the numbers of reservists that were mobilized for operations since September 11, 2001, and their military occupations and numbers of personnel that had not been mobilized. We obtained and analyzed data detailing the amounts, types, and costs of completed equipment transfers by the Army Reserve from September 13, 2001 through April 5, 2005, from the Reserve End Item Management System. We assessed the reliability of data from the Total Army Personnel Data Base - Reserves and the Reserve End Item Management System by 1) reviewing existing information about the data and the systems that produced them; 2) performing electronic testing of the relevant data elements; and 3) interviewing Army Reserve officials knowledgeable about the data. We determined that the data were sufficiently reliable for our purposes. We analyzed Department of Defense publications and reports information on equipment shortages, including the 2004, 2005, and 2006 National Guard and Reserve Equipment reports to analyze trends in the status of the equipment the Army Reserve has on hand. We obtained and analyzed data on the numbers and types of full-time staff assigned to Army Reserve units and the metrics used in identifying full-time staff requirements from the Office of the Chief, Army Reserve, Force Programs Office. We also discussed full-time support issues with readiness and training officials. To understand how current personnel and equipment policies affect the Army Reserves’ capability to provide support for near-term operations, we gathered and reviewed copies of relevant documents, including presidential executive orders and the Army's personnel planning guidance. To assess the extent to which the Army Reserve is planning and implementing initiatives designed to improve its readiness and provide predictability of deployment for its members, we reviewed and analyzed policy guidance; instructions; documents; and implementation plans related to Army and Army Reserve initiatives, including the Total Army Plan; the 2004 Army Campaign Plan with change 1; the 2003 and 2004 Army Transformation Roadmap; the Army's 2004 and 2005 posture statements; the Army Reserve's 2005 posture statement; the Army's 2004 and 2005 modernization plans; the Army Reserve's expeditionary force planning documents; and other Army Reserve planning and budget documents. We also discussed the status of planning for the Army Reserve’s conversion to a rotational force and a modular structure with Army and Army Reserve officials. To assess ongoing initiatives to improve readiness and force management, we reviewed status reports and discussed implementation challenges with Army Reserve officials managing the initiatives. We conducted our review from April 2004 through July 2005 in accordance with generally accepted government auditing standards. In addition to the contact named above, the following individuals also made major contributions to the report: Margaret Morgan, Timothy A. Burke, Alissa Czyz, Ronald La Due Lake, Kenneth Patton, Rebecca Medina, and Eileen Peguero. | The Department of Defense (DOD) cannot meet its global commitments without continued reserve participation. The Army Reserve provides critical combat support and combat service support units, such as medical and transportation units, to the Army. While Army Reserve members historically could expect to train one weekend a month and 2 weeks a year with activations for limited deployments, since September 11 some have been called upon to support ongoing military operations for a year or more. GAO (1) identified the challenges the Army Reserve faces in continuing to support overseas operations and (2) assessed the extent to which the Army and Army Reserve have taken steps to improve the Army Reserve's readiness for future missions. While the Army Reserve has provided ready forces to support military operations since September 11, 2001, GAO found that it is becoming increasingly difficult for the Army Reserve to continue to provide these forces due to personnel and equipment shortages. The three primary causes of these shortages are (1) the practice of not maintaining Army Reserve units with all of the personnel and equipment they need to deploy, (2) current DOD and Army personnel policies that limit the number of reservists and length of time reservists may be deployed, and (3) a shortage of full-time support staff to develop and maintain unit readiness. These challenges are compounded by emerging recruiting shortfalls. The Army and Army Reserve have recently begun several initiatives to improve the Army Reserve's readiness and provide more deployment predictability for its soldiers; however, the Army lacks a comprehensive management strategy for integrating the initiatives to ensure that each initiative most efficiently contributes to the achievement of its overall readiness and predictability goals. One of the Army Reserve's major initiatives has been to develop a rotational force model. However, the model cannot be fully implemented until the Army determines the types and number of Army Reserve units it will need to carry out its plans to restructure into a more modular and flexible force. Because the Army has not defined what personnel, units, and equipment the Army Reserve will need under the new modular and rotational models, it cannot be assured that its initiatives are most efficiently working together to meet readiness goals and that funding is appropriately targeted to meet those goals. Until plans that integrate the initiatives are completed and approved and adequate resources are provided to implement them, the Secretary of Defense and the Congress will continue to lack assurance that DOD has an effective and efficient plan for resolving the Army Reserve's growing challenges. |
The Results Act requires annual performance plans to cover each program activity set out in the agencies’ budgets. The act requires the plans to (1) establish performance goals to define the level of performance to be achieved by a program activity; (2) express such goals in an objective, quantifiable, and measurable form; (3) briefly describe the strategies and resources required to meet performance goals; (4) establish performance indicators to be used in measuring or assessing the relevant outputs, service levels, and outcomes of each program activity; (5) provide a basis for comparing actual results with the performance goals; and (6) describe the means to verify and validate information used to report on performance. DOT submitted to the Congress performance plans for fiscal years 1999 and 2000. DOT’s performance plan provides a clear statement of the performance goals and measures that address program results. Program goals and measures are expressed in a quantifiable and measurable manner and define the levels of performance. However, the plan could be improved by consistently linking the performance goals and strategic outcomes and consistently describing interagency coordination for crosscutting programs and the Department’s contribution to these programs. In addition, the plan could be improved by consistently describing how the management challenges facing the Department will be addressed, including how the Department will address certain financial management challenges identified by its OIG. DOT’s plan includes performance goals and measures that address program results and the important dimensions of program performance. The goals and measures define the level of performance and activities for specific programs. For example, the performance goal for reducing recreational boating fatalities from 819 in fiscal year 1997 to 720 or fewer in fiscal year 2000 will be accomplished by the core activities of several U.S. Coast Guard programs—boating safety grants provided to the states, regulations developed by the Recreational Boating Safety program, and boat inspections conducted by the Coast Guard auxiliary. The plan’s goals and measures are objective, quantifiable, and measurable. For all except a few performance goals, DOT’s plan includes projected target levels of performance for fiscal year 2000; for several goals, the plan includes multiyear targets. For goals that have no targets, an appendix to the plan explains why a target was not included. For nearly all of the goals and measures, the plan includes graphs that show baseline and trend data as well as the targets for fiscal years 1999 and 2000. The graphs clearly indicate trends and provide a basis for comparing actual program results with the established performance goals. For example, the performance goal for hazardous materials incidents has a graph that shows the number of serious hazardous materials incidents in transportation from 1985 through 1997. The graph also includes target levels for fiscal years 1999 and 2000 so a reader can conclude that this goal is not new in the fiscal year 2000 plan. If only a fiscal year 2000 target is indicated on a graph, the reader can assume that this is a new goal; however, this point is not explicit. The plan could be improved by indicating new goals that do not have a counterpart in the previous version. In addition, the plan includes performance goals to resolve a few mission-critical management challenges identified by us and/or DOT’s OIG.(See app. I.) For example, we reported that the Federal Aviation Administration (FAA) had encountered delays in implementing security initiatives at airports. The plan includes a performance goal to increase the detection rate of explosive devices and weapons that may be brought aboard aircraft, which will help measure progress in implementing the security initiatives. However, for the majority of the management challenges that have been identified, the plan does not include goals and measures. For example, the plan lists several activities to address problems with FAA’s $41 billion air traffic control modernization program, which since 1995 we have identified as a high-risk information technology initiative. The plan could be improved by consistently including goals and specific measures for addressing the challenges. In addition, the plan could be improved by more fully explaining how the Department will address certain financial management challenges identified by the OIG. For example, the OIG reported that the Department’s accounting system could not be used as the only source of financial information to prepare its financial statements. The fiscal year 2000 plan does not address this issue. Additionally, we question whether the plan includes the most current or complete milestones for solving long-standing financial management weaknesses. For example, the plan states that in fiscal year 1999, FAA’s new cost accounting system will capture financial information by project and activity for all of FAA’s projects. However, according to FAA’s fiscal year 1998 audit report, the cost accounting system that was scheduled to be operational by October 1, 1998, will not be fully implemented until March 31, 2001. DOT’s plan includes strategic outcomes for each of the Department’s five strategic goals. For example, for the strategic goal of safety, the Department aims to achieve six strategic outcomes—such as reducing the number of transportation-related deaths, the number and severity of transportation-related injuries, and the number of reportable transportation incidents and their related economic costs. The plan then lists specific annual performance goals that the Department will use to gauge its progress. However, in a few cases, the strategic outcomes have no related annual performance goals. For example, a strategic outcome related to mobility—to provide preventative measures and expeditious responses to natural and man-made disasters in partnership with other agencies to ensure that the Department provides for the rapid recovery of the transportation system—cannot be logically linked to any annual performance goals. The plan could be improved by including at least one annual performance goal for each strategic outcome. For each performance goal, the plan typically mentions those federal agencies that have outcomes in common with the Department. The plan also indicates goals and measures that are being mutually undertaken to support crosscutting programs. For example, the plan states that both FAA and the National Aeronautics and Space Administration (NASA) have complementary performance goals to decrease by 80 percent the rate of aviation fatalities by the year 2007. However, the plan could be improved by describing the nature of the coordination and consistently discussing the Department’s contribution to the crosscutting programs. The plan does not discuss the roles played by FAA and NASA and how their partnership will help reduce the rate of aviation fatalities. The discussion of performance goals and measures in DOT’s fiscal year 2000 performance plan is a moderate improvement over the discussion in the fiscal year 1999 performance plan and shows some degree of progress in addressing the weaknesses that we identified in the fiscal year 1999 plan. We observed that the fiscal year 1999 plan could have been improved by (1) explaining how the management challenges are related to the rest of the performance plan and by including goals and specific measures for addressing the challenges; (2) consistently linking strategic goals, program activities, and performance goals; and (3) indicating interagency coordination for the crosscutting programs and consistently discussing the Department’s contribution to these programs. Among the improvements, the fiscal year 2000 plan describes the management challenges facing the Department, explains activities that will be undertaken to address them, and provides page citations for specific performance goals that address the challenges discussed elsewhere in the plan. DOT’s plan provides a specific discussion of the strategies and resources that the Department will use to achieve its performance goals. The plan covers each program activity in the Department’s $51 billion proposed budget for fiscal year 2000. An appendix to the performance plan lists the Department’s program activities and proposed funding levels by strategic goal. These funds are also mentioned in the discussions of strategic goals in the body of the plan. For each performance goal, the plan lists an overall strategy for achieving it, as well as specific activities and initiatives. For example, DOT expects to increase transit ridership through investments in transit infrastructure, financial assistance to metropolitan planning organizations and state departments of transportation for planning activities, research on improving train control systems, and fleet management to provide more customer service. However, our work has identified problems associated with some strategies. The plan identifies the rehabilitation of approximately 200 airport runways in the year 2000 as one of the activities contributing to the performance goal concerning the condition of runway pavement. We reported that there is a lack of information identifying the point at which rehabilitation or maintenance of pavement can be done before relatively rapid deterioration sets in. As a result, FAA is not in a position to determine which projects are being proposed at the most economical time. We have also reported on strategies for addressing the performance goal of reducing the rate of crashes at rail-grade crossings, some of which are included in the performance plan. For example, the plan addresses two strategies noted in our report—closing more railroad crossings and developing education and law enforcement programs—but does not address the installation of new technologies. For each performance goal, the plan also describes external factors, called special challenges, that can affect the Department’s ability to accomplish the goal. For example, the performance goal for passenger vessel safety includes the external factors of (1) the remote and unforgiving environment at sea and human factors, which play an important role in maritime accidents; (2) the complexity of the operation and maintenance of passenger vessels; and (3) foreign and international standards that apply to vessels. The plan describes how particular programs, such as the marine safety program, will contribute to reducing the number of casualties associated with high-risk passenger vessels. The plan also indicates activities to address the external factors, including conducting oversight of technologically advanced vessels, such as high-speed ferries, and implementing and marketing the International Safety Management Code. In discussing corporate management strategies, the plan briefly describes how the Department plans to build, maintain, and marshal the resources, such as human capital, needed to achieve results and greater efficiency in departmental operations. The corporate strategies are broadly linked to the strategic goals. For example, the plan states that the human resource management strategy supports the strategic goals by ensuring that DOT’s workforce has the required skills and competencies to support program challenges. The plan lists four key factors that will contribute to this corporate strategy: workforce planning that will identify the need for key occupations; managing diversity; learning and development activities to support employees’ professional growth; and redesigning human resource management programs, such as personnel and payroll processing. In some cases, the plan lists specific programs under the corporate strategies but does not consistently identify the resources associated with them. For example, the plan discusses the completion of all remediation or appropriate contingency plans to make the computer systems ready for the year 2000 so that there are no critical system disruptions. However, there is no discussion of the resources needed to support this strategy. The discussion of strategies and resources in DOT’s fiscal year 2000 performance plan is much improved over the fiscal year 1999 plan. We observed that the fiscal year 1999 plan generally did a good job of discussing the Department’s strategies and resources for accomplishing its goals. However, we noted that the plan could have been improved in several ways, such as by more clearly describing the processes and resources required to meet the performance goals and recognizing additional external factors—such as demographic and economic trends that could affect the Department’s ability to meet its goals. DOT’s fiscal year 2000 plan contains such information. The Department’s fiscal year 2000 performance plan generally provides a clear and comprehensive discussion of the performance information. The plan discusses the quality control procedures for verifying and validating data, which, it says, DOT managers follow as part of their daily activities, as well as an overall limitation to DOT’s data—a lack of timeliness—and how the Department plans to compensate for this problem. In addition, for each performance measure, the plan provides a definition of the measure, data limitations and their implications for assessing performance, procedures to verify and validate data, the source database, and the baseline measure—or a reason why such information is missing. For example, the plan defines the performance measure for maritime oil spills—the gallons spilled per million gallons shipped—as counting only spills of less than 1 million gallons from regulated vessels and waterfront facilities and not counting other spills. The plan further explains that a limitation to the data is that they may underreport the amount spilled because they exclude nonregulated sources and major oil spills. However, the plan explains that large oil spills are excluded because they occur rarely, and, when they do occur, they would have an inordinate influence on statistical trends. The plan also explains that measuring only spills from regulated sources is more meaningful for program management. However, in some cases, we found additional problems with DOT’s data systems that could limit the Department’s ability to assess performance. For example, the performance measure for runway pavement condition—the percentage of runway pavements in good or fair condition—is collected under FAA’s Airport Safety Data Program. We reported that this information provides only a general pavement assessment for all runways. This information is designed to inform airport users of the overall conditions of the airports, not to serve as a pavement management tool. We further noted that these assessments are made by safety inspectors who receive little training in how to examine pavement conditions. The performance plan acknowledges our concerns and states that FAA will update its guidance for inspecting and reporting the condition of runway pavement and will ensure that inspectors are aware of the guidance. However, as of March 1999, FAA had not updated its guidance for inspectors. According to the National Association of State Aviation Officials, which is under contract to FAA to conduct inspections and provide data on runway conditions, new guidance would require additional training for all inspectors, which is not provided for in the contract. In addition, we discuss problems with DOT’s financial management information later in this report. The discussion of data issues in DOT’s fiscal year 2000 performance plan is much improved over that in the fiscal year 1999 plan and is well on its way to addressing the weaknesses that we identified in the fiscal year 1999 plan. We observed that the fiscal year 1999 plan provided a general discussion of procedures to verify and validate data, which was not linked to specific measures in the plan. For most measures, information about the data’s quality was lacking. Among the improvements in the fiscal year 2000 plan is detailed information about each performance measure, which includes information on verification, validation, and limitations. DOT is making good progress in setting results-oriented goals, developing measures to show progress, and establishing strategies to achieve those goals. However, the Department’s progress in implementing performance-based management is impeded primarily by the lack of adequate financial management information. DOT has clearly made good progress in implementing performance-based management. The Department’s September 1997 strategic plan and performance plan for fiscal year 1999 were both considered among the best in the federal government. And, as discussed in this report, DOT’s fiscal year 2000 performance plan improves upon the fiscal year 1999 plan. Furthermore, our work has shown that prior to these Department-wide efforts, several of DOT’s agencies made notable efforts in becoming performance-based. For example, in reviewing programs designated as pilots under the Results Act, we noted the successful progress of the Coast Guard’s marine safety program. We reported that the Coast Guard’s pilot program became more performance-based, changing its focus from outputs (such as the number of vessel inspections) to outcomes (saving lives). The Coast Guard’s data on marine casualties indicated that accidents were often caused by human error—not by deficiencies in the vessels. Putting this information to use, the Coast Guard shifted its resources and realigned its processes away from inspections and toward other efforts to reduce marine casualties. We reported that the marine safety program not only improved its mission effectiveness—for example, the fatality rate in the towing industry declined significantly—but did so with fewer people and at lower cost. Additionally, in 1997, we cited the National Highway Traffic Safety Administration (NHTSA) as a good example of an agency that was improving the usefulness of performance information. The agency’s fiscal year 1994 pilot performance report provided useful information by discussing the sources and, in some cases, the limitations of its performance data. In 1998, we again cited NHTSA as a good example of an agency that was developing performance measures for outcome goals that are influenced by external factors. Additionally, in 1997, we reported that the Federal Railroad Administration had shifted its safety program to focus on results—reducing railroad accidents, fatalities, and injuries—rather than the number of inspections and enforcement actions. The fiscal year 2000 performance plan indicates that the Department is taking further steps to instill performance-based management into its daily operations. According to the plan, DOT has incorporated all of its fiscal year 1999 performance goals into performance agreements between the administrators of DOT’s agencies and the Secretary. At monthly meetings with the Deputy Secretary, the administrators are expected to report progress toward meeting these goals and program adjustments that may be undertaken throughout the year. Finally, some individual agencies in DOT have developed performance information that includes leading indicators associated with the Department-wide goals. For example, the Department’s fiscal year 2000 budget submission for FAA’s facilities and equipment includes 10 performance goals—such as reducing the rate of accidents or incidents in which an aircraft leaves the pavement—related to reducing the fatal accident rate for commercial air carriers. According to DOT’s performance plan, such indicators will be used to help assess the results of DOT’s programs and provide a basis for redirecting them. A key challenge that DOT faces in implementing performance-based management is the lack of accountability for its financial activities. In fact, serious accounting and financial reporting weaknesses at FAA led us to designate FAA’s financial management as a high-risk area. From an overall perspective, DOT’s accounting information system does not provide reliable information about the Department’s financial performance. DOT’s OIG has consistently reported that it has been unable to express an opinion on the reliability of DOT’s financial statements because of, among other things, problems in the Department’s accounting system. Although the fiscal year 1998 audit report stated that FAA is making significant progress, it cited deficiencies that include inaccurate general ledger balances and unreconciled discrepancies between the general ledger balances maintained in FAA’s accounting system and subsidiary records. The OIG also cited problems with the Department’s accounting systems that prevented the systems from complying with the requirements of the Federal Financial Management Improvement Act of 1996. The OIG concluded that for the Department’s systems to comply with the requirements of the act, the Department needs, among other things, to modify its accounting system so that it is the only source of financial information for the consolidated financial statements. Concerns have also been expressed by the OIG about the number and total dollar amount of adjusting entries made outside the accounting system to prepare the financial statements. For example, FAA made 349 adjustments to its accounting records, which totaled $51 billion, in the process of manually preparing its fiscal year 1998 financial statement. DOT is taking actions to correct the financial reporting deficiencies that were identified by the OIG. On September 30, 1998, the Department submitted to the Office of Management and Budget (OMB) a plan that identified actions by DOT, especially FAA and the Coast Guard, to correct the weaknesses reported in the OIG’s audits. For example, the plan called for DOT to complete physical counts of and develop appropriate support for the valuation of property, plant, equipment, and inventory at FAA and the Coast Guard. Furthermore, the Department’s ability to implement performance management is limited by the lack of a reliable cost accounting system or an alternative means to accumulate costs. As a result, DOT’s financial reports (1) may not be capturing the full cost of specific projects and activities and (2) may lack a reliable “Statement of Net Cost,” which includes functional cost allocations. The lack of cost accounting information also limits the Department’s ability to make effective decisions about resource needs and to adequately control the costs of major projects, such as FAA’s $41 billion air traffic control modernization program. For example, without good cost accounting information, FAA cannot reliably measure the actual costs of its modernization program against established baselines, which impedes its ability to effectively estimate future costs. Finally, the lack of reliable cost information limits DOT’s ability to evaluate performance in terms of efficiency and effectiveness, as called for by the Results Act. We provided the Department of Transportation (DOT) with the information contained in this report for review and comment. The Department stated that it appreciated our favorable review of its fiscal year 2000 performance plan and indicated that it had put much work into improving on the fiscal year 1999 plan by addressing our comments on that plan. DOT made several suggestions to clarify the discussion of its financial accounting system, which we incorporated. The Department acknowledged that work remains to be done to improve its financial accounting system and stated that it has established plans to do this. DOT also acknowledged the more general need for good data systems to implement the Results Act and indicated that it is working to enhance those systems. To assess the plan’s usefulness for decisionmakers and maintain consistency with our approach in reviewing the fiscal year 1999 performance plan, we used criteria from our guide on performance goals and measures, strategies and resources, and verification and validation.This guide was developed from the Results Act’s requirements for annual performance plans; guidelines contained in OMB Circular No. A-11, part 2; and other relevant documents. The criteria were supplemented by our report entitled Agency Performance Plans: Examples of Practices That Can Improve Usefulness to Decisionmakers (GAO/GGD/AIMD-99-69, Feb. 26, 1999), which builds on the opportunities for improvement that we identified in the fiscal year 1999 performance plans. In addition, we relied on our knowledge of DOT’s operations and programs from our numerous reviews of the Department. To determine whether the performance plan covered the program activities set out in DOT’s budget, we compared the plan with the President’s fiscal year 2000 budget request for DOT. To determine whether the plan covered mission-critical management issues, we assessed whether the plan included goals, measures, or strategies to address major management challenges identified by us or the OIG. To identify the degree of improvement over the fiscal year 1999 plan, we compared the fiscal year 2000 plan with our observations on the previous plan. We performed our review in accordance with generally accepted government auditing standards from February through April 1999. We are providing the Honorable Rodney E. Slater, Secretary of Transportation, and the Honorable Jacob J. Lew, Director, OMB, with copies of this report. We will make copies available to others on request. If you or your staff have any questions about this report, please call me at (202) 512-2834. Major contributors to this report are listed in appendix II. In January 1999, we reported on major performance and management challenges that have limited the effectiveness of the Department of Transportation (DOT) in carrying out its mission. In December 1998, the Department’s Office of Inspector General (OIG) issued a similar report on the Department. Table I.1 lists the issues covered in those two reports and the applicable goals and measures in the fiscal year 2000 performance plan. Acquisition of major aviation and U.S. Coast Guard systems lacks adequate management and planning. None. The plan, however, acknowledges that air traffic control modernization is a management issue that needs to be addressed. Furthermore, the plan states that DOT has formulated activities to address this issue. The Federal Aviation Administration’s (FAA) $41 billion air traffic control modernization program has experienced cost overruns, delays, and performance shortfalls. The plan also identifies the Coast Guard’s acquisition project as a management issue and describes activities to address it. The Coast Guard needs to more thoroughly address the justification and affordability of its $9.8 billion project to replace/modernize its ships and aircraft. (DOT’s OIG also identified air traffic control modernization as a top priority management issue.) Important challenges remain in resolving FAA’s Year 2000 risks. (The OIG also identified this area as a management issue.) None. However, the plan’s corporate management strategies include an objective to complete all Year 2000 remediation or contingency plans so that there are no critical system disruptions. In addition, the plan states that the Year 2000 issue is a management challenge that needs to be addressed and identifies activities and milestones for addressing it. FAA and the nation’s airports face funding uncertainties. DOT and the Congress face a challenge in reaching agreement on the amount and source of long-term financing for FAA and airports. (The OIG also identified this area as a management issue.) None. However, the plan identifies financing for FAA’s activities as a major issue that the Department, the Congress, and the aviation community need to address. The plan also lists activities that FAA is undertaking to develop the information needed to make financing decisions. (continued) Aviation safety and security programs need strengthening. The plan includes performance goals to Shortcomings in aviation safety programs include the need for FAA to improve its oversight of the aviation industry, record complete information on inspections and enforcement actions, provide consistent information and adequate training for users of weather information, and resolve data protection issues to enhance the proactive use of recorded flight data to prevent accidents. reduce the fatal aviation accident rate for commercial air carriers and general aviation, reduce the number of runway incursions, reduce the rate of operational errors and deviations, FAA has encountered delays in implementing security initiatives at airports. Completing the initiatives will require additional funding and sustained commitment from FAA and the aviation industry. increase the detection rate for explosive devices and weapons that may be brought aboard aircraft, and FAA’s computer security of its air traffic control systems is weak. get threat information to those who need to act within 24 hours. (The OIG also identified aviation safety and transportation security as management issues.) In addition, the plan’s corporate management strategies include objectives to conduct vulnerability assessments on all new information technology systems to be deployed in fiscal year 2001 that fall under the purview of Presidential Decision Directive 63 and ensure that all DOT employees receive or have received general security awareness training in fiscal years 1999 or 2000 and that 60 percent of the systems administrators receive specialized security training by September 30, 2000. The plan also identifies computer security as a management challenge that needs to be addressed. A lack of aviation competition contributes to high fares and poor service for some communities. Increasing competition and improving air service will entail a range of solutions by DOT, the Congress, and the private sector. None. The plan identifies airline competition as a management challenge. DOT has submitted to the Congress a number of legislative proposals to address the issue. DOT needs to continue improving oversight of surface transportation projects. Many highway and transit projects continue to incur cost increases, experience delays, and have difficulties acquiring needed funding. None. The plan identifies surface transportation infrastructure needs as a management challenge and identifies activities to address the issue. (The OIG also identified this area as a management issue.) Amtrak’s financial condition is tenuous. Since it began operations in 1971, Amtrak has received $22 billion in federal subsidies. Because there is no clear public policy that defines the role of passenger rail in the national transportation system and because Amtrak is likely to remain heavily dependent on federal assistance, the Congress needs to decide on the nation’s expectations for intercity rail and the scope of Amtrak’s mission in providing that service. None. The plan identifies the financial viability of Amtrak as a management challenge and states that, as a member of Amtrak’s Board, DOT will work to address the issue. (The OIG also identified this area a management issue.) (continued) DOT’s lack of accountability for its financial activities impairs its ability to manage programs and exposes the Department to potential waste, fraud, mismanagement, and abuse. Since 1993, the OIG has been unable to express an opinion on the reliability of the financial statements of certain agencies within the Department. DOT also lacks a cost accounting system or alternative means of accumulating the full costs of specific projects or activities. None. However, the plan’s corporate management strategies include objectives to receive an “unqualified,” or “clean,” audit opinion on the Department’s fiscal year 2000 consolidated financial statement and stand-alone financial statements; (The OIG also identified this area as a management issue.) enhance the efficiency of the accounting operation in a manner consistent with increased accountability and reliable reporting; and implement a pilot of the improved financial systems environment in at least one operating administration. The plan identifies financial accounting as a management challenge facing the Department and addresses key weaknesses that should be resolved before DOT can obtain a “clean” opinion in fiscal year 2000. DOT’s plan includes performance goals to improving the Department’s motor carrier safety program and taking prompt and meaningful enforcement actions for noncompliance, reduce the rate of fatalities involving large trucks, increase seat belt usage nationwide, increasing the level of safety of commercial trucks and drivers entering the United States from Mexico, reduce the rate of grade-crossing crashes, reduce the rate of rail-related fatalities for trespassers, reducing railroad grade-crossing and trespasser accidents, reduce the number of serious hazardous materials incidents in transportation, and improving compliance with safety regulations by entities responsible for transporting hazardous materials, and reduce the rate of rail-related crashes and fatalities. enhancing the effectiveness of the Federal Railroad Administration’s Safety Assurance and Compliance Program. DOT needs to provide leadership to maintain, improve, and develop the port, waterway, and intermodal infrastructure to meet current and future needs. There is also a need to identify funding mechanisms to maintain and improve the harbor infrastructure of the United States. DOT’s plan includes performance goals to reduce the percentage of ports reporting landside impediments to the flow of commerce and ensure the availability and long-term reliability of the St. Lawrence Seaway’s locks and related navigation facilities in the St. Lawrence River. (continued) DOT faces several challenges in implementing the Government Performance and Results Act. Many of DOT’s performance outcomes, such as improved safety, a reduction in fatalities and injuries, and well-maintained highways, depend in large part on actions by other federal agencies, states, and the transportation industry. Their assistance will be critical in meeting DOT’s goals, which were developed under the Results Act. DOT’s ability to achieve its goals will also be influenced by the effective utilization of human resources. None. The plan identifies the Department’s implementation of the Results Act as a management challenge and mentions activities to address the issue. Helen Desaulniers The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 37050 Washington, DC 20013 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (202) 512-6061, or TDD (202) 512-2537. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | Pursuant to a congressional request, GAO provided information on the Department of Transportation's (DOT) performance plan for fiscal year (FY) 2000, focusing on: (1) the usefulness of DOT's plan in providing a clear picture of intended performance across the Department; (2) the strategies and resources that DOT will use to achieve its goals; and (3) whether DOT's performance information will be credible. GAO noted that: (1) overall, DOT's performance plan for FY 2000 should be a useful tool for decisionmakers; (2) it provides a clear picture of intended performance across the Department, a specific discussion of the strategies and resources that the Department will use to achieve its goals, and general confidence that the Department's performance information will be credible; (3) DOT's FY 2000 performance plan represents a moderate improvement over the FY 1999 plan in that it indicates some degree of progress in addressing the weaknesses that GAO identified in an assessment of the FY 1999 plan; (4) GAO observed that the FY 1999 plan did not: (a) sufficiently address management challenges facing the Department; (b) consistently link strategic goals, program activities, and performance goals; (c) indicate interagency coordination for crosscutting areas; or (d) provide sufficient information on external factors, the processes and resources for achieving the goals, and the performance data; (5) among the improvements in the FY 2000 plan are more consistent linkages among the program activities and performance goals, additional information on external factors and strategies for achieving the goals, and a more comprehensive discussion of the data's quality; (6) these improvements and other activities indicate that DOT has clearly made good progress in implementing performance-based management; (7) for example, the plan indicates that the Department is incorporating the performance goals into performance agreements between the administrators of DOT's agencies and the Secretary; (8) however, the plan still needs further improvement, especially in explaining how certain management challenges, such as financial management weaknesses, will be addressed; (9) for example, DOT's Office of Inspector General (OIG) reported that the Department's accounting system could not be used as the only source of financial information to prepare its financial statements; (10) while the FY 2000 plan does not address this issue, the Department has recognized the financial reporting deficiencies identified by the OIG and is taking actions to correct them; and (11) the lack of accountability for financial activities is a key challenge that DOT faces in implementing performance-based management. |
Large banking organizations in the United States generally are organized as bank holding companies, which are companies that can control, among other entities, one or more banks. Typically, a large U.S. parent (or top tier) bank holding company owns a number of domestic depository institutions that also engage in lending and other activities. A holding company may also own nonbanking and foreign entities that engage in a broader range of business activities, which may include securities dealing and underwriting, insurance, real estate, leasing and trust services, or asset management. Some large U.S. bank holding companies have thousands of subsidiaries. Figure 1 provides a simplified example of a large bank holding company’s structure. The Bank Holding Company Act of 1956, as amended, contains a comprehensive framework for the supervision of bank holding companies and their nonbank subsidiaries. Generally, any company that acquires control of an insured bank or bank holding company is required to register with the Federal Reserve as a bank holding company. Under the Bank Holding Company Act, these companies are subject to, among other things, consolidated supervision by the Federal Reserve. Further, the act restricts the activities of the holding company and its affiliates to those that are closely related to banking or, for qualified financial holding companies, activities that are financial in nature. The Section 165(d) resolution plan requirement is one of many Dodd- Frank Act provisions and related reforms designed to help restrict future government support for and reduce the likelihood and effects of the failure of SIFIs. Such reforms include the act’s (1) restrictions on the Federal Reserve’s emergency authorities to provide assistance to financial institutions; (2) new tools and authorities for FDIC and the Federal Reserve to resolve a failing SIFI outside of bankruptcy if its failure would have serious adverse effects on the U.S. financial system; (3) enhanced regulatory standards for SIFIs related to capital, liquidity, and risk management; and (4) other reforms intended to reduce the potential disruptions to the financial system that could result from a SIFI’s failure, such as the Volcker rule and swaps clearing and margin requirements. Title I of the Dodd-Frank Act requires bank holding companies with $50 billion or more in consolidated assets and nonbank financial companies designated by the Financial Stability Oversight Council (FSOC) to periodically submit to FDIC, the Federal Reserve Board, and FSOC resolution plans that detail how the companies could be resolved in a rapid and orderly manner in the event of material financial distress or failure. If FDIC and the Federal Reserve jointly determine that a resolution plan is not credible or would not facilitate an orderly resolution under the Code, they must notify the company in writing of such a determination and identify the aspects of the plan that the regulators jointly found deficient, and the company must submit a revised plan that remedies the deficiencies. If the company fails to resubmit a credible plan that adequately remedies the deficiencies, FDIC and the Federal Reserve may jointly impose more stringent capital, leverage, or liquidity requirements; restrict growth, activities, or operations; and, if within two years after the implementation of those requirements the company has failed to resubmit a resolution plan with the required revisions, in consultation with FSOC, require the company to divest itself of certain assets or operations. Section 165(d) of the Dodd-Frank Act requires resolution plans to include the following information: the manner and extent to which any insured depository institution affiliated with the company is adequately protected from risks arising from the activities of any nonbank subsidiaries of the company; descriptions of the company’s ownership structure, assets, liabilities, and contractual obligations; and identification of the cross-guarantees tied to different securities, identification of major counterparties, and a process for determining to whom the collateral of the company is pledged; and any other information that the Federal Reserve and FDIC jointly require by rule or order. FDIC and the Federal Reserve’s final resolution plan rule took effect in November 2011. The rule requires companies subject to the rule to file plans annually but implements filing deadlines on a staggered schedule that is generally based on companies’ total nonbank assets (or, in the case of foreign-based companies, their total U.S. nonbank assets). The groups of filers required to meet each deadline are known as waves (see table 1). As table 1 shows, the first wave—the largest bank holding companies—generally were required to file their initial resolution plans in 2012, while the other companies (Waves 2 through 4) were not required to file their initial plans until 2013 or later. According to the resolution plan rule, a company’s plan must be divided into a public section and a confidential section. The latter section must include seven informational sections: (1) executive summary, (2) strategic analysis, (3) description of corporate governance relating to resolution planning, (4) description of organizational structure and related information, (5) management information systems, (6) interconnections and interdependencies, and (7) supervisory and regulatory information. In the strategic analysis section—generally the most substantive component—each company must describe the key assumptions and supporting analysis underlying the plan, the specific actions the company must take to facilitate a rapid and orderly resolution, the strategy for maintaining the operations of and funding for the company and its material entities, and the actions the company will take to prevent or mitigate any adverse effects of a failure. The strategy must also describe any potential material weaknesses or impediments to the plan, and the actions and steps the company has taken or proposes to take to remediate or otherwise mitigate the weaknesses or impediments identified by the company. As noted earlier, although any determination that a company’s plan is not credible or would not facilitate an orderly resolution under the Code must be made jointly, neither the statute nor the resolution plan rule requires the regulators to make such a determination each time they review the plans, even if they identify shortcomings in a company’s plan. As of January 2016, the regulators have not yet jointly determined that any companies’ plans are not credible or would not facilitate an orderly resolution under the Code. Specifically, FDIC’s Board of Directors determined that the Wave 1 filers’ 2013 plans and three of the Wave 2 filers’ 2014 plans were not credible or would not facilitate an orderly resolution under the Code. However, the Federal Reserve Board of Governors did not make a similar not credible determination, but instead said that the companies must take meaningful action to improve their resolvability under the Code. The Board of Governors noted that this action was consistent with the statement in the resolution plan rule’s preamble that the initial resolution plans would provide the foundation for developing more robust plans over the next few years. Complementing the 165(d) resolution plan requirement, FDIC adopted a final rule in January 2012 requiring an insured depository institution with $50 billion or more in total assets to periodically provide FDIC with a contingent plan for the resolution of such institution in the event of its failure. The rule requires that the plan enable FDIC, as receiver, to resolve the institution under Sections 11 and 13 of the Federal Deposit Insurance Act. The plan must ensure that depositors have access to their insured deposits within 1-business day of the institution’s failure and that the plan maximizes the return from the sale or other disposition of any assets and minimizes the amount of loss realized by creditors. In cases where resolution of a financial company under the Code may result in serious adverse effects on U.S. financial stability, the orderly liquidation authority set out in Title II of the Dodd-Frank Act serves as the backstop alternative. Orderly liquidation authority gives FDIC the authority, subject to certain constraints, to resolve large financial companies, including nonbanks, outside of the bankruptcy process. FDIC may be appointed receiver for a financial company if the Secretary of the Treasury, in consultation with the President, determines, among other things, that the company’s failure and its resolution under applicable federal or state law, including bankruptcy, would have serious adverse effects on U.S. financial stability and no viable private-sector alternative is available to prevent the default of the financial company. While the Dodd-Frank Act does not specify how FDIC must exercise this authority, FDIC has been developing approaches to resolving a company under the orderly liquidation authority, including one that it refers to as the single- point-of-entry approach. U.S. regulators have coordinated with foreign counterparts through the G20 and the Financial Stability Board to develop a policy framework for addressing the risks posed by SIFIs. In November 2010, G20 leaders endorsed the Financial Stability Board’s framework for reducing the probability and impact of the failure of SIFIs. Key elements of this framework include developing effective resolution regimes for these institutions. FDIC, the Federal Reserve System, and Treasury helped to develop international standards that the Financial Stability Board issued for resolution regimes in October 2011. According to the Financial Stability Board’s November 2015 progress report, only a subset of its member jurisdictions, mostly those home to global, systemically important banks, have a bank resolution regime with a scope and range of powers that is broadly in line with the international resolution standards. It also reported that all global, systemically important banks have recovery plans and crisis management groups, but significant work remains to make resolution strategies and plans operational. Bankruptcy is a federal court procedure conducted under the Code. Under the resolution plan rule, companies must describe how they would be resolved or reorganized under Title 11 of the Code, which includes Chapter 11. A reorganization proceeding under Chapter 11 allows a debtor that is a commercial enterprise to continue to operate some or all of its operations subject to court supervision as a way to satisfy creditor claims. The debtor typically remains in control of its assets under a Chapter 11 proceeding, but in some cases the court may direct the U.S. Trustee to appoint a Chapter 11 trustee to take over the affairs of the debtor. Chapter 11 proceedings can be voluntary (initiated by the debtor) or involuntary (generally initiated by at least three creditors holding at least a certain minimum amount of claims against the debtor). Certain financial institutions may not file as debtors under the Code, and other entities face special restrictions in using the Code. Insured depository institutions: Under the Federal Deposit Insurance Act, FDIC serves as the conservator or receiver for insured depository institutions placed into conservatorship or receivership under applicable law. Insurance companies: Insurers generally are subject to oversight by state insurance commissioners, who have the authority to place them into conservatorship, rehabilitation, or receivership. Broker-dealers: Broker-dealers can be liquidated under the Securities Investor Protection Act or under a special subchapter of Chapter 7 of the Code. However, broker-dealers may not file for reorganization under Chapter 11. Commodity brokers: Commodity brokers, also known as futures commission merchants, are restricted to using only a special subchapter of Chapter 7 for bankruptcy relief. Regulators often play a role in financial company bankruptcies. With the exception of the Commodity Futures Trading Commission and Securities and Exchange Commission (SEC), the Code does not explicitly name federal financial regulators as a party of interest with a right to be heard before the court. In practice, however, regulators frequently appear before the court in financial company bankruptcies. For example, as receiver of failed insured depository institutions, FDIC’s role in bankruptcies of bank holding companies is typically limited to that of creditor. The Commodity Futures Trading Commission has the express right to be heard and raise any issues in a case under Chapter 7. SEC has the same rights in a case under Chapter 11. SEC may become involved in a bankruptcy particularly if there are issues related to disclosure or the issuance of new securities. The Commodity Futures Trading Commission and SEC also are involved in Chapter 7 bankruptcies of broker-dealers and commodity brokers. In the event of a broker-dealer liquidation, pursuant to the Securities Investor Protection Act, the bankruptcy court retains jurisdiction over the case and a trustee, selected by the Securities Investor Protection Corporation, typically administers the case. SEC may join any Securities Investor Protection Act proceeding as a party. FDIC and the Federal Reserve have developed separate but similar processes for their reviews of companies’ resolution plans. Both regulators have processes for staffing review teams, determining whether a plan includes all required information, assessing whether a plan’s strategy mitigates obstacles to the company’s orderly resolution, and documenting and vetting team findings and conclusions. Although the regulators’ review processes are separate, the regulators coordinate with each other in various ways, such as in their discussions about review findings and their communications with companies. FDIC and the Federal Reserve have separate but similar processes for reviewing resolution plans. For instance, both developed strategies for reviewing plans and provided their review teams with guidance on implementing the strategies. As shown in figure 2, FDIC and the Federal Reserve each have two committees—composed of senior staff—that offer direction to review teams on plan assessment strategies. We found that both FDIC and the Federal Reserve typically prepare scoping memorandums or project plans to structure their upcoming plan reviews. For example, two FDIC scoping memorandums we reviewed for Wave 2 companies included key areas of focus, background information from previous plans, and assignments of specific review components and products to be delivered. We also reviewed two Federal Reserve project plans for Wave 3 companies—one for larger companies and another for smaller companies—that included objectives of the review, governance, responsibilities, products to be delivered, and timelines, among other items. Both FDIC and the Federal Reserve have separate review teams for each wave of plan filers. As shown in figure 3, FDIC’s Office of Complex Financial Institutions and the Division of Risk Management Supervision’s Complex Financial Institutions Section share responsibility for reviewing resolution plans submitted by the Wave 1 filers, two of the four Wave 2 filers, and the nonbank filers. The Division of Risk Management Supervision’s Large Bank Supervision Branch reviews plans submitted by the Wave 3 filers and the other two Wave 2 filers. Subject matter experts in issue areas such as legal, resolution, and international from other FDIC divisions participate on reviews as needed. Within the Federal Reserve System, 10 Federal Reserve banks review resolution plans of companies located in their district, with assistance, as needed, from subject matter experts. The Federal Reserve Bank of New York conducts most of the reviews, given that more than 75 percent of the Wave 1 and 2 companies and designated nonbanks and about two-thirds of the Wave 3 companies are located in its district. For the Wave 1 and 2 companies and designated nonbanks, both regulators assign a team of around five to six staff to review each company’s plan. For Wave 3 companies, FDIC generally assigns a five- to-six person team to review multiple Wave 3 plans, and the Federal Reserve generally assigns a two person team to review each plan (see figure 3). During their plan reviews, FDIC and Federal Reserve teams assess whether submitted resolution plans are informationally complete. As noted, the resolution plan rule includes seven informational requirements, such as an executive summary, strategic analysis, and description of organizational structure. We found that to determine whether submitted plans contain all required information, both regulators use similar checklists to conduct and document their completeness reviews. Teams typically are given about 2 weeks to conduct the completeness review. Following their completeness reviews, we found that FDIC and Federal Reserve teams then conduct two types of more substantive reviews of companies’ plans. First, the regulators conduct vertical, or company- specific, reviews to identify issues, shortcomings, and obstacles to resolvability. As shown in table 2, FDIC and the Federal Reserve focus their vertical plan reviews on similar assessment areas. For example, we found that both regulators assess how the companies plan to maintain, transfer, sell, or wind down their critical operations—defined in the final rule as the operations of the company for which the failure or discontinuance would pose a threat to the financial stability of the United States—in an orderly manner through the resolution process. Second, FDIC and Federal Reserve teams conduct horizontal reviews to examine selected issues across multiple companies. For example, FDIC’s 2015 plan review included a horizontal review of the governance mechanism across all Wave 1 and 2 companies. According to FDIC officials, the horizontal reviews supplement the vertical assessment of key issue areas and promote consistency across the plan reviews. In addition, we found that the regulators use horizontal reviews to help inform their general guidance and decision-making around resolution planning. The regulators each prepare an overall summary memorandum documenting each plan review and, in some cases, supporting memorandums for specific assessment areas. They also typically prepare memorandums documenting their horizontal reviews. Finally, the regulators have developed or are currently developing assessment frameworks that they use or plan to use to determine whether aspects of a resolution plan are deficient based on their vertical and horizontal reviews. Specifically, FDIC recently developed a framework that rolls up the findings of its five assessment areas into three broader areas, each of which includes a short list of key questions that—combined with staff judgment about each company’s facts and circumstances—are used to determine whether a plan is deficient. Federal Reserve officials told us that they are currently developing a similar framework and have recently used FDIC’s framework to guide interagency discussions. According to FDIC and Federal Reserve officials, teams generally complete their vertical reviews within about 2 months, and horizontal reviews can take approximately another 2 months. Since their initial reviews in 2012, FDIC and the Federal Reserve periodically have revised parts of their review processes based on lessons learned. For example, as described earlier, in 2014, FDIC revised its approach to plan assessments by establishing key assessment areas to frame its review. In addition, FDIC officials told us that because of the large number of Wave 3 companies, FDIC developed an information technology tool for recording responses from Wave 3 filers’ plans. The tool serves to allow staff to consistently capture information and run standard and customized reports as needed. The Federal Reserve reported that in 2013, it automated its obstacles log—an electronic database in which reviewers catalog each obstacle to rapid and orderly resolution at each material entity—by prepopulating cells with drop-down menus based on reviewers’ 2012 findings on Wave 1 filers’ plans. The Federal Reserve also noted that it simplified its completeness review process in 2013 as well as leveraged analyses it conducted in 2012 to identify Wave 1 companies’ critical operations, rather than repeating the analyses. After teams complete their reviews, their findings are subject to further review and vetting at a higher level. According to FDIC, for the regulator’s Wave 1 and 2 reviews, the Oversight Group, an interdivisional group of senior executives, directs vertical and horizontal team efforts, reviews staff-level shortcomings and deficiencies to be included in company- specific feedback letters, recommends industry-wide guidance and action items, coordinates with Federal Reserve senior staff to help ensure consistency across reviews, and recommends staff-level findings to the FDIC Board of Directors. For FDIC’s Wave 3 reviews, the Division of Risk Management Supervision’s Large Bank Supervision Branch created an interdivisional resolution plan review committee, which serves a similar purpose as the Oversight Group for Wave 1 and 2 reviews. At the Federal Reserve, the Federal Reserve Board’s Recovery and Resolution Planning Section performs the same tasks under the direction of the two Resolution Plan Vetting Committees and in consultation with the review teams and legal staff. Finally, FDIC’s Board of Directors and the Federal Reserve’s Board of Governors separately review and vote on staff recommendations on the credibility of plans, requests for filing extensions, and joint feedback letters provided to companies. Although each board votes separately, to make a joint determination under the act—for example, to determine that a plan is deficient—each board must vote to approve the action. FDIC and the Federal Reserve have coordinated not only on reviews of resolution plans but also on the development of the review process. For example, Federal Reserve officials stated that in 2012, the regulators initially held joint training sessions. Also, the Federal Reserve developed a preliminary methodology for identifying critical operations and collaborated with FDIC to implement it. Subsequently, FDIC and the Federal Reserve worked together to refine the list of critical operations and identified whether a company had critical operations and, if so, notified the company of the operations they deemed critical before the company submitted its initial plan. During the review process, FDIC and the Federal Reserve coordinate with each other in a number of ways. For example, the two regulators independently determine the scope of their plan reviews, but FDIC officials told us that they compared their assessment areas and generally agreed on the same areas of focus. Similarly, FDIC and Federal Reserve officials said that the regulators shared their training materials with each other. Officials from both regulators also told us that they coordinated their meetings with companies to minimize any duplicative efforts, and that senior staff schedule weekly calls and periodic meetings to discuss findings and any issues identified during the review process. The officials noted that they were often in daily communication with each other during the plan reviews. Finally, while review teams from each regulator were not initially allowed to share internal review documents with one another without prior approval, FDIC authorized teams to share such information without prior approval beginning with the 2014 pilot reviews. After the teams complete their separate reviews, the regulators work together to reach agreement on the findings and conclusions that they use to make recommendations for their respective boards’ consideration. For example, FDIC officials told us that after the regulators completed their reviews of Wave 1 filers’ 2013 plans, the regulators jointly identified a number of issues with the plans and then, with little dissension, agreed on prioritizing and addressing them. The regulators also have coordinated on the guidance and feedback they provide to companies. Officials from both regulators told us that at this time, they were not considering combining their staffs to form one team to jointly review and assess resolution plans. According to FDIC officials, the FDIC Board needs to be able to make its credibility determinations based on its own independent analysis. Federal Reserve officials told us that because most of a plan review involved reading and analysis, there would be few efficiency gains from doing the work jointly. But officials from both regulators emphasized to us that the current process was collaborative because the review teams were in regular communication with each other. As we have previously reported, to achieve a common outcome, collaborating agencies should establish mutually reinforcing or joint strategies to achieve a common outcome. Such strategies help in aligning the partner agencies’ activities, core processes, and resources to accomplish the outcome. In addition, agencies should establish compatible policies, procedures, and other means—such as frequent communication—to work across agency boundaries. Given FDIC’s and the Federal Reserve’s similar review strategies, coordinated approach to communicating with companies, and frequent communication with one another, their resolution plan review processes—while conducted separately—are generally collaborative. FDIC and the Federal Reserve have made progress reviewing the resolution plans that companies submitted each year from 2012 to 2014 but have provided limited disclosures about their reviews and have not always provided companies enough time to incorporate feedback given the annual filing cycle. As previously noted, under the resolution plan rule, the regulators are required to review submitted plans and are allowed, but not required, to jointly determine whether the plans are deficient. FDIC’s Board of Directors determined that all of the Wave 1 filers’ 2013 plans and three of the Wave 2 filers’ 2014 plans were not credible or would not facilitate an orderly resolution under the Code. However, the Federal Reserve Board of Governors did not make such a determination but instead said that the companies must take meaningful action to improve their resolvability under the Code. The Board of Governors noted that this action was consistent with the statement in the resolution plan rule’s preamble that the regulators did not expect that the initial resolution plan iterations submitted after this rule takes effect will be found to be deficient and that the initial resolution plans would provide the foundation for developing more robust plans over the next few years. The regulators issued press releases in August 2014 and March 2015 stating that they expected to jointly determine that the resolution plans submitted by Wave 1 and 2 filers, respectively, in 2015 were deficient if the filers had not made sufficient improvements. Although the resolution plan rule sets forth the information companies must include in their plans, the regulators have clarified, revised, and, in some cases, expanded information requirements through their guidance and feedback. To a large extent, we found that the guidance and feedback has focused on the rule’s strategic analysis, which must describe a company’s plan for a rapid and orderly resolution under the Code. For example, to address shortcomings found in Wave 1 filers’ 2012 plans, the regulators issued publicly available guidance (April 2013) instructing the filers, among other things, to support the assumptions underlying their resolution strategies, discuss steps to mitigate five obstacles the regulators identified as common during a resolution, and provide a detailed description of their planned bankruptcy process in their subsequent plans. Following their review of the Wave 1 filers’ 2013 plans, the regulators issued each filer a feedback letter that identified shortcomings and provided additional information and regulator-specified assumptions for the 2015 plans (see table 3). The feedback letters also directed the filers to improve their resolvability under the Code—for example, by establishing a rational and less complex legal structure, developing a holding company structure that supports resolvability, and ensuring the continuity of shared services that support critical operations and core business lines throughout the resolution process. Consistent with the resolution plan rule’s preamble, which conveyed expectations that the review process would evolve, the guidance and expectations communicated to companies have evolved over time. The regulators—in addition to finding shortcomings in a number of the companies’ assumptions—also have had to clarify their expectations about such assumptions through several rounds of feedback. For example, from April 2013 to August 2014, the regulators clarified previously provided assumptions for Wave 1 filers—such as a company’s assumptions about its access to government funding. Additionally, the regulators clarified and expanded assumptions—for instance, about the likely behavior of foreign authorities, counterparties, and others—that companies were to make in their subsequent plans. In September 2014, FDIC and Federal Reserve officials jointly met with each Wave 1 filer to discuss the feedback letters. Based on our review of the meeting notes, we found that companies continued to ask for additional clarification about the assumptions and expanded requirements introduced in the feedback letters. In December 2014, the regulators offered to preview certain elements of Wave 1 filers’ 2015 plans and then in February 2015 provided the filers written feedback on the plan previews. We reviewed the feedback to Wave 1 filers and found that it included company-specific feedback, identifying instances in which, for example, a company made an unallowable assumption or did not provide adequate support for an assumption. The regulators also clarified additional plan assumptions and requirements introduced in the August 2014 feedback letters. Generally, the regulators took a similar approach with the Wave 2 and 3 filers (see table 3 above), sending them individual letters setting out general directions after reviewing their initial plans (filed in 2013). They also sent individual letters that provided more detailed guidance after reviewing the 2014 plans (see table 3). As discussed below, however, the regulators have exempted a majority of Wave 3 companies from most of the plan requirements. Wave 1 and 2 companies we interviewed generally said the regulators’ feedback was limited. For example, most of the 10 companies we spoke with said that the guidance and feedback lacked specificity and seemed to be generally aimed at the industry as opposed to individual companies. One company told us that it was not clear how the regulators defined a “rational and less complex legal structure.” Nonbank financial companies we interviewed said the lack of specificity in regulators’ guidance was a significant challenge. At the same time, several companies also told us that guidance and communication from the regulators had improved more recently. For example, as noted, the regulators met with the companies in September and December 2014 and then in February 2015 provided written feedback on the previews of companies’ 2015 plans. Nearly all of the 15 Wave 3 companies we interviewed told us that they generally had not received any company-specific feedback on their 2013 plans from the regulators. For example, two companies said the regulators told them to consult the guidance for Wave 1 companies and incorporate elements applicable to the company. Nearly all of the 15 companies told us that the lack of feedback from the regulators was a challenge in complying with the resolution plan requirement. Moreover, several Wave 3 companies we interviewed said that the regulators seemed to take a one-size-fits-all approach to resolution planning, and some pointed out that these companies were less complex than the Wave 1 companies and should be given guidance tailored to less complex companies. FDIC and Federal Reserve officials generally said their guidance and processes have evolved through the iterations of plan reviews. According to the Federal Reserve officials, they initially focused their plan reviews on identifying potential obstacles to a resolution and, accordingly, they also focused their initial guidance on such obstacles. Officials also said that as their knowledge about the companies increased, they were able to issue more specific guidance and feedback to companies. Similarly, FDIC’s officials told us that in the initial years of plan reviews, they focused on the obstacles and basic elements of the plans—including financial, operational, and structural aspects of a company’s resolution strategy—and had little dialogue with the companies. Since then, officials added that they have issued more detailed guidance, conducted more substantive plan reviews, and increased communications with the companies. FDIC officials also said that while guidance generally has been targeted to Wave 1 filers, it has been adjusted for Wave 3 filers, given the differences in complexity between the Wave 3 and Wave 1 filers. Based on our review of the July 2015 feedback letters sent to Wave 3 filers, we generally found that the guidance did not include some of the requirements that were in the August 2014 feedback letters sent to Wave 1 filers, such as the need for companies to achieve a rational and less complex legal entity structure. FDIC and the Federal Reserve have each developed or are currently developing a framework for assessing whether plans are deficient, but they have not disclosed the frameworks to plan filers or the public. As discussed, for its 2015 reviews, FDIC refined its assessment approach by dividing its plan review into five components: (1) an assessment of a company’s critical operations, (2) stress scenario leading to a bankruptcy filing, (3) strategy for resolving its material legal entities, (4) readiness to implement its strategy, and (5) resolution planning governance process. In addition, FDIC recently developed a framework that distills the five components into three principal areas and includes a series of questions that are used to determine whether aspects of a plan are deficient based on the staff review findings. As summarized by FDIC officials, they use the framework to determine whether a resolution plan will work, whether a company can implement its plan, and whether the company has integrated resolution planning into its corporate governance structure. According to the officials, their resolution plan assessment framework has been shared with the Federal Reserve and agreed upon as a means to create a common intersection between the two regulators’ independent plan review processes. Federal Reserve officials told us that they used FDIC’s assessment framework to guide interagency discussions during their recent plan reviews. They added that they are currently developing and expect to finalize their own framework in early 2016, with slight differences based on lessons learned from their review of companies’ 2015 plans. However, companies lack a full understanding of the regulators’ overall assessment frameworks for determining whether aspects of a plan are deficient. While the regulators jointly issued public guidance in April 2013 to Wave 1 filers, the guidance has been supplemented in part by subsequent written and oral feedback provided to each company that has clarified and expanded existing assumptions and requirements. Further, similar to bank examination findings, such feedback is considered confidential supervisory information, prohibiting the companies from disclosing or discussing it with each other. Although companies generally have been provided feedback about their plan shortcomings, they have not been provided with any assurances that addressing the shortcomings would mean that the regulators would not find aspects of their plans deficient. Further, FDIC’s and the Federal Reserve’s feedback did not fully clarify their overall assessment frameworks for the companies whose plans were under review. Nearly all of the eight Wave 1 and 2 companies we interviewed believed that credibility was a subjective standard that the regulators had not clearly defined, presenting challenges for the companies. Several companies described a sense of uncertainty about what changes they should make to their plans, with one specifically saying that the companies could waste time and money working toward an unclear objective. Two of the companies explained to us that there was more than one way to achieve resolution but that it was not clear which options the regulators would find credible. Finally, another company told us that because of the subjective nature of the credibility assessment, it was concerned about the penalties the regulators might assess if its plan was found deficient. FDIC and Federal Reserve officials told us that, at the highest level, determining whether a plan was not credible involved judgment about the nature of each company and its resolution strategy. Because all companies and their resolution strategies are different, certain shortcomings may be much more important for one company than another, and the statute gives the regulators discretion in determining how findings under the various assessment factors affect a plan’s overall credibility. The regulators’ frameworks enable them to apply their expert judgment to the facts and circumstances of each company’s plan. FDIC views its framework as confidential supervisory information and thus has not disclosed it. FDIC officials told us that they are considering the policy implications of such disclosure. Importantly, disclosing the assessment framework, at least in an abbreviated form, would provide companies with a more comprehensive understanding of the principal factors that the regulators use to identify plan deficiencies. In turn, companies could use such information to evaluate their own plans, identify potential deficiencies, enhance their plans, and prioritize their remediation efforts. The disclosure of the assessment framework would be similar to the disclosure of FDIC’s and the Federal Reserve’s bank examination manuals, which are publicly available on their websites. According to the Office of Management and Budget’s directive on open government, transparency promotes accountability by providing the public with information about government activities. Similarly, our prior work has recognized that transparency—balanced with the need to maintain sensitive regulator information—is a key feature of accountability. Without more fully disclosing the regulators’ frameworks for reviewing plans and identifying plan deficiencies, the companies lack key information for assessing and improving their plans. In addition, companies and the public have a limited basis for understanding how the regulators are fulfilling their responsibility under the resolution plan rule, which could undermine the public’s confidence in the resolution planning process. For example, companies and the public would not know the extent to which FDIC’s and the Federal Reserve’s frameworks for determining whether a plan is deficient are similar or different. FDIC and the Federal Reserve recognize the limited benefit of requiring many smaller, less complex Wave 3 companies to file a full resolution plan, but officials said that it was important to continually monitor Wave 3 companies for potential sources of systemic risk through their plan submissions. In addition to permitting companies with limited nonbanking operations to file a tailored plan, the rule permits the regulators to further reduce the information required in a company’s plan. Following their review of Wave 3 companies’ 2013 plans, the regulators exercised this authority—allowing 61, or about 52 percent, of the companies to file “reduced plans” in 2014. Under the 2014 reduced plans, companies were exempted from most of the resolution plan rule’s informational requirements and were required to only report whether they had (1) made any material changes that required their prior plans to be modified or (2) taken any actions to improve their resolvability. In that regard, reduced plans still provide the regulators with a way to monitor such companies. Following their review of the Wave 3 filers’ 2014 plans, the regulators permitted 90 of the filers, or about 76 percent, to file a reduced plan for the 2015 plans, and another 12 percent were permitted to file tailored plans (see fig. 2). According to FDIC officials, all 90 companies that are permitted to file a reduced plan are foreign banking organizations with limited U.S. operations. FDIC officials told us that the regulators considered a number of factors in permitting certain Wave 3 companies to file reduced plans. They said that the regulators gained a better understanding of the companies, their plans, and the potential effect of their failure on U.S. financial stability, and adjusted some of their criteria to allow a greater number of Wave 3 filers to file reduced plans in 2015. However, the regulators did not disclose their criteria for granting the exemptions from most of the plan requirements in their joint feedback letters to the Wave 3 companies or publicly. Generally, FDIC and Federal Reserve officials said that the application of their criteria could reveal confidential information, and FDIC officials stated that this was in part because their criteria may reflect proprietary or sensitive company information. As noted earlier, the Office of Management and Budget’s directive on open government and our prior work have recognized that transparency is a key feature of accountability, even when there is a need to safeguard certain sensitive information to protect companies and markets. Without greater transparency, the lack of a clear understanding of the regulators’ decisions, including the reasons for viewing certain companies as less risky and allowing certain companies to file reduced plans, may weaken public and market confidence in resolution planning and limit the extent to which the regulators can be held accountable for their decisions. For example, without knowing why the companies qualified for filing a reduced plan, they and other Wave 3 companies would not know what steps, if any, they could take to decrease their risk profile and qualify for a reduced- plan filing in future years. Moreover, Wave 3 filers and the public also would not know whether the reduced-plan benefit was provided consistently. Although the Dodd-Frank Act did not specify the frequency with which companies had to file their resolution plans, FDIC and the Federal Reserve stipulated in the resolution plan rule that companies had to file plans approved by their boards on an annual basis. However, the rule does not require FDIC and the Federal Reserve to substantively review the plans or provide feedback within any set time frame. As shown in table 4, our analysis of the 2012, 2013, and 2014 resolution plan reviews found that the regulators required around 5 to 13 months (or close to 9 months on average) to review the plans and jointly provide companies with written guidance or feedback. The review process can be resource- intensive: As discussed, the review process involves a number of steps— including vertical and horizontal assessments, internal and interagency discussions, drafting of guidance and feedback, and board determinations. Unless the regulators extended the plan submission date, companies would have about 3 months, on average, to incorporate the feedback, obtain their boards of directors’ approval, and file their plans for the next year. Because of the amount of time required to review the Wave 1 filers’ initial, or 2012, plans, FDIC and the Federal Reserve jointly extended the filers’ 2013 resolution plan filing date from July 1, 2013, to October 1, 2013. However, the Wave 1 filers submitted their 2014 plans before the regulators could provide them with feedback on their 2013 plans. As a result, the regulators instructed the Wave 1 filers to incorporate the feedback in their 2015 plans and conducted an abbreviated review of the Wave 1 filers’ 2014 plans. FDIC and the Federal Reserve generally prepared project plans or similar documents for each review of a wave of resolution plan submissions that included target dates for completing key tasks. However, in reviewing the regulators’ project plans, we found that the plans did not always include a date for providing joint feedback, and for those project plans that did, target dates were missed. For example, although FDIC and the Federal Reserve set dates for completing specific phases of their plan reviews, the regulators did not set a date for providing joint feedback to the Wave 1 filers’ 2013 plans. The Federal Reserve planned to provide Wave 2 filers with feedback on their 2013 plans by the end of 2013 but did not provide them with feedback until mid-April 2014. Similarly, the Federal Reserve set target dates for providing Wave 3 filers with feedback on their 2013 plans but required more time. FDIC and Federal Reserve officials told us that the 2013 plans were complex and had multiple shortcomings that caused delays in providing feedback. According to Federal Reserve officials, the teams generally completed their review of the plans and prepared necessary internal work products in about 4 months, in accordance with the proposed deadlines. Moreover, FDIC officials said that regulators generally agreed with each other about the facts and findings. Officials from both regulators said their main challenge was sorting through the various fundamental issues that appeared across the filers’ plans, developing agency plans to address those issues, and crafting language to include in feedback. The officials told us that the regulators wanted to make sure they provided the appropriate response and chose the best approaches to address the issues. Federal Reserve officials also said that reaching joint agreement on issues and feedback added some time. FDIC and Federal Reserve officials told us that they recognize the constraints the companies have experienced because of the timing of the regulators’ feedback. FDIC officials said that they expected the content and timing of feedback to be more specific to each company’s plan in the future, which could affect the timing of the feedback. Although Section 165(d) of the Dodd-Frank Act directed the Federal Reserve to require companies to file their resolution plans periodically, FDIC and the Federal Reserve required companies to annually file resolution plans approved by their board of directors in the resolution plan rule. However, the resolution plan rule’s annual filing cycle may not be feasible. We found that the regulators took 9 months, on average, to review plans and provide companies with joint feedback. At the same time, FDIC officials said that companies need up to 3 months to obtain internal approval of their plans, and FDIC staff keep that in mind when requesting turnaround times from companies. Federal Reserve officials attributed their long review time, in part, to the plans’ complexity and said that companies ideally should have 6 months to incorporate regulatory feedback. However, Federal Reserve officials said that it currently is not realistic to expect the regulators to review plans in 6 months or the companies to address the feedback fully in their allotted remaining time. Federal internal control standards state that agencies should externally communicate the necessary quality information to achieve their objectives and that information should be readily available to recipients when needed. With regard to resolution plans, the agencies must be able to provide not only quality information—such as guidance or feedback—to companies but also sufficient time for the companies to incorporate the information in their plans. Absent a longer filing cycle, the rule may not effectively allow for the achievement of its intent. Companies faced challenges because of the lack of timely guidance or feedback from the regulators. More than half of the 25 companies we interviewed, including companies from each wave, identified concerns about the timing of the regulators’ feedback. Two companies told us they received feedback late in their planning process, making it difficult or impossible for them to incorporate the feedback into their next plans. Similarly, another company told us that it was expensive to revise its plan when feedback was provided in the late stage of the planning process. Furthermore, eight of the Wave 1 and 2 and nonbank filers told us that the amount of time it took them to prepare their resolution plans ranged from 6 months to a year. Finally, four other companies told us that the timeliness of the feedback needed to be improved, with one suggesting that the regulators issue feedback at the beginning of the planning year. According to companies and stakeholders that we interviewed, resolution planning has improved the resolvability of SIFIs under the Code. The larger filers we interviewed generally said that resolution planning had led to some operational improvements, while the smaller filers we interviewed generally said that they had reaped few benefits from resolution planning. Additionally, regulators are using plans to enhance their supervision of large financial companies. However, uncertainty exists about the plans’ ability to provide for a rapid and orderly resolution of the largest SIFIs, in part because none has used its plan to go through bankruptcy. At the same time, the regulators told us that they were incurring considerable costs to review the plans, and companies said that complying with the rule also had raised their costs. In concept, resolution plans are expected to make the U.S. financial system safer and help end “too big to fail” by enabling SIFIs to be resolved in an orderly manner that does not have adverse effects on U.S. financial stability or require taxpayer funds. Because of the size, complexity, or interconnectedness of the Wave 1 companies, the failure of one of them poses the threat of disrupting U.S. financial stability. Under the rule, companies must prepare strategies and financial projections in their resolution plans using assumptions about funding, liquidity, and market conditions under baseline, adverse, and severely adverse economic conditions. In response to the resolution plan rule, the Wave 1 filers have prepared resolution plans and made structural and other changes to become more resolvable. Most of the 10 Wave 1, Wave 2, and nonbank filers and 20 stakeholders whom we interviewed told us that going through the planning process better positioned companies for an orderly resolution or had the potential to reduce systemic risk. For example, a bankruptcy attorney told us that resolution planning had benefited companies by forcing them to engage in comprehensive thinking for the first time about how to undergo a resolution. Additionally, a consultant said that the value of resolution planning lay in the development of the companies’ underlying operational and business capabilities to undergo a resolution process. Officials from a Wave 1 filer also told us that through resolution planning, the company had identified and mitigated obstacles to its resolution, better positioning it to be resolved under the Code. At the same time, around half of these filers and other stakeholders told us that they did not expect companies to be able to use their plans as a playbook in the event of failure. For example, one bankruptcy attorney said that the written plan itself was less beneficial than the planning process because the actual cause of bankruptcy could differ from the hypothetical scenario in the plan. Another bankruptcy attorney told us that it was important for companies to think through how they might react under various circumstances, but a resolution plan was just a strategy and did not reflect exactly what a company would do if it failed. A consultant said that the resolution plans themselves were not a source of value, because the likelihood that a company’s resolution plan would match the actual conditions or events under which the company undergoes a resolution process was low. Additionally, officials of a Wave 1 filer explained that they distinguished between planning and writing the plan and noted that while the planning process had been beneficial, the resolution plan itself likely would not be useable in the event of failure. In their 2015 public plan disclosures, the Wave 1 filers generally stated or indicated that they believed that their resolution plans would effectively resolve them within a reasonable time frame, without systemic disruption, and without taxpayer assistance. In addition, these companies identified in their public plans an array of actions they had taken or were in the process of undertaking to enable them to be resolved in an orderly manner under the Code. For example, actions taken by Wave 1 filers in response to the August 2014 feedback letters include the following. Establish a rational and less complex legal structure that would take into account the best alignment of legal entities and business lines. To achieve this objective, at least 9 of the 11 filers stated in their public plans that they have taken one or more of the following actions: (1) reduced assets, businesses, and legal entities; (2) grouped legal entities with common features into separate ownership chains under common holding companies to simplify the spin-off of businesses in a resolution scenario; (3) exited certain lines of businesses or services; or (4) created separate retail and institutional broker-dealers. Through these changes, a company can improve its resolvability by reducing the effect of one subsidiary’s failure on an affiliate and improving the ability to separate and transfer specific businesses within the company. addition, in accordance with a Federal Reserve rule, the four foreign Wave 1 companies are establishing intermediate holding companies in the United States to, among other things, support resolvability. Wave 1 filers have adhered to the International Swaps and Derivatives Association (ISDA) Stay Protocol. The ISDA Stay Protocol overrides a broad range of default rights, including termination of transactions, which are triggered by the parent or other affiliate entering resolution. The protocol serves to provide time to facilitate an orderly resolution of a company by imposing a stay on derivatives contracts and other qualified financial contracts, following the company’s bankruptcy. numerous subsidiaries on three different continents. The filing created an “event of default” for its derivatives, resulting in the termination of more than 900,000 contracts. The lack of access to computer systems and personnel made it difficult to manage the wind down of the company after the broker-dealer had been sold. Intercompany financial information was shut down when a subsidiary entered insolvency, enormously affecting the company’s ability to generate information, efficiently liquidate assets, and realize maximum value. Information was spread across 2,700 software applications across the globe and had to be retrieved from among thousands of accounts and cross- referenced for accuracy. Demonstrate that shared services, supporting critical operations and core business lines—such as information technology services—would continue throughout the resolution process. To achieve this objective, at least 10 of the filers have taken one or more of the following actions: (1) developed employee retention plans to support critical operations and core business lines from stress to resolution; (2) placed critical shared services staff and assets in service subsidiaries that operate as stand-alone entities or subsidiaries of the company’s bank; or (3) enhanced legal agreements between material entities to enable continued access to intellectual property and information technology in a resolution scenario. Through such structural, contractual, and other changes, a company can help ensure that it has continued access to critical shared services, information, and employees needed to execute its resolution strategy in an orderly and timely manner. Demonstrate that operational capabilities—such as providing information on a timely basis—that are necessary for resolution are in place. To address this objective, at least 10 of the filers have taken steps to enhance their operational capabilities, such as by enhancing their (1) collateral management reporting to provide an enterprise-wide view of collateral holdings in each jurisdiction, by legal entity, and by line of business; or (2) management information system capabilities to produce, for example, information for each material legal entity. Access to timely information is important in helping to facilitate the resolution of large, complex companies with extensive, global operations. For example, these reporting capabilities would help the company to access critical information, such as the location of collateral or the identity of key employees or counterparties, and avoid disruptive aspects during resolution. According to nearly all 10 of the Wave 1, Wave 2, and nonbank filers we interviewed, some of the steps they have taken to improve their resolvability also have improved aspects of their business operations. For example, one filer said that examining contracts to avoid internal contagion—the possibility that problems in one legal entity could spill over to other legal entities—had benefited the company’s risk management. Another filer told us that the company had a better understanding of its subsidiaries, which is useful in running the company, because of the changes it had made to its management information systems in response to resolution planning. In its public plan, one company said that it had incorporated resolution planning into its business processes when considering whether it should engage in acquisitions or new products. Some companies also said that the resolution plan requirement had accelerated or expanded projects that already were underway to improve business operations. Other ancillary benefits cited by the filers include helping educate employees about the company and bringing more transparency to settlement risk and intraday liquidity. In contrast to the larger filers, most of the 15 Wave 3 filers we interviewed told us that they had reaped few to no benefits from resolution planning, although several Wave 3 companies noted that the process had given them a better understanding of the company. Several of these companies said that because of their simple organizational structure, they did not make any material changes or improvements in response to resolution planning and therefore did not achieve many, if any, benefits. For example, one reduced-plan filer said that the resolution plan was simply another report that the company was required to file. In contrast, four Wave 3 companies we interviewed told us their companies had benefited from resolution planning. For example, one of these filers said that the company’s new focus on legal entities helped it realize more operating efficiencies. FDIC and the Federal Reserve also expect to use resolution plans to enhance their supervision of large financial companies. In addition to helping ensure that such companies can be resolved in a rapid and orderly manner, the regulators detailed in the final rule’s preamble three ways in which they planned to use the resolution plans: to support FDIC’s planning for the exercise of its resolution authority pursuant to the resolution authority granted in Title II of the Dodd- Frank Act and the Federal Deposit Insurance Act, to assist the Federal Reserve in its supervisory efforts to ensure these companies operate in a safe and sound manner that does not pose risks to U.S. financial stability, and to enhance their understanding of the U.S. operations of foreign banks and improve efforts to develop a comprehensive and coordinated resolution strategy for a cross-border company. Established in 2010, FDIC’s Office of Complex Financial Institutions is responsible for, among other things, reviewing 165(d) resolution plans and preparing and implementing resolution plans to be used under FDIC’s Title II authority. The office has been developing Title II resolution plans for the largest financial companies covered by Title II to ensure that FDIC is prepared to serve as receiver if any of these companies fail. Importantly, such plans may draw on the strategy and information elements in a company’s 165(d) plans. According to FDIC officials, the regulator has tools that the companies do not have under the Code, such as access to temporary liquidity, but the 165(d) resolution plans have been helpful in planning for their resolution authority under Title II. The officials said that FDIC would need to address many of the same obstacles to rapid and orderly resolution that the companies are confronting in their plans. These obstacles include reducing the interconnectedness of material entities and improving the timely access to information necessary to resolution. According to Federal Reserve officials, they are actively working to integrate resolution preparedness into their permanent supervisory work. For example, the regulator’s Large Institution Supervision Coordinating Committee recently implemented the Supervisory Assessment of Recovery and Resolution Preparedness, a horizontal exercise that evaluates certain large companies’ options to support recovery and progress in removing impediments to orderly resolution. As detailed in the August 2014 feedback letters, the actions the regulators expected the Wave 1 filers to take to improve their resolvability formed the basis for the horizontal exercise, according to Federal Reserve officials. They plan to undertake the exercise annually. Moreover, the officials said that the Supervisory Assessment of Recovery and Resolution Preparedness was the first step in incorporating resolution planning into their overall supervisory framework, and the Federal Reserve plans to continue to build on this effort. As part of the regulators’ enhanced understanding of foreign banks through resolution planning, FDIC and the Federal Reserve have undertaken efforts to promote cross-border coordination and cooperation on the resolution of global, systemically important banks. For example, FDIC and the Bank of England, in conjunction with prudential regulators in their respective jurisdictions, developed contingency plans for the failure of one of these companies with U.S. and United Kingdom operations. Similarly, FDIC and the European Commission have established a joint working group to focus on resolution and deposit insurance issues, and FDIC also has collaborated with regulators in Switzerland, Germany, and Japan to discuss cross-border issues and impediments affecting the resolution of these companies. As part of a mandate, the Federal Reserve established company-specific crisis management groups for each of the globally systemically important banks headquartered in the United States, which are co-hosted with the FDIC and comprised primarily of each company’s prudential supervisors and resolution authorities in the United States and key foreign jurisdictions. According to a Federal Reserve official, these groups are working to mitigate potential cross-border obstacles to an orderly resolution of these companies. Federal Reserve officials told us their participation in these discussions has been beneficial to help clarify confusion among foreign authorities about the difference between Title I and Title II resolution under the Dodd-Frank Act. Although companies have made progress developing resolution plans to improve their resolvability under the Code, stakeholders and others have identified several factors that create uncertainty about the plans’ ability to provide for a rapid and orderly resolution of the largest SIFIs. First, all but two of the domestic Wave 1 and Wave 2 companies use a single-point-of- entry strategy in their 2015 resolution plans, but this is a legally novel strategy. The foreign Wave 1 companies use a combination of closing and selling businesses in their plans, but prefer a single-point-of-entry strategy for their global resolution plans. According to their public plans, these companies generally intend to revisit this strategy for their U.S. resolution plans after establishing their intermediate holding companies. As of March 2016 and since the resolution plan rule was finalized, none of the plan filers has gone through bankruptcy and legally tested the single- point-of-entry strategy. Some companies and experts that we interviewed view single-point-of-entry as a promising strategy but acknowledge that its ability to facilitate a rapid and orderly resolution of a large SIFI is still uncertain. Some academics have noted that the strategy may work if the failure is limited to the U.S. holding company but may not work if a foreign subsidiary of the U.S. holding company is the source of the failure. Second, most of the 20 stakeholders we interviewed maintain that the Code may not be adequately designed to resolve large SIFIs. In prior reports, we have detailed a number of challenges the Code presents in relation to the resolution of these companies. Financial regulators that may be aware of potential systemic consequences, do not have standing to be heard before the court as a party of interest or the ability to file an involuntary bankruptcy petition against a financial company, including in response to balance-sheet insolvency. The Code does not provide for guaranteed funding for failing companies. Experts generally considered funding mechanisms essential for the orderly resolution of large financial companies. Title II provides FDIC with access to an emergency liquidity fund, but there is nothing comparable under the Code. Qualified financial contracts, such as derivatives and repurchase agreements, receive safe-harbor treatment under the Code. These contracts are not subject to the Code’s automatic stay and can be liquidated, terminated, or accelerated in the event of insolvency. The ISDA Stay Protocol, as mentioned above, begins to address this issue and overrides a broad range of default rights through contractual changes. However, the ISDA Stay Protocol covers only companies that voluntarily agree to the protocol. In November 2014, 18 major global banks signed the protocol. The Code generally covers only the U.S. operations of companies and has limited provisions for cross-border cooperation between the bankruptcy courts and other jurisdictions. Congress has considered revising the Code, especially in reference to addressing the treatment of qualified financial contracts. The Hoover Institution resolution project group has also proposed a new chapter— Chapter 14—of the Code to address issues related to bankruptcies of large financial companies. Finally, a resolution plan is not legally binding, including on a bankruptcy court or other resolution authority. According to a House of Representatives report, large financial companies are not required to file for bankruptcy and could have an incentive to wait to file to force FDIC to resolve the company under Title II. Resolution planning also involves a broad array of assumptions about how other stakeholders will behave, including creditors and other counterparties who must accept the reorganization plan and judges who confirm the final plan. These assumptions introduce uncertainty, both for the companies in developing their plans and the regulators in determining whether they are not credible. According to nearly all 15 of the Wave 3 companies and most of the 20 stakeholders we interviewed, resolution plans for most of the Wave 3 filers may not reduce systemic risk. Most stakeholders told us that the failure of most Wave 3 companies would not threaten U.S. financial stability generally because of their limited size and complexity. As noted earlier, the regulators have exempted 90 Wave 3 filers from most plan information requirements, recognizing the limited benefit of requiring these companies to file a full resolution plan. At the same time, FDIC officials said that it was important for the regulators to continue to monitor these companies because of their potential to change in size or complexity that could pose systemic risk. Additionally, FDIC officials said that because the Wave 3 companies had a sizable collective presence and were interconnected with other companies in the U.S. financial system, their resolution plans could provide valuable information in understanding company operations and resolution strategies on an industry-wide basis. They explained they might explore other areas of potential risk related to these companies. Federal Reserve officials also noted that while most Wave 3 filers did not pose a systemic risk, there could be a situation in which they did—for instance, if all companies in a region experienced financial stress at the same time. A Federal Reserve Governor and some members of Congress have questioned the $50 billion threshold for the resolution planning requirement and other enhanced prudential standards under the Dodd- Frank Act. In a 2014 speech, a Federal Reserve Governor said that he favored increasing the asset threshold for companies that fall under the resolution plan requirement, because the failure of most of these companies would not produce considerable negative effects on the financial system. In addition, Congress is considering raising the automatic SIFI threshold from $50 billion or more in total assets to $500 billion or more in total assets. For bank holding companies with $50 billion to $500 billion, the bill would create a multistep process to determine if a bank holding company should be designated as systemically important and required to abide by the additional rules to which those bank holding companies are subject, such as the resolution plans. The systemically important determination is based on a foundational determination that material financial distress of that entity could pose a threat to U.S. financial stability. This change could eliminate the resolution plan requirement for some Wave 3 companies, but the extent to which this could happen cannot be determined because the designation process involves regulatory and FSOC discretion. We found that U.S. bank holding companies that are Wave 3 filers were typically smaller, less interconnected, and less complex than those that are Wave 1 and 2 filers. To assess the extent to which filers in different waves have the potential to adversely affect the financial system or the broader economy if they become distressed, we constructed indicators of filers’ size, interconnectedness, and complexity as of the second quarter of 2015. Our indicator of size is a filer’s total assets. Our indicators of interconnectedness are the gross notional amounts of credit default swaps outstanding for which a filer is the reference entity and a filer’s total debt outstanding, excluding deposits. Our indicators of complexity are the number of a filer’s legal entities, the number of a filer’s foreign legal entities, and the number of foreign countries in which a filer’s foreign legal entities are located. We then compared the median values of the indicators for domestic Wave 1 and 2 filers to the median values for domestic Wave 3 filers (see table 5). These indicators suggest that domestic Wave 3 companies have less potential to adversely affect the financial system or broader economy if they become distressed. While our approach allows us to compare indicators of size, interconnectedness, and complexity for domestic Wave 1 and 2 filers to those for domestic Wave 3 filers, our indicators have limitations and should be interpreted with caution. For example, our indicator of size does not include off-balance-sheet activities and thus may understate the amount of financial services or intermediation a filer provides. In addition, our indicators of interconnectedness may not reflect all of the channels through which a filer could affect other parts of the financial system. Similarly, our indicators of complexity may not capture all relevant types of complexity. Nevertheless, differences in our indicators provide important context regarding the relative potential for filers in different waves to adversely affect the financial system or the broader economy if they become distressed. As previously mentioned, the resolution plans include a public and private section, and the public sections generally have been of limited use to stakeholders, but FDIC and the Federal Reserve have taken action to improve their usefulness. Under the final rule, a company’s resolution plan must have a public section that includes a high-level description of the resolution strategy, information on material entities and core business lines, and information helpful in understanding how the resolution plan would be executed. According to FDIC officials, market participants should be able to understand the progress, or lack of progress, companies are making towards resolution from the public plans. However, stakeholders generally did not find the initial public sections to be useful. For example, nearly all nine of the academics and credit rating agencies that we interviewed told us that the 2012 through 2014 public sections were not informative—noting that the information was limited or already publicly available in other sources. Similarly, a 2013 study analyzing the 2012 public sections of the 11 Wave 1 filers found that the public disclosures did not facilitate market discipline and, in some cases, did not increase public understanding of the financial institution or its business. In addition, most of the companies we interviewed had received few or no comments from shareholders or creditors on their resolution plan. In our review of transcripts from investor conferences held by five of the Wave 1 and 2 filers between August 2014 and June 2015, we found that the companies generally did not discuss resolution plans in their presentations, and three securities analysts raised questions about the implementation status of resolution plans, indicating that investors generally did not use the public sections of resolution plans in their evaluations of these companies. In a February 2015 written communication to the Wave 1 companies and the Wave 2 company that filed in July 2015, the regulators jointly provided new guidance that directed the companies to provide more detailed information in their 2015 public plan sections. These areas included more detail on each material entity, the strategy for resolving each material entity in a manner that mitigates systemic risk, a high-level description of what the company would look like following resolution, and the steps taken to improve resolvability under the Code. After the release of the 2015 public plans, we followed up with stakeholders who had commented on the previous public plans to obtain their views on the 2015 public plans. Most of these stakeholders told us that the 2015 public plans were an improvement over previous years’ plans but that additional information would be helpful. For example, improvements included additional information on a company’s organizational structure and intergroup funding. Suggestions for improvement included adding a consolidated balance sheet and having consistent components to facilitate analysis across multiple companies. One Wave 1 company said that because the 2015 public portion of the plan contained more detailed information than previous years, it was prepared for more questions from shareholders but did not experience any increase in inquiries or comments about the plan. FDIC performed a horizontal review of the July 2015 public plans to see that they met the new requirements in the February 2015 joint communication, according to FDIC officials. FDIC officials said that some companies did a good job of showing items visually and that they planned to capture best practices and give additional feedback for the next filing. The officials told us that the regulators also directed the three foreign Wave 2 companies and nonbank filers to disclose additional information in the public sections of their December 2015 plans. However, they did not give such instructions to Wave 3 companies. In addition to their concerns about the public plan sections, several of the 20 stakeholders we interviewed raised concerns about the regulators’ lack of transparency about their review processes. As previously discussed, the regulators have developed and revised their approaches for analyzing and assessing the plans but have publicly disclosed limited information about their reviews. Two academics whom we interviewed told us that after the failure of financial regulators during the 2008 financial crisis, the public was being asked to put too much trust in the regulators without any transparency. A bankruptcy attorney provided another perspective on transparency and said that everyone would benefit if the regulators were more transparent about their standards and allowed the companies to talk among themselves to solve impediments to resolution that were common to multiple companies. FDIC and the Federal Reserve are considering publicly providing more information about their resolution plan reviews. Federal Reserve officials told us that while they were continuously evaluating the release of more plan information into the public domain, they did not have a time frame for reaching a decision on this issue. FDIC officials also told us that the regulator was considering disclosing more information about its review process but had not yet reached the point of sharing such information with the public. FDIC and the Federal Reserve have incurred costs in their annual review of each company’s resolution plan but differ in the extent to which they have tracked these costs. Staff resources are one of the most significant costs. According to FDIC data, the regulator spent around $3.2 million, $3.3 million, and $4.2 million on staff payroll related to resolution planning in calendar years 2012, 2013, and 2014, respectively. As shown in figure 5, FDIC incurred the highest average payroll cost per company in 2012 for activities related to Wave 1 filers, which generally are the largest or most complex companies. Figure 5 also shows that FDIC’s average payroll cost related to Wave 1 and 2 filers declined in the subsequent year. However, as discussed above, FDIC (like the Federal Reserve) did an abbreviated review of the Wave 1 filers’ 2014 plans, resulting in a much lower average cost in 2014. FDIC officials told us that they expected the resources required to review the resolution plans for Wave 1 companies to increase in 2015, because the plans contain more detailed information to be reviewed, such as project plans. FDIC officials also told us that the regulator assigned regional and division staff on a short-term basis to review plans submitted by Wave 3 filers to reduce costs by avoiding hiring additional staff. In contrast, the Federal Reserve tracks the number of staff assigned to review resolution plans but does not track staffing costs specific to resolution plan review. According to Federal Reserve officials, instead of having a dedicated staff working on resolution plan review, the regulator enlists existing staff from various parts of the Federal Reserve System to provide appropriate expertise. For its review of the 2015 plans submitted by the 11 Wave 1 filers, the Federal Reserve assigned 144 staff. Of these staff, 95 of them (66 percent) were from the Federal Reserve banks: 67 staff were from the Federal Reserve Bank of New York, and 28 staff were from the Federal Reserve Banks of Boston, Chicago, Richmond, and San Francisco. The remaining 49 staff were from the Federal Reserve Board. Federal Reserve officials told us that staffing costs have been consistent each year, but work hours have decreased as staff have become more efficient at reviewing plans. In addition to payroll costs, FDIC has incurred other costs related to resolution planning. For example, in 2012 FDIC paid a consulting company about $278,000, which FDIC officials said provided them with insights on the obstacles and challenges that Lehman Brothers faced during its bankruptcy. FDIC also incurred approximately $827,000, $326,000, and $10,000 in travel costs in calendar year 2012, 2013, and 2014, respectively. FDIC incurred the majority of these travel costs in connection to plans submitted by Wave 1 filers. The Federal Reserve did not track travel costs specific to resolution plan review, but Federal Reserve officials told us that travel costs had increased slightly because they increased the number of meetings with Wave 1 companies in New York City prior to the July 2015 filings. All of the 25 companies we interviewed said that they had incurred compliance and other costs to prepare their resolution plans, but they did not measure costs the same way. Of the nine Wave 1, Wave 2, and nonbank filers that provided us with estimates, the cost of preparing resolution plans from 2012 through 2015 ranged from about $500,000 to about $105 million per plan. However, these estimates varied significantly because the companies used different approaches to estimate costs and did not always include the same cost components in their estimates. Officials from the Wave 1, Wave 2, and nonbank filers we interviewed largely separated their resolution plan costs into two categories: (1) internal staff and (2) external consultants and attorneys, with some filers also including the costs of projects to enhance their resolution capabilities. For the low-end cost estimate, the company provided us only with data on the fees it paid to external consultants and attorneys. The high-end estimate included the cost of internal staff, external consultants and attorneys, and capabilities projects. According to the Wave 1, Wave 2, and nonbank filers we interviewed, preparation of the resolution plans requires considerable internal staff resources. Most of these companies have created a team of full-time employees dedicated to resolution planning—ranging from 3 professionals to 30 professionals. At the same time, many other staff from across the company, such as business line managers and support managers from legal, treasury, and technology departments and senior management and board members, are involved in the preparation or review of the plan. Several companies estimated that hundreds of employees worked at least part-time on their resolution plan. The number of work hours spent annually on resolution planning varied among the companies providing an estimate—ranging from 55,000 work hours to about 1 million work hours. The work hours varied, in part because like the cost estimates, companies used different methods to estimate work hours. For example, one company also included work hours for its recovery and resolution plans in other countries in its estimate. Nearly all of the Wave 1, Wave 2, and nonbank filers we interviewed had hired outside consultants or attorneys to help them prepare their resolution plans, but such costs varied across and within companies. Several officials told us that they relied heavily on outside experts for their initial plans, because they were unsure of how to comply with the rule or did not have the in-house expertise. The amount of consulting or attorney fees paid by the companies in a given year ranged from around $500,000 to $25 million. Two companies’ officials told us that their use of external experts had decreased as their companies built up their in-house expertise, but officials of another company told us that their company spent more on external consultants for its 2015 plan because it was undertaking major infrastructure initiatives. According to most of the Wave 1, Wave 2, and nonbank filers we interviewed, their resolution planning costs are increasing, in part because of the projects they are undertaking to enhance their capabilities to execute the resolution plan. As discussed, such projects include enhancing collateral management reporting and management information systems. For example, one company estimated that it spent about $50 million on capability enhancements and expected these costs to triple in the next 2 to 3 years. Officials from two other companies also told us they expected their internal staff or external costs to increase dramatically as they implemented capability-enhancement projects. According to officials from FDIC and the Federal Reserve, the regulators have not considered actions to reduce the compliance costs for these filers because companies make their own decisions on how to comply with the resolution plan rule based on their structure. FDIC officials said that the regulator was not requiring companies to choose a specific model for responding to the rule. Federal Reserve officials said that resolution planning was a substantial undertaking for many of these companies because they had not considered resolvability before and did not have a system in place to gather the relevant information. FDIC officials said companies should have had some of these systems in place before the 2008 financial crisis, but the crisis revealed that they often did not. According to most of the Wave 1, Wave 2, and nonbank filers we interviewed, the resources devoted to resolution planning have had an opportunity cost but have not yet had a clearly measurable effect on their business or competitiveness. Half of these companies said that while it was too soon to know whether the resolution plan requirement would have any negative effects on their competitiveness, they were concerned about that potential impact. In contrast, two other companies said that compliance did not put them at a disadvantage, with one explaining that its competitors had the same requirements. Additionally, most of these companies said that they had not had to make many, if any, cost adjustments in other areas due to resolution planning. For example, one Wave 1 filer stated that resolution plan costs are not a large percentage expense for the company overall, representing approximately 2 percent of its initiative budget. Nearly all said that complying with the resolution plan rule was on par with or less costly than other prudential regulations, such as the Comprehensive Capital Analysis and Review (stress testing), Basel III capital requirements, and Volcker rule. Of the 13 Wave 3 filers that provided us with cost estimates, the cost of preparing their initial resolution plan varied widely. Four companies estimated that they spent less than $400,000 to prepare their initial tailored plans, with two estimating their costs to be $35,000 and $15,000. For the other companies that provided estimates, their costs ranged from about $1 million to about $6 million, with no consistent difference between companies filing a full or tailored plan. Like the larger filers, nearly all of these Wave 3 filers hired external consultants or attorneys to help them prepare their initial plans, with total fees ranging from $15,000 to $3.5 million. But nearly all told us that they reduced their use of external experts for their subsequent plans and that the cost of preparing their subsequent plans declined. Additionally, the number of internal work hours associated with resolution planning varied considerably among the Wave 3 companies. Of the companies that provided estimates, two estimated over 10,000 work hours, three estimated 1,000 to 6,000 work hours, and four estimated less than 1,000 work hours to complete the resolution plan. Cost estimates varied, in part because companies used different approaches to measure costs. Similar to the larger companies, several of the Wave 3 filers we interviewed said that the time and resources dedicated to resolution planning represent an opportunity cost. Without the resolution plan requirement, the companies could expend these resources and staff time on revenue-generating activities, according to the companies. However, most of these companies said that resolution planning had not had a measurable effect on their business or competitiveness, and several said that they generally had not made cost adjustments in other areas due to resolution planning. In comparison to other regulations, several of the Wave 3 companies said that complying with the resolution plan rule was on par with or less costly than the Comprehensive Capital Analysis and Review (stress testing), Basel III capital requirements, and the Volcker rule. According to Federal Reserve officials, the regulators helped to reduce the burden on these companies by giving some the option of filing tailored plans and exempting others from most of the informational requirements. As previously mentioned, the regulators have exempted 90 Wave 3 filers from most plan information requirements. However, FDIC officials said that this exemption was related more closely to the companies’ lower levels of complexity and effect on U.S. financial stability than it was to reducing the companies’ costs. The regulators are considering ways to reduce compliance costs for these filers while still obtaining the necessary information, according to officials from both FDIC and the Federal Reserve. FDIC and the Federal Reserve have made progress implementing the Dodd-Frank Act’s framework for resolution planning for large financial institutions. For the smaller financial companies, the regulators have taken steps to reduce the burden of planning under the resolution plan rule, including by significantly reducing the plan informational requirements for the majority of such filers. However, weaknesses remain in the following areas: Disclosure and transparency. The regulators have not disclosed their assessment frameworks and criteria for confidentiality reasons, which limits the potential for companies to better achieve the Dodd- Frank Act’s objective. For example, a better understanding of the regulators’ assessment frameworks could give the larger companies a more complete understanding of the key factors that can lead to plan deficiencies. Likewise, disclosure of the regulators’ criteria could help motivate smaller companies to reduce their systemic risk and understand how they might qualify to file reduced plans. Greater disclosure and transparency also could enhance the accountability of the regulators’ decisions by, among other things, better informing the public on how the regulators are assessing resolution plans and reducing plan requirements for smaller companies, thereby bolstering public and market confidence. Timeliness of guidance and feedback. FDIC and the Federal Reserve have taken about 9 months on average to review resolution plans and jointly provide companies with guidance or feedback. Because the resolution plan rule requires companies to file plans annually, some companies may not have sufficient time to fully incorporate such guidance or feedback into their subsequent plans and obtain their board of directors’ approval of the plans by the submission deadline. For example, some companies completed and submitted their 2014 plans before receiving the regulators’ feedback on their previous year’s plans, resulting in a less effective and efficient use of time and resources for both the companies and the regulators. We are making the following three recommendations: To enhance disclosure and strengthen transparency and accountability, FDIC and the Federal Reserve should take the following actions: Publicly disclose information about their respective frameworks for assessing and recommending to their boards whether a plan is not credible or would not facilitate an orderly resolution under the Code. For example, the regulators could disclose aspects of their assessment frameworks as a supplement to their initial guidance publicly issued in April 2013. Publicly disclose aspects of their criteria used to decide which Wave 3 companies are allowed to file a reduced plan. In addition, to strengthen the efficiency and effectiveness of resolution planning, FDIC and the Federal Reserve should revise the resolution plan rule’s annual filing requirement to provide sufficient time not only for the regulators to complete their plan reviews and provide feedback but also for companies to address and incorporate regulators’ feedback in subsequent plan filings. For example, the regulators could extend the annual filing cycle to every 2 years or provide companies at least 6 months from the date of feedback or guidance to file another plan. We provided a draft of this report to FDIC and the Federal Reserve for review and comment. In their joint written comments (reproduced in appendix II), the regulators concurred with our findings and recommendations regarding transparency and timeliness. They stated that they are committed to enhancing public disclosure around resolution planning and plan to make public the information needed to understand their frameworks. They also stated that they intend to work to find the most appropriate way to ensure that sufficient time is provided for the regulators to complete their reviews and for plan filers to incorporate the regulators’ feedback in their subsequent plan filings. FDIC and the Federal Reserve also provided technical comments on the draft report, which we incorporated as appropriate. We are sending copies of this report to the House Committee on Financial Services, FDIC, and the Federal Reserve. In addition, the report is available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-8678 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives were to examine (1) the processes used by the Federal Deposit Insurance Corporation (FDIC) and Board of Governors of the Federal Reserve System (Federal Reserve) (jointly, the regulators) to review resolution plans; (2) the extent to which the regulators have determined whether resolution plans are not credible or would not facilitate an orderly resolution under the Bankruptcy Code; and (3) stakeholder views on the usefulness of the resolution plans to companies and other stakeholders. To examine the process used by the regulators to review resolution plans and the extent to which the regulators have determined whether resolution plans are not credible or would not facilitate an orderly resolution under the Code, we reviewed Section 165(d) of the Dodd- Frank Wall Street Reform and Consumer Protection Act, the final resolution plan rule, and FDIC’s and the Federal Reserve’s policies and procedures. We analyzed the regulators’ internal guidance, training documents, and workpapers related to plan reviews conducted for plan years 2012 through 2014, guidance and feedback provided to the companies, and FDIC’s and the Federal Reserve’s Board meeting minutes where credibility determinations were discussed. To examine what is known about the usefulness of the resolution plans to companies and other stakeholders, we selected a sample of 25 companies that filed a resolution plan in 2014 and interviewed them to obtain their views on the benefits, costs, and challenges associated with the plans. We selected 10 of these companies from the 18 Wave 1, Wave 2, and designated nonbank filers, and 15 from the 120 Wave 3 filers. We grouped the Wave 1, Wave 2, and designated nonbank filers together because they generally represent the largest filers and FDIC and the Federal Reserve generally use the same processes for reviewing these companies’ plans. From this group, we systematically selected and attempted to contact 10 filers. We were able to conduct interviews with 9 of these companies, and we supplemented the sample with 1 additional filer that had been interviewed prior to the sample selection. For the Wave 3 filers, FDIC provided us with a breakdown of the companies by the type of plan they were allowed to file in 2014: (1) 30 companies that filed a full resolution plan, (2) 30 companies that were approved to file a tailored plan, and (3) 60 companies that were approved to file a reduced plan. Within these categories, we randomly selected 4 full plan filers, 3 tailored plan filers, and 3 reduced plan filers. In two cases, officials from the sampled company declined to participate, so we randomly selected a substitute from the same plan type category. We also supplemented the sample of Wave 3 filers with 1 full plan filer and 3 tailored plan filers that had been interviewed prior to the sample selection and 1 full plan filer that requested to be included for a total sample of 15 Wave 3 filers. The information collected from this sample of companies cannot be generalized to the larger population of all companies that are required to file a resolution plan. These interviews were also used in our analysis for the second objective. In addition, we judgmentally selected a sample of 20 stakeholders that we interviewed to obtain their views on the usefulness of the resolution plans. We selected stakeholders who (1) had subject matter expertise, such as academics and industry groups; (2) had experience advising companies on their resolution plans, such as bankruptcy attorneys and consultants; or (3) used the plans in their work, such as credit ratings agencies, investors, and creditors. To characterize companies’ and stakeholders’ views throughout the report, we consistently defined modifiers (e.g. “nearly all”) to quantify each group of interviewees’ views as follows: “all” represents 100 percent of the group, “nearly all” represents 80 percent to 99 percent of the group, “most” represents 60 percent to 79 percent of the group, “several” represents 40 percent to 59 percent of the group, and “some” represents 20 percent to 39 percent of the group. While the percentage of the group of interviews remains consistent, the number of interviews each modifier represents differs based on the number of interviews in that grouping: 10 Wave 1, Wave 2, and designated nonbank filers; 15 Wave 3 filers; and 20 stakeholders. Table 6 provides the number of interviews in each modifier for each group of interviews. Furthermore, we met with officials from the Securities and Exchange Commission, the Securities Investor Protection Corporation, the National Association of Insurance Commissioners, and two state insurance departments about their involvement with resolution plan reviews. We also analyzed the 2015 public plans of all Wave 1 filers and 1 Wave 2 filer and the 2014 public plans of all Wave 3 filers and 2 designated nonbank filers, and reviewed government, academic, and other studies on resolution plans’ implementation and usefulness. For our discussion of the extent to which filers have the potential to adversely affect the financial system or the broader economy if they become distressed, we used data from Bloomberg and the Federal Reserve as of the second quarter of 2015 to construct indicators of filers’ size, interconnectedness, and complexity. Our indicator of size is a filer’s total assets. Our indicators of interconnectedness are the gross notional amounts of credit default swaps outstanding for which a filer is the reference entity and a filer’s total debt outstanding, excluding deposits. Our indicators of complexity are the number of a filer’s legal entities, the number of a filer’s foreign legal entities, and the number of foreign countries in which a filer’s foreign legal entities are located. We then compared the median values of the indicators for domestic Wave 1 and 2 filers to the median values for domestic Wave 3 filers. We assessed the reliability of the data from Bloomberg for the purpose of constructing our indicators of size and interconnectedness by reviewing relevant documentation and by electronically testing the data for outliers, missing values, and obvious errors, and we found them to be sufficiently reliable for this purpose. We assessed the reliability of data from the Federal Reserve for the purpose of constructing our indicators of complexity by corresponding with Federal Reserve officials, and we found them to be sufficiently reliable for this purpose. For our analysis of FDIC’s payroll expense data, we connected the companies for which FDIC reported resolution planning-related expenses with the parent companies that are required to file resolution plans under Section 165(d) of the Dodd-Frank Act. We then sorted the parent companies by filing wave to identify the average, minimum, and maximum payroll costs that FDIC staff incurred for each filing wave by calendar year (2012 through 2014). FDIC’s data included 11 Wave 1 filers that filed their first plans in July 2012, 4 Wave 2 filers that filed their first plans in July 2013, 108 Wave 3 filers that filed their first plans in December 2013, and 3 nonbank filers that filed their first plans in July 2014. According to FDIC officials, the absence of the remaining 8 of 116 Wave 3 filers from December 2013 indicates that not all activities had been properly coded. We excluded expenses for companies that did not file a 165(d) resolution plan. Despite FDIC’s acknowledgment of some minor coding errors, we believe our use of the data provides a reasonably accurate estimate to illustrate the trends in the regulator’s spending on resolution plans. In addition, we met with officials from the offices of the FDIC and Federal Reserve that are responsible for reviewing resolution plans, including FDIC’s Office of Complex Financial Institutions and Division of Risk Management Supervision, the Federal Reserve’s Division of Banking Supervision and Regulation, and the Federal Reserve Bank of New York. We discussed their policies and procedures related to plan reviews as well as their views on plans’ usefulness. We conducted this performance audit from November 2014 to April 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, Richard Tsuhara (Assistant Director), Lisa Reynolds (Analyst-in-Charge), Nancy Barry, Katherine Carter, Emily Chalmers, William Chatlos, Risto Laboski, Courtney LaFountain, Kun-Fang Lee, Jessica Sandler, and Jena Sinkfield made significant contributions to this report. | Section 165(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act requires bank holding companies with $50 billion or more in total assets and nonbank financial companies designated by the Financial Stability Oversight Council for supervision by the Federal Reserve to prepare plans for their rapid and orderly resolution under the Code. In 2011, the regulators issued a rule to require companies to annually file a resolution plan. If they jointly found a plan was not credible, the company could be subject to more stringent requirements. GAO was asked to review the regulators' programs for assessing resolution plans. This report examines each regulator's review processes, the progress made in assessing plans, and stakeholder views on the usefulness of the plans. GAO analyzed FDIC's and the Federal Reserve's policies and procedures, documentation of plan reviews, guidance and feedback provided to companies, and public plans. GAO also interviewed the regulators, a judgmental sample of 25 companies (18 percent of all companies required to file a plan) based on assets, and a variety of market participants and academics based on their expertise, experience working with companies, or use of public plans. The Federal Deposit Insurance Corporation (FDIC) and Federal Reserve System (Federal Reserve) have developed separate but similar review processes for determining whether a resolution plan is “not credible” or would not facilitate a company's orderly resolution under the Bankruptcy Code (the Code). Both regulators have processes for staffing review teams, determining whether a plan includes all required information, assessing whether a plan's strategy mitigates obstacles to the company's orderly resolution, and documenting and vetting team findings and conclusions. Although the regulators' review processes are separate, the regulators coordinate with each other by meeting jointly with companies, working together to discuss and share review findings, and jointly issuing guidance and feedback to companies. The regulators have made progress assessing resolution plans but have provided limited disclosures about their reviews. Following their 2012, 2013, and 2014 plan reviews, the regulators clarified and expanded their expectations for the plans—jointly providing companies with guidance or feedback. The regulators did not jointly make any not-credible determinations but reported they may do so for the 2015 plans. However, they have not disclosed their frameworks for determining whether a plan is not credible. They also developed but have not disclosed their criteria for reducing plan requirements for many smaller companies. Without greater disclosure, companies lack information they could use to assess and enhance their plans. The regulators view such information as confidential, but a federal directive on open government recognizes that transparency promotes accountability by providing more information on government activities. A lack of information on how the regulators assess plans and allow some companies to file reduced plans could undermine public and market confidence in resolution plans. In addition, the resolution plan rule requires companies to annually submit plans approved by their board of directors. However, the annual filing cycle may not be feasible. GAO found that the regulators took 9 months, on average, to complete their reviews. FDIC said companies can take up to 3 months to obtain internal approval of their plans. The regulators attributed their long review time in part to the plans' complexity, and one regulator said that companies ideally should have 6 months to incorporate feedback. Absent a longer filing cycle, companies may not have sufficient time to revise their plans to incorporate regulatory feedback intended to enhance their resolvability under the Code. According to companies and stakeholders that GAO interviewed, resolution planning has improved the resolvability of large financial companies under the Code. Companies with $100 billion or more in nonbank assets generally said that resolution planning also had led to some operational improvements, but companies with less than $100 billion in nonbank assets generally said that they had reaped few benefits from resolution planning. However, whether the plans of the largest companies actually would facilitate their rapid and orderly resolution under the Code is uncertain, in part because none has used its plan to go through bankruptcy. At the same time, the regulators told GAO that they were incurring costs to review the plans, and companies said that complying with the rule also had raised their costs. GAO recommends that FDIC and the Federal Reserve publicly disclose information about their assessment frameworks and reduced plan criteria for smaller companies and revise the annual filing requirement. The regulators agreed with GAO's recommendations. |
The FSM and the RMI are located in the Pacific Ocean just north of the equator, about 3,000 miles southwest of Hawaii and about 2,500 miles southeast of Japan (see fig. 1). The FSM is a federation of four semiautonomous states and has a population of approximately 103,000 (as of 2010) scattered over many small islands and atolls. The FSM states maintain considerable power, relative to the FSM National Government, to allocate U.S. assistance and implement budgetary policies. Chuuk, the largest state, has 47 percent of the FSM’s population, followed by Pohnpei (35 percent), Yap (11 percent), and Kosrae (6 percent). By contrast, the RMI government is responsible for allocating U.S. assistance in that country, though the RMI’s 29 constituent atolls and five islands exercise local government authority. About three-quarters of the RMI population of approximately 53,000 (as of 2011) live in Majuro, the nation’s capital, and on Ebeye Island in the Kwajalein Atoll. U.S. relations with the FSM and the RMI began during World War II, when the United States ended Japanese occupation of the region. The United States administered the region under a United Nations trusteeship beginning in 1947. During the 1940s and 1950s the RMI was the site of 67 U.S. nuclear weapons tests. The four states of the FSM voted in a 1978 referendum to become an independent nation, while the RMI established its constitutional government and declared itself a republic in 1979. Under the trusteeship agreement, both newly formed nations remained subject to the authority of the United States until 1986. The United States, the FSM, and the RMI entered into the original Compact of Free Association in 1986 after lengthy negotiations. The compact provided a framework for the United States and the two countries to work toward achieving the following three main goals: (1) establish self-government for the FSM and the RMI, (2) ensure certain national security rights for all of the parties, and (3) assist the FSM and the RMI in their efforts to advance economic development and self- sufficiency. The compact’s third goal was to be accomplished primarily through U.S. direct financial assistance to the FSM and the RMI. From 1987 through 2003, the FSM and the RMI are estimated to have received about $2.1 billion in compact financial assistance. Under the original compact, the FSM and the RMI used funds for general government operations; capital projects, such as building roads and investing in businesses; debt payments; and targeted sectors, such as energy and communications. The FSM concentrated much of its spending on government operations at both national and state levels, while the RMI emphasized capital spending. While the original compact set out specific obligations for reporting and consultations regarding the use of compact funds, the FSM, RMI, and U.S. governments provided little accountability over compact expenditures and did not ensure that funds were spent effectively or efficiently. In 2003, the United States approved separate amended compacts with the FSM and the RMI that went into effect on June 25, 2004, and May 1, 2004, respectively. The amended compacts provide for direct financial assistance to the FSM and the RMI from 2004 to 2023, decreasing in most years (hereafter referred to as the annual decrements). The amounts of the annual decrements are to be deposited in the trust funds established under the amended compacts for the two nations (see fig. 2). For more information on compact assistance and trust fund contributions, see appendix III. The amended compacts and associated fiscal procedures agreements require that grant funding support the countries in six core sectors— education, health, infrastructure, environment, private sector development, and public sector capacity building—with the education and health sectors having the greatest priority. Within the core sector grants, the RMI must also target grant funding to Ebeye and other Marshallese communities within Kwajalein Atoll: $3.1 million annually for 2004 through 2013 and $5.1 million annually for 2014 through 2023 (hereafter referred to as Ebeye special needs funds). In addition to receiving compact sector grants, the FSM and the RMI are eligible for a supplemental education grant each year. The amended compacts’ implementing legislation authorized annual appropriations of about $12.2 million for the FSM and $6.1 million for the RMI beginning in 2005 to the U.S. Secretary of Education to supplement the education grants awarded under the amended compacts. Under the fiscal procedures agreements, permitted uses of the supplemental education grant funds include, among other things, support for direct educational services at the local school level focused on school readiness, early childhood education, primary and secondary education, vocational training, adult and family literacy, and the smooth transition of students from high school to postsecondary educational pursuits or rewarding career endeavors. Funding for the supplemental education grant is appropriated annually to Education and transferred to Interior for disbursement, with Interior responsible for ensuring that the use, administration, and monitoring of supplemental education grant funds are in accordance with a memorandum of agreement among Interior, Education, HHS, and the Department of Labor (Labor), as well as with the fiscal procedures agreements. In addition to amended compact grants, the FSM and the RMI receive other grants and assistance from U.S. agencies. For example, in fiscal years 2007 through 2011, the FSM spent about $197 million and the RMI spent about $46 million in noncompact grants from agencies including Interior, Education, HHS, Labor, and the Department of Transportation. See appendix IV for more information on noncompact grants awarded to the FSM and the RMI. The legislation and fiscal procedures agreements for the amended compacts established oversight mechanisms and responsibilities for the FSM, RMI, and the United States. JEMCO and JEMFAC were jointly established by the United States and, respectively, the FSM and the RMI to strengthen the management and accountability and promote the effective use of compact funding. Each five-member committee comprises three representatives from the United States government and two representatives from the corresponding country. The United States, the FSM, and the RMI are required to provide the necessary staff support to their representatives on the committee to enable the parties to monitor closely the use of assistance under the compacts. JEMCO’s and JEMFAC’s designated roles and responsibilities include the following: reviewing the budget and development plans from each of the governments; approving grant allocations and performance objectives; attaching terms and conditions to any or all annual grant awards to improve program performance and fiscal accountability; evaluating progress, management problems, and any shifts in priorities in each sector; and reviewing audits called for in the compacts. In practice, JEMCO and JEMFAC allocate grants and attach terms and conditions to grant awards through resolutions, which are discussed and voted upon at their meetings. From fiscal years 2004 through 2013, JEMCO and JEMFAC allocated about $1.1 billion in sector grants to the FSM and RMI under the amended compacts. In practice, JEMFAC has allocated Ebeye special needs funds as a separate grant allocation, resulting in seven sectors. For more detailed information on compact sector allocations, see appendix V. The FSM national and state governments and the RMI government are to manage the sector and supplemental education grants and monitor day- to-day operations to ensure compliance with grant terms and conditions. The governments are also required to track progress toward performance goals and report quarterly to the United States. The FSM and the RMI must annually report to the U.S. President on the use of U.S. grant assistance and other U.S. assistance provided during the prior fiscal year, and must also report on their progress in meeting program and economic goals. Each country has established an agency dedicated to providing compact oversight and ensuring compliance with regulations in the amended compacts, grant award terms and conditions, and JEMCO and JEMFAC resolutions. The FSM and the RMI must adhere to specific fiscal control and accounting procedures and are required to submit annual audit reports, within the meaning of the Single Audit Act, as amended. Single audits are focused on recipients’ internal controls over financial reporting and compliance with laws and regulations governing U.S. federal awardees and provide key information about the federal grantee’s financial management and reporting. Through its participation in the JEMCO and JEMFAC, the United States can require that terms and conditions be attached to any and all annual grant awards to improve program performance and fiscal accountability. Interior’s Office of Insular Affairs (OIA) has responsibility for the administration and oversight of the FSM and RMI compact sector and supplemental education grants. In addition to headquarters staff, OIA operates a Honolulu field office and has staff in the FSM and RMI to conduct oversight. Under the fiscal procedures agreements governing the amended compacts, OIA is responsible for using financial reports to monitor each country’s budget and fiscal performance, and for using performance reports submitted by the countries to evaluate sector grant performance. OIA officials are also responsible for monitoring compliance with grant terms and conditions. If problems are found in areas such as the FSM and RMI monitoring of sector grants or a lack of compliance with grant terms, the United States may impose special conditions or restrictions, including requiring the acquisition of technical or management assistance, requiring additional reporting and monitoring, or requiring additional prior approvals. Additionally, the United States may withhold grant funds if the countries breach the terms and conditions of certain sections of the amended compacts or of the fiscal procedures agreements, or fail to comply with the award conditions of a grant. As the U.S. agency with the largest grant awards to the FSM and the RMI, Interior is designated as the cognizant audit agency for FSM and RMI single audits and has several responsibilities, including providing technical advice to auditees and auditors and considering grant extensions to the report submission date, informing other affected federal agencies of any direct reporting of irregularities or illegal acts, and coordinating the federal response for audit findings that affect the federal program of more than one agency. Furthermore, all U.S. agencies providing noncompact grants to the FSM and the RMI are responsible for administering those grants in accordance with Office of Management and Budget (OMB) requirements and agency regulations that include the Grants Management Common Rule. Under the common rule, U.S. agencies may consider a grantee as “high risk” if the grantee has a history of unsatisfactory performance, is not financially stable, has a management system that does not meet required standards, has not conformed to the terms and conditions of previous awards, or is otherwise irresponsible. Single audits provide key information about the adequacy of a grantee’s management system. Federal agencies that designate a grantee as high risk may impose special grant conditions. In fiscal years 2007 through 2011, the FSM and RMI spent at least half of their compact sector funds in the education and health sectors. Most of the compact funds in these sectors paid for personnel costs and medical supplies and equipment. Both countries spent significant amounts of compact funds on personnel in the education and health sectors, which resulted in JEMCO and JEMFAC resolutions aimed at capping the budgetary levels for personnel in these sectors at fiscal year 2011 levels because of concerns about the sustainability of sector budgets as compact funding continues to decline through fiscal year 2023. While the four FSM states completed plans in 2012 and 2013 to address the annual decrements in compact sector funding through fiscal year 2023, the FSM National Government and the RMI have not submitted plans to address the decrements. As a result, the U.S. members of the JEMCO and JEMFAC are considering withholding certain fiscal year 2014 compact sector grant funds until the FSM National Government and RMI submit their plans. At the annual JEMCO and JEMFAC meetings in August 2013, fiscal year 2014 sector grant funds were not allocated to the FSM or the RMI. In fiscal years 2007 through 2011, the FSM spent about 67 percent, or $158 million, of sector compact funds in the education and health sectors. As seen in figure 3, of the total expenditures in all six compact sectors, expenditures for education represented approximately 37 percent and expenditures for health represented about 30 percent. Expenditures in the other four sectors—infrastructure, environment, private sector development, and public sector capacity building—together accounted for about 33 percent of total compact expenditures during this period. In addition to education sector compact funds, the FSM also spent about $35.7 million in supplemental education grant funds to support education initiatives. For information on FSM infrastructure sector compact expenditures, see appendix II. Compact funds in the FSM supported a significant portion of government expenditures in the education and health sectors. Education sector compact and supplemental education grant funds together constituted about 85 percent of total education expenditures, and health sector compact funds constituted about 66 percent of total health expenditures in fiscal year 2011. Other noncompact U.S. grants represented an additional 10 percent of the education expenditures and 25 percent of health expenditures in fiscal year 2011. With regard to the use of funds, in fiscal years 2009 through 2011, the FSM spent about 61 percent of its education sector compact and supplemental education grant funds to pay personnel, and about 41 percent of its health sector compact funds to pay personnel (see fig. 4). The levels of expenditures in the FSM education and health sectors dedicated to personnel concerned JEMCO because of the potential effects on the sustainability of sector budgets as compact funding continued to decline through fiscal year 2023 because of the annual decrements. In September 2011, JEMCO resolved that it would not approve fiscal year 2013 budgets for the education and health sectors until the FSM demonstrated that budgetary levels for personnel expenses reflected in education and health sector proposals did not exceed fiscal year 2011 levels. According to OIA, the FSM complied with this resolution in its fiscal year 2013 compact funding proposals. In March 2013, the four FSM states had completed plans to address the annual decreases, or decrements, in compact sector funding through 2023; however, the FSM National Government has not completed a plan to address the fiscal challenges facing the government because of the annual decrements. The states’ plans, completed in 2012 and early 2013, detail the proposed expenditure cuts across sector budgets intended to offset the annual decrements while preserving essential services in the education and health sectors. Absent additional revenues, proposed cuts are to be implemented in 2014, 2017, and 2020. While U.S. JEMCO members expressed their satisfaction with the FSM states’ plans, at the March 2013 JEMCO midyear meeting, they called for the FSM National Government to create a plan addressing how it will manage the fiscal challenges facing the government and how it will support the states in managing annual decrements. An FSM official explained that the FSM National Government did not create a plan because it receives only a small portion of FSM compact funds. The official said the FSM National Government was focused instead on shifting its sector operating costs, such as for the College of Micronesia, to the government’s own funds, freeing up compact funds for priorities in the education and health sectors. The FSM official also noted the government’s efforts to develop an operational plan by early 2014 outlining how the FSM government will address the budgetary and economic challenges it faces through 2023 and beyond. In May 2013, the three U.S. JEMCO members notified the FSM that the United States was considering withholding select fiscal year 2014 compact sector funds from the FSM National Government until it completes a plan detailing the concrete commitments that will be made to complement and support the states’ plans to address the annual decrements in compact sector funding. Without this plan, the FSM may not be able to sustain essential services in the education and health sectors in the absence of compact funding. The FSM National Government responded in July 2013 indicating that to address the decrement it was considering, among other things, tax reform, alternative energy initiatives, an annual funding set- aside, increased FSM trust fund contributions, and improved revenue sharing with the states. In its comments on our draft report, the FSM National Government mentioned the issue of revenue sharing between the national and state governments, noting that the FSM leadership is working together to arrive at a decision that will be beneficial to both levels of government and at the same time facilitate greater effectiveness in meeting the development objectives of the FSM. (See app. X for a copy of the FSM’s comments.) At the annual JEMCO meeting in August 2013, fiscal year 2014 sector grant funds were not allocated to the FSM. In fiscal years 2007 through 2011, the RMI spent about 50 percent, or $89 million, of sector compact funds in the education and health sectors. As shown in figure 5, of the total compact expenditures within the seven compact sectors (including Ebeye special needs as a sector), education represented approximately 31 percent and health represented approximately 19 percent. Expenditures in the other five sectors— infrastructure, environment, private sector development, public sector capacity building, and Ebeye special needs—together accounted for about 50 percent of total compact expenditures during this period. In addition to education sector compact funds, the RMI spent about $26.5 million of supplemental education grant funds and $11.9 million of Ebeye special needs funds to support education initiatives. In addition to health sector compact funds, the RMI spent about $3 million of Ebeye special needs funds to support health initiatives. For information on RMI infrastructure sector compact expenditures, see appendix II. Compact funds in the RMI supported a significant portion of government expenditures in the education and health sectors. Education sector compact funds, supplemental education grants, and Ebeye special needs education funds constituted about 62 percent of total education expenditures in fiscal year 2011, while health sector compact funds and Ebeye special needs health funds constituted about 33 percent of total health expenditures. Other noncompact U.S. grants represented an additional 6 percent of education expenditures and 17 percent of health expenditures in fiscal year 2011. In fiscal years 2007 through 2011, the RMI spent most education and health compact funds on personnel: about 54 percent of the education sector compact and supplemental education grant funds paid for personnel, while about 64 percent of the health sector compact funds paid for personnel (see fig. 6). Due to interrelated concerns about the amount of funds dedicated to personnel costs and the sustainability of sector budgets, JEMFAC resolved in August 2011 that personnel-related expenses in the education and health sector budgets for fiscal year 2012 could not exceed fiscal year 2011 levels and directed that fiscal year 2012 compact funds made available by this change should be budgeted for direct support of education and health programs and services. According to OIA, the RMI complied with this resolution. The RMI has not updated its plan to address the annual decrements in compact funding. In March 2011, the RMI submitted a draft medium- term budget and investment framework, which included a plan to address the annual decrements and provided an overview of economic performance, the country’s fiscal situation, and budget estimates. However, U.S. JEMFAC members raised concerns that the framework did not account for significant ongoing health sector operational costs, relied on reform efforts, and assumed unlikely new revenues. While the RMI provided a draft update to its framework in July 2013, the government has not updated the plan for addressing the annual decrements. The RMI budget submissions for fiscal years 2012 and 2013 did not reflect the RMI’s commitments outlined in the framework and failed to address JEMFAC’s ongoing concerns regarding decrement planning. An RMI official responded that the RMI government could not provide the updated framework and annual decrement plan because of obstacles it encountered in completing the 2011 audit and finalizing the 2011 census. In April 2013, the three U.S. JEMFAC members notified the RMI that the United States was considering withholding fiscal year 2014 compact sector funds from the RMI until the RMI submits the framework and an annual decrement plan. In July 2013, RMI officials submitted an updated framework outlining anticipated revenues in the medium term, but it lacked an annual decrement plan, as required. Without the annual decrement plan, the RMI may not be able to sustain essential services in the education and health sectors in the medium term. At the August 2013 JEMFAC meeting, the RMI submitted an updated medium-term budget and investment framework dated August 2013 along with several budget portfolio statements for fiscal year 2014 including statements for the departments of health and education. The RMI government considers this to be its decrement plan. However, the information was provided to the U.S. members of the JEMFAC 3 days prior to the annual meeting, and according to these members, they did not have sufficient time to review it and determine whether or not it meets the requirements of the JEMFAC resolution. At the annual JEMFAC meeting in August 2013, fiscal year 2014 sector grant funds were not allocated to the RMI. Data reliability issues hindered our assessment of progress by the FSM and RMI in both the education and health sectors for fiscal years 2007 through 2011. Between 2004 and 2006, both countries began tracking education and health indicators, establishing data collection systems, and collecting data for the majority of the indicators and have continued to track data on their indicators since that time. (See app. VI for a list of all FSM and RMI indicators in the education and health sectors.) While both countries tracked annual indicators to measure progress in these sectors, in reviewing subsets of these indicators we determined that data for eight of the subset of nine education indicators we reviewed in the FSM and for three of the subset of five education indicators we reviewed in the RMI were not sufficiently reliable to assess progress for the compacts as a whole—for a variety of reasons, some specific to individual indicators, but primarily because of missing, incomplete, or inconsistent data. We found one RMI education indicator to be both reliable and capable of demonstrating progress: the education level of teachers in the RMI. The other reliable RMI education indicator was student enrollment. We determined that data for all five of the subset of FSM health indicators we reviewed were not sufficiently reliable to assess progress for the compacts as a whole. In the RMI, of the subset of five health indicators we reviewed, we determined that one was sufficiently reliable and two were not sufficiently reliable to assess progress; for the remaining two indicators, we had no basis to judge the reliability of the data. In much of their reporting on these indicators, the FSM and RMI have noted data reliability problems and some actions they have taken to address the problems. The compacts’ joint management and accountability committees have also raised concerns about the reliability of the FSM’s education and health data and the RMI’s health data and required that each country obtain an independent assessment and verification of these data; neither country has met that requirement. In 2004, the FSM established 20 indicators to track progress toward its overarching goals in education: to improve the educational system of the country, including primary, secondary, and postsecondary education, and to develop the country’s human and material resources necessary to deliver these services. However, our review of a subset of 9 of the 20 FSM education indicators found problems with data reliability. Table 1 provides a summary of the data reliability determinations we made in reviewing the subset of 9 education indicators. (For a complete list of the indicators the FSM has tracked and reported since fiscal year 2005, see app. VI.) We determined that the data for number of schools by grade level were sufficiently reliable to report on progress in the FSM education sector. The number of schools by grade level, by itself, does not necessarily demonstrate progress or lack thereof; however, it does provide useful information about the changes in the states’ education systems. Both Chuuk and Pohnpei, for example, have gone through a process resulting in school closures, with or without consolidation of some schools, and the numbers of schools by grade level reflect this. In Chuuk, the number of schools declined from a total of 154 primary and secondary schools in 2007 to 85 schools in 2012, a 45 percent reduction. In Pohnpei, the number of schools declined from a total of 41 primary and secondary schools in 2007 to 34 schools in 2011, a 17 percent reduction. We determined that 8 of the subset of 9 FSM education indicators we reviewed could not be used to assess progress over time because of data reliability issues summarized above in table 1. For example, we found that the four FSM states did not use common definitions for some indicators; consequently, the education indicator reports we reviewed do not contain consistent data for these indicators and comparisons cannot be made across states. As an example, Chuuk, Pohnpei, and the FSM National Government each applied its own definition of dropout, creating inconsistencies in the data for that indicator. Student enrollment data provide another example: Chuuk and Kosrae included both public and private schools in reporting student enrollment data, while Pohnpei and Yap included only public schools. In addition to data reporting inconsistencies, we found that data in FSM’s education indicators reports sometimes were not complete. For example, in 2011, average daily student attendance data for Chuuk were missing; for that same year, Chuuk also lacked completion and graduation rate data for 8th and 12th graders. During January 2013 site visits in Chuuk, we visited 13 school sites selected on the basis of available time and travel constraints. This included 6 of 8 schools on the island of Weno and 7 schools on four lagoon islands. In several cases, these were school sites we visited in 2006. In facilities we were able to visit both in 2006 and 2013, we noted general improvements in the overall maintenance and condition; however, staff we interviewed reported that a lack of chairs, desks, and textbooks was a concern, especially in lagoon-island schools. In addition, we visited the Chuuk Department of Education warehouse where we found hundreds of cases of books and supplies that had not been shipped to schools in the outer islands as intended, according to the warehouse manager. An OIA education grant manager reported that the department had recently purchased and distributed 4,000 chairs and the distribution process had gone smoothly. However, as of May 2013, Chuuk did not have a fully implemented purchasing plan, inventory management system, or monitoring plan for textbooks, as required by JEMCO, according to an OIA official. In Pohnpei, we visited 8 schools (5 elementary and 3 high schools) of a total of 34 public elementary and high schools on the main island of Pohnpei, selected on the basis of available time and travel constraints. The school buildings we visited were generally clean. From what we were able to observe, they had electricity, functioning fans in the classrooms, and functioning windows. We observed desks, chairs, and textbooks in the classrooms. The newly built schools that we visited, which were funded through public sector infrastructure grants, had water tanks and new bathrooms with sinks and toilets that appeared to be operational. From what we observed, these schools were generally maintained in good condition. However, we also noted minor issues such as chipped paint and broken classroom doors and locks in some facilities. In 2004, the FSM began tracking data on 14 health indicators to measure its progress toward improving diagnostic and treatment capacity and ensuring the provision of services to geographically dispersed populations (see app. VI for a complete list of the indicators). However, our review of a subset of 5 of the 14 FSM health indicators found problems with data reliability. We determined that none of these indicators could be used to assess progress because of data reliability issues (see table 2). We found inconsistencies in the data provided by the states compared with data for the same indicators included in the FSM’s 14 annual health indicators report. For example, FSM data on immunization cannot be used due to issues with data in Chuuk. According to the FSM immunization expert, the data for that indicator were unreliable prior to 2011 because in Chuuk there was no registry of immunization to allow the computation of a coverage rate. In reviewing the Chuuk medical records, the immunization expert found that (1) an individual child might have three different immunization records in the system under three variations of his or her name, and (2) there was not appropriate consideration as to when a vaccination was medically valid and therefore should be counted. For an immunization to be medically valid, for example, a series may need to be given within certain time frames. The records that the expert examined showed vaccinations being given too early in the sequence, resulting in an incorrect dosage and invalidating the vaccination. Finally, the expert noted that immunization program documentation was bad. We also identified problems when reviewing how the FSM calculates the percentage of days when all essential drugs are in stock. Specifically, we identified problems with the source documents used in the calculations in Chuuk and Pohnpei, calling into question the reliability of the data presented in the health indicators report. The key documents from each health care facility that are used to calculate the indicator are the formulary (the list of the essential drugs) and each facility’s inventory report. We attempted to verify the accuracy of the Chuuk hospital drug inventory report and found that the report contained some incorrect information. For example, the report listed 219 bottles of Amoxicillin 125 MG/5ML Suspension 150 ML, but the hospital’s storage room had none. Since the inventory report is used in calculating the number reported for the essential drugs indicator, incorrect information found in the report raises questions about the validity and reliability of the information for this indicator in the health indicators report. In January 2013, we visited Chuuk’s only hospital, which we had previously visited in 2006. We noted that the hospital was generally better maintained than it had been on our prior visit. Moreover, officials told us that it now has reliable and consistent electric power, which was not the case in the past. Additionally, whereas previously Chuuk’s hospital had only a small incinerator to burn medical waste, we observed two functioning medical waste incinerators, which we were told operate on a routine basis. In 2006, some of the selected medical equipment that we observed was not working. In 2013, the selected equipment that we observed, such as a digital X-ray machine and laboratory equipment, was being used and reported as functional. During our 2006 visit to Chuuk’s hospital, many of the on-hand drugs that we spot checked were past their expiration days. On our 2013 visit to the hospital, however, the majority of the on-hand drugs that we spot- checked were within their labeled expiration dates. We also spot-checked drugs in two dispensaries on Chuuk Lagoon islands and found most of the drugs we checked to be within their labeled expiration dates. We cannot comment regarding on-hand drugs at the three other dispensaries in Chuuk lagoon that we visited, as they were closed when we attempted to visit them even though their schedules indicated that they were supposed to be open. During our 2006 visit to selected Pohnpei dispensaries, we also had found that varying amounts of the drugs on hand that we spot checked were past their expiration dates. On our recent visit to three of the four dispensaries on the main island, however, most of the on-hand drugs that we spot checked in selected dispensaries were within their expiration dates or had an extended shelf life. The three dispensary buildings we selected on Pohnpei in 2013 were all open on the day we visited. In addition, health assistants were present at the time of our visits. The buildings all generally appeared to be in an acceptable condition and had electricity at the time of our visits. The three selected dispensaries also reported some concerns, however. For example, we found some equipment, such as scales and freezers that were not functioning at the time of our visit. We also visited Pohnpei’s only public hospital during our site visits. However major renovation work was taking place on the day of our visit, which made it impossible to make any observations about its normal functioning. (For information on compact-funded infrastructure projects in the education and health sectors, see app. II.) The RMI has tracked 20 indicators selected by JEMFAC in 2004 for monitoring progress in education and began reporting on them annually in 2005 in response to a JEMFAC resolution. The RMI’s overarching education goals were to improve the educational system of the country, including primary, secondary, and postsecondary education, and to develop the country’s human and material resources necessary to deliver these services. For a complete list of the indicators the RMI has tracked and reported from 2007 through 2011, see appendix VI. However, in our review of a subset of 5 of the 20 RMI education indicators, we found problems with data reliability (see table 3). We determined that the data for 2 indicators were sufficiently reliable to assess progress in the RMI’s education sector: (1) total enrollment by grade and gender and (2) number and percentage of teachers by education level. Data we reviewed showed an improvement in the qualifications of RMI teaching staff, with the percentage of teachers having no degree, or a high school diploma, or a certificate decreasing from 57 percent in school year 2006-2007 to 42 percent in school year 2011-2012. Over the same time frame, the number of teachers holding associate’s, bachelor’s, or master’s degrees increased from 43 percent to 55 percent. OIA has advised the RMI Ministry of Education that all uncertified teachers should be in a ministry-approved degree program to be individually eligible for salary support from sector grant, supplemental education grant, or Ebeye special needs funds, and that these teachers should be certified by school year 2015. We determined that data for 3 of the indicators could not be used to assess education sector progress for the compact as a whole because of data reliability problems. For example, we found that the RMI changed the data source for some of the indicators it reported on during fiscal years 2007 through 2011. In fiscal years 2007 through 2010, the RMI reported Pacific Island Literacy Test data on student achievement for 4th graders, whereas in fiscal year 2011 it reported the Marshall Islands Standardized Test for 3rd, 6th and 8th graders, so year-to-year progress cannot be assessed because different grades and different tests were used. In January 2013, we made site visits to 6 of 12 public educational facilities in Majuro Atoll and 3 of 6 public educational facilities in Kwajalein Atoll, selected on the basis of available time and travel constraints. The new and renovated classrooms that we visited all had desks, chairs, and chalkboards. Most of the fans and lighting that we observed were in working order at the time of our visit, as were the new bathrooms. However, many of the safety doors that we observed at our selected schools were either off their hinges and moved to one side or propped open with an object. Officials told us that this problem occurred because the doors had not been properly installed. When we visited the RMI in 2006, we were shown classrooms in the Marshall Islands High School that had collapsed ceilings. We found no such problems during our visit to this school in 2013. However, we did find that several of the water tanks at the school were not connected to any of the buildings. At another school that we visited, Laura Elementary, classrooms in the new building had desks, chairs, and electricity, but an old building that was still used lacked electricity. At Delap Elementary, the classrooms also had electricity. On Ebeye, we visited a school in Gugeegue that had consistent electricity, we were told. We observed chairs, desks, and textbooks on our visit. However, we were also shown one of the school buildings being used for classrooms though it was considered unsafe by the RMI’s Project Management Unit. (For information on compact-funded infrastructure projects in the education and health sectors, see app. II.) The RMI established 26 indicators to measure progress toward its goal of improving primary health care in the RMI in 2006, and tracked them since 2007 (see app. VI for a list of the RMI’s health indicators), according to the RMI’s Ministry of Health. We found that 1 of the subset of 5 indicators that we reviewed—tuberculosis prevalence rates—was sufficiently reliable to assess progress in the health sector for fiscal years 2009 through 2011 (see table 4). While the number of tuberculosis cases was 23 in fiscal year 2009, the number increased to 30 cases in fiscal year 2010 and then fell slightly to 29 in fiscal year 2011. However, we determined that 2 of the subset of 5 health indicators that we reviewed were not sufficiently reliable because of various issues with data collection and reporting. For example, we determined that data reported for immunization coverage for 2-year-olds and the child mortality rate were not reliable due to the timeliness and accuracy of reporting and low coverage rates for data from the outer islands, all problems noted in the Ministry of Health’s responses to our questions on data reliability. We found that for 2 other health indicators we had no basis to judge their reliability. During January 2013, we visited both hospitals in the RMI, one located on Majuro and the other on Ebeye island in the Kwajalein Atoll. We did not attempt to visit any health clinics in other atolls due to logistic considerations. During our 2006 visit to the Ebeye island hospital, we were told that persistent problems with Ebeye’s power supply continued to interrupt hospital services. In 2013, however, we were told that the Ebeye island hospital had regular electricity, which we observed at the time of our visit. This facility also appeared to be clean, and the selected medical and laboratory equipment that we examined was functioning. On our visit to the hospital in Majuro, we asked whether the dispensary maintained a drug formulary—a list of the required drugs on hand. The hospital in Majuro provided us with a copy of its formulary, which was from 2007. The drugs and medical supplies that we spot-checked at the hospital were within their labeled expiration dates. (For information on compact-funded infrastructure projects in the education and health sectors, see app. II.) Education. In the annual education indicators report that it submitted to JEMCO from 2007 through 2011, the FSM identified problems with the overall quality, and consistency, of the education data, as well as problems with timeliness in reporting. Additionally, the reports noted the need for training of the data managers and difficulties with the data systems. In March 2012, JEMCO reaffirmed the need for reliable education data to evaluate performance in a resolution that required independent verification of performance indicators and data for the education sector, which the FSM was to communicate in a report due to OIA by July 1, 2013, prior to the August 2013 annual meeting. In April 2013, the FSM Department of Education (National Government) addressed the JEMCO resolution by seeking proposals to conduct an independent verification of its performance indicators and data quality. The request for proposals stated that the project period was approximately 2 months, ending July 30, 2013, but it did not state whether a report on the results of the project would be prepared within that time frame. Health. The FSM reported on its 14 annual health indicators, comprehensively by state and for the National Government, in a July 2012 report by the FSM national Department of Health and Social Affairs covering fiscal years 2004 through 2011. The report noted limitations with some of the data, for example, that not all infant deaths in the outer islands were included in the infant mortality data. In response to the report, JEMCO identified concerns regarding the reliability of data reported for the health indicators. For example, JEMCO noted concerns about the accuracy of the reported infant mortality rates as well as the reported number of encounters for primary health care services offered in community and dispensary settings, which the FSM tracked as a proxy measure of improved community-based primary health care. In its 2012 resolution JEMCO reaffirmed the need for reliable and quantifiable health data to evaluate performance and also required independent verification of performance indicators and data for the health sector; it required the FSM to submit a report on the health indicators by July 1, 2013. We inquired about the status of the FSM’s effort to address the JEMCO resolution to conduct an independent verification of the health data, and the Department of Health and Social Affairs informed us that the FSM asked for an extension of the July deadline. According to OIA, the FSM did not budget sufficient funds for the assessment, and that is why the FSM needed an extension. Education. From fiscal years 2007 through 2011, the RMI reported data on its annual indicators in its Ministry of Education annual portfolio budget statements (hereafter, portfolios). The RMI Ministry of Education reported that data on educational indicators are entered quarterly into its data management system, and that schools generally provide their data before the established deadlines. The RMI also provided us with copies of the standard forms that it uses to collect data on educational indicators. The RMI’s portfolios containing the indicator data did not explicitly identify limitations associated with the overall data; however, the portfolios included some notes describing limitations for a couple of indicators. For example, one note indicated that student teacher ratios did not include private schools. JEMFAC has not sought an independent review of RMI education indicator data quality. Health. The RMI Ministry of Health issued an annual health data report for each year from 2007 through 2011. The RMI also noted in its 2011 annual health data report that immunization coverage data showed a significant drop because of data entry problems, mainly in terms of lateness in entering data and an inability to keep track of children moving from one locality to another. The RMI Ministry of Health reported it uses a number of different international databases to track its health indicator progress such as WebIZ for immunizations and EpiAnywhere for tuberculosis. The Ministry of Health reported that they have undertaken a couple of different data assessments to improve data accuracy, as well as made efforts to improve reporting from Ebeye and the outer islands. Among the checks the Ministry of Health reported that it conducts to ensure the accuracy of the tuberculosis rate indicator is comparing the data entered into the database with results from lab tests, X-rays, and clinical visits. In 2009, JEMFAC noted that the RMI health data were unreliable because of discrepancies related to outer island data and infant mortality rates. Other outside reports also questioned how the Ministry of Health handled other data on disease incidence, prevalence, and mortality. In 2010, JEMFAC required that the Ministry of Health initiate and complete an assessment of the reliability of all its health data-management practices by September 30, 2011. The ministry obtained technical assistance from a United Nations Volunteer to address the requirement. However, the volunteer technical expert only stayed 10 months, leaving in July 2012, and the position was still vacant as of July 2013, according to the Ministry of Health. The RMI had not provided JEMFAC with the required report as of June 2013. The single audit reports we reviewed indicated challenges to ensuring accountability of compact and noncompact U.S. funds in the FSM and RMI. For example, these governments’ single audits showed repeat findings and persistent problems in noncompliance with U.S. program requirements, such as accounting for equipment. The United States has taken steps regarding the accountability of compact funds, such as establishing the Chuuk Financial Control Commission, but Interior has not coordinated with other U.S. agencies regarding the risk status of the FSM and the RMI for noncompact funds. Furthermore, the offices responsible for compact administration in the FSM, RMI, and United States faced limitations hindering their ability to conduct compact oversight. For example, OIA experienced a staffing shortage that disproportionately affected compact grant oversight compared to other OIA activities, with 5 of 11 planned positions filled in 2012. In fiscal years 2006 through 2011, the FSM National Government single audit reports indicated that the government faced financial accountability challenges. However, the single audit reports for Chuuk and Pohnpei state governments demonstrated improvement in financial accountability: financial statement audit opinions improved and the number of material weaknesses and significant deficiencies declined. As an example of the remaining challenges for the FSM National Government, its 2011 single audit report identified problems with the extent of noncompliance with program requirements, such as preparing required quarterly reports. These reports are important because OIA uses them for oversight of the amended compact. Furthermore, the National Government’s 2011 single audit report contained several repeat findings—problems noted in previous audits that had not been corrected for several years. For a detailed summary of our review of the FSM single audit reports, see appendix VII. The following briefly summarizes our analysis of the single audits for the FSM National Government and the state governments of Chuuk and Pohnpei. Financial reporting: FSM National Government single audit reports conveyed that the government was not able to account fully for its use of compact or noncompact funds for fiscal years 2006 through 2008. Chuuk’s single audit reports continued to identify financial accountability weaknesses, primarily because Chuuk’s financial statements did not contain information on its land leases in fiscal years 2009 through 2011. For fiscal years 2006 through 2011, Pohnpei received an unqualified opinion on its financial statements included in its single audit reports. (For additional details, see app. VII.) Compliance with requirements of major federal programs: The FSM National Government continued to be noncompliant with the terms and conditions of major federal programs in fiscal year 2011 in each of its three major programs. Furthermore, its fiscal year 2011 single audit report included four material weaknesses and eight significant deficiencies. The FSM National Government continued to have findings that have not been corrected for several years. For example, seven findings had recurred at least three times in the 4 years prior to 2011. In addition, the FSM National Government had consistently lacked the ability to prevent disbursing funds in excess of available funds in each year for the previous 2 years and lacked the ability to accurately report financial information in each of the previous 4 years. We believe recurring weaknesses in internal controls increase the risk that assets are susceptible to misuse. In contrast, Chuuk’s fiscal year 2011 single audit report demonstrated improvement in compliance with major federal programs. Whereas Chuuk previously had been considered noncompliant in fiscal years 2006 through 2010, it was considered materially compliant in fiscal year 2011. Pohnpei’s single audit reports also demonstrated improvement, as the state government was noncompliant with the requirements of federal programs in fiscal years 2006 and 2007 but was considered materially compliant in fiscal years 2008 through 2011. See appendix VII for additional information. Timeliness: The FSM National Government and Chuuk did not submit their 2006 single audit reports on time due to a delay in the reconciliation of accounting records. In fiscal years 2007 through 2011, however, the FSM National Government and Chuck submitted their single audit reports on time. Pohnpei met the deadline for submitting single audit reports during the entire period, fiscal years 2006 through 2011. (For additional details, see appendix VII.) The FSM has a national audit office, the Office of the National Public Auditor (ONPA), and Pohnpei has a Public Auditor. According to ONPA officials, ONPA has a staff of 15 in Pohnpei and 5 in Chuuk. According to state officials, the Pohnpei state government’s Office of the Public Auditor (OPA) has a professional staff of 8. Both the ONPA and OPA identified internal control weaknesses in their audits of the FSM National Government and state government that could lead to waste, fraud, and abuse. The following are examples from reports issued by the ONPA. An audit report on the National Government’s payroll operating controls for fiscal years 2010 through 2012 found overpayments to employees including payments to active and terminated employees and for hours worked but not authorized. A report on the Chuuk State Department of Health Services found that the department did not implement a procurement and inventory control system ensuring the efficient use of funds and the timely distribution of medications to recipients. This program was funded by the amended compact health sector grant. A report on the Chuuk Department of Education found that it failed to provide many students with textbooks, to hold schools and students accountable for lost books, and to ensure that classroom lessons followed the approved state curriculum. This program was funded by amended compact education sector grant. In fiscal years 2008 through 2011, the Pohnpei state government’s OPA also conducted audits that identified findings related to internal control weaknesses potentially leading to waste, fraud, and abuse. For example, its September 2008 audit report found weak internal controls in the issuance of pharmaceutical and medical supplies from the Pohnpei Central Medical Supply Unit and other sections of the Department of Health Services. The amended compact was the primary source of funding. The report noted the lack of assurance that recipients actually received all items indicated in the receipts because there was not a reliable audit trail for the issuance of pharmaceutical and medical supplies. RMI single audit reports for fiscal years 2006 through 2011 demonstrated an increase in material weaknesses in noncompliance with the requirements of federal programs. For example, the 2006 single audit report identified 4 material weaknesses in compliance with federal awards and about $5.7 million in unresolved questioned costs. However, the 2011 single audit report identified 8 material weaknesses and about $7.4 million in unresolved questioned costs as of September 30, 2011. While reports for fiscal years 2006 through 2010 were submitted on time, the 2011 single audit report was late. For a detailed summary of our review of the RMI single audit reports, see appendix VII. The following briefly summarizes our analysis of the RMI single audits. Financial reporting: In fiscal years 2006 through 2011, the RMI received an unqualified audit opinion on each of its annual financial statements. (See app. VII for a list of the opinions on financial statements in the RMI’s audit reports for fiscal years 2006 through 2011.) Compliance with requirements of major federal programs: The RMI single audit reports indicated they were noncompliant with the requirements of federal programs in fiscal years 2006 through 2011. The fiscal year 2011 single audit report included eight findings that were considered material weaknesses. Some findings were related to compact grants and others to noncompact funding. Furthermore, several of the weaknesses were not corrected over several years. For example, seven of the eight material weaknesses reported in the fiscal year 2011 single audit recurred at least once in the 2 prior years and five had recurred in 3 out of the 4 previous years. For example, each year for 4 years prior to fiscal year 2011, the RMI was not able to provide supporting documentation for its expenses and an adequate accounting for its fixed assets to meet the requirements in the fiscal procedures agreement. Furthermore, we believe that recurring weaknesses in internal controls increase the risk that assets are susceptible to misuse. Also, the fiscal year 2011 RMI single audit report demonstrated that the RMI did not comply with some of the requirements of federal programs. For example, the RMI disbursed $1 million in compact sector grants to the Marshall Islands National Telecommunications Authority without an audit. In addition, the auditors reported that documentation supporting expenditures from various ministries could not be located and resulted in questioned costs totaling approximately $1.1 million; other questioned costs were also identified for various reasons in the 2011 single audit. (For additional details, see app. VII.) Timeliness: For fiscal years 2006 through 2010, the RMI met the single audit report submission deadline. In July 2012, the RMI contacted OIA and requested an extension to file its 2011 single audit by September 30, 2012. OIA granted the extension, stating no adverse action would be taken if the single audit was completed and received by OIA by September 30, 2012. However, RMI submitted its fiscal year 2011 report in February 2013, 8 months late. According to the RMI Ministry of Finance, the 2011 single audit report was late because of staff turnover, computer system issues, and late reconciliation of general ledger and bank accounts. As a result, the 2011 single audit was not received by the United States until 17 months after the end of the year in which the reported findings were identified; OIA took no adverse action. (For additional details, see app. VII.) RMI Office of the Auditor General (OAG) officials also told us that previous annual single audits reported fraud indicators (e.g., numerous findings on noncompliance with procurement requirements) that were not looked into by the RMI government in office at that time. The current OAG indicated that if the RMI government at that time, including the then OAG, had investigated the reported procurement issues, the recent fraud cases in the Ministry of Health and Human Services and Ministry of Finance might have been uncovered earlier. (For additional details, see app. VII). Working through JEMCO and JEMFAC, OIA has led actions to improve financial accountability of compact funds and has recommended further actions. The improvement in Chuuk audit reports was the result of cooperation between the JEMCO and Chuuk state government. For example, Chuuk’s fiscal year 2004 single audit report included 30 findings and unresolved questioned costs totaling approximately $6.7 million. In fiscal year 2005, the JEMCO established the Chuuk Financial Control Commission (CFCC) to assist the Chuuk government in managing its finances. Consequently, Chuuk’s fiscal year 2011 single audit report identified 5 findings with no unresolved questioned costs. According to a CFCC official, the CFCC has played an important role in restoring and maintaining the integrity of compact sector grant expenditures. The JEMFAC reported after its review of the RMI fiscal year 2011 single audit report that unresolved questioned costs had significantly increased over the previous 4 years. At the JEMFAC midyear meeting held on March14, 2013, discussion included the issue of the RMI’s inability to comply with requirements regarding allowable costs, cash management, equipment, and real property management, among other issues, as well as the related unresolved questioned costs reported in the 2011 single audit, which totaled over $5 million. The RMI Secretary of Finance told OIA officials that the RMI had recently taken positive steps to resolve outstanding questioned costs and to strengthen the ministry’s internal controls; nevertheless, OIA recommended that JEMFAC refrain from allocating unexpended grant funds from fiscal year 2011 and fiscal year 2012 until the RMI demonstrated that it had resolved all current questioned costs. At its annual meeting in August 2013, JEMFAC did not allocate the unexpended 2011 and 2012 funds. Although OIA has authority to impose special conditions or restrictions for unsatisfactory performance or failure to comply with grant terms, OIA officials have preferred to work through the JEMCO and JEMFAC committees rather than take unilateral action. While no official “high risk” designation exists in the amended compacts or fiscal procedures agreements, the fiscal procedures agreements’ provisions governing grants administration allow the same special conditions to be applied to amended compact grants that exist for other high-risk grantees receiving federal assistance. OIA officials told us that they treat the amended compact funds as high risk and provide special conditions through the JEMCO and JEMFAC resolutions, such as requiring the acquisition of technical or management assistance, requiring additional reporting and monitoring, or withholding funds. Regarding financial accountability of noncompact grants, OIA has not coordinated the federal response to audit findings that affect programs of more than one agency. Nor have OIA or other federal agencies designated the FSM or the RMI as high-risk grantees, which would allow those agencies to impose special conditions on their grants such as requiring additional reporting and monitoring. Single audit reports show compliance problems for compact and noncompact grants. For example, the 2011 FSM National Government single audit reported that for one special education grant, the FSM, unable to draw down funds from the grant account because the period of funds availability had closed, improperly reimbursed itself from a different grant account that was still open. The same single audit also reported that the FSM National Government submitted financial reports for Transportation’s Airport Improvement Project grant that did not agree with underlying financial records. According to OIA officials, Interior has not coordinated the response of federal agencies to these audit findings because of its focus on its responsibility for oversight of the amended compact funding. According to Interior officials, while Interior and other U.S. agencies may designate the FSM and the RMI as high-risk grantees for noncompact grants if the grantee has a history of performance problems, as of June 2013, no agencies have done so, potentially because of the lack of coordination between OIA and other grantors. Education officials noted that the department looks to see if there are systemic problems when designating a grant recipient as high risk but they have not formally assessed this status for the FSM or RMI. HHS officials believe the department’s noncompact funds are at risk, but HHS has not conducted a systematic review of FSM and RMI audit results or considered whether the grantees should be considered high risk. OIA officials told us they have not undertaken a formal analysis to determine whether Interior noncompact funds should have a high- risk designation and have not held formal discussions with other grantor agencies (e.g., with Education, Transportation, or other grantors) regarding this issue. FSM officials stated in January 2013 that staff constraints in the Office of Statistics, Budget and Economic Management, Overseas Development Assistance, and Compact Management’s (SBOC) Division of Compact Management limit the division’s ability to conduct oversight. The Division of Compact Management is responsible for, among other things, day-to- day communications with JEMCO and the U.S. government and oversight of compact implementation, including coordination with recipients of compact grants to ensure effective and efficient use of compact funds. FSM officials told us that the division is currently staffed by three staff members who provide compact oversight for the FSM National Government and the four states across six sectors. However, FSM officials told us that they need additional staff so they can conduct more oversight activities. In addition to the staffing shortage, FSM officials told us that the Division of Compact Management is hampered by its lack of authority to ensure that the National Government and the four states comply with compact requirements. For example, while the National Government and any subgrantees, including the four states, are required by the compact’s fiscal procedures agreements to provide quarterly reports with data and information on progress toward sector performance indicators, the Division of Compact Management does not have the authority to enforce this requirement if the National Government and states do not comply. In this case, FSM officials will sometimes request that the Department of Finance withhold quarterly allotments of compact funds until an entity submits the required information or, if necessary, identify issues for OIA to address. According to RMI officials, staff constraints in the Office of Compact Implementation (OCI) limit the office’s ability to conduct oversight and enforce compact requirements across multiple sectors and operations in numerous atolls. OCI has responsibility for all issues related to the compact and is also responsible for preparation and follow-up for all JEMFAC meetings, responses to GAO reports, and preparations for any congressional hearings on compact-related matters. RMI officials told us that the office is currently staffed by two people—a director and a foreign service officer—who run the office with three divisions. RMI officials also stated they depended on officials from other government agencies to help them fulfill their responsibilities. For example, OCI uses the legal advisor of the Ministry of Foreign Affairs to assist with compact issues since the OCI’s Division of Compact Legal Affairs has not filled its legal position. Additionally, OCI officials told us they are hampered by their lack of authority to require that the RMI ministries implementing projects funded by sector grants comply with compact requirements. For example, OCI works through the Ministry of Foreign Affairs or the Office of the Chief Secretary when other RMI ministries or offices have not submitted compact-related reports. RMI officials said the government has not resolved the question of who within the RMI government has the authority to withhold funds to ensure compliance. According to RMI comments on our draft report, the Office of the Chief Secretary does not have authority to withhold funds from ministries or offices to compel them to comply with compact requirements (see app. XI). From fiscal years 2011 through 2013, OIA experienced staff constraints, particularly in the Honolulu field office and in the FSM, that limited its ability to carry out its compact oversight responsibilities. In 2010, OIA created a plan that provided detailed staffing projections across OIA for fiscal years 2010 through 2014. To ensure effective oversight for the amended compacts, OIA projected a need for 8 staff in the Honolulu field office, 2 field staff in the FSM, and 1 field staff in the RMI for fiscal years 2011 through 2013, a total of 11 staff. (See app. VIII for the plan’s detailed staffing projections.) However, in 2011 and 2012, OIA had a total of 5 staff for compact oversight: 4 staff in its Honolulu field office and 1 field staff in the RMI. In March 2013, OIA filled 1 of the 2 projected FSM field staff positions. The OIA 2010 workforce plan projected the need for 50 staff for all of its divisions in fiscal years 2010 through 2014; it projected that existing resources would allow OIA to fund a total of 43 staff during this period. However, actual staffing levels were less than 43 in 2011 and 2012. Though compact oversight staff would represent 22 percent of total projected staff in the plan, compact oversight staff represented 12 percent and 14 percent, respectively, of actual OIA total staff in fiscal years 2011 and 2012. As a result, OIA’s staffing shortage disproportionately affected compact grant oversight compared to other OIA activities. See table 5. According to OIA officials, the following three factors contributed to the staffing shortages affecting compact oversight in fiscal years 2011 and 2012. Budget constraints and uncertainties: OIA officials said budget constraints and uncertainties prevented the office from hiring staff and filling vacant positions as outlined in the workforce plan. OIA noted that the plan assumed sufficient budgetary resources, and with enacted budgets in fiscal years 2010 through 2013, OIA could not hire additional staff. OIA officials also cited budget uncertainties for fiscal years 2012 and 2013 as a factor that kept them from filling the second education grants specialist position. OIA priorities: OIA management did not fill compact-related vacancies because of other priorities, such as filling headquarters-based positions before filling field positions. For example, an OIA official said that OIA management held back some available funding in hopes of staffing a Guam field office. Lack of qualified candidates: OIA officials also noted that in 2011 OIA posted the vacancy for the second education grants specialist position in Honolulu but did not receive sufficiently qualified candidates, which prevented the office from hiring. Staffing shortages, particularly those in the Honolulu field office, have negatively affected OIA’s compact oversight in the FSM and the RMI. While oversight activities, site visits, and required meetings occurred, OIA noted the following oversight gaps: In a 2010 report, Interior’s Office of the Inspector General reported that OIA’s compact oversight was hindered by the lack of an FSM field representative to support oversight efforts, despite the fact that the FSM received about $100 million in grant funds, more than any other insular area. Additionally, the report questioned whether OIA was effectively utilizing existing staff in the Honolulu field office. One OIA official said that the Honolulu field office’s staffing shortage hinder OIA’s ability to scrutinize financial reports and provide feedback to both countries. This official also stated that without a second person working on education sector compact assistance, OIA cannot thoroughly analyze education budgets, which results in high- level recommendations to the JEMCO and JEMFAC rather than specific recommendations that address issues such as the potential misuse of funds. Noting that the RMI experienced an increase in unquestioned costs over a period of 3 years, the OIA official stated that if the Honolulu office had a second education grants specialist, OIA could identify these issues earlier and support the OIA audit liaison in following up on issues identified in the single audits. At the midpoint of the 20-year amended compact assistance term, the FSM and RMI face critical challenges in compact implementation. During the first 10 years, the FSM and the RMI spent most of their funds for education and health, sectors prioritized in the compact agreements. However, because of data reliability issues, neither country can demonstrate whether it has made progress toward its goals in these sectors. Now, with 10 years of amended compact sector funding left, both countries must quickly plan for reduced grant resources and resolve the accountability issues that have plagued them to date so that they can fully utilize the funds and time left to achieve their goals. Both countries must complete plans that address annual decrements in compact funding and determine new revenue sources that will replace compact grant assistance in 2023. Despite multiple JEMCO and JEMFAC resolutions calling for the countries to produce these plans, the FSM National Government has yet to develop a plan that shows how it will address budgetary and economic challenges through 2023 and support the states in adjusting to the annual decrements, while the RMI government has yet to develop a plan that demonstrates how it will adjust to the annual decrements. In the absence of these plans, JEMCO and JEMFAC will face challenges ensuring that annual grant assistance for both countries is allocated in a sustainable manner. Ongoing problems with data reliability exist for both countries. Without reliable data, the countries cannot assess progress toward their goals in the education and health sectors and cannot effectively use results data for setting priorities and allocating resources aimed at improving performance. The lack of reliable data also hampers the ability of JEMCO and JEMFAC to oversee compact expenditures and assess the countries’ progress toward all its goals in the education and health sectors. The FSM’s and RMI’s single audits continue to identify long-standing and recurring findings, which if addressed could allow both countries to more effectively use U.S. resources and diminish potential losses that arise from fraud, waste, and abuse. Given these recurring audit findings, both compact and noncompact U.S. funds are at risk. Interventions by JEMCO were effective in Chuuk in bringing improved financial accountability; however, similar JEMCO and JEMFAC interventions have not been undertaken for the FSM National Government or the RMI. Furthermore, U.S. grants provided separately from the amended compact by multiple agencies are at risk. Although OIA has a lead role regarding audit matters, it has not formally coordinated with other U.S. agencies to address audit findings, nor has it assessed whether its own noncompact grants should be classified as high risk. Moreover, other federal agencies whose grants may be at risk have not routinely considered designating either country as a high-risk grantee. Such consideration could enable U.S. agencies to enforce conditions and restrictions on noncompact grant funds they provide, thus improving the oversight and management of the funds. Finally, although the majority of grants administered by OIA are amended compact grants, OIA’s amended compact oversight function was disproportionally affected by staffing shortages. While budget constraints prevented OIA from hiring the total number of staff it needed to conduct oversight for all of its grants, decisions to staff other OIA divisions rather than hire compact oversight staff affected OIA’s ability to ensure compact funds were efficiently and effectively used. We recommend that the Secretary of the Interior take the following five actions: In order to improve the ability of the U.S. agencies participating in the JEMCO and JEMFAC committees to conduct required oversight of compact funds, direct the Director of Insular Affairs, as Chairman of JEMCO, to coordinate with other JEMCO-member U.S. agencies to have JEMCO take all necessary steps, or, as the administrator of compact grants, to directly take all necessary steps, to ensure that the FSM (1) completes satisfactory plans to address annual decrements in compact funds, (2) produces reliable indicator data used to track progress in education and health, and (3) addresses all single audit findings in a timely manner; and direct the Director of Insular Affairs, as Chairman of the JEMFAC, to coordinate with other JEMFAC-member U.S. agencies to have JEMFAC take all necessary steps, or, as the administrator of compact grants, to directly take all necessary steps, to ensure that the RMI (1) completes satisfactory plans to address annual decrements in compact funds, (2) produces reliable indicator data used to track progress in education and health, and (3) addresses all single audit findings in a timely manner. In order to improve financial accountability of noncompact U.S. grant assistance provided to the FSM and the RMI, consult with other grantor agencies to determine whether the FSM National Government or any FSM states meet the criteria to be designated as a high-risk grant recipient for noncompact funds, or whether other steps should be taken to improve accountability; and consult with other grantor agencies to determine whether the RMI meets the criteria to be designated as a high-risk grant recipient for noncompact funds, or whether other steps should be taken to improve accountability. In order to ensure that Interior is providing appropriate resources for oversight and monitoring of the FSM and RMI compacts, take actions to correct the disproportionate staffing shortage related to compact grant implementation and oversight. We provided a draft of this report for comment to Interior, Education, HHS, and State and also to the FSM National Government and the government of the RMI. Interior, the FSM National Government, and the government of the RMI provided formal written comments on the draft report, which are reprinted in appendixes IX, X, and XI, respectively, and which we summarize below. Education and HHS had no comments on the draft report. In an e-mail received August 13, 2013, from State’s GAO Liaison, State indicated that our report will inform its continuing work, mainly through its involvement in the JEMCO and JEMFAC. For example, State noted, the U.S. members of the JEMCO are currently taking steps to address decrement planning and improve the production of reliable indicator data in the compact priority sectors of health and education in the FSM. Similarly, the U.S. members of the JEMFAC continue to work with the RMI on its decrement plan. Interior generally concurred with all five of our recommendations and briefly discussed each. With regard to our recommendations for actions involving JEMCO and JEMFAC, Interior noted examples of how it and other U.S. members of JEMCO and JEMFAC have worked to make improvements in the three areas mentioned in the recommendations: decrement plans, reliable indicator data to track progress in education and health, and addressing single audit findings. Interior also discussed our recommendations to determine, in consultation with grantor agencies, whether steps should be taken to improve accountability of noncompact funds to the FSM and RMI, including application of the high-risk designation for grant recipients. Interior noted that it cannot direct other agencies to take action with regard to any grant-specific issues and stated it was unaware of any precedent for federal agencies to jointly designate a grantee as high risk; however, Interior said it would discuss this approach with other federal agencies. Although Interior also concurred with our final recommendation, to take actions to correct the disproportionate staffing shortage related to compact grant implementation and oversight, Interior’s response indicates that it considers corrective action to be contingent on its receiving funding for new positions through the annual budget process. However, the intent of our recommendation is to have Interior work with its actual funding levels, whatever they may be, to correct what we observed to be a misalignment in how it allocates its staff. We found that compact grants account for the majority of grant funds that OIA administers and that OIA’s staffing shortage has disproportionately affected compact grant oversight compared with other OIA activities. We believe it is feasible for OIA to address this imbalance regardless of whether it receives funding for new positions. Appendix IX presents a copy of the letter from Interior. Interior also provided technical comments that we incorporated in the report where appropriate. In its written comments on our draft report, the FSM National Government focused on three areas of our reporting: (1) decrement planning, (2) data reliability issues for education and health indicators, and (3) financial accountability over compact and U.S. federal program funds. The FSM agreed on the importance of these three issues to the successful implementation of the amended compact. The FSM identified activities under way to plan for the decrement, such as the 2023 Planning Committee’s efforts to identify ways to intensify private sector growth. Regarding data reliability, the FSM cited implementation of a contract to assess the national education system’s ability to produce valid and reliable data and efforts under way to review the quality of health indicators with government staff. The FSM remarked on what it characterized as the heavy emphasis in our report of the possibility of achieving increased accountability over noncompact grant funds through a “high-risk” designation, but noted that it was assured because the process involved in a “high-risk” designation is not an arbitrary one. As some of the FSM’s comments related to topics discussed at the August 22, 2013, JEMCO annual meeting, which we attended, we have updated our report to reflect information presented at that meeting. Appendix X presents a copy of the letter from the FSM National Government. The government of the RMI also provided written comments on our draft report. The RMI believes it submitted adequate plans regarding the medium-term budget and investment framework and the decrement, while at the same time noting the usefulness of the decrement plan as a policy guide and planning tool, rather than as a mechanism for making line-item budgetary decisions. Regarding data reliability, the RMI generally agreed with our findings of data reliability problems in both the education and health sectors. The RMI agreed that there were limitations to their education data for certain indicators, and reported that they faced challenges in data collection due to the number of schools that were spread out over a large ocean area, and the deficient state of their transportation and communication systems. In the health sector, the RMI pointed out that it has 52 health centers spread throughout 29 atolls, making it difficult to collect data in a timely manner, and that it also lacks personnel dedicated solely to collecting and entering health indicator data. The RMI, however, noted that its Ministry of Health is seeking external assistance to improve health data. In response to our recommendation that—in order to improve financial accountability of noncompact U.S. grant assistance provided to the RMI—the Secretary of the Interior should consult with other agencies to determine whether the RMI meets the criteria to be designated as a high-risk grant recipient for noncompact funds, or whether other steps should be taken to improve accountability, the RMI noted that internal controls are now in place to detect and deter fraud, waste, and noncompliance with the fiscal procedures agreement or other U.S. federal regulations. For that reason, the RMI Ministry of Finance does not believe that any special conditions or restrictions for unsatisfactory performance or failure to comply with grant terms are warranted. As some of the RMI’s comments related to topics discussed at the August 20, 2013, JEMFAC meeting, which we attended, we have updated our report to reflect information presented at that meeting. See appendix XI for a detailed presentation of comments from the RMI and our responses to them. At both the annual JEMCO and JEMFAC meetings in August 2013, resolutions were passed in response to our recommendations related to decrement planning, data reliability, and addressing single audit findings. The resolutions approve the use of prior year unobligated funding to address one or more of the following three areas: (1) completing satisfactory plans to address annual decrements in compact funds, (2) producing reliable indicator data used to track progress in education and health, and (3) addressing all single audit findings in a timely manner. In addition to providing copies of this report to your offices, we will send copies to interested congressional committees. We will also provide copies of this report to the Secretaries of the Interior, Education, HHS, and State, as well as to the President of the Federated States of Micronesia and the President of the Republic of the Marshall Islands. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-3149 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix XII. This report examines, for fiscal years 2007 through 2011, (1) the Federated States of Micronesia’s (FSM) and the Republic of the Marshall Islands’ (RMI) use of compact funds in the education and health sectors; (2) the extent to which the FSM and RMI have made progress toward achieving their stated goals in education and health; and (3) the extent to which oversight activities by the FSM, RMI, and the United States ensure accountability for compact funding. In addition we provide information on the FSM and the RMI infrastructure sector grants. To determine how the FSM and RMI used amended compact funds in the education and health sectors, we analyzed the single audits for the FSM National Government and the state governments of Chuuk and Pohnpei and for the RMI government for fiscal years 2007 through 2011. The single audits provide information on total education and health sector compact fund expenditures as well as total supplemental education grant expenditures in both countries and Ebeye special needs expenditures in the RMI. The single audits also provide details on specific expenditures within each of these sectors, such as personnel costs and medical supplies. However, data on specific expenditures for fiscal year 2007 and fiscal year 2008 were not available for the FSM National Government or the state of Chuuk; hence, we reported on specific sector expenditures for the FSM National Government, Chuuk, and Pohnpei for fiscal years 2009 through 2011 only. We were able, however, to provide specific expenditure data for the RMI for fiscal years 2007 through 2011. We report on the specific expenditures that constitute at least the top 80 percent of expenditures in the education and health sectors, as well as for supplemental education grant expenditures for both countries. Any remaining expenditure categories are aggregated under an “Other expenditures” category. Within the single audits, we also analyzed the total expenditures within the education and health sectors for the FSM National Government, Chuuk, Pohnpei, and the RMI government to determine the portion of sector expenditures supported by compact and noncompact U.S. funds. We determined that these data were sufficiently reliable for the purposes of our report. To evaluate the extent to which the FSM and RMI made progress toward achieving their stated goals in the education and health sectors from fiscal years 2007 through 2011, we identified the indicators the FSM and RMI developed to track progress in those sectors. In assessing FSM progress, we used data from Chuuk and Pohnpei since these two states represent 82 percent of the FSM population. As each country had numerous indicators, we selected a subset of the health and education indicators in both countries to review. We used the U.S. 5-year reviews of the FSM and RMI; Joint Economic Management Committee (JEMCO) and Joint Economic Management and Financial Accountability Committee (JEMFAC) health and education related resolutions from 2007 through 2012; and the Millennium Development Goals (MDG) performance measures as criteria to determine the subset of measures. We selected these criteria for the following reasons: the U.S. 5-year reviews and the JEMCO and JEMFAC resolutions identified indicators that reflected country-specific concerns, while the MDG reflected global standards because they were developed by international health and education experts and agreed upon by almost all developing countries. An indicator was selected to be part of the subset if it was included in two of the three sources listed above for the FSM, and listed in all three sources for the RMI. We also consulted with officials at the U.S. Departments of Education (Education) and Health and Human Services (HHS) regarding our proposed methodology. We then reviewed FSM and RMI annual reports tracking these indicators for 2007 through 2011. To determine whether the data presented in the annual health and education indicator reports were sufficiently reliable to measure progress in the compacts as a whole, and in selected states, we reviewed the reports themselves, reviewed JEMCO and JEMFAC resolutions related to health and education data, and interviewed FSM and RMI officials responsible for collecting and providing the data during our site visits in January 2013. In the FSM and RMI, we also attempted to replicate the reported data in some of the education and health reports. Additionally, we sent each country a series of specific follow-up questions related to the subset of indicators to learn more about each country’s data collection and verification activities, as well as to try to clarify discrepancies in the data we identified. In some instances, the responses we obtained did not provide sufficient information for us to determine that the data were reliable; in those instances we classified the indicators as “no basis to judge.” We reported on the reliability of these indicators in the report. To identify the extent to which the FSM and RMI governments conducted monitoring and oversight activities, we reviewed the amended compacts and fiscal procedures agreements to identify specific monitoring responsibilities. We also reviewed the U.S. briefing documents, as well as the minutes and resolutions, when available, related to the JEMCO and JEMFAC meetings. We further reviewed FSM and RMI documents—such as portfolios, quarterly performance reports, and annual reports, for fiscal years 2007-2011 as available—submitted by the FSM and RMI governments to the U.S. government to confirm compliance with accountability reporting requirements. We discussed the lack of required annual reporting with Department of the Interior (Interior) Office of Insular Affairs (OIA) officials. We obtained the single audit reports for the years 2006 through 2011 from the FSM Office of the National Auditor’s website and the RMI’s Office of the Auditor General. These reports included audits for the FSM National Government and the state governments of Chuuk and Pohnpei, and for the RMI government. In total, 24 single audit reports covered 6 years, a period that we considered sufficient for identifying common or persistent compliance and financial management problems involving U.S. funds (amended compact and other noncompact funds). We determined the timeliness of submission of the single audit reports by the insular area governments using the Federal Audit Clearinghouse’s (FAC) “Form Date,” which is the most recent date that the required SF-SAC data collection form was received by the FAC. We did note that the “Form Date” is updated if a revised SF-SAC for that same fiscal year is subsequently filed. Our review of the contents of the single audit reports identified the auditors’ opinions on the financial statements, matters cited by the auditors in their qualified opinions, the numbers of material weaknesses and reportable conditions reported by the auditors, and the status of corrective actions. We did not independently assess the quality of the audits or the reliability of the audit finding information. We analyzed the audit findings to determine if they had recurred in successive single audits and were still occurring in their most recent audit and categorized the auditor’s opinions on the financial statements and the Schedules of Expenditures of Federal Awards. To determine oversight activities conducted by the OIA Honolulu office, we reviewed senior management statements regarding the purpose and function of this office and job descriptions for OIA staff. To identify the staffing levels for the Honolulu office we reviewed Interior’s 2010 workforce plan and obtained current staffing levels from OIA, as well as reviewed Interior congressional budget submissions for 2013 and 2014 for actual staffing levels in 2011 and 2012. We discussed this information with OIA officials to ensure that the data were sufficiently reliable for our use. To provide information on the FSM and RMI infrastructure sector grants, we analyzed the single audits for the FSM National Government and the state governments of Chuuk and Pohnpei and for the RMI government for fiscal years 2007 through 2011. The single audits provide information on total infrastructure sector compact fund expenditures and provide details on specific expenditures within the infrastructure sector, such as contractual services. However, data on specific expenditures for fiscal year 2007 and fiscal year 2008 were not available for the FSM National Government or the state of Chuuk; hence, we reported on specific sector expenditures for the FSM National Government, Chuuk, and Pohnpei for fiscal years 2009 through 2011 only. We were able, however, to provide specific expenditure data for the RMI for fiscal years 2007 through 2011. We report on the specific expenditures that constitute at least the top 80 percent of expenditures in the infrastructure sector. Any remaining expenditure categories are aggregated under an “Other expenditures” category. We determined that these data were sufficiently reliable for the purposes of our report. We also reviewed the infrastructure development and infrastructure maintenance plans for the FSM and RMI, interviewed officials in the FSM and RMI project management units, and reviewed progress reports submitted by the FSM and RMI. We reviewed JEMCO and JEMFAC minutes and resolutions related to the infrastructure sector and discussed the status of the infrastructure development plans and projects with OIA’s infrastructure grant manager. Additionally, we visited a variety of ongoing completed projects in the FSM and RMI supporting the health and education sectors in January 2013. To address all objectives, we held interviews with officials from Interior (Washington, D.C.; Honolulu, Hawaii; and the RMI) and the Department of State (Washington, D.C.; the FSM; and the RMI). We also interviewed officials from the HHS (Washington, D.C., and San Francisco, California) and Education (Washington, D.C.). We traveled to the FSM (Chuuk and Pohnpei) and the RMI (Kwajalein and Majuro Atolls) in January 2013. In addition, in Chuuk state, we visited the islands of Fefen, Parem, Tonoas, Udot, and Weno. In both countries we visited selected primary and secondary schools, hospitals, and dispensaries. Our site selections were judgmental because of the number of facilities on the islands, logistics, and the time at our disposal. The facilities we visited exhibited a mix of factors, such as facility type (elementary and secondary schools), age (older and newer facilities), renovation status (those which had been renovated and those that had not), and logistical needs. Where possible, we selected facilities that we had visited in 2006 in order to draw comparisons, to the degree possible. During our site visits we made observations and performed spot checks. We used our 2006 report to help select aspects to observe—such as cleanliness, electrical power, and desks—and drug expiry dates to spot-check. These site visits were not designed to yield generalizable conclusions but rather to illustrate relevant conditions in the education and health sectors, including whether there was functioning equipment, in both countries. We discussed compact implementation with FSM (national, Chuuk, and Pohnpei governments, as applicable) and RMI officials from the attorney general, education, finance, foreign affairs, health, auditor general, public works, and public service commission offices. Furthermore, we met with the RMI’s Office of Compact Implementation and Chief Secretary and the FSM’s Office of Statistics, Budget and Economic Management, Overseas Development Assistance, and Compact Management. In Kwajalein Atoll, we met Ebeye health and education officials to discuss compact implementation issues. We also observed the 2012 annual meetings, the 2013 midyear meetings, and the 2013 annual meetings of the JEMCO and the JEMFAC. We contacted Interior’s Inspector General’s Office in Washington, D.C., to discuss ongoing investigations in the FSM and RMI; however, we received no response to our inquiries. We conducted this performance audit from August 2012 to September 2013 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In the infrastructure sector, the FSM spent the majority of sector compact funds, 74 percent, on contractual services, which include repairing and maintaining facilities such as schools (see fig. 7). The FSM tracks progress in the infrastructure sector by the completion of projects. The FSM established an infrastructure development plan in 2004 and infrastructure maintenance funds by 2009. As we reported in 2007, the infrastructure development plan proved to be problematic because it included synopses of 11 different infrastructure sectors, contained long lists of projects, and though its estimated costs were prepared by professional engineers, it did not provide explanations or support for individual projects or prioritize them as the Joint Economic Management Committee (JEMCO) required. Furthermore, the plan was not based on any type of assessment of the needs of specific areas in the FSM, did not meet with concurrence from the FSM states, and was not adopted by the FSM Congress. In fiscal year 2010, the FSM submitted an official list of priority infrastructure projects; JEMCO had already approved partial funding for 13 projects on the list at its September 2009 annual meeting. Of the 19 priority-one projects, 4 were school buildings and classrooms in Pohnpei and 2 were school buildings in Yap; the remaining 13 were health-care facilities or projects directly affecting public health and safety, including water and wastewater projects and a detention center. The Office of Insular Affairs (OIA) has used the FSM’s 2010 list of 19 priority-one projects as the basis for funding infrastructure projects in the FSM. As of June 2013, the FSM National Government and state governments had not issued a revised infrastructure development plan, according to OIA. FSM infrastructure is overseen by a Program Management Unit (PMU) whose responsibilities include (1) certifying infrastructure projects, or determining that the scope and budget are reasonable and justifiable, and (2) ensuring that the projects will be designed to a professionally acceptable standard and that the project budgets properly reflect the costs of such as standard. The PMU also certifies that projects in all four FSM states are consistent with the priorities listed in the FSM’s infrastructure development plan. The PMU is to provide quarterly reports on construction activities to OIA. The reports generally include information related to the phase of a project, such as whether or not professional engineers and design services are being sought; the type of project (classroom, dispensaries, etc); the type of predesign document; whether or not a request for fee proposal was issued; and whether task orders were issued. PMU reports also include comments on such details as whether the estimated cost is higher than budgeted for, and whether land title documents were provided. The FSM’s PMU has not consistently provided quarterly progress reports on construction activities to OIA. According to OIA, significant delays, deficiencies, and project cost overruns have not been brought to OIA’s attention in a timely manner as required by the amended compact’s fiscal procedures agreement. OIA believes that the PMU’s inability to ensure professional effectiveness on a continual basis through the services of an experienced Contracting Officer is hindering implementation of compact- funded infrastructure projects throughout the FSM. In 2006, the FSM’s PMU hired a Contracting Officer on behalf of the FSM National Government to execute project planning, design, and construction of projects throughout the FSM. Since 2006, the PMU has had a succession of Contracting Officers, eight in all. In a 2011 resolution, JEMCO stated that it would not consider approval of any new infrastructure project proposals until the PMU hired a professional Contracting Officer. In December 2012, the PMU’s Contracting Officer quit, claiming “constant interference from the FSM PMU Program Manager and a corrupted decision-making environment within the PMU controlled by the PMU Program Manager.” A new Contracting Officer was hired in February 2013. During fiscal years 2007 through 2012, the FSM completed 6 education- related projects on the September 2009 JEMCO-approved list of 19 priority projects, and other projects are under way. A major factor in determining OIA’s approval of a project has been whether the government holds clear title to the land. Chuuk. Land title disputes have been common in Chuuk, and as a result of this continuing problem, no new schools were built in Chuuk using infrastructure funds in fiscal years 2004 through 2011. However, according to OIA’s infrastructure grant manager, because of the poor condition of schools in Chuuk, OIA permitted some school buildings to be renovated with infrastructure maintenance funds or carryover education sector grant funds, and these projects were not on the FSM list of priority infrastructure projects. According to Chuuk’s Planning and Statistics Office, six school projects have been completed on Weno and islands within the Chuuk lagoon using money from Chuuk’s infrastructure maintenance fund. According to the Chuuk State: School Facility Repair and Construction Master Plan, as of May 31, 2012, 51 primary schools and 5 secondary schools needed renovation, new construction, or both. Pohnpei. Land title issues have been less of a problem here, and 6 school projects were completed. Since 2009, classrooms were built at four elementary schools (a single project on the priority list), and buildings and classrooms were constructed at two high schools on the priority list. Designs for two College of Micronesia facilities were started but not completed for the Pohnpei State Campus, a vocational center and a learning resources center, according to OIA. In the FSM, difficulty and delays in establishing JEMCO-approved priorities and unresolved land titling issues affected the construction and maintenance of health facilities. Dispensaries in Chuuk were on the OIA- approved list of FSM priority projects in fiscal year 2009, but these projects have not begun as of April 2013. Eight other projects with public health and safety aspects such as waterlines and sewers were also on the priority infrastructure project list; the majority of them are in Pohnpei. In addition to approving the priority projects, JEMCO also approved funding for the repair of Pohnpei State Hospital’s roof and ceiling. The U.S. Army Humanitarian Assistance-FSM (HAFSM) Team completed the renovation project in 2013. HAFSM replaced the roof and undertook extensive internal repairs, including installing new dry wall and plumbing, as well as doing interior painting throughout the hospital. Repairs did not include the electrical system or air conditioning. Chuuk State Hospital was on the list of projects JEMCO approved in 2009 that got included in the 2010 list of 19 priority-one projects; however, it was not until June 2012 that the Chuuk state government’s Infrastructure Planning and Implementation Committee finalized its revised infrastructure priorities in a plan that included a new hospital estimated to cost about $50 million dollars. The Chuuk plan also called for replacing 68 dispensaries in the outer islands using a common dispensary model estimated to cost $150,000 each. OIA had not received a plan from the national government to replace the dispensaries, as of June 2013. In the infrastructure sector, the RMI spent the majority of compact sector funds, 65 percent, on capital outlay, which includes construction project and maintenance contracts payments for facilities such as schools and hospitals (see fig. 8). The RMI tracks progress in the infrastructure sector by the completion of projects. The RMI expended $86.5 million dollars on infrastructure projects including infrastructure maintenance, from fiscal years 2004 through 2011, according to OIA. The RMI stated it has constructed or renovated over 200 classroom facilities in the education sector and 45 projects in the health sector and has also conducted essential maintenance at its two hospitals. During fiscal years 2007 through 2011, the RMI’s Project Management Unit was generally consistent in reporting monthly to the Office of Insular Affairs (OIA) on the status of construction activities, according to OIA. The reports included the project number and name as well as a brief description of the project. These reports also included categories such as the contract value, amount certified to date, estimated final cost, percentage completed, and completion date, and other details such project status—completed, on hold, or on-going for example. In August 2012, allegations were raised by an RMI official regarding the Project Management Unit’s use of substandard materials and bid rigging. OIA proposed a review by an independent engineering firm in response to the allegations. OIA recommended to the Joint Economic Management and Fiscal Accountability Committee (JEMFAC) at its March 2013 meeting that additional allocations of compact infrastructure funds to the RMI be withheld until the review was completed and the results submitted to JEMFAC. The RMI negotiated a contract with an independent professional engineering firm to undertake an assessment of the Project Management Unit’s procedures, contract administration, and inspection process; the review is expected to commence in August 2013, according to OIA. The school buildings and dispensaries constructed throughout the RMI were built using standard designs prepared by a professional engineering firm. The College of the Marshall Islands Master Plan, initiated in 2007 with capital projects worth over $25 million, was almost completed when we visited in January 2013. Future infrastructure projects include the redevelopment plan for the hospital in Majuro. Various designs for the hospital project, which was estimated to cost between $50 million and $70 million, have been discussed for over 5 years. The key unresolved issue is the size of the new facility, which was still being discussed as of June 2013. The RMI has recently begun to focus on preventive maintenance of infrastructure facilities. For example, in its fiscal year 2013 budget statement for infrastructure, the RMI noted that an adequate level of maintenance resources was critical for the longevity of the new College of the Marshall Islands campus, and RMI proposed allocating $280,000 for this purpose. These dollar amounts shall be adjusted each fiscal year for inflation by the percentage that equals two-thirds of the percentage change in the U.S. gross domestic product implicit price deflator, or 5 percent, whichever is less in any one year, using the beginning of 2004 as a base. Grant funding can be fully adjusted for inflation after 2014, under certain U.S. inflation conditions. The increase in RMI grant assistance from fiscal year 2013 to 2014 is due to a $2 million increase in payments to be made available for addressing the special needs of the community at Ebeye and other Marshallese communities within the Kwajalein Atoll. From fiscal years 2004 through 2013, the U.S.–FSM Joint Economic Management Committee (JEMCO) and the U.S.–RMI Joint Economic Management and Financial Accountability Committee (JEMFAC) allocated about $1.1 billion in sector grants to the countries under the amended compacts. Additionally, about $142 million in supplemental education grant funds were provided to the countries during this period. Figures 9 and 10 show the distribution of allocations by sector for fiscal years 2004 through 2013 and tables 8 and 9 provide each country’s allocation amounts, by sector, for this period. As shown in figures 11 and 12, the education, health, and infrastructure sectors in both countries received the most funding during this period, consistent with provisions in the amended compacts legislation indicating that these sectors were priorities. Tables 10 and 11 list the education and health indicators that the Federated States of Micronesia (FSM) tracked during fiscal years 2007 through 2011. Tables 12 and 13 list the education and health indicators that the Republic of the Marshall Islands (RMI) tracked during the same period. The National Government of the Federated States of Micronesia (FSM) and the individual FSM states (Chuuk and Pohnpei) submitted their required single audit reports on time for 5 of the 6 fiscal years from 2006 through 2011. Similarly, the Republic of the Marshall Islands (RMI) submitted its single audit reports on time during those years except for fiscal year 2011. Half of the financial statement audit opinions for the FSM and all for the RMI were unqualified for fiscal years 2006 through 2011. However, 17 of 18 financial statement audits for those years from the FSM and all 6 from the RMI found material weaknesses and significant deficiencies resulting in the entities receiving qualified audit opinions with regard to internal controls over financial reporting. In most of the single audit reports submitted by both countries for those years, auditors also rendered qualified audit opinions on compliance with requirements of major federal programs. In addition, our review of the single audit reports found that internal control weaknesses have persisted in both countries since we last reported on their single audits in December 2006. As a result of persistent weaknesses in RMI’s single audit reports, in March 2013, the Department of the Interior’s Office of Insular Affairs (OIA) recommended to the U.S.–RMI Joint Economic Management and Financial Accountability Committee (JEMFAC) that it refrain from allocating unexpended grant funds from fiscal year 2011 and fiscal year 2012 until the RMI demonstrated that it had resolved all current questioned costs. The amended compacts and their respective fiscal procedures agreements require the FSM and RMI to submit reports each year on audits conducted within the meaning of the Single Audit Act, as amended. Single audits generally cover the entire organization and focus on recipients’ internal controls over financial reporting and compliance with laws and regulations governing federal awards. A single audit report includes the following: the auditor’s opinion (or disclaimer of opinion, as appropriate) regarding whether the financial statements are presented fairly in all material respects in conformity with generally accepted accounting principles, and a report on internal controls related to financial statements; the entity’s audited financial statements; the schedule of expenditures of federal awards and the auditor’s opinion on whether the schedule is reported fairly in relation to the financial statements as a whole; the auditor’s opinion (or disclaimer of opinion) regarding whether the auditee complied with the laws, regulations, and provisions of contracts and grant agreements (such as the compact), which could have a direct and material effect on each major federal program, and a report on findings on internal controls related to federal programs; a summary of findings and any questioned costs for the federal program; and corrective action plans for findings identified for the current year as well as unresolved findings from prior fiscal years. Single audits are a key control for the oversight and monitoring of the FSM and RMI governments’ use of U.S. awards, and the resulting audit reports are due at the Federal Audit Clearinghouse—which includes an automated public database of single audit information on the Internet—9 months after the end of the audited period. For the FSM and RMI, that is by July 1 each year. All single audit reports include the auditor’s opinion on the audited financial statements and a report on the internal controls related to financial reporting. The FSM National Government and Chuuk state submitted their single audit reports late for fiscal year 2006 but submitted them on time for fiscal years 2007 through 2011. The RMI submitted its single audit report on time for fiscal years 2006 through 2010 but submitted its report late for fiscal year 2011. Table 14 shows the timeliness of reports for the FSM and the RMI. Among the 24 audit reports submitted by the FSM national and two state governments and by the RMI for fiscal years 2006 through 2011, 15 reports received unqualified opinions. For fiscal years 2006 through 2008, the FSM National Government received qualified opinions on their financial statements. However, the FSM National Government improved its financial management reporting and received an unqualified (“clean”) audit opinion on its financial statements for fiscal years 2009 through 2011. In 2006, Chuuk received a disclaimer of opinion, which is given when the auditor determines that the audit cannot be completed in accordance with generally accepted auditing standards and therefore an opinion cannot be expressed on the financial statements. For fiscal years 2007 through 2011, Chuuk received qualified opinions on its financial statements. Chuuk’s 2011 financial statement audit opinion was qualified because the financial statements did not report a liability for land leases and related claims payable in the governmental activities and general fund or the expenditure for the current period reflecting the change in that liability. Table 15 shows the type of financial statement audit opinions for the FSM and the RMI for fiscal years 2006 through 2011. For fiscal years 2006 through 2011, 17 of 18 financial statement audits from the FSM National Government and the two FSM states and all 6 from the RMI found material weaknesses, significant deficiencies, or both in internal control over (1) financial reporting and (2) compliance with the requirements of major federal awards. (For a detailed count of these reportable findings, see table 16 for the FSM and table 17 for the RMI.) The single audit reports for fiscal year 2011, the most recent year for which reports were available during our review, identified a combined total of 13 material weaknesses and significant deficiencies which relate to the FSM’s fiscal year 2011 financial statements, and a total of 11 for the RMI’s statements (see tables 16 and 17, respectively). These findings indicated a lack of effective internal controls over collection of travel advances and the lack of ability to adequately safeguard assets; to ensure that transactions are properly recorded; and to prevent or detect fraud, waste, and abuse. For example, the material weaknesses reported in FSM’s fiscal year 2011 single audit report included (1) the lack of timely reconciliation of the Holding Bank Account, (2) the lack of adequate monitoring of collection of travel advances, (3) the lack of timely and accurate reconciliation of general ledger accounts, and (4) the lack of adequate reconciliation of and accounting for fixed assets. In RMI’s fiscal year 2011 single audit report, the auditors found material weaknesses that included (1) the lack of documentation to determine whether certain costs were allowable, (2) lack of inventory of fixed assets, (3) lack of general ledger account reconciliation, and (4) lack of internal controls over bank wire transfers. We found that 6 of the 7 material weaknesses in internal control over financial reporting contained in the FSM’s fiscal year 2011 single audit report were recurring problems from the previous year or had been reported for several years. Below are two examples: General ledger account reconciliations were not performed in a timely manner or accurately. The lack of timely and accurate account reconciliations may affect accurate reporting and timely submission of the single audit report. Fixed-asset records were not periodically reconciled and timely recorded. Likewise, 8 of the 11 material weakness findings in the RMI’s fiscal year 2011 single audit report were recurring problems from the previous year or had been reported for several years, including these examples: Fixed assets records were not being periodically reconciled and recorded in a timely manner. Procurement requirements were not followed, such as the lack of the required three price quotations for an expenditure. The FSM and RMI have developed corrective action plans to address financial statement findings in the 2011 single audit. In addition to the auditor’s report on financial statement findings, FSM and RMI auditors issuing an entity’s single audit reports also issue an opinion on the entity’s compliance with requirements of major federal programs. Of the 24 single audit reports submitted by the FSM national and state governments and the RMI for fiscal years 2006 through 2011, 19 received qualified opinions regarding compliance with requirements of major federal programs. The remaining six received unqualified opinions; Pohnpei received 4 of the 6 unqualified opinions. In the 2011 single audit reports on compliance with requirements of major federal programs, auditors reported 14 material weaknesses and significant deficiencies for the FSM and 8 for the RMI (see tables 16 and 17, respectively). For example, in the FSM, the reported material weaknesses included (1) the lack of internal controls over compliance with cash management requirements, (2) lack of funds control to prevent disbursements in excess of available funds, and (3) lack of controls over property accountability. In the RMI, findings that were material weaknesses included (1) a lack of fixed assets inventory control, (2) the lack of internal controls over compliance with cash management requirements, (3) the lack of internal controls over procurement, and (4) the lack of adequate documentation of cost allowability. We found that 13 of the 14 findings from the 2011 FSM and state governments’ single audit reports, and 7 of the 8 findings from the 2011 RMI single audit report, were recurring problems from the previous year or had recurred for several years. In contrast, for the FSM only 5 of the 41 findings from the 2005 single audit reports and, for the RMI, only 5 of the 13 findings from the 2005 single audit report were recurring problems from the previous year or had recurred for several years. The FSM and RMI 2011 single audit reports stated that the FSM and RMI have developed corrective action plans to address all the 2011 single audit reports’ findings on compliance with requirements of major federal programs. As the count of single audit findings in table 17 demonstrate, material weaknesses related to internal controls have increased over the last 3 years. As we have previously reported, weaknesses in internal controls may lead to fraud, waste, and abuse. Since late 2010, 22 cases involving collusion among three employees of the RMI Ministry of Finance, three employees of the RMI Ministry of Health, and three local businesses are being prosecuted in the RMI. These 22 cases involve a total of approximately $550,000 in compact funding. According to an OIA official, this fraud was not uncovered through an audit; rather, it was detected when the leader of the group of government workers involved in the fraud tried to pick up a vendor payment from the RMI Ministry of Finance, raising suspicions and leading to an investigation. According to an OIA official, in 2012, two former RMI government workers were charged with 25 counts of theft related to 20 checks from the government valued at $350,000. They received fines and 5-year prison sentences. According to an RMI official, the investigation is ongoing, and the RMI Office of the Auditor General (OAG) has collaborated with the RMI Attorney General since the start of the investigation. Furthermore, the OAG has taken its own action to better detect fraud by creating a new investigation unit within the OAG to conduct investigations of suspected fraudulent activities and created a confidential fraud hotline where RMI citizens can contact the OAG to report instances of fraud, waste, and abuse for further investigation. According to an RMI official, over the past 5 years, the RMI Auditor General has focused on financial and compliance audits, including the single audits of RMI government agencies. The OAG also conducted its own audits of component units for fiscal years 2006 through 2011. According to the RMI Auditor General, because of insufficient staff, the OAG performed only 1 performance audit over the past several years, and additional staff would be needed to enable the office to address the demand for fraud investigations. Recognizing the magnitude of potential fraud, OIA authorized a Technical Assistance grant of $110,500 in 2012 to recruit a Certified Fraud Examiner for RMI. According to a RMI OAG official, as of June 2013, the RMI had not filled this position. problem might have occurred during our visit. We noted this information on page 33. We have not verified this information. 9. In its comments, the RMI noted that Delap Elementary School currently has no problem with water. It noted though that during the dryer months water catchment tanks are low or have no water, and that Majuro Water and Sewer Company rations water. The reference to the lack of water at Delap Elementary school was deleted from the final report. 10. In its comments regarding our observation that a school building was being used on Ebeye though it was considered unsafe, the RMI noted that the building has been abandoned and that a new three-classroom building has been constructed at Kwajalein Atoll High School. We noted this information on page 33. We have not verified this information. 11. In its comments, the RMI noted that the Office of the Chief Secretary did not have the authority to withhold funds, but if it had the authority to do so, it would do so as a last resort. We amended the text on page 51 of the report to reflect this information. 12. In its comments, the RMI stated that it feels a reference to intent of the RMI trust fund to provide an annual source of revenue post-2023 should cite our 2007 trust fund report. We added the footnote citing our prior trust fund report, as suggested. In addition to the person named above, Emil Friberg (Assistant Director), Christina Bruff, Julie Hirshen, and Jeffrey Isaacs were key contributors to this report. Ashley Alley, David Dayton, Martin De Alteriis, and Etana Finkler provided technical assistance. Compacts of Free Association: Improvements Needed to Assess and Address Growing Migration. GAO-12-64. Washington, D.C.: November 14, 2011. Compacts of Free Association: Micronesia Faces Challenges to Achieving Compact Goals. GAO-08-859T, Washington, D.C.: June 10, 2008. Compacts of Free Association: Implementation Activities Have Progressed, but the Marshall Islands Faces Challenges to Achieving Long-Term Compact Goals. GAO-07-1258T. Washington, D.C.: September 25, 2007. Compacts of Free Association: Trust Funds for Micronesia and the Marshall Islands May Not Provide Sustainable Income. GAO-07-513. Washington, D.C.: June 15, 2007. Compacts of Free Association: Micronesia’s and the Marshall Islands’ Use of Sector Grants. GAO-07-514R. Washington, D.C.: May 25, 2007. Compacts of Free Association: Micronesia and the Marshall Islands Face Challenges in Planning for Sustainability, Measuring Progress, and Ensuring Accountability. GAO-07-163. Washington, D.C.: December 15, 2006. Compacts of Free Association: Development Prospects Remain Limited for Micronesia and the Marshall Islands. GAO-06-590. Washington, D.C.: June 27, 2006. Compacts of Free Association: Implementation of New Funding and Accountability Requirements Is Well Underway, but Planning Challenges Remain. GAO-05-633. Washington, D.C.: July 11, 2005. Compact of Free Association: Single Audits Demonstrate Accountability Problems over Compact Funds. GAO-04-7. Washington, D.C.: October 7, 2003. Compact of Free Association: An Assessment of Amended Compacts and Related Agreements. GAO-03-890T. Washington, D.C.: June 18, 2003. Compact of Free Association: An Assessment of Current U.S. Proposals to Extend Assistance. GAO-02-857T. Washington, D.C.: July 17, 2002. Foreign Assistance: Effectiveness and Accountability Problems Common in U.S. Programs to Assist Two Micronesian Nations. GAO-02-70. Washington, D.C.: January 22, 2002. Foreign Relations: Kwajalein Atoll Is the Key U.S. Defense Interest in Two Micronesian Nations. GAO-02-119. Washington, D.C.: January 22, 2002. Compact of Free Association: Negotiations Should Address Aid Effectiveness and Accountability and Migrants’ Impact on U.S. Areas. GAO-02-270T. Washington, D.C.: December 6, 2001. Foreign Relations: Migration From Micronesian Nations Has Had Significant Impact on Guam, Hawaii, and the Commonwealth of the Northern Mariana Islands. GAO-02-40. Washington, D.C.: October 5, 2001. | In 2003, the U.S. government approved amended Compacts of Free Association with the FSM and the RMI, providing for a total of $3.6 billion in assistance over 20 years. Given the countries' dependence on compact funding, GAO was asked to conduct a review of the use and accountability of these funds. This report addresses (1) the FSM's and RMI's use of compact funds in the education and health sectors; (2) the extent to which the FSM and RMI have made progress toward stated goals in education and health; and (3) the extent to which oversight activities by the FSM, RMI, and U.S. governments ensure accountability for compact funding. GAO also provided information on infrastructure spending and projects in the education and health sectors. GAO reviewed relevant documents and data, including single audit reports; interviewed officials from Interior, other U.S. agencies, and the FSM and RMI; assessed data reliability for subsets of both countries' education and health indicators; and visited compact-funded education and health facilities in both countries. In fiscal years 2007 through 2011, the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) spent at least half their compact sector funds in the education and health sectors. Because both countries spent significant amounts of compact funds on personnel in the education and health sectors, the U.S.-FSM and U.S.-RMI joint management and accountability committees capped budgets for personnel in these sectors at fiscal year 2011 levels due to concerns about the sustainability of sector budgets as compact funding continues to decline through fiscal year 2023. The FSM states completed plans to address annual decreases in compact funding; however, the FSM National Government and the RMI have not submitted plans to address these annual decreases as required. Without plans, the countries may not be able to sustain essential services in the education and health sectors in the future. Data reliability issues hindered GAO's assessment of progress by the FSM and RMI in the education and health sectors for fiscal years 2007 through 2011 for the compacts as a whole. Between 2004 and 2006, both countries began tracking education and health indicators, establishing data collection systems, and collecting data for the majority of the indicators and have continued to track data on their indicators since that time. In education, GAO found 3 of 14 indicators in the subsets of indicators it reviewed for both countries to be sufficiently reliable and 1 also to be capable of demonstrating progress: the education level of teachers in the RMI. GAO found a variety of data reliability problems, such as some FSM states reporting data for both public and private schools while other states included only public schools in their data. In the health sector, GAO determined that data for all 5 of the subset of indicators it reviewed in the FSM were not sufficiently reliable to assess progress for the compacts as a whole, and in the RMI, 1 health indicator was sufficiently reliable and 2 were not sufficiently reliable; for 2 other RMI health indicators, GAO had no basis to judge. In much of their reporting on their education and health indicators, the FSM and RMI have noted data reliability problems and some actions they have taken to address the problems. The U.S.-FSM and U.S.-RMI joint management and accountability committees have also raised concerns about the reliability of FSM's education and health data and RMI's health data and required that each country obtain an independent assessment and verification of these data; both countries have yet to meet that requirement, and, as a result, neither country can determine its progress in these sectors. The single audit reports GAO reviewed indicated challenges to ensuring accountability of compact and noncompact U.S. funds in the FSM and RMI. For example, the governments' single audits showed repeat findings and persistent problems in noncompliance with U.S. program requirements, such as accounting for equipment. The Department of the Interior (Interior) has taken steps regarding accountability of compact funds such as establishing the Chuuk Financial Control Commission, but Interior has not coordinated with other U.S. agencies about the risk status of the FSM and RMI. Furthermore, the FSM, RMI, and U.S. offices responsible for compact administration faced limitations hindering their ability to conduct compact oversight. For example, Interior's Office of Insular Affairs (OIA) experienced a staffing shortage that disproportionately affected compact grant oversight compared to other OIA activities, with 5 of 11 planned positions filled. Among other actions, Interior should (1) take all necessary steps to ensure the reliability of FSM and RMI indicators in education and health, (2) assess whether to designate each country as high risk, and (3) take actions to correct its disproportionate staffing shortage related to compact grant implementation and oversight. Interior generally agreed with GAO's recommendations and identified actions taken, ongoing, and planned. |
Engaged employees are more than simply satisfied with their jobs. Instead, according to employee engagement literature, engaged employees are passionate about and energized by what they do, are committed to the organization, the mission, and their job, and are more likely to put forth extra effort to get the job done. take pride in their work, A number of studies of private-sector entities have found that increased levels of engagement result in better individual and organizational performance including increased employee performance, productivity, and profit margins; higher customer service ratings; fewer safety incidents; and less absenteeism and turnover. Studies of the public sector, while more limited, have shown similar benefits. For example, the Merit Systems Protection Board (MSPB) found that higher levels of employee engagement in federal agencies led to improved agency performance, less absenteeism, and fewer equal employment opportunity complaints. The FEVS measures employees’ perceptions of whether, and to what extent, conditions characterizing successful organizations are present in their agencies. OPM has conducted this survey every year since 2010. The EEI is composed of 15 FEVS questions covering the following areas: Leaders lead, which surveys employees’ perceptions of the integrity of leadership, as well as employees’ perception of leadership behaviors such as communication and workforce motivation. Supervisors, which surveys employees’ perceptions of the interpersonal relationship between worker and supervisor, including trust, respect, and support. Intrinsic work experience, which surveys employees’ feelings of motivation and competency relating to their role in the workplace. According to OPM, the EEI does not directly measure employee engagement. Instead, it covers the conditions that lead to employee engagement. Specifically, OPM noted that organizational conditions lead to feelings of engagement, which in turn lead to engagement behaviors, such as discretionary effort, and then to optimum organizational performance. Sometimes the EEI is discussed in the same context as another workforce metric, the Partnership for Public Service’s Best Places to Work in the Federal Government rankings. Although these scores are also derived from the FEVS, they were created as a way of rating employee satisfaction and commitment across federal agencies. The rankings are calculated using a weighted formula of three different questions from OPM’s FEVS: (1) I recommend my organization as a good place to work, (2) considering everything, how satisfied are you with your job, and (3) considering everything, how satisfied are you with your organization. The recent government-wide average decline in the EEI masks the fact that the majority of federal agencies sustained and a few increased EEI levels during the same period. From 2006 through 2014, government- wide EEI levels increased to an estimated high of 67 percent in 2011 and then declined to an estimated 63 percent in 2014, as shown in figure 1. The decline in the EEI that began after 2011 is the result of several large agencies bringing down the government-wide average. For example, we found that 13 out of 47 agencies saw a statistically significant decline in their EEI score from 2013 to 2014. While this is 28 percent of agencies, they employ nearly 69 percent of federal employees and include the Department of Defense, Department of Homeland Security, and Department of Veterans Affairs. Meanwhile, the majority of agencies sustained their EEI levels and a few improved them, as shown in figure 2. Between 2013 and 2014, of 47 agencies included in our analysis of the EEI, 3 increased their scores, 31 held steady, and 13 declined. The recent government-wide downward trend in employee engagement levels coincided with external events—such as sequestration, furloughs, and a 3-year freeze on statutory annual pay adjustments from 2011 to 2013—that OPM and others contend negatively affected federal employee morale. For example, in March 2014, we reported that officials from agencies—including those that furloughed employees— raised concerns about how sequestration affected the morale of current employees. Even one agency with a downward trending engagement score is not to be taken lightly and there is opportunity for improvement at all federal agencies. However, the large number of agencies that sustained or increased their levels of employee engagement during this time suggests that agencies can positively influence employee engagement levels even as they weather difficult external circumstances. For example, the FTC maintained a consistent estimated 76 percent EEI score—well above the government-wide average—throughout the period of general decline. Of the three components that comprise the EEI, employees’ perceptions of leaders consistently received the lowest score, and at times was about 20 percentage points lower than the other components. Moreover, from a high point in 2011, leadership scores saw the greatest decrease and accounted for much of the government-wide average decline in the EEI, as figure 3 shows. The questions comprising the EEI leadership component focus on integrity of leadership and on leadership behaviors such as communication and workforce motivation (see table 1). Three of the five questions are specific to senior leaders—department or agency heads and their immediate leadership team responsible for directing policies and priorities and typically members of the Senior Executive Service or equivalent (career or political). Two are specific to managers—those in management positions who typically supervise one or more supervisors. In our 2003 work on transformations, we found that leaders are the key to organizational change—they must set the direction, pace, and tone, and provide a clear, consistent rationale that brings everyone together behind a single mission. The relative strength of the supervisors component of the EEI suggests that the employee-supervisor relationship is an important aspect of employee engagement. These questions focus on the interpersonal relationship between worker and supervisor and concern supervisors’ support for employee development, employees’ respect, trust, and confidence in their supervisor, and employee perceptions of an immediate supervisor’s performance. This is consistent with MSPB research, which suggests that first-line supervisors are key to employee engagement and organizational performance. Intrinsic work experience was the strongest EEI component prior to 2011, but fell during the period of government-wide decline in engagement levels. These questions reflect employees’ feelings of motivation and competency related to their role in the workplace, such as their sense of accomplishment and their perception of utilization of their skills. Understanding how employee engagement varies within differing populations of employees can enable agency leaders to consider how different cohorts experience their environment and thus can help leadership determine how to focus engagement efforts. For example, knowing that employees with fewer supervisory responsibilities could be less engaged—and could be having a negative effect on organizational performance—could spur agency leaders to direct additional resources to understanding the needs of this subset of the workforce and improving their sense of engagement. We found that government-wide, the greatest variation in EEI levels was related to pay category and supervisory status. For example, respondents in progressively lower General Schedule (GS) pay categories had progressively lower levels of engagement government-wide. In contrast, employees in the SES pay category reported consistently higher engagement levels—at least 10 percent more than any lower pay category. While there was less difference between the EEI levels of other pay categories, employees in the GS 13 through 15 categories consistently had higher EEI levels than employees in all other lower GS pay categories. Employees in the Prevailing Rate System, commonly known as the wage grade system, consistently had the lowest EEI levels. For example, in 2014, EEI levels for respondents in the SES pay category were an estimated 84.2 percent compared to an estimated 54.7 percent for respondents in the wage grade pay category. Similarly, respondents with fewer supervisory responsibilities had progressively lower EEI levels government-wide. Because employees in higher pay categories are likely to have more supervisory responsibilities, responses by pay category and supervisory status represent similar populations. Variations in EEI levels by supervisory status are shown in figure 4. With respect to other populations of employees, agency tenure, federal tenure, age, and race consistently resulted in some variation but less than pay category and supervisory status. For example, in 2014, American Indian or Alaska Native respondents reported the lowest engagement for any race category with an estimated EEI of 57.6. Asian respondents reported the highest levels of engagement with an estimated EEI score of 68.4. Gender, ethnicity (Hispanic/non-Hispanic), and work location (headquarters/field) consistently had the least variation. For example, in 2014, males had an estimated EEI of 63.2 percent and females an estimated EEI of 63.3 percent. For results of our analysis of employee population groups, see appendix II. Overall we found that what matters most in improving engagement levels is valuing employees—that is, an authentic focus on their performance, career development, and inclusion and involvement in decisions affecting their work. The key is identifying what practices to implement and how to implement them, which can and should come from multiple sources— FEVS and other data sources, other agencies, and OPM. The lessons learned from our three case study agencies were that the goal should not be to just increase a number—that is, have a high EEI—but should also include a focus on improving the organization. Of the various topics covered by the FEVS that we analyzed, we identified six that had the strongest association with higher EEI levels compared to others, as described in figure 5. We used regression analysis to test which selected FEVS questions best predicted levels of employee engagement as measured by the GAO-calculated EEI, after controlling for other factors such as employee characteristics and agency. Constructive performance conversations. We found that having constructive performance conversations was the strongest driver of the EEI. For the question “My supervisor provides me with constructive suggestions to improve my job performance,” we found that, controlling for other factors, someone who answered “strongly agree” on that FEVS question would have, on average, an engagement score that was more than 20 percentage points higher than someone who answered “strongly disagree” on the 5-point response scale. As we found in our March 2003 report on performance management, candid and constructive feedback helps individuals maximize their contribution and potential for understanding and realizing the goals and objectives of an organization. At Education, one of our case study agencies, the Office of the Chief Information Officer (OCIO) implemented a process to help ensure that constructive performance conversations regularly occur. In addition to department-wide requirements for supervisors to hold two performance conversations a year, OCIO officials said that they require all supervisors to offer OCIO employees optional quarterly conversations. These quarterly performance conversations are guided by a set of specific topics that supervisors and employees developed together to ensure that employees receive consistent and regular constructive feedback and coaching. Career development and training. Our analysis found that career development and training was the second strongest driver. For the question, “I am given a real opportunity to improve my skills in my organization,” we found that, controlling for other factors, someone who answered “strongly agree” to that question would have, on average, an engagement score that was 16 percentage points higher than someone who answered “strongly disagree.” As we found in 2004, the essential aim of training and development programs is to assist an agency in achieving its mission and goals by improving individual and, ultimately, organizational performance. At NCUA, another of our case study agencies, officials said the agency focused on providing training for employees throughout their careers. For example, NCUA requires each employee to develop an individual development plan. For employees new to credit union examining—a majority of employees—NCUA has a standardized 18-month training program that combines classroom and practical work. New examiners must complete a core set of courses and may also choose additional elective courses. NCUA officials said that they are constantly assessing formal and informal training for entry-level employees to identify areas to improve the curriculum and instruction. For more experienced examiners, NCUA provides continuing training and development, according to these officials. Remaining drivers. For the remaining four drivers, we found that, controlling for other factors, someone who answered “strongly agree” or “very satisfied” to those questions would have, on average, an engagement score that was 12 percentage points higher than someone who answered “strongly disagree” or “very dissatisfied.” Those four drivers are work-life balance (“My supervisor supports my need to balance work and other life issues”), inclusive work environment (“Supervisors work well with employees of different backgrounds”), employee involvement (“How satisfied are you with your involvement in decisions that affect your work”), and communication from management (“How satisfied are you with the information you receive from management on what’s going on in your organization”). Examples of how our three case study agencies implemented practices consistent with these drivers include the following: Work-life balance. FTC officials implemented an outreach strategy to inform staff about child and elder care resources after learning that employees were not aware of the services or did not know that they qualified for these services. Officials said employee knowledge of and agency commitment to these kinds of programs enhances supervisor support for work-life balance. Similarly, to support work-life balance, as part of its engagED initiative, Education revised telework policies, provided training for managers and employees on the new polices and on working in a telework environment, and improved infrastructure to make telework as effective as time spent in the office, according to Education officials. Inclusive work environment. The FTC established an agency- wide Diversity Council to develop comprehensive strategies to promote understanding and opportunity throughout FTC. FTC officials said that employees of all levels were interested in forming such a council. This included employees who experienced firsthand the diversity issues as well as managers who could address those issues. The goal of FTC’s Diversity Council— composed of representatives from each bureau and office—is to engage employees and supervisors across the agency, make recommendations for improving diversity, and foster the professional development of all agency employees, according to these officials. Employee involvement. Education’s Office of General Counsel (OGC) has a permanent employee-driven Workforce Improvement Team (WIT) that grew out of an office-wide meeting with employees at all levels to involve employees in the discussions about the FEVS results. As a result of this group’s work, Education’s OGC management introduced additional training and professional development opportunities and improved employee on-boarding through a new handbook and mentoring program. Education’s OGC officials said that the staff-driven WIT has created feelings of stronger ownership, engagement, and influence in office decision making. Education’s OGC officials said that OGC’s management seeks feedback from staff, including from the WIT, to evaluate the effectiveness of improvement efforts. These officials said this strengthens two-way communication, which improves employee engagement and organizational performance. Communication from management. NCUA officials told us that the head of the agency and its senior leaders communicate with line employees (who are mostly in the field) through quarterly webinar meetings. The meetings are scheduled to accommodate the field employees’ frequent travel schedule and generally start with any “hot topics” and continue with discussion of agency efforts to meet mission goals. The agency head takes questions in advance and during the webinar and, when needed, participants research and share responses with agency employees. According to NCUA officials, these regular, substantive conversations demonstrate top leadership’s commitment and respect for all employees as valued business partners. These key drivers can help agencies develop a culture of engagement as agencies embed them into the fabric of everyday management practices, rather than simply reacting to the results of the most recent FEVS. Importantly, these six practices were generally the consistent drivers of higher EEI levels when we analyzed them government-wide, by CFO Act agency, and by selected employee populations (such as agency tenure and supervisory status). Because these six practices are the strongest predictors of the EEI, this suggests they could be the starting points for all agencies embarking on efforts to improve engagement. Our case study agencies also identified three key lessons for improving employee engagement. Any change must be implemented using effective management practices. The EEI alone is not enough; agencies must look to other sources of data for a complete picture of employee engagement levels in their organization and its components. Improving engagement and organizational performance takes time and does not neatly follow the survey cycle; change may involve several efforts and effects are seen at different points in time. Our three case study agencies attributed their high or increasing levels of engagement to overall effective management practices more so than to efforts specifically aimed at improving engagement levels. Officials at these agencies said they pay attention to employee engagement scores, but also focus on overall positive organizational health and culture and on how their agency implements change efforts. Some of the practices agencies cited parallel those we identified in 2003 as key to successful organizational transformation, including top leadership involvement, consistency, creating a line of sight linking individual results to organizational performance, and employee outreach. Top leadership involvement. Officials from all three of our case study agencies said that top agency leaders were directly involved in organizational improvement efforts. We have previously reported top leadership that is clearly and personally leading the change presents stability and provides an identifiable source for employees to rally around and helps the process/efforts stay the course. For example, Education officials said Education’s Chief Information Officer is directly involved in efforts to address FEVS scores—he is directly involved in the data analysis, reviewing Education’s OCIO action plans developed by each of his subordinate directors, overseeing implementation of strategies, and assessing their effectiveness. Consistency. Officials at Education’s OCIO said it is important to ensure that policies are applied consistently, which is the goal of that office’s Speaking with One Voice initiative. The biweekly management meetings to discuss and clarify the implementation of department policies (e.g., telework, resources, and employee bonuses) were instituted after conversations with employees revealed that policies were inconsistently applied. As a result of the initiative, Education’s OCIO officials said employees know that senior leaders are paying attention to how policies affect employees and are accountable for ensuring appropriate implementation. Line of sight. FTC officials emphasized the importance of creating a line of sight between the agency’s mission and the work of each employee. As we have previously reported, successful organizations create a “line of sight” showing how team, unit, and individual performance can contribute to overall organizational results. FTC officials said that the agency lists every employee that contributed to a case in the pleadings, from the attorneys and paralegals to the information technology specialists who provided computer support. Officials said that legal actions are the culmination of the efforts of many employees, both mission and mission- support staff, and including their names on pleadings helps create a line of sight from each employee’s contribution to the organization’s success. Further, FTC officials said they recognize how mission support functions, such as excellent human resources customer service contribute to the agency mission. For example, FTC officials said that they emphasize to the human resources staff that their prompt handling of payroll and benefits issues contributes to the overall efficiency and mission accomplishment by minimizing the time other FTC employees expend on these concerns. As a result, mission employees can focus on accomplishing their mission-related responsibilities. Employee outreach. According to officials at all three of our case study agencies, they all reach out to employees and their labor union representatives, if applicable, to obtain insight into their FEVS scores or to inform other improvement efforts. Our 2003 report found that employee involvement strengthens the improvement process by including frontline perspectives and experiences. By participating in improvement task teams, employees have additional opportunities to share their experiences and shape policies and procedures as they are being developed and implemented. For example, in 2012, while NCUA’s EEI score was above the government-wide level, FEVS questions about awards, performance appraisals, and merit-based promotions were its lowest scoring categories. NCUA officials said they contracted with an external facilitator to conduct workshops and webinar-based feedback sessions with employees to gain insight into their FEVS results and identify root causes influencing the survey scores. These officials said that using external facilitators offered employees confidentiality and created an environment that encouraged open conversations. Based on these feedback sessions, NCUA created an internal employee-driven committee to inform revisions to the awards, performance appraisals, and merit-based promotion process, and developed recommendations for NCUA’s management to implement these changes. Most of the committee’s recommendations were implemented. According to officials at our case study agencies, while the EEI provides a useful barometer for engagement, other indicators can provide officials with a deeper insight into reasons for engagement levels and areas for improvement. Other data such as turnover rates and equal employment opportunity (EEO) complaints—which are likely already collected by federal agencies—can provide additional insight and strategies for improving employee engagement. Notably, MSPB found that there is a statistically significant correlation between higher levels of employee engagement and fewer EEO complaints. Officials in the three case study agencies said that they pay attention to their FEVS scores, but other sources of data can provide explanatory or agency-specific information valuable to developing improvement strategies. As one example, NCUA officials said they identified a slight increase in turnover in recent years from the human capital data and are reviewing their exit survey process in calendar year 2015 to determine the best way to gather this information as well as to identify trends in reasons for employees leaving. NCUA officials said providing applicants with a clear understanding of the work will help to ensure a good position fit initially, which leads employees to stay engaged with the organization. Credit union examiners often travel between credit unions and do not regularly report to an office. Therefore, NCUA is revising its vacancy announcements to better communicate the nontraditional work environment of field staff, which officials said comprises nearly 80 percent of the agency’s workforce. For example, NCUA officials said that applicants are asked to also indicate preferences on working independently. Case study agency officials told us that they take a multi-year, multi-prong approach to improving engagement and do not base engagement efforts solely on the survey cycle or focus their attention on year to year changes in the EEI. Some case study agency officials said a single survey cycle does not provide enough time to implement changes and see results because real change usually takes more than 1 year. The FEVS cycle begins around May and agencies receive results in September or October. It may be late-winter or early-spring before an agency will have designed an action plan. By the time the next survey cycle begins, agencies may still be interpreting results and developing and implementing their action plans. Moreover, according to case study agency and other officials we interviewed, the annual survey cycle does not allow enough time for employees’ perceptions to change before the next cycle begins. For example, an Education official said that it took a few years to see the effects of engagement-related actions. Members of the Chief Human Capital Officers Council and National Council on Federal Labor- Management Relations joint working group on employee engagement said that the effects of initiatives implemented to improve engagement will not be reflected in the EEI scores for at least a couple of years, which makes evaluating their effectiveness challenging. OPM officials agreed that efforts to improve engagement should not be based on the survey cycle, but noted the benefits of an annual survey. Specifically, OPM stated that agencies are increasingly using the FEVS as a management tool to help them understand issues at all levels of an organization and to take specific action to improve employee engagement and performance. An annual survey such as FEVS can help ensure that newly appointed agency officials (or a new administration) can maintain momentum for change, as the surveys suggest employees are expecting their voices to be heard. Further, OPM officials noted if agencies, managers, and supervisors know that their employees will have the opportunity to provide feedback each year, they are more likely to take responsibility for influencing positive change. Instead of focusing exclusively on FEVS and EEI scores, case study agencies took a longer term approach to their engagement efforts. For example, according to officials, Education established engagED, a long- term cultural change initiative, to build a more innovative, collaborative and results-oriented agency and create a more engaged workforce. This initiative focused on three areas—increasing multi-way communications, performance accountability, and professional growth opportunities—which officials said were consistently identified as challenges through the FEVS analysis and facilitated feedback discussions. Instead of focusing on one specific FEVS question, Education identified these broad themes to bring about a systemic change, according to officials. EngagED addressed these challenges through several actions intended to prompt thoughtful discussion among employees, accountability for results, and developmental opportunities. Among others, these actions included the following: Quarterly all-staff meetings with the Secretary to discuss various topics. A “lunches with leaders” program allowed agency employees more access, input, and participation in key topics discussed by senior agency leaders. A redesigned performance appraisal system to simplify and standardize performance rating levels to more clearly reflect performance expectations, and consistently recognize and reward successful performers within principal offices and across the agency. Periodic leadership summits to provide agency leaders with developmental activities identified by staff that are focused on teams, individual leadership, and problem resolution. An Education Policy Briefing Series to provide agency employees with an opportunity to learn about cutting-edge education issues that relate to the goals and work of the agency and to provide a forum for staff to interact and share expertise. According to Education officials, this longer-term, broad-based approach helped Education improve its scores even while government-wide scores were decreasing. Officials said they monitor each year’s results, but their success demonstrates the value of taking a long-term perspective. OPM provides a number of tools and resources to support agencies’ efforts to use EEI data to identify areas that need improvement, as shown in table 2. However, these tools do not provide agencies with the drivers of the EEI or enable agencies to determine if changes in EEI levels are meaningful. One of OPM’s key strategic goals is to help agencies create inclusive work environments where a diverse federal workforce is fully engaged and energized to put forth its best effort, achieve their agency’s mission, and remain committed to public service. OPM’s strategic plan for fiscal years 2014-2018 states that it will ensure agencies target, address, and measure key drivers of employee engagement. However, OPM does not analyze the drivers of the EEI or provide agencies the tools to do so. A driver analysis based on FEVS questions can help agencies more effectively target limited resources and can provide a roadmap to design strategies to improve EEI levels. OPM officials told us that they do not conduct a driver analysis to determine which FEVS questions are associated with higher EEI scores and report them via OPM’s online tools because they would have to use a more complicated and less transparent method of calculating the EEI. Specifically, to conduct a driver analysis OPM would have to calculate the EEI for each individual respondent by determining the proportion of positive responses to the 15 EEI questions for each respondent. OPM would also have to account for unanswered questions. OPM currently calculates the EEI by averaging all the positive responses to the EEI questions for the group of respondents. While OPM officials acknowledged the importance and value of the individual level calculation for determining drivers, they said that the benefit of the current method of calculating the EEI is that it is simpler and officials can see how the scores are calculated—as an average. However, OPM officials noted that they could separately conduct a driver analysis outside of the online tools. In 2006, OPM conducted a regression analysis to identify which questions best predicted overall job satisfaction, overall satisfaction with the organization, and intent to stay or leave. This suggests that OPM has the capability to conduct such an analysis. Research on employee engagement emphasizes the importance of identifying the drivers of an engagement or related metric as an initial step in improving employee engagement. For example, the Partnership for Public Service’s Best Places to Work in the Federal Government guidance lists a driver analysis as a key element in determining where agencies should focus their action planning efforts. If managers understand the drivers of engagement, then they can better target their engagement efforts, particularly in times of limited resources. The results of our driver analysis demonstrate consistency of results government- wide and by CFO Act agency as well as selected employee populations. Similar or even more limited investment of OPM resources could yield information that would benefit all agencies. However, by not determining which FEVS questions are associated with higher EEI levels, OPM is missing an opportunity to assist agencies in targeting their engagement resources. As noted earlier, the administration has said agency leaders will be held accountable for making employee engagement a priority and making it an integral part of their agency’s performance management system. For example, the December 2014 memorandum on engagement and performance calls on agencies to incorporate engagement measures into SES and agency performance plans. According to the memorandum, SES performance plans are to include a measurable component related to improving employee engagement by 2016. GPRAMA annual performance plans are to include baselines and organizational targets for strengthening employee engagement with a focus on a percent change. As agencies begin to use engagement measures to inform other performance measurement decisions, understanding whether EEI changes are statistically significant will become especially important. However, OPM does not report whether changes in agency EEI scores are statistically significant—that is, whether the change is meaningful and not due to random chance. As a result, agency officials do not have the information they need to appropriately interpret changes in the EEI. OPM does provide agencies with absolute changes in the EEI—increases and decreases that may or may not be statistically significant due to sampling variability. The method we used to determine statistical significance showed that only 34 percent (16 of 47) of the absolute changes in agency EEI scores from 2013 to 2014 were actually statistically significant. Without understanding whether changes are statistically significant, managers may take action based on data that has limited meaning. For example, a manager might assume an annual increase in the EEI meant specific engagement efforts were successful when they were not or assume an annual decline in the EEI meant specific engagement efforts were not successful and abandon an effort too soon. Statistical significance is a function of two things: (1) the size of the change—the increase or decrease in the EEI, and (2) the size of the population sampled. In general, the smaller the sample, the larger the change needs to be before it is statistically significant, and the larger the sample, the smaller a change needs to be to be significant. In FEVS, sample sizes tend to be substantially smaller at smaller agencies. For example, from 2013 to 2014 the Federal Mediation and Conciliation Service, with a workforce of over 200 employees, had a 2 percentage point change in the EEI, which was not statistically significant, based on the method we used to determine statistical significance. During that same period, the Department of Defense—the largest federal agency with over 700,000 employees—had about a 0.7 percentage point decrease in the EEI; this was a statistically significant change. Without knowing whether changes in the EEI are statistically significant, agency officials do not have the context to determine whether a change is meaningful. As agencies move from analyzing data to developing strategies to improving engagement and linking it to organizational performance, the specific strategies and lessons learned from the experiences of other agencies can be beneficial to those who may be seeking information related to improving employee engagement and performance. Table 3 describes OPM efforts to help agencies develop and implement strategies to improve employee engagement and link engagement to performance. OPM has several efforts under way to support agencies’ efforts to develop and implement strategies to improve engagement and link it to performance. Most of these efforts focus on the identification and sharing of promising practices, where OPM works in partnership with federal agencies. During the course of our audit, OPM officials described the following avenues for identifying these practices—the Engagement Outreach Team, in-person events, the CHCO Council–National Council on Federal Labor-Management Relations Employee Engagement Working Group, and through the designation of agency-appointed Senior Accountable Officials. OPM officials said their goal is to use the Community of Practice page on UnlockTalent.gov as the platform for sharing the identified promising practices. However, as of May 2015, OPM has only posted limited content on the Community of Practice page—video clips from three events. Engagement Outreach Team. OPM’s Engagement Outreach Team is a seven-person intra-agency team formed in August 2014, representing four OPM offices. Each outreach team member provides individualized support to three to four President’s Management Council agencies and identifies potential promising practices. OPM officials said the Outreach Team speaks with each of their assigned agencies, and based on these conversations, the Outreach Team meets weekly to share successes and challenges, address action items on their respective agencies’ efforts, and identify potential promising practices. However, as of May 2015, none of the promising practices identified by the Outreach Team had been added to the Community of Practice page on UnlockTalent.gov and OPM officials said they did not have a plan for how they will use the information gathered from President’s Management Council agencies to inform the Community of Practice page. In April 2015, OPM officials said the Outreach Team was evaluating all of the qualitative data received from agencies, including feedback on previous events and resources offered by the team to determine the next best steps forward, including developing content for the Community of Practice page of UnlockTalent.gov. However, officials did not provide a time frame for completing the evaluation or developing the content. In-person events. During the fall of 2014, OPM hosted three in-person, Washington, D.C.-based events for agency officials aimed at identifying promising practices in improving employee engagement. Specifically, in November 2014, OPM partnered with OMB and the Presidential Personnel Office to hold the Federal Employee Engagement Forum event at the White House. Panels of public- and private-sector representatives discussed (1) approaches to improving employee engagement and performance through use of data, (2) best practices in collaborative engagement strategies, and (3) the best use of tools and strategies to improve employee engagement and performance. OPM officials said approximately 150 people attended including senior agency officials or their staff and representatives from national labor unions and private- sector organizations. OPM also held two sessions for agency officials in OPM’s Innovation Lab to identify strategies for improving employee engagement. OPM officials said about 20 people attended each session from 11 different agencies. Participants included CHCOs and other senior leaders as well as other agency officials involved with employee engagement efforts. On May 18, 2015, following a briefing on the preliminary findings of our audit, OPM posted video clips on the Community of Practice page of UnlockTalent.gov from the Federal Employee Engagement Forum held at the White House and another in-person event, the SES Leadership Event. Regarding the Innovation Lab events, according to OPM officials, summaries of the sessions were shared with participants and by request with other officials. OPM officials said they have no further plans for when and how to share the Innovation Lab summaries with a broader government-wide audience. CHCO Council–National Council on Federal Labor-Management Relations Employee Engagement Working Group. Coordinated by the CHCO Council Executive Director, the working group was launched in February 2014 with representatives from 15 agencies and 8 nongovernment organizations including federal employee unions and organizations representing managers and executives. The group meets on approximately a quarterly basis and is organized into three subcommittees—(1) promising practices, (2) key enablers and barriers, and (3) measures and incentives. Two representatives, one each from an agency and a labor union, co-chair the full working group and each of the subcommittees. The group’s 2014 work culminated in presentations to the CHCO Council and the National Council on Federal Labor-Management Relations. According to the CHCO Council Executive Director, a key goal of the working group is to identify practices that will be shared on the Community of Practice page of UnlockTalent.gov. However, despite the preliminary work as reflected in the November 2014 presentations, no practices had been posted on the Community of Practice page, as of May 2015. Further, according to the CHCO Council Executive Director, agencies have been reluctant to hold their engagement practices up as a model. Agency-Appointed Senior Accountable Officials. According to OPM officials, from March through May 2015, OPM met once with each agency’s Senior Accountable Official to discuss their agency’s engagement baseline, plans for engagement activities, assistance needed, and best practices. In addition, OPM officials said in May 2015 they hosted a workshop for the Senior Accountable Officials to share leading practices and strategies to address common challenges. OPM officials said materials from this event were provided to participants, and included examples from participating agencies. OPM officials said after this workshop, they designed five workgroups for Senior Accountable Officials or their designee to work with officials from the People and Culture CAP goal to address specific engagement challenges. OPM officials said the workgroup’s outcomes and next steps will be shared in the fall of 2015, when the 2015 survey results are available to agencies. Linking increased employee engagement to improved organizational performance is important because it recognizes that improved engagement is not an end in itself. Instead, the ultimate aim is to enhance the ability of agencies to cost-effectively carry out their missions. The administration’s December 2014 memorandum calls for agencies to establish the linkage between employee engagement and mission performance. Specifically, agencies are to collect return on investment information—that is, whether a change in engagement levels resulted in improvements to performance metrics related to agency mission, such as a reduction in error rates. OPM, as the lead agency on the CAP employee engagement subgoal, has provided limited examples or guidance for how agencies could establish a linkage between engagement and performance. According to OMB officials, establishing such a link is the key step in agency efforts to improve employee engagement and performance. OPM officials said they began a study on how to link engagement to outcomes at three agencies whose outputs can be quantitatively measured. These agencies are the U.S. Mint’s Bureau of Engraving and Printing, the Patent and Trademark Office, and OPM’s Retirement Services Division. Specifically, OPM planned to analyze the relationship between EEI scores and production or performance measures at a team level. However, this effort has been delayed with no estimated completion date, and officials said that linking the EEI to team level performance or production outputs has been more difficult than anticipated. Following a briefing on the preliminary findings of our audit, OPM posted a video clip from the Federal Employee Engagement Forum panel on linking metrics to business outcomes. While this is an important step, the video segment featured only one example from a federal agency. Because experience with linking employee engagement in the public sector to organizational performance is limited (as indicated by our interviews with OPM and OMB officials and the literature that we reviewed), agencies do not have a clear model on how to make this link and demonstrate that it resulted in improved mission accomplishment. Even at our three case study agencies—each of which have high or improving EEI scores—officials said that they lacked sufficient in-house expertise to develop and conduct such an analysis. Pursuant to the People and Culture Employee Engagement CAP subgoal, the administration has established a target of improving employee engagement government-wide to 67 percent by the issuance of 2016 FEVS results, a 4 percentage point increase from the 2014 government- wide score. Without the ability to link increased engagement to improved performance, the extent to which an increase of 4 percentage points will translate into improved performance is unclear. Further, given the time horizon necessary to see real improvements, it is unclear if efforts to improve engagement can be achieved by 2016. Higher levels of employee engagement can translate into higher levels of organizational performance. However, for agencies to attain the ultimate goal of improving organizational performance, agencies must take a holistic approach—analyzing data, developing and implementing strategies to improve engagement, and linking their efforts to improved performance. The tools and resources OPM has developed represent an important first step toward helping agencies improve employee engagement. However, OPM cannot ensure officials are correctly understanding and using EEI data, because it does not report on whether EEI changes are statistically significant—that is, whether the changes are due to something other than chance. OPM also does not determine the FEVS questions that lead to increased EEI levels, which would enable agencies to focus on areas that drive engagement. At the same time, informed decisions require more than just EEI data. When faced with multiple options, agencies need to target their resources to the practices found to drive employee engagement—notably constructive performance conversations. Moreover, as indicated by our case study agencies, how changes are implemented—including the involvement of top leadership, consistency, employee outreach, and creating a line-of-sight between individual and organizational performance—ultimately affects whether those changes merely produce temporary compliance or result in sustainable cultural transformation. Further, other data can be used to provide more specific information on what needs attention. However, efforts take time and should not be seen solely as an annual effort measured by the results of the next survey, but as a continuous process. Although OPM has developed a process for identifying and collecting promising practices, OPM’s sharing of promising practices has been limited, and whether and when its efforts will come to fruition is unclear. Promising practices around analyzing EEI data and implementing improvement strategies are important; however, given the public sector’s limited experience linking engagement to performance, promising practices on creating this linkage are critical. In furtherance of its role to support agencies’ efforts to improve employee engagement and performance, we recommend that the Director of OPM take the following three actions: 1. To enable agencies to better target resources for engagement efforts, OPM should annually analyze and report on drivers of the EEI government-wide and by selected subsets of the federal workforce, such as agencies or employee population groups. 2. To enable agencies to identify meaningful changes in EEI levels, OPM should provide agencies with information on whether annual changes to EEI scores, both government-wide and by selected subsets of the federal workforce, are statistically significant. 3. To ensure agencies are leveraging promising practices and lessons learned from other agencies in developing effective strategies to improve engagement and performance, OPM should, in partnership with federal agencies, expand its efforts to share promising practices to include information on linking engagement to mission accomplishment and monitoring how engagement investments improve performance through data-driven reviews, like HRstat; and implement its strategy to share these practices in time to inform agency efforts stemming from their 2015 FEVS results. We provided a draft of this product to the Director of OPM for comment. In written comments, which are reproduced in appendix V, OPM concurred with our first recommendation and partially concurred with our second and third recommendations. OPM stated that it concurred with our recommendation to analyze and report on the drivers of employee engagement government-wide and by subsets of the federal workforce. OPM said that starting with the release of the 2015 FEVS, it is committed to conducting, analyzing, and reporting on key drivers of the EEI at the government-wide level and has formed a working group to make recommendations on the scope of the analysis and the reporting in subsets of the federal workforce. OPM stated that it partially concurred with our recommendation to provide information on whether changes are statistically significant, and noted that among other actions, the working group referenced above is to provide guidance on how best to disseminate this information to agencies. At the same time, OPM maintained that in addition to the EEI, agencies should also rely on multiple indicators to assess organizational performance. This was a key point that we made in our report. Specifically, we said that in addition to the EEI, other indicators—such as turnover data—can provide officials with additional insights into reasons for engagement levels and areas for organizational improvement. However, in order for agencies to meaningfully use EEI data in their analyses, we continue to recommend that OPM provide agencies with information on whether changes in the EEI are statistically significant. With respect to our third recommendation, OPM noted that while it agreed with our recommendation to share promising practices in time to inform agency efforts based on the FEVS 2015 survey results, OPM disagreed with our assessment of OPM’s efforts. In its written comments, OPM outlined the steps taken to identify and share promising practices after being briefed on the findings of our audit. For example, OPM noted that in May 2015, it held a workshop with the Senior Accountable Officials responsible for agency engagement efforts in an effort to share promising practices and generate solutions to common challenges; OPM also noted it has formed workgroups among the Senior Accountable Officials around specific topic areas, with a goal of sharing those practices with the larger federal community this fall. We have modified our report to include more information on OPM’s efforts and plans to share promising practices with agencies in time to inform the analysis of the FEVS 2015 survey results. However, until such information is shared with the larger federal community and includes models for linking engagement to mission accomplishment, we continue to believe that OPM should take additional actions to assist agencies in leveraging their lessons learned, as we recommended. We also provided a draft of this product to the Secretary of Education, Chairwoman of the FTC, and the Chairman of NCUA for technical review and comment. We received technical comments from them that we incorporated, as appropriate. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the appropriate congressional committees, the Director of the Office of Personnel Management, and other interested parties. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report please contact me at (202) 512-2757 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this product are listed in appendix VI. To determine the trends in employee engagement as measured by the Office of Personnel Management (OPM) Federal Employee Viewpoint Survey (FEVS) and identify key practices to improve employee engagement we analyzed (1) employee engagement index scores (EEI) from 2006 to 2014 and (2) the extent to which selected 2014 FEVS questions predicted EEI scores. This appendix describes our methodology for preparing the dataset and for calculating the EEI to conduct these analyses. For the methodology and results of our analysis of EEI trends, see appendix II; for our methodology for identifying the drivers of the 2014 EEI, see appendix III; and for the results of our driver analysis, see appendix IV. The FEVS provides a snapshot of employees’ perceptions about how effectively agencies manage their workforce. Topic areas are employees’ (1) work experience, (2) work unit, (3) agency, (4) supervisor, (5) leadership, (6) satisfaction, (7) work-life, and (8) demographics. OPM has administered the FEVS annually since 2010; from 2002 to 2010, OPM administered the survey biennially. The FEVS includes a core set of questions, and agencies have the option of adding questions to the surveys sent to their employees. The FEVS is based on a sample of full- and part-time, permanent, non- seasonal employees of departments and large, small, and independent agencies, which in 2014 represented about 97 percent of the federal executive branch workforce. According to OPM, the sample is designed to ensure representative survey results would be reported by agency, subagency, and senior leader status as well as for the overall federal workforce. Once the necessary sample size is determined for an agency, if more than 75 percent of the workforce would be sampled, OPM conducts a full census of all permanent, non-seasonal employees. For 2014, the total sample size was 872,495. According to OPM, this size was more than sufficient to ensure a 95 percent chance that the true population value would be between plus or minus 1 percent of any estimated percentage for the total federal workforce. Government-wide, in 2014, 392,752 employees completed surveys for a response rate of 46.8 percent. Among departments and large agencies, the Department of Veterans Affairs had the lowest response rate—32.6 percent—and the National Science Foundation had the highest—77.3 percent. We analyzed the 2006 through 2014 FEVS data file containing the 84 core questions and demographic variables provided to us by OPM. The datasets contain the full demographic and work unit location information on the respondents. OPM forward coded older FEVS datasets to match the coding for the 2014 survey so that question numbering and response categories were consistent across time. If a question from the 2014 survey instrument was not present in a previous year, OPM coded the questions as missing in the older data set. To assess the reliability of the FEVS data, we examined descriptive statistics, data distribution, and reviewed missing data. We also reviewed FEVS technical documentation as well as the statistical code OPM uses to generate the index and variance estimates, and we interviewed officials responsible for collecting, processing, and analyzing the data. On the basis of these procedures, we believe the data were sufficiently reliable for use in the analysis presented in this report. OPM first introduced the EEI in 2010, when it contained 8 questions. OPM revised it in 2011 to contain the 15 questions that currently comprise the EEI. According to OPM, the EEI is a measure of the conditions conducive to engagement. The EEI consists of three components—leaders lead, supervisors, and intrinsic work experience. OPM calculates the EEI by averaging the component scores, which are an average of the percent of positive responses to each question in the respective component. For a full list of EEI questions, see table 1 earlier in this report. To determine trends in employee engagement as measured by the FEVS for the years 2006 to 2014, we calculated the EEI using the data provided by OPM. For 2010 to 2014, we calculated the index using responses to the 15 questions contained in the current index. For 2006 and 2008, we calculated the EEI using only 11 of the 15 EEI questions because the 2006 and 2008 surveys did not include four questions that were added to the survey in 2010. Because OPM calculates the EEI and its component scores at the group level, we used data from OPM to recalculate the EEI for each individual, which enabled us to conduct regression analysis and assess the statistical significance of changes in EEI. The individual level calculation is scaled between 0 and 100 and is based on the proportion of each individual’s positive responses to the 15 constituent EEI questions. To test the comparability of the 2010 to 2014 estimates, which we calculated based on the 15 questions in the current EEI, and the 2006 and 2008 estimates, which we calculated based on the 11 EEI questions in the survey at that time, we recalculated the EEI for 2010 to 2014 using just the 11 EEI questions present in the 2006 and 2008 survey data. The revised EEI estimates for 2010 to 2014 based upon just the 11 questions averaged about 2.9 percentage points less than the EEI estimates based on the full 15 questions. While the trend line with a peak in 2011 was similar when the estimates were plotted by year, we did not make comparisons from 2008 to 2010 because of the change in the index composition. To generate estimates for agencies and employee population groups, we aggregated the index across individuals using the appropriate sample weights. We followed the replicate weight variance estimation methodology recommended by OPM to generate sample variance estimates for the index scores. This enabled us to analyze the drivers of engagement and assess the statistical significance of differences. To ensure that our calculation of the EEI would yield sufficiently similar results as OPM’s methodology for 2014, we assessed the correlation between the two versions. When aggregated to the agency level, our index is nearly perfectly correlated with the OPM measure in 2014 (ρ=0.99971). To confirm the cohesiveness of the individual index, we calculated Cronbach’s alpha, a measure of internal consistency that ranges from zero to 1 for 2014. The alpha value of .94 suggests that the scale of the items captures the majority of the variation in the underlying items, indicating high internal consistency. Using the Employee Engagement Index (EEI) calculated at the individual level, for 2006 through 2014 we analyzed the EEI government-wide, including the EEI components scores; by agency for those with a minimum of 5 years of Federal Employee Viewpoint Survey (FEVS) data for the years analyzed and at least 100 respondents, and by employee population measured by the FEVS. For each analysis, we determined statistically significant year-to-year changes in the EEI from 2006 to 2014, with the exception of 2008 to 2010 because the questions in the EEI for those years were not comparable. We identified statistical differences by assessing whether the 95 percent confidence intervals of two estimates overlapped or not rather than conducting multiple t-tests; confidence intervals that do not overlap represent differences that are statistically significant. If the change was statistically significant, there is less than a 5 percent probability that the difference occurred by chance. This method of assessing difference is conservative, in that it may underestimate the amount of statistically significant differences in cases of minor overlap of confidence intervals, but does not require us to use a testing methodology modification such as a Bonferroni adjustment to account for multiple comparisons. Table 4 below shows the downward trend in the government-wide EEI and for two of the three components. Tables 5 and 6 show the EEI trends for the 47 agencies with a minimum of 5 years of FEVS data for the years analyzed and at least 100 respondents and whether year to year changes were statistically significant. These tables are the basis for figure 2. Table 7 shows the estimated EEI by employee population category. To determine the extent of variation in responses within an employee population, we measured the greatest possible amount of variation in each of the years 2006 through 2014. Specifically, we measured the percentage point difference between the confidence interval upper bound of the category with the highest EEI and the lower bound confidence interval of the category with lowest EEI in each of the years. Pay category and supervisory status consistently had the widest variation in EEI scores. Our analysis of the drivers of engagement measures the extent to which selected FEVS questions predict the EEI. To conduct this analysis, we reviewed relevant literature and interviewed knowledgeable individuals to identify and refine a list of potential drivers of engagement, and then identified corresponding FEVS questions not included in the EEI. Using FEVS 2014 data, we then used multiple linear regression analysis to assess the correlation between the driver questions and the EEI, controlling for other factors such as agency and employee characteristics. We used both statistical significance and the magnitude of regression coefficients to define drivers of the EEI. We conducted sensitivity tests to ensure that our results were robust to differences in model specification, functional form, and to the exclusion of cases with high levels of missing data. In addition to our government-wide analysis, we analyzed the drivers among employees at each of the Chief Financial Officers Act agencies and selected employee populations. Results of these analyses were generally consistent with our government-wide analysis. To determine the FEVS questions to include in our statistical model we reviewed relevant literature and interviewed knowledgeable researchers, government officials from the United Kingdom, Canada, and Australia responsible for their comparable public-sector employee survey, and consultants on employee engagement. We then categorized all the potential drivers identified by sector—such as academia, consultants, and the federal government. We selected the drivers identified by two or more sectors, as well as those for public policy reasons we considered important to include in our model. We subsequently identified the corresponding FEVS questions not included in the EEI that reflected the concepts for each of the drivers. We selected at least one FEVS question as a proxy for each of the potential drivers that we identified, as shown in table 8. The questions that we selected were those we determined to be the most actionable by managers and representative of the potential driver. We also selected three drivers and questions for other public policy considerations. To assess the relationship between potential drivers and employee engagement as measured by our index, controlling for other factors, we used linear multiple regression analysis using FEVS 2014 data. Our ordinary least squares regression analysis assesses the unique correlation between the potential drivers and engagement, controlling for respondent characteristics. For most models, we controlled for supervisory status, agency tenure, location, veteran’s status, and age. In other models we also controlled for respondent’s sex, education, reported likelihood of leaving their job in the near future, race, Hispanic ethnicity, disability status, and sexual orientation. With the exception of age group and agency, we used the modal category of the sample as a referent category. We also included a variable to control for how many of the 15 index questions the respondent answered. In general, our agency variable included dummies for 37 individual agencies and an intercept for the remaining agencies, which tended to be substantially smaller in size; results were similar when we tested a model with intercepts for all individual agencies available in the sample. We used statistical software to account for the sample design in our variance estimates. The 37 agencies include the 24 CFO Act agencies as well as other agencies that participated in early FEVS data collection efforts. is a sample specific measure of how well the variation in the model’s independent variables (such as agency or demographics) predicts the variation in the dependent or outcome variable (here, engagement). It runs from 0 to 1, with a score of 0 suggesting that the model has no explanatory power and a score of 1 suggesting that the independent variables predict 100 percent of the variation in the dependent variable. some questions offering a “do not know” response category. For respondents missing or answering “do not know” to specific driver questions, we imputed data using the agency-level average for that individual to avoid losing cases in estimation through listwise deletion. Our model treats drivers of engagement as linear predictors of the engagement index. This is a strong assumption in light of the fact that the response categories to the driver questions are ordinal, rather than interval data. In other words, while the responses are ordered, the difference between two adjacent categories (such as very negative and somewhat negative) is not necessarily equal to the difference between two other adjacent categories (such as neutral and somewhat positive), and therefore the assumption of linearity may not be appropriate. We conducted sensitivity tests to ensure that our results were similar when we treated the drivers as categorical variables including intercepts for item nonresponse and no basis to judge responses. Given that our results were similar under either specification, we decided to use the linear covariates in our models to ease the interpretation of results and to reduce the degrees of freedom required to estimate the model. Given the large number of cases in our government-wide analysis, nearly all of the coefficients on the drivers in the model were statistically significant. Accordingly, we incorporated a substantive threshold in our determination of whether an independent variable acted as a driver. We considered variables to be drivers of engagement if they had a coefficient that rounded to 3 or above, indicating that on average, each increase in positivity of responses was associated with a 3 percentage point increase in the 0 to 100 measure of engagement. In other words, a coefficient of 3 implies that, compared to a respondent who answered neutrally to a given driver question, a respondent who answered very positively (which is two units above neutral) would have a predicted engagement score 6 percentage points higher. The results for our government-wide model appear in table 9 in appendix IV. They demonstrate that while almost all of the questions we tested attained statistical significance, a subset of questions could be considered drivers in that they had statistically significant coefficients that rounded to 3 or above. As shown in table 9, we identified six driver questions that strongly and significantly predicted the employee engagement score after controlling for agency and employee characteristics—these were questions 1, 42, 46, 55, 63 and 64. The strongest driver from our model was an employee’s response to question 46, a question related to performance management, which asks whether “my supervisor provides me with constructive suggestions to improve my job performance.” Compared to employees who gave a neutral response to this question, employees who strongly agreed had an average employee engagement score approximately 10.5 percentage points higher on a 0 to 100 scale after controlling for other factors such as agency, employee characteristics and other drivers. Similarly, compared to employees who responded strongly disagree, employees who answered strongly agree had an EEI score, on average, more than 20 points higher. The second strongest driver we identified was question 1, “I am given a real opportunity to improve my skills in my organization.” Compared to those who answered neutral to this measure of career development and training, those who answered strongly agree had predicted engagement scores approximately 8 percentage points higher. Compared to a strongly disagree response, the EEI score was, on average, approximately16 points higher. Four other questions had slightly smaller coefficients that rounded to 3 or above, suggesting that a respondent who answered strongly agree (or very satisfied) would have a predicted engagement level approximately 5 to 7 points higher than one who answered neutral, controlling for other factors. Compared to a strongly disagree (or very dissatisfied) response, the EEI score was, on average, approximately 12 points higher. These four questions were question 42 (“My supervisor supports my need to balance work and life issues”); question 55 (“Supervisors work well with employees of different backgrounds”); question 63 (“How satisfied are you with your involvement in decisions that affect your work?”); and question 64 (“How satisfied are you with the information you receive from management on what is going on in your organization?”) The coefficients in our analysis indicate the unique association between a given independent variable, such as a driver or employee population control, accounting for the potential effects of other variables. The R In light of these results, as well as reasons cited above, we determined that the linear specification is sufficient for identifying which independent variables appear to best predict variation in the engagement index. However, we also recognize that it may be appropriate to relax the assumption of linearity depending on the research question. Finally, we tested our model on subsets of the population with response patterns that could reflect data quality issues, such as missing more than a third of the index questions or more than half of the driver variables. Our results from these analyses were consistent with the overall government- wide estimates. The potential drivers we considered in our models were selected based on an extensive review of academic, government, and policy-related literature and a logical assessment of the particular concepts with which they related. However, researchers may disagree over which FEVS questions provide the best and most actionable proxies for the drivers we identified. Had we selected different questions as proxies for drivers found in the literature, our results may have been different. FEVS was not initially designed with the express purpose of measuring engagement or of identifying factors related to engagement. To the extent policymakers seek to use data to assess drivers of engagement, best practices suggest designing a survey or questions to align expressly with the concepts of interest. Although we believe that FEVS as designed and currently implemented is sufficient for an analysis such as that presented above, our sensitivity tests suggest that alternative measures of engagement or drivers might provide different insights as to which factors most strongly predict engagement. Our analysis does not provide insight into the validity of the EEI for measuring conditions conducive to engagement or employee engagement directly. Although we found that the 15 questions comprising the EEI had strong internal cohesion, we did not conduct factor analysis or additional research to determine whether an alternative scale or questions better captured the concept of engagement. Our model is not a causal assessment of the relationship between the specific FEVS questions included in our model and increased engagement. While our results identify some areas that might relate to increased engagement, we cannot be certain that an investment in a specific driver will result in increases in employee engagement. However, our results do confirm a general consistency of which drivers of the EEI, as measured by questions currently available in FEVS data, appear to be statistically and substantively significant across a wide range of agencies and subgroups. In other words, across agencies and selected employee population groups, positive responses to the six FEVS questions in our government-wide model were associated with increases in the EEI. To assess potential drivers for agencies, we replicated our government- wide regression model among employees at the 24 CFO Act agencies. We limited our analysis to the CFO Act agencies because they were of sufficient size so as to produce reliable results. As shown in tables 10 through 15 in appendix IV, the drivers for the CFO Act agencies were generally consistent with the results of our government-wide analysis, with some exceptions. For example, for several agencies, question 63 would not meet our definition of a driver in that the coefficient does not always round to 3 or above. We analyzed the drivers by employee population groups. We selected employee population groups (1) with different amounts of variation in EEI levels within the employee population group; (2) with distinct subsets of the employee population from the others selected (for example, we did not select both pay category and supervisory status because the categories would represent similar populations); and (3) for which, in our opinion, agencies could identify actionable steps for a subset of the employee population group. The employee population groups we analyzed were supervisory status, age, veterans status, work location (headquarters or field), and agency tenure. We then estimated versions of our regression model that included a subset of employee characteristic control variables to assess which potential drivers most strongly correlated with EEI, after controlling for agency and other factors. As shown in tables 16 to 20 in appendix IV, the drivers for the selected employee population groups were generally consistent with the results of our government-wide analysis, with minor exceptions. For example, when analyzing potential drivers by age group, question 63 does not reach our threshold for a driver among respondents younger than 40. Appendix IV: Results of GAO’s Analysis of the Drivers of the Employee Engagement Index Question/Variable Federal Employee Viewpoint Survey question included in GAO model Question No. 1: I am given a real opportunity to improve my skills in my organization. Question No. 42: My supervisor supports my need to balance work and other life issues. Question No. 46: My supervisor provides me with constructive suggestions to improve my job performance. Question No. 55: Supervisors work well with employees of different backgrounds. Question No. 63: How satisfied are you with your involvement in decisions that affect your work? Question No. 64: How satisfied are you with the information you receive from management on what’s going on in your organization? Question No. 9: I have sufficient resources to get my job done. Question No. 10: My workload is reasonable. Question No. 14: Physical conditions allow employees to perform their jobs well. Question No. 17: I can disclose a suspected violation of any law, rule or regulation without fear of reprisal. Question No. 20: The people I work with cooperate to get the job done. Question No. 24: In my work unit, differences in performance are recognized in a meaningful way. Question No. 29: The workforce has the job-relevant knowledge and skills necessary to accomplish organizational goals. Question No. 32: Creativity and innovation are rewarded. Question No. 37: Arbitrary action, personal favoritism and coercion for partisan political purposes are not tolerated. Question No. 38: Prohibited Personnel Practices are not tolerated. Question No. 41: I believe the results of this survey will be used to make my agency a better place to work. Question No. 70: Considering everything, how satisfied are you with your pay? Imputation flags by question Question 1 0.62 ref. . ref. . Education level Less than high school High school diploma/GED or equivalent Some college (no degree) Associate’s degree (e.g. AA, AS) Bachelor’s degree (e.g. BA, BS) ref. . Master’s degree (e.g. MA, MS, MBA) Doctoral/professional degree (e.g. Ph.D., MD, JD) Agency tenure Less than 1 year ref. . ref. . Military service status No prior military service ref. . Currently in National Guard or Reserves ref. . Missing Age group 25 and under ref. . Yes, to take another job within the federal government ref. . Yes, to take another job outside the federal government 0.2 ref. . Race American Indian or Alaska Native Native Hawaiian or other Pacific Islander ref. . Sexual orientation Heterosexual or straight ref. . Gay, lesbian, bisexual, or transgender I prefer not to say Flag for number of the 15 index questions for which respondent answered do not know or gave no response No index questions missing/do not know ref. . 1 to 5 index questions missing/do not know 6 to 10 index questions missing/do not know More than 10 index questions missing/do not know Office of Management and Budget ref. Court Services and Offender Supervision Agency National Aeronautics and Space Administration National Archives and Records Administration Legend: * p<0.05, ** p<0.01, *** p<0.001 Constant: -46.42*** R-squared: 0.74 Number of cases: 392,749 Design degrees of freedom: 392,667 imputation flags for potential driver variables, subgroup models control for 37 distinct agencies, the number of index questions missing, as well as the following employee population group variables: supervisory status, location, age group and military status. We incorporated a substantive threshold in our determination of whether an independent variable acted as a driver. We considered variables to be drivers of engagement if they had a coefficient that rounded to 3 or above, indicating that on average, each increase in positivity of responses was associated with a 3 percentage point increase in the 0 to 100 scale. imputation flags for potential driver variables, subgroup models control for 37 distinct agencies, the number of index questions missing, as well as the following employee population group variables: agency tenure, supervisory status, age group, and military status. We incorporated a substantive threshold in our determination of whether an independent variable acted as a driver. We considered variables to be drivers of engagement if they had a coefficient that rounded to 3 or above, indicating that on average, each increase in positivity of responses was associated with a 3 percentage point increase in the 0 to 100 scale. For further information regarding this statement, please contact Robert Goldenkoff, Director, Strategic Issues, at (202) 512-2757 or [email protected]. Individuals making key contributions to this statement include Chelsa Gurkin, Assistant Director; Tamara Stenzel, Analyst-in-Charge; Carl Barden, Alyssia Borsella, Martin De Alteriis, Deirdre Duffy, Robert Gebhart, Donna Miller, Anna Maria Ortiz, Ulyana Panchishin, Jerry Sandau, and Karissa Schafer. | Research on both private- and public-sector organizations has found that increased levels of engagement—generally defined as the sense of purpose and commitment employees feel toward their employer and its mission—can lead to better organizational performance. GAO was asked to review recent trends in federal employee engagement and steps OPM and agencies are taking to improve it. Among other things, this report: (1) describes trends in employee engagement from 2006 through 2014, (2) identifies practices in improving employee engagement, and (3) evaluates OPM's tools and resources to support employee engagement. To meet these objectives, GAO analyzed responses to FEVS questions from 2006 through 2014, conducted a regression analysis, and reviewed OPM documents and interviewed OPM and other agency officials. From 2006 through 2014, government-wide engagement levels—as measured by the Office of Personnel Management's (OPM) Employee Engagement Index (EEI)—increased to an estimated high of 67 percent in 2011 and then declined to an estimated 63 percent in 2014. This decline is attributable to several large agencies—including the Department of Defense—bringing down the government-wide average. The government-wide decline masks the fact that the majority of federal agencies either sustained or increased EEI levels during the period. Of the three components that comprise the EEI—employees' perceptions of agency leaders, supervisors, and their intrinsic work experience—perceptions of leaders consistently received the lowest score. GAO's regression analysis of selected Federal Employee Viewpoint Survey (FEVS) questions identified six practices as key drivers of the EEI (see table), with constructive performance conversations being the strongest. For example, at one agency, supervisors and employees developed a set of topics for quarterly performance conversations to ensure that employees receive consistent and regular constructive feedback and coaching. OPM developed resources to help agencies use EEI data to strengthen employee engagement but fell short of supporting a holistic approach to improving engagement and linking to performance. For example, OPM does not report whether annual EEI changes are statistically significant—that is, whether the changes were meaningful or due to random chance. Likewise, OPM does not analyze which FEVS questions are associated with higher EEI scores. This information would help agencies better focus their efforts to improve engagement and target resources. Further, OPM has provided limited examples or lessons learned on linking engagement to agency performance, which agencies will need to inform their next survey cycle. GAO recommends that the Director of OPM take the following three actions: (1) report annually on drivers of the EEI, (2) provide information on statistically significant changes in EEI scores, and (3) share examples and lessons learned to improve engagement and link engagement to performance in time to inform results of the next survey cycle. OPM concurred with the first recommendation and partially concurred with the second and third recommendations. GAO continues to believe that additional action on these recommendations is needed as discussed in the report. |
Digitizing health information has many potential benefits including reducing costs and increasing medical accuracy. One key example of digitized health information is an electronic health record (EHR). An EHR is a digital version of a patient’s paper medical record or chart. EHRs ideally make information available instantly and securely to authorized users. They can contain the medical and treatment history of a patient, diagnoses, medications, treatment plans, immunization dates, allergies, radiology images, and laboratory and test results. These records can also give a provider access to evidence-based tools for making decisions about a patient’s care and can automate certain workflows. System software for managing EHRs is typically purchased by providers (such as physicians, hospitals, and health systems) from vendors that develop the systems. When these systems are interoperable, information can be exchanged—sent from one provider to another—and then integrated into the receiving provider’s EHR system, allowing the provider to use that health information to inform clinical care. HIPAA required the Secretary of HHS to develop regulations protecting the privacy and security of health information. To fulfill this requirement, HHS published Standards for Privacy of Individually Identifiable Health Information (the Privacy Rule) in December 2000 and Security Standards for the Protection of Electronic Protected Health Information (the Security Rule) in February 2003. The Privacy Rule establishes national standards for safeguarding protected health information (PHI). PHI is individually identifiable health information that is transmitted or maintained in any form or medium. The Privacy Rule states that PHI may be used or disclosed to other parties by “covered entities” or their business associates only under specified circumstances or conditions, and generally requires that a covered entity or business associate make reasonable efforts to use, disclose, or request only the minimum necessary PHI to accomplish the intended purpose. The Privacy Rule governs the use and disclosure of individuals’ health information and also provides individuals with privacy rights with regard to their health information. For example, the Privacy Rule provides the right to request restrictions on uses and disclosures of PHI, the right to adequate notification of privacy practices, the right of access to PHI, and the right to request amendments to inaccurate or incomplete PHI. The Privacy Rule also requires that covered entities and business associates employ appropriate safeguards for protecting PHI. The Security Rule establishes nationwide standards for safeguarding PHI that is held or transferred electronically. It operationalizes the protections contained in the Privacy Rule by specifying administrative, technical, and physical security practices to secure individuals’ electronic protected health information (ePHI). For example, the Security Rule requires organizations to complete an enterprise-wide risk assessment and to create a risk management plan to address identified risks. In the Security Rule, HHS distinguishes between “required” and “addressable” implementation controls. Required controls must be implemented. In contrast, the requirement to implement “addressable controls” is more open-ended. Organizations do not have to implement these controls if they determine they are not “reasonable and appropriate” and can document their reasons. However, they are required to implement equivalent alternative measures to achieve a comparable level of security assurance. Thus, while some action is required with regard to addressable controls, a wide variety of interpretations and alternative implementations is possible. Further, a variety of factors, such as implementation cost and organizational size, can be considered when making decisions on implementing addressable controls. The HITECH Act was intended to promote the adoption and meaningful use of health information technology. Subtitle D of the act includes enhanced security and privacy protections associated with the electronic transmission of health information, in part through several provisions that strengthen the civil enforcement of the HIPAA rules. Further, the act requires HHS to establish an audit function to ensure the implementation of the Security and Privacy Rules by covered entities and business associates. Also, pursuant to the HITECH Act, HHS has issued the Interim Final Rule for Breach Notification for Unsecured Protected Health Information, effective September 23, 2009. Several components within HHS have responsibilities associated with implementing HIPAA and the HITECH Act. For example, one of the Centers for Medicare & Medicaid Services’ (CMS) responsibilities under the HITECH Act is the administration of the Medicare and Medicaid Electronic Health Records program, which provides incentives for eligible entities that adopt and meaningfully use certified EHR technology. Additionally, the Office of the National Coordinator is responsible for setting standards for the implementation of systems that process electronic health records. OCR’s role is to implement and enforce the Privacy, Breach Notification and Security Rules. The office is divided into eight separate regions and a headquarters office in Washington, D.C. Each regional office has the authority to investigate cases which can either be opened by the regional office or assigned from the central intake unit located in headquarters. In addition to investigating potential HIPAA violations, OCR is also responsible for performing HIPAA compliance audits called for under the HITECH Act. U.S. critical infrastructure is the necessary services that support the nation’s society and serve as the backbone of our economy, health, and security. Critical infrastructure is comprised of systems and assets, whether physical or virtual, so vital to the United States that the incapacity or destruction of such systems and assets would have a debilitating impact on the national public health or safety, nation’s security, or national economic security. The critical infrastructure sectors were defined in Presidential Policy Directive 21 and consist of 16 sectors, one of which is health care and public health. Public-private efforts to strengthen critical infrastructure help the public sector enhance security and rapidly respond to and recover from hazard events and assist the private sector in restoring business operations and minimizing losses. Because most critical infrastructure assets are owned and operated by the private sector, effective partnerships between private and public sectors are key to protecting them. In addition to health care, other sectors include financial services, communications, and information technology. The President issued Executive Order 13636, Improving Critical Infrastructure Cybersecurity, in February 2013. The intent of the directive was to strengthen the security and resilience of critical infrastructure against evolving threats, while incorporating strong privacy and civil liberties protections into cybersecurity initiatives. It called for an updated national framework to reflect the increasing role of cybersecurity in securing physical assets. The order directed NIST to work with stakeholders to develop a voluntary framework, based on existing standards and industry best practices, for reducing cyber risks to critical infrastructure. In response, in February 2014, NIST released the Framework for Improving Critical Infrastructure Cybersecurity (Cybersecurity Framework). Created through collaboration between government and the private sector, the Cybersecurity Framework consists of standards, guidelines, and practices to promote the protection of critical infrastructure. The prioritized, flexible, repeatable, and cost-effective approach of the framework is designed to help owners and operators of critical infrastructure apply the principles and best practices of risk management to improving the security and resilience of critical infrastructure. Executive Order 13636 directed sector-specific federal agencies to establish, in coordination with the Department of Homeland Security, a voluntary program to support the adoption of the NIST Cybersecurity Framework by owners and operators of critical infrastructure and other interested entities; create incentives to encourage owners and operators of critical infrastructure to participate in the voluntary program; and, if necessary, develop implementation guidance or supplemental materials to address sector-specific risks and operating environments. HHS was designated as the sector-specific agency for the health care and public health sector. As a sector-specific agency, HHS is responsible for providing institutional knowledge and specialized expertise as well as leading, facilitating, or supporting the security and resilience programs and associated activities for the sector. The health care and public health sector protects the health of the population before, during, and after any incident with actual or potential consequences. The sector consists of direct health care, health plans and payers, pharmaceuticals, laboratories, blood, medical materials, health information technology, mortuary care, and public health. The use of health information technology, including EHR systems, has the potential to allow health care providers and others to share health care information electronically, which may lead to improved health care quality and reduced costs. Electronic sharing of health information is especially important because the health care system is highly fragmented, with care and services provided in multiple settings, such as physician offices and hospitals, that may not be coordinated. Because of this fragmentation, providers may lack ready access to critical information needed to coordinate the care of patients and to ensure that informed decisions are made about the best treatment options. Lack of care coordination can lead to inappropriate or duplicative tests and procedures that can increase health risks to patients and poorer patient outcomes. As we previously reported, estimates of this spending increase have ranged from $148 billion to $226 billion per year. EHR systems can overcome many of the limitations of manual health records. Sharing clinical data using manual methods such as faxing paper records can be time consuming and costly and may be unavailable at the point of care. In addition, data shared via manual methods are generally not formatted so that they can be easily accessed by other electronic systems or stored in EHRs. Lacking the ability to access and store manual data in their systems, providers may not be able to easily find the information they need or electronically transmit it to another provider. In contrast, effective electronic sharing of health information has the potential to bring patient information directly from an EHR to the health care professional providing the care, regardless of where the care or services are delivered or when the information is needed. Electronically exchanging information is also important in new approaches to health care delivery, such as accountable care organizations, because of the need for providers in different settings to have ready access to information needed to manage and coordinate care. Accountable care organizations, as defined by the Centers for Medicare & Medicaid Services, are groups of doctors, hospitals, and other health care providers who collaborate to give coordinated care to Medicare patients. The goal of this coordinated care is to ensure that patients receive the right care at the right time while avoiding unnecessary duplication of services and preventing medical errors. Electronic health records have the potential to improve the quality of care patients receive from such organizations and to reduce health care costs. Finally, according to the Office of the National Coordinator for Health Information Technology, electronic exchange of health information is also important to patients themselves. The interoperable electronic exchange allows consumers to securely find and use vital health information, enhancing care delivery, public health, and research, and empowering them to make informed decisions regarding their health. While electronic health information can offer many potential benefits, it can be vulnerable to security lapses that can jeopardize its confidentiality, integrity, and availability. More individuals’ ePHI was compromised in 2015 than in any previous year following the establishment of the HITECH Act in 2009, according to data that health care providers reported to HHS. Based on these data, over 113 million individual health care records were compromised in 2015 due to hacking or other incidents. As figures 1 and 2 show, both the total number of reported breaches involving health care records as well as the number of individual records compromised have increased significantly since 2013. The following are examples of recent large data breaches involving health care information. In May 2015, the University of California, Los Angeles (UCLA) Health network discovered that records in its possession had been compromised in a cyberattack on its information technology (IT) systems. According to the UCLA Health website, the attackers accessed parts of the UCLA Health network that contained personally identifiable information (PII) such as names, addresses, dates of birth, Social Security numbers, medical record numbers, Medicare or health plan ID numbers, and some medical information. UCLA Health stated that it had notified the Federal Bureau of Investigation (FBI) regarding the cyberattack and pursued help from computer forensic experts to investigate the incident. According to UCLA Health, it offered affected individuals 12 months of identity theft recovery and restoration services as well as a $1,000,000 insurance reimbursement policy and additional health care identity protection. In addition, individuals whose Social Security number or Medicare identification number was stored on the parts of the network that had been compromised were given 12 months of credit monitoring at no cost. In January 2015, Anthem, Inc. learned of a large-scale cyberattack on its IT systems. According to Anthem, the cyber-attackers obtained PII for approximately 79 million individuals with Anthem accounts and individuals who receive health care services in any of the areas that Anthem serves, including names, dates of birth, Social Security numbers, health care ID numbers, home addresses, e-mail addresses, and employment information such as income data. Anthem reported that, after discovering the attack, it contacted the FBI, began working to close the security vulnerability, and contracted with a cybersecurity firm to assist in the investigation and to strengthen the security of its systems. Anthem also set up a website with information specific to the incident and arranged to have identity protection services provided to compromised individuals at no cost for 2 years. Also in January 2015, Premera Blue Cross, which provides insurance primarily to individuals in Alaska and Washington, discovered that cyber attackers had gained unauthorized access to its IT systems. Premera reported the initial attack had occurred in May 2014 and that approximately 11 million records of patients and individuals who do business with Premera were affected. According to Premera, cyber attackers were able to access information such as names, addresses, e-mail addresses, telephone numbers, dates of birth, Social Security numbers, member identification numbers, medical claims information, and bank account information. Premera reported that it was cooperating with the FBI’s investigation into the attack and was working with a cybersecurity contractor to remove the infection created by the attack. In July 2014, Community Health Systems, Inc. confirmed that its computer network had been the target of a cyberattack. Community Health Systems said that it engaged a cybersecurity contractor and was working with federal law enforcement authorities. According to its website, approximately 4.5 million individuals were affected, including those who were referred for or received services within the previous 5 years. The data included patient names, addresses, birthdates, telephone numbers, and Social Security numbers. Community Health Systems said it notified affected patients and regulatory agencies and offered no-cost identity theft protection services to affected individuals. These incidents reflect an increase in attacks against health information that has been reported by organizations that monitor global information security trends. For example, a study conducted by Mandiant reported that health care IT breaches, which had previously been a minor portion of their investigations, emerged in 2014 as a notable target for criminals. Likewise, a study done by KPMG reported in 2015 that a survey of health care executives indicated that health care organizations are frequently targeted compared to other types of organizations and the magnitude of the threat against health care information has grown exponentially. Specifically, four-fifths of executives at health care providers and payers told KPMG that their IT systems had been compromised by cyberattacks. In its own study of historical health care industry data breaches, Verizon reported that breaches of personally identifiable health information were diverse and affected more industries than just health care. In 2014, the FBI issued a warning to health care providers that the health care industry was not as resilient to cyber intrusions as the financial and retail sectors, increasing the potential for cyber intrusions. Threats to the security of systems containing health information can come from a variety of sources. Intentional threats include both targeted and untargeted attacks from a variety of sources, including criminal groups, threat actors, foreign nations engaged in espionage, and health care industry insiders. These threat sources vary in terms of the capabilities, their willingness to act, and their motives, which can include monetary gain or other motives. According to subject matter experts, the increasing extent to which electronic health information is subject to cyberattack reflects the increased value of the compromised data on the black market. According to these experts, criminals are aware that obtaining complete health records are often more useful than isolated financial information, such as credit information. Electronic health records often contain extensive amounts of information about an individual. Cyber criminals seeking access to health information for its resale value may use a variety of readily available software tools to carry out attacks, such as intercepting and capturing data as they are transmitted, exploiting known vulnerabilities in commercially available software, and using e-mail phishing techniques to gain unauthorized access to systems and information. In addition to the threat of cyberattack, health IT systems face significant threats from insiders. While all of the breaches of over 1 million records in 2015 were attributed to outside attackers, a health care industry representative told us that insiders are consistently identified as the biggest threat. In addition to the threat of health care professionals and staff directly accessing medical records for unauthorized purposes, insiders may also fall victim to phishing attacks and other forms of social engineering that could provide outside attackers with unauthorized access to IT systems that they would not otherwise be able to obtain. Finally, health information systems also face unintentional threats. According to Verizon, 45 percent of breaches of personally identifiable health information since 1994 have involved lost or stolen equipment that contained unencrypted information. Another 20 percent of breaches were attributable to errors such as mis-delivered documents, improper disposal, and publishing errors. Table 1 summarizes potential adverse impacts as well as the types of groups or individuals that could pose threats to health information systems. To encourage covered entities and business associates to implement effective security and privacy protections, HHS established guidance for compliance with the HIPAA requirements regarding the security and privacy of protected health information. However, HHS investigations, industry stakeholders, and HHS’s own reviews have shown that organizations have struggled to select appropriate security and privacy controls. For critical infrastructure sectors, such as health care, NIST has published the Cybersecurity Framework to assist organizations in selecting and implementing appropriate controls. However, the guidance published by HHS does not address all of the elements in the NIST guidance. HHS officials said they intended their guidance to be minimally prescriptive to allow flexible implementation by a wide variety of covered entities. However, until these entities address all the elements of the NIST Cybersecurity Framework, their EHR systems and data are likely to remain unnecessarily exposed to security threats. HHS recognizes that performing a comprehensive risk assessment is essential for organizations to understand their environment and to select appropriate security and privacy controls. Under the Security Rule promulgated by HHS, a key element for compliance with HIPAA requirements is completing a security risk assessment. HHS guidance states that conducting such an assessment serves as the foundation for an organization’s security and privacy program as it represents a comprehensive determination of the risks that are common to the organization’s core functions, processes, segments, common infrastructure, and information systems. A comprehensive risk assessment reduces the risk of a HIPAA violation and increases assurance that health information is protected appropriately. According to OCR, an effective risk assessment includes analysis of the potential risks and vulnerabilities to the confidentiality, availability and integrity of all ePHI that an organization creates, receives, maintains, or transmits. Security risk assessments are intended to be the basis for a wide variety of risk-based decisions and activities by organizations through all phases of designing, developing, implementing, and maintaining information security controls. OCR identifies such assessments as the first step in implementing safeguards and a cornerstone of effective HIPAA compliance. Because security risk assessments are central to the implementation of effective security controls, OCR, in consultation with NIST, developed two sets of guidance to help organizations of different sizes perform risk assessments. According to OCR officials, the NIST HIPAA Security Rule (HSR) Toolkit guidance was issued in 2010 and is meant to assist larger covered entities and their business associates in conducting security risk assessments. The stated purpose of the HSR Toolkit is to help covered entities and their business associates better understand the requirements of the HIPAA Security and Privacy Rules, implement those requirements, and assess those implementations in their operational environment. In response to feedback that the HSR Toolkit was difficult for smaller entities to use, OCR issued additional guidance in coordination with the Office of the National Coordinator for Health Information Technology (ONC) in 2015. This guidance, referred to as the Security Risk Assessment Tool, is designed to provide smaller covered entities and business associates step-by-step guidance in conducting their assessments. Both guidance documents address the implementation specifications identified in the HIPAA Security Rule and cover basic security practices, security failures, risk management, and personnel issues. The tools are organized as a series of questions addressing various security categories. Basic security practice questions include defining and managing access, backups, recoveries, and physical security. Risk management questions address periodic reviews and evaluations. Lastly, personnel issue questions address access to information as well as the on-boarding and release of staff. OCR investigations, industry stakeholders, and HHS’s own audits have shown that covered entities and their business associates face challenges in implementing the Security and Privacy Rules. Specifically, HHS data from 2015 show that performing risk assessments and developing risk management plans, which document how identified risks are to be addressed, are among the most challenging aspects of the rules for covered entities to implement. OCR investigations where corrective actions were required showed that approximately 23.9 percent of complaints and breach reports received by HHS result in investigations that involve questions about how organizations have conducted risk analyses and approximately 22.3 percent involve how organizations developed risk management plans. Further, stakeholders from the private sector have expressed concerns that risk management programs under the HHS guidance are difficult because requirements are not clearly defined. One stakeholder from a private sector organization who works on HIPAA compliance and assessment stated that it was difficult for organizations to know whether they had adequately addressed all the requirements. OCR identified incomplete risk assessments as an area of concern during its pilot audit program. Under the HITECH Act, HHS was required to conduct periodic audits to ascertain whether covered entities and business associates are in compliance with the HIPAA Security and Privacy Rules. In response, OCR developed and implemented a pilot program that it used to conduct 115 audits of covered entities from 2012 to 2013. According to OCR officials, one trend identified during the pilot program was a failure to complete risk assessments at many of the covered entities that were audited. OCR officials noted that a failure to complete a comprehensive risk assessment can put an organization at a higher risk for failing to meet other HIPAA security and privacy requirements, which could result in a breach of ePHI. The Security Rule requires covered entities and their business associates to perform risk analyses and create risk management plans. To provide guidance on assessing risks to ePHI, HHS developed the Security Rule Toolkit and Security Risk Assessment guidance. To supplement this guidance and provide organizations assistance in developing risk management plans that address identified risks, HHS published seven documents called the HIPAA Security Information Series. Additionally, HHS has published several pieces of threat-specific guidance to assist covered entities in developing controls to address specific risks, such as the risks to mobile devices. Similarly, NIST has published the Cybersecurity Framework to provide organizations in critical infrastructure sectors, including health care, guidance on designing an effective information security program, including both assessing risks and implementing controls to mitigate them. NIST’s Cybersecurity Framework includes a core set of cybersecurity activities common to all critical infrastructure sectors that form a baseline of topics for critical infrastructure organizations to consider as they tailor specific implementations of security controls to meet their identified risks. The framework core is divided into five broad security functions (Identify, Protect, Detect, Respond, and Recover), which in turn are divided into 22 more specific categories and 98 subcategories. The 98 subcategories generally correspond to security controls cited in NIST’s guidance on security and privacy controls for federal information systems and organizations. While adherence to the Cybersecurity Framework is voluntary, its core set of security controls represents a consensus of topics to consider when developing information security programs. It was developed by NIST with extensive collaboration among private and public sector stakeholders. In February 2016, OCR acknowledged the importance of the framework by publishing the HIPAA Security Rule Crosswalk to NIST Cybersecurity Framework, which maps the Security Rule’s administrative, physical, and technical controls to relevant subcategories in the framework. According to officials from HHS’s Office of the Coordinator for Health Information Technology, this crosswalk was intended to show how organizations’ existing HIPAA compliance efforts fit into the NIST guidance. However, while the crosswalk demonstrated that the major elements of the Security Rule correspond to elements of the NIST Cybersecurity Framework, HHS guidance does not address many of the specific security control elements included in the Cybersecurity Framework. For example, of the 98 framework subcategories, the HSR Toolkit fully addresses only 19. Many of the specific controls detailed within the framework’s 98 subcategories are not addressed in the either the HHS security assessment guidance or in its other risk management guidance. The HIPAA Security Information Series, which is intended to provide additional guidance on remediating risks, outlines a high-level approach to choosing and implementing controls and does not specifically address the Cybersecurity Framework controls or how covered entities and business associates should tailor them to meet their specific needs. The Cybersecurity Framework subcategories that were not fully addressed include a wide range of security controls. For example, the guidance on risk assessments addresses controls from risk assessment subcategories, such as the need to develop and perform risk assessments, installing software updates, and receiving security alerts. However, it does not address controls in other risk assessment subcategories, such as penetration testing and developing risk responses. Penetration testing ensures that controls are operating as intended by testing to identify vulnerabilities that could be exploited. If security controls are not operating as intended, covered entities may be leaving their systems vulnerable to threats. HHS officials stated that the HSR Toolkit and the Security Risk Assessment guidance were designed specifically for the risk analysis portion of the overall risk management process and thus were not intended to assist organizations in the selection and tailoring of specific security controls to meet their needs. However, gaps in the overall set of guidance could lead to incomplete risk assessments and risk management plans as well as inconsistent implementation of security controls. Without addressing all major elements of the Cybersecurity Framework, the guidance may not be helping guide these entities as effectively as possible to comprehensively consider potential risks to the security and privacy of electronic health information. As a result, systems containing such information may remain unnecessarily vulnerable to breaches and other security and privacy threats. To enforce the Security and Privacy Rules, HIPAA grants HHS investigatory powers and the ability to impose civil money penalties on covered entities. The Secretary of HHS delegated these responsibilities to OCR, which is charged with implementing and enforcing the HIPAA rules. As part of its oversight of the implementation of the Security, Breach Notification, and Privacy Rules by covered entities and business associates, OCR has established an enforcement program to review the high volume of complaints that are submitted each year. However, the office does not always ensure that identified issues are corrected and does not always issue appropriate guidance for cases resolved informally. Further, while the office has developed an audit function as an additional oversight function, as required under the HITECH Act, it is not yet fully operational and its effectiveness is not yet known. The office also has not demonstrated the effectiveness of its enforcement program over time or fully communicated or coordinated its enforcement results with the Centers for Medicare & Medicaid Services (CMS). Until HHS addresses these issues, it is likely missing opportunities to ensure compliance and to demonstrate the full effectiveness of its oversight program. Through OCR, HHS investigates potential violations of the HIPAA Security, Breach Notification, and Privacy Rules. These investigations may be initiated in several ways. For example, the office has established a system for individuals to submit complaints about potential data breaches or other potential violations of the HIPAA Security and Privacy Rules, which it may investigate if warranted and based on resource availability. HHS also provides covered entities a reporting system to notify OCR of data breaches. The office assesses these cases to determine whether to initiate investigations. In addition, OCR can initiate its own investigations based on factors such as media reports, patterns of repeat violations, or referrals from other government organizations, among other instigating events. OCR receives thousands of individual consumer complaints every year, and the number has been growing. For example, OCR reported receiving 17,779 complaints regarding the potential violations of HIPAA rules in 2014; 12,974 in 2013; and 10,457 in 2012. To address the high volume of cases that it receives, OCR has implemented a triage process where a central intake unit reviews all complaints as they are submitted and decides whether to (1) forward the complaint to a regional office for further review and potential investigation, (2) provide “technical assistance” in lieu of an investigation, or (3) decline to investigate. Of the many complaints it receives, OCR opens investigations of relatively few. Analysis of OCR case files shows that a variety of factors limit the number of investigations. Reasons OCR may decline to investigate a complaint include a lack of jurisdiction, a lack of consent from an individual to disclose information to the entity being investigated, allegations that would not constitute a violation of the Security and Privacy Rules, or covered entities no longer being in business. In some cases, instead of opening an investigation, the office may provide technical assistance intended to clarify the responsibilities of covered entities or how to implement specific aspects of the Security and Privacy Rules. According to OCR officials, if the office conducts a complaint investigation, it has several options for reaching a resolution. It may conclude that no violation has occurred or that corrective actions have already been taken that address any identified deficiencies. Some investigations may result in a resolution agreement, which may contain items such as a binding corrective action plan, settlements, or requirements for reporting to HHS on progress. Consistent with the regulation, the office seeks primarily to resolve complaints through informal means and technical assistance and resorts to fines only in cases where the organization will not comply or in cases of willful neglect. In the preamble to the Enforcement Rule, HHS stated that based on its experience this method is effective and that the law does not mandate an adversarial approach. While OCR does not investigate all complaints that are submitted, in many cases it chooses to provide “technical assistance” intended to help covered entities and business associates comply with Security, Breach Notification, and Privacy Rule requirements. According to OCR officials, and consistent with regulation, providing technical assistance is a way to address cases that would otherwise be closed without an investigation. For the 2015 period we reviewed, in most of the cases where technical assistance was provided in lieu of a full investigation the guidance documents provided were relevant to the issue. However, for 12 of the 94 cases we reviewed the technical assistance was not directly applicable to the submitted complaint. For example, in one case, a complaint was submitted about a covered entity using easily guessed passwords to secure protected health information before e-mailing it to individuals. HHS closed this complaint by sending the covered entity a checklist for securing postal mail and faxes rather than guidance for protecting e-mail. In several other cases complaints were made about ePHI being inappropriately accessible on a covered entity’s website. OCR provided guidance to the entities on password protections for workstations, which was not relevant to the identified website problem. According to OCR officials, the reason that technical assistance does not always address identified problems is that OCR has only limited technical assistance guidance on hand, which may not always directly address identified issues, and there is no review process to ensure that it is consistent and relevant. OCR officials stated that resource limitations have prevented them from developing a more comprehensive set of technical guidance or establishing a review process. As a result, some complaints are closed with organizations receiving limited guidance on how to achieve compliance. The unaddressed weaknesses identified in the complaints increase the risk of future HIPAA violations and may result in entities continuing to employ weak security practices that could jeopardize the security and privacy of the electronic health information in their custody. OCR’s letters closing out cases that it investigated did not always include indications that covered entities had implemented or had committed to implement corrective actions or other measures to better adhere to the Security, Breach Notification, and Privacy Rules. Internal control standards state that to ensure identified deficiencies are corrected in a timely manner, oversight bodies should monitor the status of remediation efforts until they are completed. During the 2015 period we reviewed, most of the identified actions were addressed before the cases were closed. However, in 13 of the 205 cases we reviewed where corrective actions were identified, such actions were not addressed before closure. In one case HHS concluded that a covered entity that had suffered a breach had failed to fully address several key elements of the Security and Privacy Rules. Specifically, the entity had not completed a risk assessment or risk management plan, had not trained its staff appropriately, did not have written policies and procedures for securing protected health information, and did not use encryption. Although the entity reported implementing improved encryption and data loss prevention software, it had not provided evidence of instituting the required training, establishing the required HIPAA compliance policies, or conducting the required enterprise-wide risk assessment and risk management plan. Nevertheless, HHS closed the investigation with these significant issues outstanding. In its close-out letter, HHS encouraged the entity to revisit its training policies and HIPAA compliance policies and reminded it of its responsibilities to perform a risk assessment and create a new risk management plan. OCR requires monitoring of corrective actions for up to 3 years in cases where it and an entity under its jurisdiction enter into a settlement agreement. However in other cases, OCR does not generally follow up on investigations where corrective actions are ongoing or where such actions have not yet been fully implemented. HHS officials stated that the covered entities and business associates understand that not addressing identified issues could result in more serious enforcement actions if a repeat issue were identified in future investigations. HHS cited a lack of resources as the reason that it did not follow up with covered entities to ensure that corrective actions were being implemented before closing cases. OCR officials told us that they considered it a better use of resources to open and pursue new investigations rather than tie up resources waiting for covered entities to provide evidence that corrective actions had been taken. According to these officials, follow-up is resource intensive due to the need to constantly reassess an entity’s progress and the quality of the actions it takes. Yet, without follow up, OCR cannot determine whether corrective actions have actually been made to address identified problems or whether covered entities have responded to technical assistance with improvements to their electronic health information protections. As a result, security and privacy weaknesses may remain unaddressed. Under the HITECH Act, HHS is required to conduct periodic audits to ensure that covered entities and business associates are in compliance with the Security and Privacy Rules. In response, OCR developed and implemented a pilot program that it used to conduct 115 audits of covered entities and business partners from 2011 to 2012. After the pilot program was completed, OCR analyzed the results and used them to make adjustments in its audit protocol, which it finalized in 2016. For example, according to OCR officials, the revised protocol makes the purpose of the audits clearer and provides more specific information about the types of documents and time frames involved in an audit. OCR has announced that it will begin an initial round of audits in 2016 by selecting and reviewing 224 covered entities and business associates. The audits will be a combination of desk audits and on-site reviews. While OCR officials acknowledged that this sample will not represent a statistically projectable population, they stated that they expect the results to highlight security and privacy issues facing covered entities and business associates. For example, the final report from their pilot project identified developing risk analyses and risk management plans as a challenge for many entities. OCR has not yet determined the proportion of audits that will be desk audits versus site visits but expects the majority to be desk audits due to resource constraints. Desk audits are designed to be less-intensive document reviews that assess whether organizations have produced artifacts such as policies, procedures, and assessments as required under the Security, Breach Notification, and Privacy Rules. For site visits a team of assessors visits an organization for 2 to 5 days and conducts artifact reviews, interviews with organization personnel, and some verification of implementation. According to OCR officials, these reviews may include visual inspection of physical security controls but will not include technical control testing, such as scanning servers for software vulnerabilities. An important piece of implementing effective internal controls, such as audit programs, is establishing performance measurements for management objectives such as these. However, because no audits have yet been completed, it is not known whether OCR’s audit program as currently planned will be effective in improving covered entities’ adherence to the Security, Breach Notification, and Privacy Rules. OCR officials stated that the audit program’s results could be used as a measure of the effectiveness of its overall enforcement program. However, OCR has not yet established benchmarks or performance measures to assess the effectiveness of the audit program when it becomes operational. Without such benchmarks or measures it will be difficult to determine whether the audit efforts as designed are effective. While OCR and the Centers for Medicare & Medicaid Services (CMS) coordinate through many joint activities, including sharing information about breach reports, OCR and CMS do not share the results of their investigations internally. Sharing information across organizational boundaries can help organizations achieve their goals. Specifically, OCR does not notify CMS of investigative cases it has completed in which it has determined that risks assessments were not conducted. A goal of the meaningful use incentive program that CMS administers is to ensure that providers have implemented the requirements that they have attested to, including the completion of risk assessments. Specifically, to receive the incentives, eligible professionals must attest that they have conducted a risk analysis as required by HIPAA. While CMS conducts its own audits of program participants’ compliance with requirements for meaningful use incentives, OCR’s investigations have at times also reviewed whether covered entities and business associates have conducted risk analyses, and in some cases it has determined that risk assessments were not completed. If those entities were also participating in the meaningful use incentive program, they should be ineligible for financial incentives. Nevertheless, OCR does not notify CMS of these cases that might indicate ineligibility. Sharing this information could allow CMS to better ensure that recipients of financial incentives under the HITECH Act’s meaningful use program have met the requirements for those incentives. In response, OCR stated that CMS currently investigates entities based on its own jurisdiction under meaningful use and other legal authorities and OCR and CMS does not regularly coordinate on investigations. However, without OCR and CMS sharing the results of investigations and audits, the potential is increased for covered entities and business associates who have not fulfilled the requirements to be inappropriately receiving incentive payments. While the increasing use of EHR systems has the potential to improve health care quality, they can be vulnerable to security lapses that can jeopardize the confidentiality, integrity, and availability of the information they contain. Data breaches experienced by covered entities and their business associates have resulted in tens of millions of individuals having sensitive information compromised. As required by HIPAA, HHS issued the Security, Breach Notification, and Privacy Rules, as amended by the HITECH Act, and has implemented an oversight program to enforce compliance by covered entities and business associates. However, HHS’s guidance does not address how covered entities should tailor their implementations of key security controls identified by the National Institute of Standards and Technology to their specific needs, and thus may not be as effective as it could be. Although OCR continues to close thousands of cases per year, the closure activities in a significant minority of cases do not provide assurance that identified issues are addressed. When technical assistance is used to close cases, it does not always address the complaint directly or provide meaningful direction to organizations on how to comply with the Security and Privacy Rules. Further, cases that are closed with incomplete corrective actions and no follow-up do not provide assurance that covered entities and their business associates are completing the actions as agreed. OCR has reported on steps it is taking to improve privacy and security in the health care sector, including taking significant enforcement actions and implementing its audit program. However, without establishing measures for progress in improving security and privacy through its audit program, it will be difficult to determine whether the program as designed is effective. Additionally, OCR does not routinely coordinate with CMS to help ensure that only eligible entities receive meaningful use incentive payments under the HITECH Act’s EHR program. To improve the effectiveness of HHS guidance and oversight of privacy and security for health information we recommend that the Secretary of Health and Human Services take the following actions: update security guidance for covered entities and business associates to ensure that the guidance addresses implementation of controls described in the NIST Cybersecurity Framework; update technical assistance that is provided to covered entities and business associates to address technical security concerns; revise the current enforcement program to include following up on the implementation of corrective actions; establish performance measures for the OCR audit program; and establish and implement policies and procedures for sharing the results of investigations and audits between OCR and CMS to help ensure that covered entities and business associates are in compliance with HIPAA and the HITECH Act. We provided a draft copy of this report to HHS for review and comment, and in response the department provided written comments, which are reproduced in appendix II. HHS stated that it concurred with three of the five recommendations in the draft report and would take actions to implement them. The department did not agree or disagree with the remaining two recommendations but stated that it would consider taking actions to implement them as well. Regarding our third recommendation—that HHS revise the current enforcement program to include following up on the implementation of corrective actions—HHS stated that for settlement agreements, OCR follows up with entities to ensure corrective actions have been taken. We agree that for these cases, follow up does occur and have clarified this in the final report. However, for cases that do not result in a settlement agreement, ensuring that corrective actions have been taken would provide OCR greater assurance that entities have implemented actions to come into compliance with HIPAA requirements. Additionally, for those cases that we identified where corrective actions had not been completed before case closure, we intend to provide HHS with additional requested information. With regard to our fifth recommendation—that HHS improve information sharing between OCR and CMS on organizations that may be in violation of HIPAA requirements—HHS noted that OCR shares information with CMS on breach reports. We note this in the report. However, our recommendation focuses on OCR sharing information about the results of its investigations with CMS, which is not currently done. Sharing this information could allow CMS to better ensure that recipients of financial incentives under the HITECH Act’s meaningful use program have met the requirements for those incentives. HHS also provided technical comments, which we incorporated as appropriate. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Department of Health and Human Services. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staffs have questions about this report, please contact Gregory C. Wilshusen at (202) 512-6244. He can also be reached by e- mail at [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. Our objectives were to (1) describe the expected benefits and cyber threats to electronic health information; (2) determine the extent to which the Department of Health and Human Services’ (HHS) security and privacy guidance for electronic health records reflect and align with federal guidance; and (3) assess the extent to which HHS oversees compliance with HHS information security and privacy requirements at covered entities. To address our first objective, we analyzed prior GAO reports that identified benefits of electronic health records and security and privacy threats to data and information systems to identify major risks that can affect systems that collect, maintain, and share electronic health information. We also reviewed independent analyses of the threat landscape affecting electronic health data and systems and interviewed subject matter experts and stakeholders from organizations that collect and analyze data on this subject. We identified these experts and stakeholders through interviews with agency officials and other stakeholders. They were considered subject matter experts and stakeholders based on job titles, organizational affiliation, and publications. Further, we analyzed information reported by HHS on health care data breaches affecting over 500 individuals and interviewed knowledgeable HHS officials about the data. We determined that the data were sufficiently reliable for our purposes by interviewing knowledgeable agency officials and reviewing the data for obvious outliers. Regarding our second objective, we reviewed relevant information security and privacy laws, including the Health Insurance Portability and Accountability Act of 1996 and the Health Information Technology for Economic and Clinical Health Act. Additionally, we reviewed the Security, Breach Notification, and Privacy rules issued by HHS. We also reviewed National Institute of Standards and Technology (NIST) standards and guidance, including the Cybersecurity Framework and Special Publication 800-53, Security and Privacy Controls for Federal Information Systems, to identify baseline security and privacy controls that are recommended for consideration when conducting security risk assessments. We compared these controls to those cited in HHS’s security risk assessment guidance to identify potential gaps in the guidance. We also obtained key documents from a representative sample of Security, Breach Notification, and Privacy Rules investigations conducted by HHS’s Office of Civil Rights (OCR) that were closed between January 1, 2015, and December 10, 2015. Specifically, we obtained and analyzed key documents, such as notification letters and closure letters, associated with 205 cases that OCR determined required a corrective action and 94 cases where OCR provided technical assistance in lieu of investigation. Estimates based on a probability sample are subject to sampling error. Because we followed a probability procedure based on random selections, our sample is only one of a large number of samples that we might have drawn. Since each sample could have provided different estimates, we express our confidence in the precision of our particular sample’s results as a 95 percent confidence interval (e.g., plus or minus 10 percentage points). This is the interval that would contain the actual population value for 95 percent of the samples we could have drawn. We determined that these data were sufficiently reliable for our purposes by examining the data for outliers and interviewing knowledgeable officials about any discrepancies we identified. We also interviewed knowledgeable HHS officials to understand the purpose and structure of the HHS guidance. To address our third objective, we analyzed actions OCR took to close the representative sample of investigations that we used for the second objective. We analyzed the circumstances under which OCR directed that a corrective action be taken, provided technical assistance on complying with the Security and Privacy Rules, or closed cases without taking any action. We analyzed and compared OCR’s actions with its stated mission of enforcing compliance with the Security and Privacy Rules and helping to oversee standards for the security and privacy of protected health information. We also interviewed knowledgeable OCR and CMS officials about their enforcement role and oversight activities. We conducted this performance audit from June 2015 to August 2016 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, John de Ferrari (assistant director), Thomas Johnson (Analyst in Charge), Carl Barden, Andrea Harvey, Wilfred Holloway, Lee McCracken, Monica Perez-Nelson, Justin Palk, and Paige Teigen made key contributions to this report. | As a digital version of a patient's medical record or chart, an EHR can make pertinent health information more readily available and usable for providers and patients. However, recent data breaches highlight the need to ensure the security and privacy of these records. HHS has primary responsibility for setting standards for protecting electronic health information and for enforcing compliance with these standards. GAO was asked to review the current health information cybersecurity infrastructure. The specific objectives were to (1) describe expected benefits of and cyber threats to electronic health information, (2) determine the extent to which HHS security and privacy guidance for EHRs are consistent with federal cybersecurity guidance, and (3) assess the extent to which HHS oversees these requirements. To address these objectives, GAO reviewed relevant reports, federal guidance, and HHS documentation and interviewed subject matter experts and agency officials. The use of electronic health information can allow providers to more efficiently share information and give patients easier access to their health information, among other benefits. Nonetheless, systems storing and transmitting health information in electronic form are vulnerable to cyber-based threats. The resulting breaches—involving over 113 million records in 2015—can have serious adverse impacts such as identity theft, fraud, and disruption of health care services, and their number has increased steadily in recent years, from 0 in 2009 to 56 in 2015 (see figure). The Department of Health and Human Services (HHS) has established guidance for covered entities, such as health plans and care providers, for use in their efforts to comply with HIPAA requirements regarding the privacy and security of protected health information, but it does not address all elements called for by other federal cybersecurity guidance. Specifically, HHS's guidance does not address how covered entities should tailor their implementations of key security controls identified by the National Institute of Standards and Technology to their specific needs. Such controls include developing risk responses, among others. Further, covered entities and business associates have been challenged to comply with HHS requirements for risk assessment and management. Without more comprehensive guidance, covered entities may not be adequately protecting electronic health information from compromise. HHS has established an oversight program for compliance with privacy and security regulations, but actions did not always fully verify that the regulations were implemented. Specifically, HHS's Office of Civil Rights investigates complaints of security or privacy violations, almost 18,000 of which were received in 2014. It also has established an audit program for covered entities' security and privacy programs. However, for some of its investigations it provided technical assistance that was not pertinent to identified problems, and in other cases it did not always follow up to ensure that agreed-upon corrective actions were taken once investigative cases were closed. Further, the office has not yet established benchmarks to assess the effectiveness of its audit program. These weaknesses result in less assurance that loss or misuse of health information is being adequately addressed. GAO is making five recommendations, including that HHS update its guidance for protecting electronic health information to address key security elements, improve technical assistance it provides to covered entities, follow up on corrective actions, and establish metrics for gauging the effectiveness of its audit program. HHS generally concurred with the recommendations and stated it would take actions to implement them. |
Because Medicare pays for a large share of health care throughout the country, its size and market power can help it to lead payment reforms in the rest of the health care system. Its use of financial incentives for reaching performance targets can, in effect, set standards that private payers may adopt. However, statutory requirements for the Medicare program limit the types of changes that CMS can implement. For example, Medicare must pay for health care delivered by any eligible physician willing to accept Medicare payment and follow Medicare requirements, and must pay uniform Medicare rates to all physicians. Therefore, unlike private health care purchasers, CMS cannot exclude poor-performing providers from participating in the program and cannot negotiate different reimbursement rates with different providers. In recent years, in response to legislation, HHS has taken steps to transition Medicare physicians from a fee-for-service system in which only the volume of services is rewarded, to one in which value—as measured by the quality and the efficiency with which that care is delivered—also determines payment. CMS has worked with physician groups in designing and implementing the following physician initiatives, among others. Physician Quality Reporting System (PQRS). PQRS collects physician-reported data on quality measures for covered services furnished to beneficiaries. CMS provides an incentive payment to physicians who satisfactorily report quality data. The agency announced that, in 2013, physicians who do not satisfactorily meet PQRS submission requirements will have their fee schedule amount reduced by 1.5 percent for services furnished in 2015. Value Modifier Program. PPACA directed HHS to establish a Value Modifier to adjust Medicare payments to some physicians in 2015 and to all physicians in 2017 on the basis of the quality and cost of care provided. To develop the Value Modifier, CMS plans to use performance information on quality and cost metrics derived from Medicare claims and data submitted under PQRS. Because the Value Modifier program must be budget neutral, upward adjustments will depend on the total sum of negative adjustments in a given year. Shared Savings Program. CMS has finalized rules under which physicians, hospitals, and other health care providers may work together to better coordinate care for Medicare beneficiaries through an ACO. While individual physicians continue to be paid under the Medicare fee schedule, the agency plans to develop a benchmark for each ACO against which its performance is measured to assess whether it qualifies to receive shared savings or in some cases be held accountable for losses. Comprehensive Primary Care Initiative and Multi-Payer Advanced Primary Care Practice. Eligible primary care practices may receive shared savings rewards under some of CMS’s demonstrations related to operating a PCMH. Under the Comprehensive Primary Care Initiative, CMS intends to pay 500 primary care practices in seven markets for improved and comprehensive care management, and after 2 years offer them the chance to share in any savings they generate. For the Multi-Payer Advanced Primary Care Practice demonstration, CMS intends to award payment incentives through existing PCMH initiatives that are currently being conducted by states to make medical home practices more broadly available. Physician Compare Website. This Internet tool serves as a directory for beneficiaries, allowing them to search for a physician by specialty, location, hospital affiliation, and other factors. The profile pages also indicate if a physician satisfactorily participated in the PQRS. PPACA requires that CMS make quality and patient experience measures publicly available on the website by January 1, 2013. Publishing comparable performance results can encourage physicians to improve their performance in order to attract more beneficiaries. These legislated changes, along with market forces, have potential implications for the way many physicians practice. For example, emerging delivery models such as ACOs may lead physicians to join larger groups, more closely align with hospitals, and take on financial risk for managing patient care. Although many physicians who serve Medicare beneficiaries work in small practices, more are increasingly employed by hospitals and health care systems. As of 2008, nearly one-third of U.S. physicians worked in solo or 2-physician practices, 15 percent worked in groups of 3 to 5 physicians, 19 percent worked in practices of 6 to 50 physicians, and 13 percent practiced in hospital settings. However, a 2011 study found that physicians are increasingly selling their practices or seeking employment directly with healthcare systems, and hospitals are aggressively acquiring physician practices to remain competitive. We identified several common themes among private entities with physician payment initiatives in our study. These included the importance of focusing on physician groups rather than individual physicians, the desire for a standardized performance measurement set, the use of absolute performance and improvement targets, the timely distribution of incentive payments, an emphasis on care coordination to improve quality and efficiency, and the use of other strategies to improve quality and efficiency. For the most part, physician organizations familiar with these themes expressed their support. Private entities in our study generally based incentive payments on the performance of physician groups rather than individual physicians largely because of methodological issues and the importance of reinforcing group-wide accountability. Most of the private entities we spoke with pointed out that individual-level measurement often does not generate sufficient performance data to produce credible results. For instance, for a condition-specific performance metric, a physician may see too few patients with the relevant condition to be measured reliably. Integrated Healthcare Association (IHA) noted that using physician organizations as the unit of analysis in the California Pay-for-Performance (CA P4P) program helps to overcome small sample sizes that impede valid measurement of efficiency at the individual physician level, although sometimes even sample sizes at the physician organization level may not be adequate. A representative at Blue Cross Blue Shield of Michigan (BCBS MI) stated that this methodological issue is especially relevant when measuring performance in specialty care practices. Because subspecialists may provide distinct services within their specialties, they can look like outliers when compared with their specialty peers at the individual level. Several private entities told us that group-level measurement also promotes group-wide accountability. For example, representatives at Dean Clinic said that measuring performance at the group level allows each of its clinical divisions to leverage each physician’s strengths, and keeps them engaged in performance improvement. In addition, BCBS MI believes that group-level measurement and payment may prevent physicians with particularly complex patients from being resistant to participating in the initiative. Because many primary care physicians work in small, independent practices, CareFirst BlueCross BlueShield (CareFirst) PCMH program has developed a strategy for including them in its initiative. CareFirst physicians do not need to be a part of a formal medical group to participate in the program. Rather, they may organize voluntary, “virtual” panels for the purpose of performance measurement and incentive payments. Established physician groups may also participate, provided that they form subgroups of between 5 and 15 physicians—the panel size requirement for participation. As an incentive to join the program, CareFirst increases the fees paid under its physician fee schedule by 12 percentage points. It offers additional financial incentives to physician panels for bringing care costs within a budget target and for improving quality on a variety of metrics. CareFirst representatives believe that the primary care physician is in the best position to comprehensively understand a patient’s needs—in particular, the needs of chronically ill patients—but that no one physician has a large enough patient pool for reliable performance measurement. They said that not only does panel formation allow for reliable performance measurement, but it also provides a structure for peer pressure given that all physicians in a panel have an economic stake in high performance. Many of the private entities we spoke with were also consistent in their view that it is the responsibility of physician group management to drive individual physician performance improvement. Therefore, they not only provide physician groups with feedback reports at the group level, but most also provide supporting data at the individual physician level that can be used to generate individualized physician feedback reports. For example, under the Alternative Quality Contract (AQC), Blue Cross Blue Shield of Massachusetts (BCBS MA) sends performance data and reports in electronic format to each physician group’s central leadership, who are Similarly, responsible for sharing the results with individual physicians.under the Physician Group Incentive Program (PGIP), BCBS MI expects physician organizations to create appropriate reports at the practice unit and individual physician level to identify areas for improvement, as well as to track performance over time and guide focused system-transformation and performance improvement interventions. Some entities noted that peer pressure and competition within an organization can provide an incentive for physicians to improve their relative performance. For example, Rocky Mountain Health Plans shares relative performance data on resource use with certain physicians to facilitate communication about clinical quality and cost. Also, Dean Clinic representatives mentioned that reporting performance at the individual level within each specialty division instills peer pressure, which can help facilitate the improvement process. Furthermore, many private entities we spoke with said that physician groups have complete discretion over how their incentive payments are used and therefore may not distribute their entire incentive payments to frontline physicians. For example, BCBS MI reported that, in general, physician groups distribute roughly one quarter of PGIP incentive payments directly to front-line physicians, and invest the remainder in systems improvements that benefit the practices and the physician group. Several other private entities also stated that physician group managers use their incentive payments for shared practice improvements, such as investing in new or additional information-technology capabilities, hiring case managers, and rewarding nonphysician staff. A BCBS MA representative noted that physician groups undertake these types of shared practice investments to help make the improvements in care quality and efficiency called for in the AQC. Physician organizations in our review agreed that measurement at the physician group level for incentive pay is statistically more accurate than measurement at the individual physician level. They noted that one physician is unlikely to have a patient population large enough for statistical reliability, making it difficult for private entities to validate individual physician-level data. They also said that attributing patients to one physician for measurement purposes is difficult because physicians often work as a team to provide care. On the other hand, they noted that physician groups are likely to have the patient sample sizes needed to ensure accurate calculations and minimize the attribution problem. According to a letter to CMS from the American College of Cardiology, the physician group level provides sufficient data to ensure statistical significance but is still a level at which individual physician actions can improve quality. Physician organizations in our study also agreed that it is their responsibility to drive individual physician performance improvement. They noted that when private entities provide information on individual physician performance, managers can develop tailored physician feedback reports using their own analytical tools. For example, physician groups can use the performance reports they receive internally to aggregate data across their entire patient population. They told us that these reports can be helpful because physicians are inclined to trust the data provided by their groups’ managers, react to internal peer pressure, and want to examine their entire patient population. In addition, physician organizations we contacted cited different approaches for distributing financial incentives. For example, Mesa County Physicians Independent Practice Association (IPA), Inc., receives incentive payments on a quarterly basis from Rocky Mountain Health Plans. It then pays its physician practices, each of which may decide to distribute the incentive payments in a different manner. Some physician practices in the IPA distribute the money equally to individual physicians; others distribute the money to individual physicians on the basis of their relative performance scores; and still others retain the money for capital improvement projects. A different approach is that used by ProHealth Physicians, Inc. (ProHealth), a 200-member physician group in Cigna’s Collaborative Accountable Care (CAC) initiative. ProHealth reported setting aside a portion of the incentive payments to cover personnel and overhead costs associated with administering the initiative. About half of the remainder is distributed to individual physicians on the basis of their performance, with the highest performers receiving the most money and the lowest performers receiving no money. The rest of the incentive payment is considered profit and may be paid to its physician shareholders. In choosing performance metrics for their initiatives, the private entities we interviewed largely draw from those nationally endorsed by such groups as the National Quality Forum (NQF), which has endorsed over Many of the entities cited difficulties in developing sound 700 metrics.quality metrics for their initiatives as the reason for selecting nationally endorsed metrics. However, some entities in our study supplement nationally endorsed quality-of-care metrics with others. For example, a representative of BCBS MA told us that, in collaboration with physicians, experimental measures can be used to provide evidence on the sample size needed to generate reliable data for certain measures. Physician organizations participating in BCBS MA’s AQC have the opportunity to work on the development of up to three experimental measures of their choosing each year on the basis of a list provided by the health plan. The rest of the AQC metrics are largely NQF-endorsed and are supported by entities such as CMS or the National Committee for Quality Assurance (NCQA). To measure efficiency of care, many entities reported using a risk-adjusted total cost of care metric that captures all services provided to physicians’ entire patient population. HealthPartners, for one, uses its own NQF-endorsed total cost of care and resource use metrics calculated on a per-member basis to help identify potential overuse and underuse of services. Some private entities measure efficiency through metrics that are more specific than total cost of care. For example, Dean Health Plan’s Practitioner Incentive Model has efficiency metrics that include generic drug prescription patterns and emergency room visits per 1,000 members, a metric also used by CMS for Medicare beneficiaries. While NQF fosters agreement on national standards for measuring health care performance, no national consensus exists on a single best set of quality metrics. Most private entities that we spoke with were in agreement that use of a standardized set of performance metrics across payers would be ideal. Standardization may include uniformity in the metric selected, the benchmark against which performance is assessed, and the relevant patient population. As expressed by HealthPartners representatives, a standardized set of metrics would send strong and consistent messages to providers, and make it easier for physician groups to focus on defined areas for quality improvement. California’s IHA accomplished this by arranging for its health plans and physicians to work together to develop a uniform but dynamic set of performance metrics for statewide use. IHA reported that, until then, California physicians found it challenging to focus on performance improvement when many health plans provided incentives based on different metric sets. As of 2011, the CA P4P metric set included 85 metrics related to clinical quality, patient experience, meaningful use of health information technology, and appropriate resource use. Several of the private entities in our study commented on the dearth of reliable specialty care metrics. For example, a representative from UnitedHealth Group noted inconsistency in the number of quality metrics across specialties. Nevertheless, most private entities that we spoke with included specialists in their incentive initiatives despite their limited performance data. Dean Clinic representatives discussed how they created a list of specialty care metrics for their pay-for-performance program in collaboration with their physicians. Over the course of 1 year, they offered each care division the opportunity to develop relevant, specialty-specific metrics, a process described as resource-intensive. To be formally adopted, these metrics required consensus among physicians that the new metrics applied to the majority of specialists within that department, and they had to be measureable through billing or electronic health record data. For example, physicians in the cardiovascular surgery division are measured on the percent of cardiovascular surgeries performed without a blood transfusion. Dean representatives surmised that, if a similar process were undertaken at the national level—whereby CMS would ask each specialty society to agree on 5 to 10 clinically relevant measures—it could be a step towards developing a robust, standardized set of metrics for specialty care. Physician organizations in our review indicated that they generally prefer quality metrics that have been endorsed by national groups, but are open to the inclusion of experimental metrics. They stated that standardization across payers would reduce the administrative burden associated with tracking distinct requirements of multiple metric sets among various initiatives. For example, a physician leader at ProHealth reported that, among the 21 value-based payment initiatives in which ProHealth participates, private insurers vary not only by which metrics are selected but by how the metrics are used. Representatives of the Massachusetts Medical Society added that, as a result, physicians may become overwhelmed and may not spend time to distinguish differences between the components of each initiative. Physician organizations also noted that some experimental metrics used in private-entity initiatives can be useful for filling in clinical areas that lack strong nationally endorsed metrics, although others may lack a significant medical rationale or be difficult to measure. Furthermore, physician organizations in our study noted the importance of using specialty-specific metrics to ensure that performance is accurately attributed to specialty care providers for the care they furnish. To develop relevant metrics for specialty care providers, the Mesa County Physicians IPA organizes a team of local physicians each year to create more metrics for specialty care on the basis of new clinical evidence, similar to a process done for primary care metrics. However, according to a letter to CMS from the American Medical Association, value-based payment initiatives do not currently include all medical specialties because the tools for distinguishing value across specialties are inadequate. National medical societies have taken action to meet the need for more specialty metrics. For example, according to letters to CMS from national physician organizations, the Community Oncology Alliance has identified 16 key metrics of quality and value in cancer care delivery, and the American Association of Orthopaedic Surgeons has identified metrics for total knee replacements. Most private entities in our study base financial incentives on absolute performance targets or a combination of absolute targets and on improvement over time. Absolute targets are fixed and known to their physician groups during the performance measurement period, offering greater certainty regarding the efforts required to become eligible for payment. As such, they serve as a guide for high performers to maintain their quality and efficiency standings. Some entities reward physicians on a set of graduated absolute targets, whereby higher performance within the set of targets receives a greater reward. For example, under the AQC, physician groups are rewarded on the basis of performance targets (or “gates”) between 1 and 5. On a measure of colorectal cancer screening for members aged 51 to 75 years, AQC physician groups achieving a screening rate of roughly 65 percent met the minimum (“gate 1”) level of good performance on that measure, while those who screened about 83 percent met the maximum (“gate 5”) level of performance on that measure. Aggregating “gate” scores across the roughly 5 dozen measures in the AQC contract determines the overall performance and quality incentive payment. The effectiveness of the absolute benchmarking approach in motivating providers depends on where the performance targets are set. If the target is set too high and perceived to be too difficult to reach, physicians may not respond to the incentive. If it is set too low, the entity will be making incentive payments for performance already being delivered and will not encourage improvement. Several private entities in our study combine absolute performance targets and improvement over time in their benchmarking strategies. Benchmarking based on performance improvement provides an incentive for lower performers as well as higher performers, as it rewards the gains achieved since past performance. Under the CA P4P program, performance on each metric is typically assessed against absolute targets—set at the 75th and 95th percentiles for the program in the previous year—and on improvement—closing the gap between the group’s previous year performance score and the 95th percentile of the previous year’s target. IHA representatives told us that, as of 2012, six of the seven health plans in the CA P4P program have adopted this benchmarking methodology. Some of the entities we spoke with reward high relative performance along with improvement. Using a relative benchmark approach, physicians do not know their numerical target at the start of the performance period because their benchmark is based on the future performance of their peers. None of the entities we spoke with based incentive payments exclusively on relative performance. For instance, physician groups in Cigna’s CAC initiative must perform at a rate equal to or above the market average for each quality metric, or they must show improvement in their rate. Physician organizations in our review preferred tying incentives to absolute performance or improvement rather than relative performance. Some organizations saw merit in rewarding physician groups for achieving high performance rates; others favored incentives based, at least in part, on improvement because not all physician groups are at the same starting point. Selected organizations cautioned against using relative benchmarks, asserting that without prior knowledge of the level of performance needed to earn incentive pay, physician groups might not be willing to participate in an incentive initiative. Regardless of which benchmarking approach is used, frontline physicians might not know all the details of the incentive initiatives they work under. According to representatives of the Massachusetts Medical Society, frontline physicians likely know the performance targets that the physician group’s management sets but may not be aware of key details of payers’ incentive structures, such as the thresholds for achieving a higher incentive payment under BCBS MA’s AQC initiative. The incentive payments under the initiatives we reviewed varied in their size and method, but were similar in their timing. The size of payment incentives reported to us ranged from around 2 percent to over 20 percent of annual pay, with most initiatives offering at least 5 percent of annual pay in incentives. Several private initiatives in our study provide an incentive of at least 10 percent of annual physician revenue. We found three general methods used to make incentive payments: Some initiatives’ incentives allow physicians to earn a percentage add-on to a fee schedule. Physicians can only benefit from meeting quality and cost targets under this type of incentive; if they fail to meet those targets, physicians would still receive the full fee-for-service payment. Generally, in such cases, the payer is at risk for high costs, not the physicians. For example, on the basis of primary care physicians’ overall cost and quality performance, CareFirst’s PCMH program offers a potential increase of 20 to 60 percent in its fee schedule. Other initiatives implement the incentive through a bonus, such as a per-member-per-month bonus payment, which also does not carry significant physician risk. Cigna’s CAC provides high- and improved- quality performers with a periodic per-patient payment, adjusted by the physician group’s effect on the trend of total medical cost. BCBS MI’s PGIP has an incentive pool that provides for a bonus payment depending on performance on specific subinitiatives in which participating physician organizations choose to participate. Still other initiatives implement the incentive payment through a withhold—whereby a portion of the payment due to a physician is withheld until the status of their performance is determined at the end of the measurement period. The amount withheld is returned only to physicians who meet performance targets, putting some cost risk on the physicians. HealthPartners representatives told us that their Partners in Progress program applies a withhold from market-based payment that can range from 1 to 5 percent of revenue. Under Rocky Mountain Health Plans’ incentive program, physician groups negotiate with the health plan to determine the amount withheld. In addition to providing bonuses to physician organizations, BCBS MA’s AQC provides incentives to physician organizations through global budgets. Under a 5-year contract, each participating physician organization begins with a fixed budget that covers costs for all patient care on the basis of the population it serves; annual adjustments are made to manage the risk faced by the physician organization, such as adjustments to account for any changes in patient population health status. Physician organizations share any money with BCBS MA that is saved by spending less than the budgeted amount for the patient population, but they also share the risk when more money is spent than is budgeted. BCBS MA also rewards physician organizations with a per- member per-month bonus for high performance as compared with fixed targets on a set of quality metrics. The private entities in our study generally distributed incentive payments to physician group managers during the year immediately following the performance period. Specifically, most private entities paid incentives within 7 months of the end of the performance period. For instance, BCBS MI distributes PGIP incentive payments to physician organizations 2 months after the end of the 6-month performance period. BCBS MA provides AQC groups interim incentive payments monthly, and these payments are reconciled during the year after the annual performance period ends to reflect actual performance. According to the physician organizations in our review, the responsiveness of physicians to payer initiatives is often tied to the size, method and frequency of the incentive payment. Regarding the appropriate size of the incentives, physician organizations noted that the larger the potential payoff, the larger their performance improvement is likely to be. Although financial considerations are not the sole motivation for seeking high performance, physician organizations said they would like incentive payments to cover the costs of participating in the initiative—including the cost of data collection and the cost of improving performance. Physician organizations in our review generally found the various types of incentive payments to be fair and useful from a management perspective. For instance, MedChi, the Maryland State Medical Society, reported that physicians are attracted to CareFirst’s PCMH add-on to the fee schedule because it provides up-front capital that could be used to enhance productivity. In addition, according to a physician leader at ProHealth, the per-member per-month incentive payment under Cigna’s CAC initiative helps with forecasting revenue and planning infrastructure improvements. Finally, representatives from the Mesa County Physicians IPA said that the withhold incentive structure established by Rocky Mountain Health Plans’ Incentive Program works to keep physician groups attentive to performance improvement by knowing that some payment is at risk. From the physicians’ perspective, timely incentive payment cycles from private entities can be helpful for monitoring and adjusting performance. Physician organizations included in our review stated that incentive payments should be distributed soon after the achievement of performance to make the most difference. They noted in letters to CMS that, if an incentive is paid out very infrequently or if there is not a good understanding of how performance relates to incentive payment, it is unlikely to motivate improvement. A common element of most private entities with incentive initiatives is providing support to physicians for certain care-coordination activities.We found that several private entities fund or partially offset the costs of ancillary providers—such as health coaches or nurse coordinators—who furnish care-management services to patients with certain health conditions. CareFirst’s PCMH, for one, hires local nurse coordinators and compensates physicians for preparing and monitoring care plans for certain patients. Physicians receive $200 for each care plan created— working with CareFirst’s nurse coordinators to identify patients with multiple chronic diseases—and $100 periodically to review and update those care plans. Private entities in our review that provide financial support for care management may increase physician office visit fees or make up-front payments to physicians for care coordination. As a key element of its CAC initiative, Cigna provides physician groups with an up- front care-coordination payment, which helps support nurse care coordinators charged with reaching out to and coordinating the care for patients who have been identified as at risk for hospital readmissions or who have gaps in care. Some private entities we spoke with explicitly address care coordination in their performance measurement sets. For example, CA P4P uses a “care transitions” metric to assess whether physician groups have systems in place to follow up with a patient after laboratory tests and imaging services, as well as a care-coordination outcomes metric related to hospital readmissions. In addition, CareFirst’s nurse coordinators are responsible for monitoring physicians’ performance on metrics related to physician–patient engagement as a measure of physician groups’ ability to provide coordinated care. Many private entities reported that they provide physicians participating in their initiatives with information on gaps in care. UnitedHealth Group provides physicians with access to a web- based portal that uses claims data to identify gaps in care and opportunities for improvement. The portal identifies patients who may be due or overdue for preventive services or other health care services. In addition to receiving financial support, physician organizations in our review approved of other efforts by private entities to advance care coordination. According to Massachusetts Medical Society representatives, physician groups have used data from insurers and other sources to target patients who would benefit most from care coordination. For example, a physician group reviews the data during weekly meetings where a clinical team discusses each physician’s list of patients and determines whether patient follow-up is needed. Similarly, ProHealth case managers use data from Cigna to schedule follow-up appointments, focus on care transitions, and serve as liaisons to Cigna’s nurse care coordinators. Selected organizations noted that such care coordination has the potential to both improve patient outcomes and moderate cost growth. Several private entities in our study augment their payment initiatives with other strategies that offer physicians incentives to improve quality and efficiency: Some private entities report physician group performance results publicly. IHA publishes information on many CA P4P metrics on the state’s Office of the Patient Advocate website. It cited a survey of physician organizations by a P4P program evaluator indicating that public reporting may motivate physician organizations to improve performance as much as, or more than, the financial incentives. Some private entities use tiered physician networks as an incentive for patients to seek care from physicians deemed to be higher quality, more efficient, or both. Members who use physicians assigned to a high-quality, low-cost provider tier may receive a modest reduction in their coinsurance. A Cigna representative told us that tiered network options are available in all of its major markets. Individual physicians and physician groups can be designated as high quality and efficient on the basis of performance provided that they meet Cigna’s required thresholds for patient sample size. UnitedHealth Group conducts a Premium Designation program to distinguish those physicians—and physician groups, by specialty— who deliver higher-quality and more-efficient care from other physicians or physician groups. UnitedHealth Group representatives noted that, although this program does not necessarily lead to lower cost sharing, it is designed to enhance transparency for plan members, which in turn may motivate physician performance. When a physician does not have a large enough sample size for reliable measurement, this is noted in the public designation displays. Physician organizations in our review noted that physicians generally oppose public reporting and network tiering but may respond positively to other nonpayment incentives. They cautioned against publicly reporting performance at the individual physician level because of data reliability and methodological concerns. In addition, according to representatives from the Massachusetts Medical Society, physicians in the state also are generally against network tiering in part because of concerns related to arbitrary thresholds based on relative performance and inaccurate information from claims data. However, selected organizations noted that using peer pressure within a physician group, reducing administrative burdens associated with participating in incentive initiatives, and improving the technological capabilities of physician groups could help increase the quality and efficiency of care. CMS’s efforts—particularly through the Value Modifier program—to reform the Medicare physician payment system reflect, to varying degrees, the common themes we identified among private entities with physician payment initiatives. CMS is moving toward broader physician group-level performance measurement, but this level of measurement does not currently apply to small-practice physicians in the Value Modifier program. According to CMS, the agency is taking steps toward standardizing performance metrics across its programs and continues to solicit specialty care metrics. In its Value Modifier benchmarking strategy, CMS plans to tie physician incentives to absolute benchmarks, but not to performance improvement. It also plans to initially provide small downward fee adjustments to participating low performers and budget- neutral fee increases to participating high performers, but these adjustments will occur a year after the performance period ends. Additionally, CMS has recently taken action to promote greater care coordination and publicly report physician performance. CMS has taken a number of steps toward broader physician group-level measurement for incentive payments. The agency recently announced it would modify its performance data collection by easing PQRS reporting requirements for physician groups. Because many physician practices report performance data as individual providers, CMS has sought to promote physician group-level reporting by making PQRS group-reporting requirements more flexible. In 2013, CMS intends to give physician groups the option of having CMS calculate quality metrics from claims data. In addition to administrative claims-based reporting, CMS plans to offer alternative ways to meet group PQRS reporting standards, including through a web-based interface. In addition, CMS intends to initiate the Value Modifier at the group level and has expanded the number of ACOs serving Medicare beneficiaries. Starting in 2015, CMS plans to apply the Value Modifier to claims submitted by physicians in groups with 100 or more eligible professionals that bill Medicare under a single Tax Identification Number (TIN). CMS stated that incentives paid under a physician group TIN not only allow for more reliable measurement than at the individual level, but elevate the importance of the group in which a physician practices—since each physician in the group receives the same payment modifier. In addition, CMS has increased the number of physicians who are eligible for incentive payments at the group level by adding to the number of ACOs under contract. After initially signing 65 ACOs as of April of 2012, CMS now contracts with 153 ACOs that serve more than 2.4 million beneficiaries, and the agency accepts new ACO applications annually. Although these steps are designed to raise the number of physicians whose performance will be measured at the group level, CMS has not yet developed a method of reliable measurement for physicians in small practices in the Value Modifier program. Without such a method, the agency will likely measure those in small practices at the individual level in 2015, the performance year likely to determine the application of the Value Modifier for all physicians in 2017. According to CMS, the decision not to initially apply the Value Modifier to established groups of less than 100 eligible professionals stemmed from concerns regarding untested cost metrics and administrative complexity. For instance, CMS reported that allowing physicians to be measured as an informally defined group would require the agency to establish and maintain additional group identifiers that would not as easily account for organizational changes. While CMS has reported that the agency intends to assess the possibility of allowing the aggregation or disaggregation of TINs in future years, it has not outlined a strategy to reliably measure the performance of the majority of physicians—those in small practices. According to CMS officials, among physicians that serve Medicare fee-for-service beneficiaries, more than two-thirds currently practice in groups of less than 25 individuals. CMS officials stated that they do not plan to direct recipients on how to use incentive payments. Agency officials said there are no requirements for physician groups to use incentive payments for any particular purposes. In the case of ACOs, CMS asks applicants to identify how they plan to use payments to achieve the goals of the Shared Savings program—higher quality and lower cost—but it has not been prescriptive on how ACOs can use their shared savings. According to CMS officials, the agency is taking steps to both develop a standard set of metrics across its programs and enlarge the number of specialty care metrics in use. By 2014, the agency intends to further align the metrics in its Electronic Health Record (EHR) Incentive,Savings, and Value Modifier programs. By incorporating metrics that are endorsed by entities such as NQF, CMS’s claims-based metrics may Shared align with many private-sector programs as well.ways to increase metrics for specialty care. For example, agency officials said that while they do not formally task specialty societies with developing measures specifically for PQRS, they annually solicit input on metrics from stakeholders, including medical specialty societies. Furthermore, CMS is considering allowing metrics that have been developed, collected, approved, and vetted by specialty societies to be reported on the Physician Compare website. The agency could potentially choose to include these specialty metrics in PQRS. CMS plans to implement the Value Modifier by providing incentives only to physicians determined to be performance outliers on the basis of benchmarks using absolute targets based on existing performance, but not performance improvement. Beginning in 2013, physician groups with 100 or more eligible professionals that meet PQRS reporting standards can either elect to have their 2015 Medicare payment modified under a quality tiering approach or choose to effectively not have their payment modified at all. For physician groups that select the quality tiering approach, only those with outlier scores in either quality or cost would be eligible for a payment adjustment; those in the highest tier would potentially see an increase in their payments under the fee schedule and those in the lowest tier would potentially see a reduction.group scores would be a composite derived from performance relative to the prior year national average for each applicable quality metric; cost Physician would be measured using current year comparisons. Physician groups with low quality or high cost scores in a prior period will not be rewarded for either graduated levels of performance or improving their performance. CMS officials reported that the agency does not plan to consider rewarding performance improvement in the Value Modifier until more physicians participate in PQRS, and thus provide the agency with a more reliable understanding of how to set targets. However, until then, CMS’s benchmarking strategy will make it less likely that many physicians will choose to put a portion of their payment at risk through the Value Modifier program. Because of current incentives, the quality tiering approach is likely to encourage participation only by those groups of physicians with high prior scores. Agency officials reported that CMS plans to initially set the size of the Value Modifier fairly low. Medicare physicians participating in the quality- tiering approach of the Value Modifier program could potentially receive a downward adjustment of as much as 1 percent or an upward adjustment of up to two times a budget-neutral factor. (See table 2.) Because CMS’s Value Modifier program must be budget neutral, upward adjustments are multiplied by a factor derived from the sum total of negative adjustments for both low performers and non-PQRS reporters. CMS officials told us they would like to receive performance data from the majority of physicians before considering any increase to the magnitude of the Value Modifier. The agency stated that it does not want to initially apply a greater downward payment adjustment for the low-quality/high-cost physician groups opting for the quality-tiering approach than that of nonsatisfactory PQRS reporters (1.5 percent in 2015). Moreover, to meet the budget-neutrality requirement for the Value Modifier, CMS decided to help fund participating high performers’ payment incentive by imposing an automatic downward adjustment of 1 percent for non-PQRS reporters.adjustments for physicians with significantly poor performance or who do not meet performance reporting standards are CMS’s sole funds to increase the size of its performance incentive in the Value Modifier program. Agency officials said that CMS expects to apply its Value Modifier annually 1 year after the performance period ends. The agency has chosen to provide performance feedback reports 9 months after the end of the performance year, about 3 months before it would be applicable to the Value Modifier. For example, CMS would disseminate physician group feedback reports in the fall of 2014 that contain 2013 performance data to physician groups subject to the Value Modifier, and these reports will be the basis for the Value Modifier starting in 2015. According to agency officials, the interval between the performance period and the initial feedback reports is needed to capture a lag in data submissions (up to 3 months after the end of the year), adjust claims for price standardization and risk, and conduct quality assurance testing. However, CMS may have a sufficient amount of reliable performance data with which to make more timely incentive payments in the Value Modifier program. The Research Data Assistance Center—a CMS contractor that provides technical support on Medicare claims processing—states that claims data are generally complete 6 months from the end of the calendar year. For example, over 96 percent of Medicare claims from 2011 were finalized by July of 2012. CMS supports care-coordination incentives through several approaches. For 2013, CMS designated three additional care-coordination metrics in its administrative-based claims reporting for the group Value Modifier. For example, because care-coordination programs may reduce hospital readmissions, CMS plans to measure the rate of hospital readmissions within 30 days after being discharged. In addition, to encourage patient follow-up postdischarge, CMS has developed a set of physician billing codes for services delivered within 30 days of discharge from a hospital or skilled nursing facility. Finally, CMS pays a monthly care-management fee to selected primary care practices under both its Comprehensive Primary Care Initiative and Multi-Payer Advanced Primary Care Practice Demonstration for purposes such as coordinating care for high-risk beneficiaries and helping to engage them in their care. In addition to regularly providing performance feedback to physicians, CMS intends to report physician performance scores to the public. As required by PPACA, CMS has implemented a plan for publicly reporting physician quality and patient experience metrics through the Physician Compare website. CMS developed Physician Compare to make information on quality of care widely available so that beneficiaries can make informed decisions in their choice of physician, and to encourage physicians to improve their quality of care. Agency officials said that CMS will begin publicly reporting statistically reliable performance results of physician groups submitted through the PQRS Group Practice Reporting Option in 2013 or early 2014. Many of the themes we identified among private entities implementing payment incentives are generally accepted by physician organizations in our study and are reflected—in whole or in part—in CMS’s efforts to implement the Value Modifier program. CMS has recognized the importance of group-level measurement, particularly through its initial application of the Value Modifier exclusively to physician groups. According to CMS officials, the agency has also begun to standardize its metrics across its programs while generally adhering to nationally accepted measures that are endorsed by entities such as NQF. Finally, CMS has taken steps to provide incentives for greater care coordination through both additional payments and performance metrics. While CMS has taken steps toward addressing measurement of large physician groups, PPACA requires that the Value Modifier apply to all physicians—including those in solo and small practices—in 2017. To meet this requirement, CMS must address concerns regarding how best to reliably measure performance at that level. The challenge of measuring the performance of physicians in solo and small practices is more significant for CMS than for private entities because Medicare provides payment to any willing provider of care for beneficiaries. Yet, CMS has not laid out a strategy for its eventual application of the Value Modifier to solo and small-practice physicians in a manner that ensures measurement credibility. Options for doing so could include aggregation of solo and small practices into informal groups for measurement purposes. Despite similarities to some themes found among private entities with physician payment initiatives, other themes are not fully reflected in CMS’s Value Modifier program. For instance, most of the private entities in our study provide incentives that are tied to absolute performance benchmarks or some combination of absolute benchmarks and improved performance; in addition to approving the use of absolute benchmarks, physicians in our review favored incentives that reward improvement because baseline levels of performance vary. Until CMS provides incentives for improvement, it is likely that few physician groups that are not already high performers will opt to participate in its quality-tiering approach. Additionally, because CMS’s Value Modifier adjusts payments to physicians a year after the end of the performance period, the motivation to improve performance is diluted. While CMS has noted the need for 1 year to ensure accurate data, most of the private entities we contacted make incentive payments within 7 months of the end of the performance period so that physicians can readily see the financial effect of their performance. CMS’s 1-year time lag between performance measurement and payment adjustment may diminish the significance of the incentive to physicians. As CMS continues to implement and refine the Value Modifier program to enhance the quality and efficiency of physician care, the Administrator of CMS should consider whether certain private-sector practices could broaden and strengthen the program’s incentives. Specifically, she should consider developing at least some performance benchmarks that reward physicians for improvement as well as for meeting absolute performance benchmarks, and making Value Modifier adjustments more timely in order to better reflect recent physician performance. The Administrator should also develop a strategy to reliably measure the performance of solo and small physician practices, such as by aggregating their performance data to create informal practice groups. We provided a draft of this report to HHS for comment. In its written response, reproduced in appendix I, the department concurred with all three recommendations. Specifically, HHS stated that it will consider developing performance benchmarks that reward physician improvement once the agency has greater physician reporting on quality measures; as it develops the technology to handle claims data and quality data more rapidly, it will look for ways to decrease the gap between the performance period and the application of the Value Modifier; and it will seek to develop strategies to reliably measure the performance of solo and small physician practices. HHS also provided technical comments, which we incorporated as appropriate. We are sending copies of this report to the appropriate congressional committees and the Administrator of CMS. The report also is available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions regarding this report, please contact me at (202) 512-7114 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix II. In addition to the contact named above, individuals making key contributions to this report include Rosamond Katz, Assistant Director; David Grossman; Kate Nast; and Luis Serna III. | The Middle Class Tax Relief and Job Creation Act of 2012 required that GAO examine private-sector initiatives that base or adjust physician payment rates on quality and efficiency, and the initiatives applicability to the Medicare program. This report provides information on (1) common themes among private entities with payment incentive initiatives, and physician perspectives on those themes; and (2) the extent to which CMSs financial incentive initiatives for Medicare physicians reflect such themes. GAO acquired information from nine private entities on 12 initiatives selected from expert referrals to include various sizes, types, and geographic locations. GAO also obtained information from physician groups, state medical societies, and national physician organizations. GAO additionally interviewed CMS officials and reviewed relevant CMS documents. GAO identified several common themes among private entities under review with initiatives that provide incentives for high-quality, efficient care, and selected physician organizations generally support these themes. Specifically: Private entities generally measure performance and make incentive payments at the physician-group level rather than at the individual-physician level. Physician organizations favor this approach. Private entities use nationally endorsed performance metrics and noted the need for a standardized set of metrics across all payers. Physician organizations concur that a standardized set of metrics would be less administratively complex. Most private entities in GAO's study provide financial incentives tied to meeting absolute benchmarks--fixed performance targets--or a combination of absolute benchmarks and performance improvement. Physician organizations prefer incentives tied to absolute benchmarks over those based on how physicians perform relative to their peers. Physician organizations also favored incentives that reward improvement because baseline levels of performance vary. While private entities' incentive payments vary in size and in method, private entities typically provide such payments within 7 months of the end of the performance measurement period. Physician organizations stated that financial incentives should be distributed soon after the measurement period to have the greatest effect on performance. The efforts of the Centers for Medicare & Medicaid Services (CMS)--the agency within the Department of Health and Human Services (HHS) that administers the Medicare program--to transform the physician payment system in Medicare reflect, to varying degrees, the themes that GAO identified among selected private entities with physician payment incentives. Specifically, CMS is taking steps to do the following: Focus on group-level performance measurement and payment adjustments in the Value-based Payment Modifier (Value Modifier) program, designed to adjust Medicare payments to physicians using performance data on the quality and cost of care provided. However, CMS has yet to develop a method of reliably measuring the performance of physicians in small practices in the Value Modifier program. Apply Value Modifier payment adjustments to outlier physicians--rewarding high performers and penalizing poor performers--using absolute performance targets but not performance improvement. Under this benchmarking strategy, it is likely that only high performers will elect to participate in the program's payment adjustment. Annually adjust payments through the Value Modifier 1 year after the performance measurement period ends, rather than applying the Value Modifier closer to the time of service delivery. This time lag between performance and payment adjustment may diminish the significance of the incentive to physicians. CMS should consider whether certain private-sector practices could broaden and strengthen the Value Modifier program's incentives. Specifically, the agency should consider rewarding physicians for performance improvement as well as for meeting absolute benchmarks, and making more timely payment adjustments to better reflect recent physician performance. Furthermore, the agency should develop a strategy to reliably measure the performance of solo or small physician practices. HHS concurred with all of GAO's recommendations for CMS. |
Public Law 108-18 was enacted after we reported on the results of our review of an analysis of the funded status of the Postal Service’s CSRS pension obligations that OPM prepared at our request. This act adopted the administration’s proposal that the Postal Service be responsible for funding the value of benefits attributable to military and volunteer service of all employees first hired into civilian service after June 30, 1971, and a pro-rata share of those benefits for employees hired before the July 1, 1971, effective date of the Postal Reorganization Act (PRA). In order to determine the funded status of the Postal Service’s CSRS obligations, OPM estimated the portion of the Civil Service Retirement and Disability Fund (CSRDF) that was attributable to the Postal Service, taking into consideration all past CSRS-related payments to CSRDF by the Service and its employees, including earnings on those payments, and the Service’s pro-rata share of all CSRS-related payments from CSRDF, including benefits attributable to military service, since July 1, 1971. The act also requires that the Postal Service begin funding the portion of CSRS dynamic normal cost not otherwise funded with employee withholdings. When calculated on a dynamic basis, normal cost represents an amount of money that if set aside during employees’ working years will, with investment earnings, be sufficient to cover future benefits and expenses when due, so long as the plan’s economic and demographic assumptions hold true. Dynamic normal cost reflects the effect of assumed future general pay increases and annuitant cost-of-living adjustments (COLA) on the amount of benefits that will be ultimately paid. Consequently, when a plan’s dynamic normal cost is fully funded, unfunded liabilities due to inflation in salaries and annuity payments are avoided. This contrasts with static normal cost, wherein assumed future general pay increases and annuitant COLAs are not considered. With static funding, new unfunded liabilities are created as salary and annuity inflation actually occur. There are different actuarial methods for determining dynamic normal cost. OPM calculates the dynamic normal cost for the CSRS and FERS plans using an actuarial cost method – aggregate entry age normal – which expresses normal cost as a level percentage of aggregate basic pay for a group of new plan entrants. Consequently, this method allocates costs without regard to how benefits actually accrue. It is calculated by dividing the actuarial present value of expected future benefits a group of new plan entrants is expected to receive after retirement by the actuarial present value of the group’s expected salaries over their working lives. OPM includes the past military service of new plan entrants in its calculation of expected future benefits. Consequently, OPM’s aggregate entry age normal method allocates the cost of military service benefits proportionally over an employee’s civilian career. For fiscal year 2003, the dynamic normal cost percentage for regular CSRS employees was 24.4 percent of basic pay, of which employees pay 7.0 percent and the Postal Service the remaining 17.4 percent. Similarly, the dynamic normal cost of FERS, currently 11.5 percent of basic pay for regular employees, is fully funded with employer contributions of 10.7 percent and employee withholdings of 0.8 percent. Public Law 108-18 also requires that starting on September 30, 2004, the Postal Service begin funding any projected underfunding of its CSRS obligations calculated by OPM as of September 30, 2003. This funding is to occur over a total of 40 years, with OPM recalculating the projected underfunding and the amortization payments as of the close of each subsequent fiscal year. In the event that a surplus exists as of September 30, 2025, the Postmaster General is required to submit a report to the Congress describing how the Postal Service proposes to use such surplus. By changing the funding of military service benefits, the act made the Postal Service (1) retroactively responsible for funding a portion of military service benefits that have already been paid to annuitants and funded by Treasury on a pay-as-you-go basis and (2) prospectively responsible for funding some or all of the military service benefits expected to be paid to current and future Postal Service annuitants. The cumulative effect of this change in law was to shift responsibility for funding approximately $27 billion (net present value as of September 30, 2002) in military service costs from taxpayers to postal ratepayers. The agencies made various arguments and assertions throughout their proposals, which we organize into the following four common, overarching issues: relationship of military service to employing agency operations, historical funding of CSRS benefits payable to Postal Service employees, applicability of FERS cost allocation and funding methods to CSRS, and funding of military service benefits by federal and other entities. The agencies’ positions reflect their own perceptions of what is fair to the taxpayers and ratepayers and how the Postal Service should be treated vis- à-vis other federal agencies and considering its mandate to be self- supporting. As stated previously, in assessing the agencies' positions, we considered the accuracy of the various assertions presented, those aspects of equity and consistency raised by the agencies, the Postal Service's unique role in the financing of CSRS and FERS benefits, and its status as a self-supporting agency. The agencies’ positions with respect to each of these issues, as well as our observations on them, are presented below. We presented the agencies’ positions in the order that best framed the issue at hand. Military service has no relation to Postal Service operations, on which postal rates are based, and, in fact, had no relation to the operations of the former Post Office Department. Each of the federal employment services – military and civilian – have separate compensation, retirement benefit, and other benefits programs. Furthermore, the use of military service in the calculation of CSRS retirement benefits is a matter beyond the control of employer agencies. Receiving credit for past military service is a civilian retirement benefit that Postal Service employees receive just like other benefits, such as cost-of- living increases on annuitant benefit payments. Furthermore, individuals retiring from the Postal Service receive CSRS credit for their military service only because of their employment with the Postal Service. To a large extent, whether or not an employee’s military service has any relationship to agency operations is a function of whether or not the Congress requires that agencies fund a portion of the costs related to this service. The positions noted above go beyond mandated financial responsibilities and seek to first define more specifically the nature and extent of this relationship before deciding on whether postal ratepayers or taxpayers should fund CSRS military service benefits. Clearly, any service that is creditable towards a CSRS or FERS benefit but is rendered while employed by an entity other than the Postal Service has no direct relationship to the Service’s operations. This includes military service, service performed while employed by another agency and covered by CSRS or FERS, and service covered by another of the federal government’s defined benefit retirement plans, but is subsequently credited towards a CSRS or FERS benefit upon an employee’s acceptance of an appointment to a covered position and meeting other requirements. In addition to the uniformed services, a number of other federal agencies have compensation systems and benefit programs that are separate from those covering Postal Service employees. Having a retirement system that covers so many civilian employees and permitting the transfer of service between federal retirement systems promotes the portability of benefits, and so eases the movement of employees to other positions within the federal government. The crediting of military service towards a civilian service retirement benefit has been a feature of CSRS since it was established in 1920 and of FERS since it was established in 1986. This feature is one of many that collectively constitute a plan of benefits that defers a portion of an employee’s total compensation until retirement. Agencies and other entities whose employees are covered by CSRS and FERS have no control over the features offered, among them employee elections such as whether to provide a survivor benefit to a spouse, because the plan’s provisions are established by the plan sponsor, which in this case is the federal government. OPM and Treasury view military service of federal employees as related to employing agency operations by virtue of the fact that credit for such service is a feature of the CSRS and FERS plans in which the employees participate. They further note that it is only because an employee serves in a covered civilian position for a minimum of 5 years that the employee’s military service can be used in the calculation of a CSRS or FERS benefit. The Postal Service’s statements suggest a view of military service as involving the performance of duties unrelated to the delivery of the mail and further imply that any related compensation – including retirement benefits – should be paid for by the taxpayer. Defining this relationship is particularly important for the Postal Service because the costs associated with its retirees’ service credits earned while employed by any other entity and which are not funded by the retiree while employed by the Postal Service must be passed onto postal ratepayers. This contrasts to those agencies that receive the vast majority of their funding through appropriations, where taxpayers ultimately fund all benefits regardless of whether and to what extent agencies recognize employee retirement costs in their budgets. One can reasonably argue that the cost of military service benefits would more equitably be borne by the entity that benefited from the military service (Department of Defense), which, in essence, would mean that taxpayers would ultimately bear these costs. The funding of military service benefits by the Treasury Department was a feature of a funding methodology established by law in 1969 that did not require employer agencies to fund the full cost of all benefits not otherwise funded by employees. The prior funding mechanism for the Postal Service under CSRS (including the special treatment of military service) was developed in piecemeal fashion that never fully addressed all of the factors that affect the costs of the system. The special treatment of military service that applied to Postal Service employees can be viewed as more of an historic accident than a deliberate policy choice. This is supported by the fact that each time a comprehensive system for funding federal annuities was developed there was no special treatment of military service. In view of the long history of congressional action, it is reasonable to assume that the Congress may have taken action to address the issues of excess interest earnings and the costs of military service, even if OPM had not identified the problems with the static funding methodology. Since 1969 the Treasury Department has been responsible for funding CSRS benefits attributable to military service. The Treasury Department remained responsible for funding these benefits for employees of all federal agencies even after laws had been subsequently enacted to make the Postal Service responsible for additional retirement costs attributable to its decisions and actions that result in increases in employee pay on which benefits are computed. Retroactively making the Postal Service responsible for funding military service benefits would result in a cost transfer of $27 billion to postal ratepayers, the great majority of which has already been paid for by Treasury. Furthermore, approximately 90 percent of the cost of military service was earned before the Postal Service was created in 1971. The fact that the Congress had not acted until just recently to make the Postal Service responsible for funding the creditable military service of its employees is taken by the opposing parties to mean different things, which they assert, not surprisingly, support their respective positions. Both parties acknowledge that, prior to P.L. 108-18, when previously presented with the opportunity to reconsider the Postal Service’s funding of its employees’ CSRS benefits, the Congress chose to leave Treasury responsible for funding all CSRS military service benefits. The Postal Service contends that the passage of successive legislation relating to the financing of its CSRS costs without ever requiring that it fund CSRS military service costs was the Congress’s way of reaffirming its intention of having the Treasury fund these costs for Postal Service employees just as they do now for all other federal agency employees. OPM and Treasury contend that the piecemeal fashion with which the Congress made the Postal Service responsible for funding an increasing share of the CSRS benefits of its employees constitutes a pattern that indicates the Congress could have eventually made the Service responsible for military service costs. It is difficult to discern or even infer from the legislative history of the laws that preceded P.L. 108-18 any particular policy choice that can be seen as indicative of the Congress’s future intentions or predictive of what ultimately led to enactment of P.L. 108-18. Any legislative action must be viewed within the context of the particular facts and circumstances that existed at the time the Congress was considering specific legislation, including budgetary and fiscal considerations. For these reasons, we consider both parties’ arguments and assertions in connection with this point to be speculative and inconclusive. With respect to the Postal Service’s assertion that approximately 90 percent of the cost of military service was earned before the Service was created in 1971, we asked OPM to calculate the additional cost to the Treasury of making it responsible for the entire cost of benefits attributable to all military service estimated to have been rendered before 1972 by both former and current employees of the Postal Service. OPM estimated the additional cost to be approximately 75 percent of the $27 billion total cost to Treasury to fund all CSRS military service benefits. Based on our review of the documentation provided by the Postal Service’s actuarial consultants, it appears that the Service’s assertion was meant to convey that approximately 90 percent of the military service in years allocated to it by OPM’s pro-rata methodology was estimated to have occurred before 1972. The payment of military service costs for Postal Service employees is consistent with the funding of FERS, the funding system on which the new law was patterned. Although the method for funding CSRS benefits prior to P.L. 108-18 did not require the Postal Service to fund the cost of military service, it also did not contemplate that the actuarial gains or losses of the retirement system would be attributed to the Postal Service. Consequently, the Postal Service should not benefit from the positive experience of the CSRDF without assuming the other responsibilities that come with an approach that funds the full cost of all benefits, including military service. There is no identity between FERS funding and CSRS funding. FERS was created on a dynamically funded basis to phase out CSRS and to establish a more limited federal employment benefits program that would be fully funded by employees and employer agencies. CSRS is a totally different program from FERS, with different benefits and levels of contribution. In fact, CSRS was never fully funded by employees and employer agencies, with the exception of the Postal Service. Therefore, a change in funding methods that allows the Postal Service to receive credit for its share of higher than expected investment returns on contributions it made in accordance with the prior funding method does not justify the transfer of military service costs. There is no basis to substantiate this rationale either in accepted actuarial or financial practice. The agencies present opposing views on whether FERS funding requirements can or should be applied to CSRS benefits. Whether or not the obligation to fund military service benefits should be linked with the benefit of higher than expected investment returns is crucial to their respective arguments. There are numerous similarities and differences between CSRS and FERS, one difference being the manner and extent to which the full cost of plan benefits have been funded, including military service benefits. The fact that there are currently differences between CSRS and FERS benefits and funding requirements does not preclude changing how the Postal Service’s contributions are calculated under CSRS to a method similar to FERS. That said, we also did not find any requirement that past military service be included in the dynamic normal cost factor used for funding purposes in order for the Postal Service to be treated as a separate employer for purposes of financing CSRS and, thus, benefit from past investment gains. In fact, there are actuarial methods that would fund the cost of military service benefits in a manner different than the one OPM currently uses. Therefore, there is nothing that inextricably links the past investment experience of the CSRDF to how military service benefits are funded. No agency other than the Postal Service – including other self-supporting agencies – fully funds the cost of its employees’ CSRS benefits, including military service benefits. Furthermore, private sector companies are not responsible for funding military service costs. OPM and Treasury Position With respect to the argument that it is not fair to ask the Postal Service to finance the cost of military service because it would be the only agency required to do so, the fact that Treasury funds CSRS benefits attributable to military service rather than employer agencies merely shifts the timing of when the contributions are made and whether they are charged to a Treasury appropriation or to agency budgets. In either case, the costs would still ultimately be borne by the taxpayer. In contrast, one of the primary goals of the Postal Reorganization Act was to ensure that all of the Postal Service’s costs are recovered through postal revenues, not taxpayer dollars. Therefore, all pension costs for employees that are attributable to service after the reorganization should be borne by the Postal Service. There are numerous government entities whose programs are required by law to be financed by the users of their services and that pay less than the portion of the CSRS dynamic normal cost not otherwise paid for by employee withholdings, including military service costs. These include the Federal Deposit Insurance Corporation (FDIC) and the Pension Benefit Guaranty Corporation (PBGC). However, there have also been a few entities that have either been required by law or have voluntarily chosen to fund the dynamic normal cost of employees who retained CSRS or FERS coverage. For example, the Metropolitan Washington Airports Act of 1986 required that the Metropolitan Washington Airports Authority (MWAA) pay the difference between the dynamic normal cost of CSRS benefits (including military service costs) and the contributions made by those career civilian employees of the Federal Aviation Administration who transferred to MWAA with the leasing of the Metropolitan Washington Airports in 1986. In addition, the Power Marketing Administrations (PMA) agreed to recover the dynamic normal cost of CSRS (including military service costs) through their power rates prospectively beginning in fiscal year 1998. The PMAs agreed to do so in response to a series of reports we issued. One might reasonably argue that the Postal Service should be treated like other agencies with respect to its funding of pension costs. However, the fact that other federal entities are not currently fully funding the government’s share of CSRS normal costs does not necessarily support the argument that the Postal Service should not fund them. Likewise, it does not necessarily support the argument that other agencies start paying for these costs. Rather, it merely demonstrates the inconsistent treatment of agencies in this regard. Our long-standing position has been that employer agencies should fund the dynamic cost of the government’s retirement programs not otherwise funded with employee withholdings and deposits. We also observed on numerous occasions that, as a result of charging less than the dynamic cost of CSRS not otherwise provided by employee withholdings, agencies whose operations are intended to be self-supporting receive large subsidies that are not recognized in the cost of their goods and services. However, our previous recommendations and observations did not specifically address whether the cost of military service benefits should be included as part of a dynamic normal cost factor. Nor did we examine the issue of whether the entity that benefited from the service should ultimately pay for any related benefits. Additionally, with the exception of self-supporting agencies that pay the dynamic cost of these benefits, taxpayers ultimately fund the benefits, regardless of whether these costs are included in individual agency budgets. Therefore, charging the self-supporting agencies’ customers for the government’s share of the dynamic normal cost of pension benefits results in real savings to the taxpayers and, therefore, is not just a change in the timing and source of funding. Regarding the Postal Service’s statement that private sector companies are not responsible for military service costs, it is true that private sector companies are not required to give credit for past military service in their defined benefit pension plans. However, it should also be noted that the taxes these companies pay to the general fund of the Treasury are used to pay for various costs incurred by the federal government, including the military service benefits of military retirees and those employees who retired from agencies other than the Postal Service. The Postal Service is exempt from paying any corporate income taxes. The OPM and Treasury proposal presented five possible approaches for allocating the cost of benefits attributable to military service between the Treasury and the Postal Service. The Postal Service’s position is that taxpayers, not postal ratepayers, should be responsible for the full cost of CSRS military service benefits, and it did not offer any other funding alternatives as part of its military service funding proposal. The information from the OPM and Treasury proposal is reprinted below in table 1. OPM calculated the estimated cost to the Treasury of each approach using the pro-rata approach to allocating military service set forth in P.L. 108-18 as the baseline. OPM’s P.L. 108-18 pro-rata approach requires that the Postal Service fund (1) all CSRS military service benefits of employees hired into a civilian position after June 30, 1971, and (2) a pro-rata share of these benefits for employees hired before July 1, 1971. OPM estimated this pro-rata share of benefits by first allocating an employee’s total creditable military service based on the ratio of pre-1971 civilian service to the total civilian service which the employee accrued both before and after the effective date of the Postal Reorganization Act. OPM’s methodology also assumed that the Postal Service should be responsible for (1) the effect of post-1971 general pay increases and increasing benefit accrual rates on the final amount of military service benefits at retirement, including those military service credits allocated to the federal government, and (2) a proportional amount of post-1971 annuitant cost-of-living adjustments. These aspects of OPM’s methodology apply to the second, third, and fourth funding alternatives presented in the OPM and Treasury proposal. The other two alternatives – Treasury pays the entire cost of military service or Postal Service pays the entire cost after September 30, 2002 – have the responsible agency funding all CSRS benefits attributable to military service, including all annuitant COLAs. Appendix B of the OPM and Treasury proposal provides examples of how an example retiree’s benefit payment would be allocated into civilian and military service portions and how the federal government’s share of those amounts would be determined for each of the funding alternatives. The total estimated additional cost to the Treasury for each funding alternative is equal to the difference between the projected funded status – or “supplemental liability” – of the current law pro-rata approach with that of each alternative. Appendix C of the OPM and Treasury proposal provides the net asset, present value of future benefits, and present value of future contributions components of the “supplemental liability” for each funding alternative. “Because military service only becomes creditable at the time when an employee actually retires, it would not be unreasonable to charge Postal Service for the entire amount of military service for all employees who retired from the Postal Service after June 30, 1971. It was only because these employees retired from the Postal Service that they received credit for their military service.” ”Civil Service rules required that to receive a regular retirement benefit the employees must have at least five years of civilian service and then attain additional age and service requirements.” The rules governing the crediting of military service are established in law and regulation. Generally, military service can be used in the computation of any annuity after having completed 5 years of civilian service and if the following three conditions are met: (1) the military service was active and terminated under honorable conditions, (2) the military service was performed before separating from a civilian position covered by CSRS, and (3) the employee makes any required deposits. The OPM and Treasury statement that an employee must meet additional age and service requirements beyond the first 5 years to receive a regular (voluntary) retirement benefit is accurate, as is the statement that an employee must retire – in this case from the Postal Service – in order for military service to be counted in the computation of an annuity benefit. However, an employee is entitled to receive a disability retirement benefit at any age with 5 years of civilian service and a deferred annuity beginning at age 62 with 5 years of civilian service. Once employees meet the minimum years of civilian service necessary to be entitled to any type of annuity and meet the conditions listed above, they are entitled to have all of their military service included in the computation of their annuity. For purposes of determining how best to allocate CSRS military service benefits, it is important to note that OPM assumed that employees render military service prior to when they first enter civilian service. This leads to the presumption that the military service credits of many of the Postal Service’s retirees were already creditable towards an annuity by the time the Service commenced operations in 1971. Yet, for purposes of estimating the Postal Service’s share of the CSRS portion of CSRDF assets and the actuarial present value of future benefits, OPM allocated the years of creditable military service of former and current Postal Service employees proportionally over the employees’ civilian career. For example, an employee who retired in 1991 with 10 years of civilian service before July 1, 1971, and 20 years after June 30, 1971, would have two-thirds of any military service allocated to the Postal Service, even though OPM assumes that all military service was rendered before the employee was hired into a covered civilian position. Consequently, this example employee’s military service would have been creditable towards a civilian pension benefit before the Postal Service commenced operations. The OPM and Treasury proposal did not include an allocation alternative that reflects the extent to which military service became creditable after the Postal Service commenced operations. The scoring of each alternative approach to funding military service hinges on how Postal Service would spend any additional savings. The Postal Service was required by P.L. 108-18 to submit a proposal detailing how it would expend any savings accruing to it after fiscal year 2005 as a result of enactment of P.L. 108-18. In that separate proposal, the Postal Service provided two alternatives to spending any savings. The first alternative assumes the responsibility for funding the CSRS military service benefits of its current and former employees will return to the Treasury, while the other alternative assumes that the Postal Service will retain this responsibility as defined under P.L. 108-18. Consequently, we present our estimates of the budgetary implications of only these two military service funding alternatives in our companion report on the results of our mandated review of the Postal Service’s savings plan proposal. This report is entitled Postal Pension Funding Reform: Issues Related to the Postal Service’s Proposed Use of Pension Savings, GAO-04-238. The agencies made various arguments as to which agency – Postal Service or Treasury – should fund the cost of CSRS military service benefits. We made various observations that considered the accuracy of the various assertions presented, those aspects of equity and consistency raised by the agencies, the Postal Service's unique role in the financing of CSRS and FERS benefits, and its status as a self-supporting agency. Ultimately, the Congress must make this decision. Should the Congress decide that the Postal Service should be responsible for funding CSRS military service benefits attributable to its employees, the Congress should then decide the extent to which these benefits should be attributed to the Postal Service and perhaps to other self-supporting agencies. Even if the Congress decides that self-supporting agencies should not be required to fund CSRS military service benefits, the Congress should still consider whether these agencies should be required to fund the dynamic normal cost of their CSRS employees’ benefits that excludes the military service component. The OPM and Treasury proposal provided five alternative allocation approaches; however, none of their approaches included an allocation alternative that reflects the extent to which the Postal Service’s current and former employees had, by the time the Service commenced operations in 1971, completed the 5 years of civilian service needed to be entitled to have their past military service credits used in the computation of an annuity. This alternative would provide an estimate of Postal Service’s obligation that includes only military service benefits that became creditable after the Postal Service commenced operations. To help promote full and consistent funding of CSRS benefits among self- supporting federal agencies, we suggest that the Congress consider requiring all self-supporting federal entities to pay the dynamic cost of employee pension benefit costs not paid for by employee contributions and deposits, excluding military service costs, and treating all self-supporting federal entities consistently with regard to whatever decision is made on Postal Service funding of the military service component of CSRS employee benefits. If the Congress decides that the Postal Service should be responsible for military service costs associated with its employees, we recommend that OPM provide the Congress with estimates of the additional cost to the Treasury of making the Postal Service responsible only for employee military service that became creditable after June 30, 1971. In written comments on a draft of this report the Postmaster General expressed concern with what he saw as an inference that the Postal Service should be responsible for the cost of an employee’s military service because it hires the employee knowing of the past military service. The Postmaster General also reaffirmed the Postal Service’s commitment to the fundamental policy of veterans’ preferences. Our report did not imply that knowing of past military service was a relevant factor in determining whether the Postal Service should bear this cost, but rather simply stated the fact that the right to receive credit for past military service arises only as a result of employment in a civilian position covered by CSRS or FERS. The Postmaster General also stated that our suggestion that the Congress consider requiring all self-supporting entities to fund the dynamic costs of employee pension benefits is not an issue for the Postal Service because it began doing so as of April 2003. Our report states that there are other self- supporting agencies that are not required to fund military service costs and do not otherwise fully fund the dynamic normal cost of their CSRS employees’ benefits as the Postal Service is now required to do. We highlighted this difference in funding requirements to illustrate an inconsistency that the Congress may want to consider as it contemplates CSRS employee benefits funding by the Postal Service. The Postmaster General’s written comments are reprinted in appendix III. In written comments on a draft of this report, the Secretary of the Treasury and Director of OPM disagreed with our statement that there is no direct relationship between an employee’s prior military service and the operations of the Postal Service. They stated that granting credit for military service in calculating civilian pensions enables the Postal Service to recruit and retain veterans, who provide direct benefits to the operations of their employer. We agree that the crediting of military service facilitates the recruitment and retention of veterans who, subsequent to their military service, contribute to postal operations. However, we continue to view the relationship between military service and postal operations as indirect because the activities performed while serving in the military did not directly contribute to the daily operations of the Postal Service at the time the military service was rendered. In their comment letter, the Secretary of the Treasury and Director of OPM also provided certain clarifications with respect to their policy positions and beliefs. For example, they stated that their estimate, made at our request, of the value of benefit costs due to military service before 1971 includes all increases in the value of those benefits that resulted from pay raises granted by the Postal Service, but that they do not endorse this method, especially insofar as it permits Postal Service pay increases to then increase the cost allocated to the Treasury. We do not endorse this or any other cost allocation method. As stated in our report, our position is that the Congress needs to decide whether the Postal Service should fund the cost of military service attributable to military service of its current and former employees. If the Congress decides that the Postal Service should fund these costs, then it needs to decide which method to use in allocating costs to the Postal Service. The written comments from the Secretary of the Treasury and Director of OPM are reprinted in appendix IV. We are sending copies of this report to the Director of the Office of Personnel Management, the Postmaster General, the Secretary of the Treasury, the Director of the Office of Management and Budget, and other interested parties. We are also sending this report to the Honorable John M. McHugh, House of Representatives, as the Chairman of the Special Panel on Postal Reform and Oversight, House Committee on Government Reform. The report is also available at no charge on GAO’s home page at http://wwww.gao.gov. If you have any questions about this report, please contact Linda Calbom, Director, Financial Management and Assurance, at (202) 512-8341, or Robert Martin, Acting Director, at (202) 512-6131. You may reach them by e-mail at [email protected] and [email protected]. Other key contributors to this report were Joseph Applebaum, Richard Cambosos, Lisa Crye, Frederick Evans, Darren Goode, Scott McNulty, and Brooke Whittaker. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to e-mail alerts” under the “Order GAO Products” heading. | The Postal Civil Service Retirement System Funding Reform Act of 2003 (the Act) required the United States Postal Service, Department of the Treasury, and Office of Personnel Management (OPM) to prepare proposals detailing whether and to what extent the Treasury and Postal Service should fund the benefits attributable to the military service of the Postal Service's current and former Civil Service Retirement System (CSRS) employees. The Act required GAO to evaluate the proposals. Our objective in doing so was to assess the agencies' positions and provide additional information where it may be useful. The positions taken by OPM and Treasury and the Postal Service were driven in part by differing views on the nature and extent of the relationship between military service and an entity's operations. The Postal Service favors returning the responsibility for funding benefits attributable to military service to the Treasury, making arguments that include Treasury's historic responsibility for these benefits, the legislative history surrounding the Postal Service's funding of retirement benefits, the fact that the majority of military service by CSRS employees was rendered before the current Postal Service was created, and that military service has no connection to the Postal Service's functions or operations. OPM and Treasury favor the recently enacted law, arguing that the Postal Service was intended to be self-supporting, military service is a benefit like other CSRS benefits that should be allocated proportionally over an employee's career, and the current law is one in a series that developed today's approach to funding the Postal Service's CSRS costs. GAO observed that there is no direct relationship between an employee's military service and an entity's operations, but an indirect relationship is established once an employee is hired into a position whose retirement plan provisions credit military service when computing a civilian benefit. GAO has long held the position that federal entities should be charged the full costs of retirement benefits not covered by employee contributions in the belief that it enhances recognition of costs and budgetary discipline at the same time it promotes sounder fiscal and legislative decisions. However, our previous recommendations and matters for congressional consideration did not specifically address whether the cost of military service benefits should be included in CSRS employee benefit costs. Currently there is inconsistency in how various self-supporting government entities treat these costs. The military service of many Postal Service retirees was already creditable to a civilian pension when the Postal Service began operations in 1971. OPM's current approach, however, allocated the years of creditable military service of these employees over their entire civilian careers. If Congress decides that the Postal Service should be responsible for military service costs applicable to its employees, then consideration of an allocation alternative reflecting the extent to which the military service of current and former employees was already creditable towards a civilian pension when the Postal Service began operating would enhance the decision-making process. |
As we have previously found, there is no single definition of transit- oriented development; however, research generally describes such a development as a compact, mixed-use, and “walkable” neighborhood located near transit. Transit-oriented developments are typically located up to a half-mile from a transit station (usually a fixed guideway rail station), can encompass multiple city blocks, and have pedestrian-friendly environments. Transit-oriented developments can range in both size and scope, with some located in major urban centers while others are located in suburban neighborhoods. Transportation experts believe that transit- oriented development can increase access to employment, educational, cultural, and other opportunities by promoting transportation options to households, resulting in increased transit ridership and reduced road congestion. Figure 1 provides a graphic representation of common features of a notional transit-oriented development. A number of stakeholders play important roles in the planning and implementation of a transit-oriented development. These roles are summarized below. Local transit agencies: These agencies, such as transit authorities or transit operators, are generally responsible for building, maintaining, and operating transit systems. These transit systems can include fixed guideway transit systems—such as rail or bus rapid transit—ferry systems, paratransit services, and local bus service. State and local departments of transportation and metropolitan- planning organizations (MPO):organizations develop transportation plans and improvement programs; they also build, maintain, and operate transportation infrastructure and services. Local governments and regional councils: City and county governments have planning departments with control over land use planning, which includes zoning policies and growth management policies. These entities are also generally responsible for reviewing, engaging local residents on, and granting entitlements for new development projects. Regional councils develop land use plans used by metropolitan-planning organizations for transportation planning. Private developers: Private developers decide on and create developments and build and manage housing units and commercial developments. Lenders: Banks and other financial institutions finance developers to design and construct transit-oriented development projects. Business improvement districts: These districts—and other entities that coordinate local economic interests—have input on community infrastructure upgrades. Although FTA provides funds for transit projects that may spur transit- oriented development, it does not have a discrete program for transit- oriented development. However, the agency has been expanding its role in transit-oriented development in recent years by: Funding transit-oriented development research. Coordinating with the Department of Housing and Urban Development and the Environmental Protection Agency on the Sustainable Communities Partnership. This partnership was formed in 2009 with the goal of coordinating federal housing, transportation, water, and other infrastructure investments to support communities’ development in more environmentally and economically sustainable ways, including transit-oriented development. Implementing a transit-oriented development planning pilot program that is to provide grants to state or local governments for advance planning efforts that support transit-oriented development. FTA plans to distribute $19.98 million in grant funding to state and local agencies in 2015. Since the early 1970s, the federal government has provided a large share of the nation’s transit capital investment through the Capital Investment Grant program. Projects eligible for the program include new fixed- guideway transit lines, extensions to fixed-guideways, and projects that improve core capacity on an existing fixed-guideway system. As we recently reported,Grant projects, local transit agencies typically serve as project sponsors, although FTA provides funding for Capital Investment and design and implement these projects. The project sponsors often coordinate with local MPOs in designing and implementing these projects, and FTA awards funding to project sponsors upon completion of the pre- construction development process. This process includes a range of local policy-development and decision-making activities, including identifying the specific transit corridor and project, refining the project design, and obtaining the necessary funding commitments from state and local partners. Once a project sponsor decides to seek Capital Investment Grant funding, FTA is required by law to rate a project considering a number of evaluation criteria, before it can recommend the project to Congress for funding. While these criteria have changed over time, there are currently six individual criteria: mobility improvements, environmental benefits, congestion relief, cost-effectiveness, economic development, and land use. In addition, FTA considers the availability of federal funds; consideration of project readiness, including sufficient engineering and design to produce a reliable scope, cost figure, and schedule; and sufficient technical capacity of the project sponsor to undertake a major construction project. FTA is also required to evaluate and rate the local financial commitment and the transit agency’s ability to operate the project and continue to operate the existing transit system. See fig. 2. We found a wide range in the amount of new transit-oriented development since transit operations began for our six case study transit lines. Stakeholders in these cities attributed the amount of transit-oriented development to the influence of a variety of factors including conditions that support of transit-oriented development such as a demand for real estate, challenges that hinder transit-oriented development such as high associated construction costs, and local government policies that encourage transit-oriented development, such as transit supportive zoning. During our case study visits, we found a wide range in the amount of transit-oriented development that occurred since the implementation of a federally funded transit project. For each project, we found at least a minimal amount of transit-oriented development near at least one station; however, for each project we also found examples of stations that have had little or no transit-oriented development. For example, in Baltimore, MD, local officials told us that there has been very little development around light rail stations—except near downtown Baltimore’s Penn Station, which also services commuter rail and Amtrak—despite more than 20 years of operations and a significant upgrade in service in 2006. In contrast, local stakeholders in Charlotte, NC, told us that the South End portion of the light rail line has been largely successful in attracting transit-oriented development—although one of these stakeholders acknowledge that stations further down the transit line in Charlotte are more auto-oriented and have generated little transit-oriented development. A more detailed description of examples of our findings from each case study can be found in figures 3 to 8. Stakeholders from across our case studies identified key conditions that can support transit-oriented development, including: demand for real estate, available land for development, supportive local residents, and a transit line that efficiently connects to established job and activity centers. Specifically, we found that the following conditions support transit- oriented development: Market demand for real estate: Market demand for real estate is needed to support transit-oriented development. According to the literature we reviewed and stakeholders we spoke to, demand for real estate is driven in part by the strength of the local economy so cities with strong local economies are more likely to support transit-oriented development. One study has also shown that market demand is the primary factor developers consider when determining whether to build a transit-oriented development. For example, a developer that has built mixed-use development projects in both Washington, DC, and Baltimore told us that developers consider anticipated price growth and existing housing supply when determining locations for new development. This developer told us that consideration of these factors has led to a pipeline of about 30,000 units in Washington, while Baltimore only has a few thousand. Further, we observed many new developments along the light rail in San Francisco, which had the fastest real economic growth of the 10 largest metropolitan areas in 2012, according to the Bureau of Economic Analysis. While a strong economy and demand for real estate are necessary to support transit- oriented development, they may not always be sufficient to lead to transit-oriented development. For example, Houston had a 23 percent job growth rate from 2003 through 2013, according to the Bureau of Labor Statistics. While the United States had a 5 percent job growth rate during the same period, we observed very little transit-oriented development in Houston due to factors such as land speculation and deed restrictions placed on land around transit. Large parcels of land available for development: The availability of large amounts of land such as surface parking lots near transit stations or underutilized industrial land can also support transit- oriented development. We have previously found that many transit agencies view converting surface parking lots at transit stations into a transit-oriented development as an opportunity to accomplish multiple goals, including promoting transit-supportive land use near stations and increasing ridership. In addition, as we have previously found, research has shownincrease with proximity to a transit station. Underutilized industrial land also presents an opportunity for transit-oriented development due to the large size of industrial land parcels and the lack of neighbors to oppose new development. For example, we visited sites in both Charlotte and San Francisco where developers took advantage of large parcels of previously industrial land to build transit-oriented development. that land and housing values generally tend to Resident support for transit and transit-oriented development: Among our case study cities, San Francisco and Washington, DC, have the highest transit ridership—among the top five in the nation according to the 2009 American Community Survey—and both cities also have historically dense development patterns. As noted above, we observed many new developments near transit in both cities. In addition, according to stakeholders, cities with a high concentration of people 18 to 34 years old tend to be more supportive of transit- oriented development than other age cohorts. For example, stakeholders from Houston; Washington, DC; San Francisco; and Charlotte told us younger residents’ desire for neighborhoods close to amenities and their support for transit are signs that this age cohort is supportive of transit-oriented development. These comments conform to a national survey by the Urban Land Institute that found that the majority of this age cohort prefers a shorter commute over a larger home; is attracted to living in neighborhoods close to public transit, with a mix of shops, restaurants, and offices; and shows a preference for living in a neighborhood with a mix of housing types and a mix of incomes. Efficient access to jobs and centers of activity: Transit that efficiently connects people to established job and activity centers provides potential for transit-oriented development. According to planning and transit officials in Santa Clara County, to attract people to transit, transit routes need to move from residential areas to job centers as directly as possible. Specifically, the extent to which transit connects people to anchor institutions,and existing mixed-use neighborhoods supports transit-oriented development. Stakeholders cited Washington, DC’s Metrorail system as an efficient system that has been successful in supporting transit- oriented development because riders can reach a number of job and activity centers (such as downtown Washington, DC; Rosslyn, VA; and the Courthouse district in Arlington, VA). In San Francisco, the first segment of the T-Third Light Rail is close to Caltrain Commuter rail, which provides access to nearby areas with a high concentration of technology-industry jobs. Stakeholders from our case studies identified several factors that can hinder transit-oriented development including: (1) the higher construction cost of transit-oriented developments; (2) lenders’ reluctance to finance transit-oriented developments in some cities; (3) lengthy or discretionary local-development approval processes; (4) an unsupportive local population; and (5) land around transit stations that is unattractive for development. Specifically, we found that the following challenges can hinder transit-oriented development: Construction costs can be higher: Construction of transit-oriented developments can be more costly than for traditional, single-use developments because of the cost of mixed-use buildings and parking garages. According to literature we reviewed and stakeholders we spoke with, aspects of transit-oriented developments such as multiple stories or a mix of uses can make transit-oriented developments more costly to build than traditional developments. For example, one study found that “different functions, appearance, access, and security levels of entrances and exits for different uses can become costly features in mixed-use projects.” A national stakeholder group also told us that the higher construction costs associated with mixed-use buildings can inhibit small construction firms from pursuing mixed-use projects. Some developers, transit, and planning officials noted that transit-oriented joint development on surface parking lots at transit stations could be hindered by the high cost of constructing replacement parking garages. Typically, when transit agencies enter into agreements with developers to use existing surface parking lots for transit-oriented joint development projects, they ask developers to pay for all or for part of a parking garage to replace the surface parking spaces used for the development. In some cases, the cost of constructing a replacement parking garage may hinder the implementation of projects. For example, according to a 2012 study of parking-garage costs in the San Francisco Bay Area, a replacement parking garage may cost about $28,000 per space, or more than $14 million for a 500-space garage. In addition, a developer told us that transit agencies could have design specifications for parking garages that double the cost per parking spot compared to what he would normally construct, cost that exacerbates the challenge of providing replacement parking. Lenders may be reluctant to finance transit-oriented development: According to the transit-oriented development literature we reviewed and developers and others we spoke with, some lenders are reluctant to finance transit-oriented developments because of a perception that transit-oriented developments are riskier than more traditional developments due to higher market risk associated with mixed-use buildings. This reluctance may be heightened in areas with few or no successful transit-oriented development projects. Mixed-use developments can face market challenges because each use must have sufficient market demand to make the project as a whole profitable. For example, a national interest group told us that mixing retail use with residential use adds risk to a project because the market for retail real estate tends to be more volatile than the market for residential use. In areas with no successful examples of transit-oriented development, lenders may view these projects as additionally risky, because lenders do not know if there is local consumer demand for transit-oriented development. Local approval processes may add requirements or delays: Another challenge that can hinder transit-oriented development is a lengthy or discretionary local approval process. For example, two national stakeholders said that developers face higher risk and more uncertainty in developing projects when transit-oriented developments are not in line with the zoning code for the area. In these cases, a zoning variance is typically required from local officials, a requirement that can make the entitlement process lengthier and more discretionary. These stakeholders also said that when entitlement processes are dependent on the discretion of the local officials, developers might be unable to predict when projects will get approved or what requirements local officials will attach to projects as conditions of approval. Three developers in San Francisco and Charlotte told us that if they are uncertain of the length or outcome of the entitlement process, they might choose not to pursue projects. Local residents may not support transit or dense development: Stakeholders in every city we visited told us that transit-oriented development could face challenges when the local population is not in favor of transit or dense residential development. Transit officials in Baltimore and Houston reported that negative perceptions of transit affect transit ridership and consumer demand for transit-oriented development. Stakeholders in Baltimore told us that a social stigma associated with public transit results in low ridership on the light rail system. The Houston transit agency and a local developer told us that Houston’s “car culture”—wherein residents generally prefer to independently travel in their own car rather than on transit—is a factor that can inhibit the appeal of transit and demand for dense living near transit stations. Stakeholders in the San Francisco Bay Area reported that local residents may oppose new development out of concern about issues such as the height of buildings for dense development or perceived decreases in quality of life due to increases in population, traffic, and demand for parking. Physical features surrounding a transit station may be undesirable for development: Stakeholders in all of our case study areas reported that physical features such as highways, vast areas of vacant land, blank walls, driveway entrances, or a lack of pedestrian crossings at streets could hinder transit-oriented development. For example, local officials in Houston told us that many stations along the light rail system have challenges with the last 100 feet. Specifically, there are many areas where sidewalk and ramp improvements are needed to help better access the station. These improvements could increase walkability and make transit-oriented development more attractive. Unsupportive land uses: Land uses around transit stations that are not supportive of high-density, mixed-use development can also hinder transit-oriented development. For example, as discussed previously, vacant industrial parcels of land can support transit- oriented development. However, developers, planning officials, and other stakeholders told us that aspects of this type of land can hinder transit-oriented development if: there is still operating “legacy” industry nearby that would be noxious to residential use; the land requires environmental clean-up; the land requires significant physical-infrastructure investment such as adding sidewalks or upgrading sewer capacity; or the area lacks community infrastructure such as schools and parks. Local governments can use a variety of policies to encourage transit- oriented development including zoning regulations, station area planning, targeted infrastructure investments, and tax incentives. Stakeholders told us that these tools most successfully support transit-oriented development when they align with the local residents’ preferences and market demand for development. The following are examples of local government actions to support transit-oriented development near the projects we selected: Creating zoning and regulations supportive of elements of transit-oriented development: Local governments can support transit-oriented development by designing zoning or other regulations to facilitate more certainty for developers proposing projects near transit stations. According to two stakeholder organizations we spoke with, local governments can help improve developer certainty by developing zoning codes that specifically allow aspects of new developments that are consistent with transit-oriented development. According to a report we reviewed, transit-oriented development zoning districts that allow buildings of greater unit density or fewer parking spaces can facilitate developer certainty because the entitlement process will likely be shorter and projects will not be subject to a discretionary entitlement process. A developer in Charlotte told us that the transit-oriented development district zone made him confident that he would get his project entitled and that absent the zone, he would not have proceeded with the project. In some cases, policies supportive of transit-oriented development can make projects more economically feasible. For example, cities can allow greater height or density and require fewer parking spaces to allow developers to increase revenue or to help offset the property value premium that transit can generate. The City of Houston does not have zoning, which results in a unique regulatory environment in which the City cannot regulate land use or other building features like most cities can. The City allows a reduction in required parking and has implemented an optional transit-corridor ordinance that reduces the legal setback from the street, but few developers have used either option to date. Developing area plans that provide guidance and resolve contentious issues: Local governments can also support transit- oriented development through neighborhood-scale land-use planning activities. Among our case studies, most local governments use some form of these plans to provide detailed direction on land use, transportation, housing, parks and economic growth for the development of city blocks, corridors, or neighborhoods around transit stations. These plans typically identify gaps in city services and resources deployed at the neighborhood level and shape capital investment priorities, among other things. In San Francisco, planning officials told us they not only use neighborhood plans to guide neighborhood growth but also to create a blanket Environmental Impact Review (EIR) that is applicable for the entire neighborhood. According to these officials, this can reduce the cost of EIRs for each development and also manages public participation in the EIR process, which traditionally accounted for much of the entitlement process delay. They noted that the Area Plan also resolves a number of topics that can be contentious (such as density, height, parking, and traffic congestion issues), before developers come in with specific project plans. Developers told us that, as a result, development has concentrated in neighborhoods with Area Plans and entitlement processes for projects in these areas are shorter. According to planning and transit officials in Baltimore, Washington, DC and Charlotte, policies designed to encourage transit-oriented development are most successful when they are tailored to local circumstances such as local residents’ preferences and market demand. The following are examples of such policies in our case studies: Responsiveness to local residents’ preferences: Planning and transit officials in Baltimore, Washington, DC, and Charlotte told us that aligning local policies such as transit-oriented development districts and Area Plans with the scale of the existing community may ensure a higher level of local residents’ support for transit-oriented development. In addition, incorporating input from local residents on issues like land use, parking, density and building height may also help ensure their support. For example, a Baltimore planning official told us that the City of Baltimore held numerous public meetings while drafting their new zoning code. Due to public input, the City changed its plans to have two transit-oriented development districts of different densities and similar uses and instead developed four different transit- oriented development districts with varying density and use. Responsiveness to market demand: Planning and transit officials in Charlotte also told us that it was important for transit-oriented development districts and local government policies to conform to market demand. For example, some local governments would like to cap parking in transit-oriented zones in order to encourage transit- ridership, but city-mandated parking requirements do not always align with consumer demand for parking and therefore the requirements can hinder transit-oriented development. Some local governments would like to encourage mixed-use developments near transit by requiring retail, but two developers told us that setting aside a minimum amount of retail space in residential buildings may not align with demand for retail in that area because encouraging new retail areas is very difficult. For example, a developer in San Francisco built a mixed-use residential and retail development and the retail space remained empty for fifteen years, until it was converted into a live/work loft space. Beyond planning and zoning, local governments can also play a role in improving connections to transit and helping mitigate environmental challenges to transit-oriented development. Actions in these areas may include the following, among others: Targeted investments in infrastructure: Local governments’ efforts to support transit-oriented development through zoning and planning are enhanced when local governments make targeted investments in infrastructure around transit stations. To increase the attractiveness of transit and transit-oriented development, local governments can support the integration of multi-modal transportation choices to take riders to and from the transit stations. Stakeholders in San Francisco reported that shuttle service, car-sharing, bicycle-sharing programs, bicycle lanes, and pedestrian amenities can help move people in and around the transit station area, thus supporting ridership and making transit more attractive (see fig. 9). Tax credits for developers: In order to mitigate some of the challenges associated with transit-oriented development on vacant industrial land, some state governments have created programs that provide tax credits to help developers ameliorate clean-up costs and reduce legal liability. Stakeholders in both Baltimore and Charlotte reported that programs in which developers receive tax credits and reduced legal liability in exchange for providing a certain amount of environmental clean-up on their parcels has made development on vacant industrial land more feasible. FTA assesses several factors that can support transit-oriented development when reviewing transit projects for potential New Starts funding; however, these factors make up only a small percentage of all the factors considered. As mentioned earlier, proposed New Starts projects are evaluated and rated according to criteria set forth in law. In addition to rating the local government’s financial commitment, FTA evaluates and rates a proposed project according to six statutory project justification criteria including mobility improvements, environmental benefits, congestion relief, economic development effects, land use, and cost-effectiveness. Two of the six project-justification criteria—economic development effects and land use—require documentation from project sponsors related to whether current and future land use is supportive of transit. To assign ratings for these criteria, FTA evaluates many of the same factors that we found help support transit-oriented development. The land use criterion includes evaluation of factors such as the development, character (including amenities such as short building setbacks and active facades), pedestrian facilities, parking supply, and the percentage of affordable housing in the existing corridor and station areas compared to the percentage in the surrounding counties. Many of the elements that support high ratings for this criterion are similar to the elements that stakeholders we spoke with identified as supportive of transit-oriented development. Specifically, to receive a higher rating, project sponsors need to show, among other things, that the existing project corridor serves a significant number of employees and densely populated areas; has development with infrastructure such as sidewalks, trees, crosswalks, and other pedestrian amenities; a mix of residential, retail and professional uses; and minimal parking and thereby costly parking (more expensive parking tends to support ridership). The economic development criterion includes evaluation of several factors relating to local government policies. FTA evaluates three sub- factors within the criterion: transit-supportive plans and policies, performance and impacts of policies, and tools to maintain or increase the share of affordable housing in the project corridor. To assign ratings, FTA considers many of the same plans and policies that stakeholders told us can help support transit-oriented development. For example, FTA considers plans and policies to enhance the transit-friendly character of station areas, plans to improve pedestrian facilities, parking policies, zoning ordinances that increase development density and allow for reduced parking, and outreach and efforts to engage the development community in station area planning. FTA also considers whether proposed station areas have land available for development and demonstrated cases of development affected by transit-supportive policies and plans, policies, or incentives the local governments have in place to maintain or increase the share of affordable housing. These two criteria account for one-third of the summary-project justification rating and one-sixth of the project’s overall rating. The remaining two-thirds of the summary project-justification rating are based on four other criteria. While these four criteria could be affected by future transit-oriented development, they do not directly relate to the potential for a project to support transit-oriented development: Mobility Improvements—The total number of “linked trips” using the proposed project, with a weight of two given to trips that transit- dependent persons would make with the project. Environmental Benefits—Based upon the dollar value of the anticipated direct and indirect benefits to human health, safety, energy, and the air-quality environment scaled by the annualized capital and operating cost of the project. FTA computes these benefits based on the change in vehicle miles travelled that would result from implementation of the proposed project. Cost-Effectiveness—For New Starts projects cost-effectiveness is measured by the annual capital and operating and maintenance cost per trip on the project. The number of trips on the project is not an incremental measure but simply total estimated trips on the project. Congestion Relief—A new criterion introduced in MAP-21. Until FTA undertakes a rulemaking process, FTA plans to assign a medium rating to this criterion for all projects seeking New Starts funds. FTA uses either estimated ridership or the change in vehicle miles traveled resulting from a transit project as part of the calculation for mobility improvements, environmental benefits, and cost-effectiveness. As discussed above, the calculation for the congestion relief criterion is not yet defined. Transit ridership can be generated in a number of ways. Riders can approach a transit station by car and park at the station, a feeder bus system, or by walking from transit-oriented development or other location near transit. These ridership forecasts may take into account growth in population and employment in the region. While transit-oriented development may be part of the reason for this growth, growth could also come from broader development in the region. Benefits and high ratings for these criteria could be driven by transit-oriented development, but could also be driven by more auto-oriented uses. While FTA evaluates many of the factors or local policies that we identified that support or hinder transit-oriented development, there are inherent limitations in the extent to which some factors can be fully evaluated. For example, local officials and a developer told us that the strength of the real estate market is critical for transit-oriented development. FTA evaluates real estate market conditions as part of the economic development criterion; however, real estate markets for residential, retail, and office space are cyclical and the life cycle of a transit project planning spans many years into the future. Market conditions could change significantly between FTA’s assessment and the beginning of transit operations. According to a transit official, FTA evaluations are based on a snapshot of a specific moment in time that may not necessarily be predictive of future economic or political cycles. Similarly, development patterns and acceptance for dense, urban living may be influenced by cultural factors that influence local resident support for transit-oriented development. Factors such as Houston’s “car culture” and housing preferences of millennials can be challenging to quantify and evaluate. Among our case studies that were assessed for New Starts funding, we found that the amount of transit-oriented development realized—and the factors that local stakeholders told us supported or hindered transit- oriented development—are generally consistent with FTA’s pre- construction evaluation and rating of factors related to transit-oriented development. For example, we included two light-rail projects as case studies that FTA assessed as high or medium-high for land use and economic development. Both the Charlotte South Corridor light rail and the Third Street light rail in San Francisco were rated highly for transit- supportive land use.projects are now surrounded by several new transit-oriented developments (see figs. 4 and 6). For the Charlotte South Corridor light rail project, in support of the medium-high rating, FTA cited local policies such as the regional centers and corridors’ growth strategy, the transit overlay district, and the 2025 Integrated Land Use/Transit plan. In addition, FTA noted that changes to policies and zoning in the South End neighborhood had led to new buildings’ being built. We observed other transit-oriented development activity, such as new residential and retail establishments oriented towards the light rail (see fig. 10). Among projects we visited, the actual ridership performance of the transit lines when compared to ridership expectations or historical ridership varies. Our case studies provide several examples where ridership has grown over time. For example, when the Columbia Heights Metrorail station in Washington, DC, opened in 1999, several vacant or underutilized lots surrounded it. Ridership at the station in 2000—the first full year it was open—averaged about 4,000 riders per day. Since 2000, many new developments were constructed on the vacant or underutilized lots near the Columbia Heights station. Over the past 10 years, ridership has grown about 93% to more than 12,000 riders per day. The percentage gain in ridership for Columbia Heights has exceeded percentage gains for the other five Green Line stations that also opened in 1999 or 2001. Of the four stations in this group located in Prince George’s county—where local officials told us there has been little or no development—three have lost ridership in the past 10 years (see fig. 11). Similarly, in Charlotte, the projected opening-year average ridership for the Charlotte Light Rail system was about 9,100 riders per day. In 2008, the first full year of operations for the system, ridership averaged 11,678 per weekday, exceeding the opening-year ridership target by about 2,500 riders (28%). As development has occurred along the line, ridership has grown 30% to more than 15,000 riders per average weekday. Other projects, particularly those projects that have not been surrounded by new development, are generally not on track to meet the ridership forecasts specified in the New Stats project’s documentation, specifically: Ridership on the Houston North Corridor light rail averaged about 4,500 passengers per weekday from February to July 2014,than one-third of the expected opening year ridership of 17,400. (see fig. 12). The Baltimore Central Corridor light-rail system attracted an average of 26,647 riders per weekday in 2013. The ridership forecast for 2020 is 44,000 riders per average weekday (see fig. 12). Average weekday ridership at stations built as part of the West Tasman Light Rail Extension in Santa Clara County was 3,125 from July 2012 through January 2013. The ridership forecast for this segment was estimated to be 7,500 by 2005. (see fig. 12). In San Francisco, ridership on the T-Third Light Rail is also below expectations despite the new development project that has been built in Mission Bay. For operating purposes, the T-Third is actually part of the K Ingleside/T-Third Route that runs through downtown San Francisco and into another part of the city. San Francisco Municipal Transportation Agency does not break out ridership on the T-Third, but estimated that in fiscal year 2013 the entire route had about 34,000 riders per average weekday. This is short of the more than 80,000 daily boardings estimated for 2015 during the preliminary engineering phase of the project. However, the average weekday ridership at the nearby San Francisco Caltrain rail station has increased by 58 percent from February 2007 to February 2014. We provided DOT with a draft of this report for review and comment. In its comments DOT stated that the report highlights the multiple challenges faced by local governments in guiding development around transit. DOT reiterated FTA’s long-standing commitment to encourage local land use actions near major transit capital investment. DOT also stated that authorizing statutes have increased the prominence of land use and economic development for the FTA’s Capital Investment Grant evaluation process and that FTA has long believed transit supportive land use plans and policies indicate good regional planning. We are sending copies of this report to interested congressional committees and the Secretary of the Department of Transportation. In addition, this report will be available at no charge on GAO’s website at http://www.gao.gov. If you or your staff have any questions or would like to discuss this work, please contact me at (202) 512-2834 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. Individuals making key contributions to this report are listed in appendix II. In this we report we identify: (1) the extent to which transit-oriented development has occurred near select transit lines that received federal funds and which factors or local government policies support transit- oriented development and which factors hinder transit-oriented development, and (2) the extent to which FTA considers factors related to the potential for transit-oriented development when assessing proposed projects, and the extent to which FTA’s assessment of these factors is consistent with the factors that local stakeholders told us affect project’s results. To respond to both of our objectives, we selected six transit lines that received federal funds to serve as illustrative case studies. We selected these cases based on the existence of previously implemented and planned or in-construction federally funded transit lines in the same city or county; diversity in the existence of state and local programs and grants supportive of transit-oriented development; diversity in the current strength of the local real estate market; and geographical breadth. The results of these six case studies are not generalizable to all federally funded transit lines. While we focused on a specific transit line in each city, we discussed the greater city’s experience with transit and transit- oriented development with local officials to provide context for our cases. The case studies we selected were: Central Corridor Light Rail in Baltimore, MD; South Corridor Light Rail in Charlotte, NC; North Corridor Light Rail in Houston; TX; Third Street Light Rail, Phase 1 in San Francisco, CA; Tasman West Light Rail Extension in Santa Clara County, CA; and Green Line Metrorail Extensions in Washington, DC, and Prince George’s County, MD. To determine the extent to which transit-oriented development has occurred near these transit projects, we analyzed local land-use data, physically observed development, if any, along these transit lines, and interviewed local planning officials, developers, and other local stakeholders. To identify factors that support or hinder transit-oriented development, we conducted site visits to all of the transit lines and some nearby transit-oriented developments and interviewed a variety of stakeholders. In total, we interviewed with 66 different stakeholders including: twenty-six planning officials from eight local and regional planning entities, sixteen transit officials from eight local and regional transit agencies, fifteen representatives from both national and local-interest non-profit and research organizations with knowledge of transit-oriented development, and nine developers from seven different firms. To identify policies that local governments can use to support transit- oriented development, we reviewed state and local planning regulations, and analyzed relevant land use and transit ridership data from 2005 to 2014. Finally, we reviewed literature on transit-oriented development published within the past 5 years as well as our past reports related to FTA’s Capital Investment Grant Program and transit-oriented development. We assessed the reliability of the land use and by reviewing relevant documentation and either discussing reliability with agency officials or comparing data to corroborating information. We assessed the reliability of transit ridership data by reviewing documentation on the methods used to collect and maintain the data. We deemed the data on land use and transit ridership we collected reliable for the purposes of this report. To determine the extent to which FTA considers factors related to potential transit-oriented development when assessing proposed projects, we reviewed and analyzed relevant laws including Moving Ahead for Progress in the 21st Century Act (MAP-21) and the preceding funding authorization laws. We also reviewed FTA’s Annual Report on Funding Recommendations and New Starts policy guidance. For projects that were assessed for New Starts funding, to determine the extent to which FTA’s assessment is consistent with future land use changes, if any, we reviewed FTA’s project assessments and materials used to support project recommendations. We then compared these assessments with information gathered from our site visits. To determine the extent to which these projects have met ridership projections included in the information provided for New Starts funding assessment, we gathered ridership data from transit agencies and compared this data to the original ridership forecasts. We also interviewed FTA officials. We conducted this performance audit from February 2014 through November 2014 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. In addition to the contact named above, John W. Shumann (Assistant Director); Melissa J. Bodeau; Mark Braza; Leia Dickerson; Kathleen Donovan; Terence Lam; Matthew LaTour; Hannah Laufe; Cheryl Peterson; and Kelly Rubin contributed to this report. | From 2004 to 2014, FTA allocated $18.9 billion to build new or expanded transit systems through the Capital Investment Grant program. One of the key goals for many local governments when planning major capital-transit projects is to encourage transit-oriented development as a way to focus future regional population growth along transit corridors. Transit-oriented development is generally described as a compact and “walkable” neighborhood near transit with a mix of residential and commercial uses. GAO was asked to examine transit-oriented development. This report addresses (1) the extent to which transit-oriented development has occurred near select transit lines that received federal funds and the factors and local policies that affect transit-oriented development, and (2) the extent to which FTA considers factors related to the potential for transit-oriented development when assessing proposed projects and the extent to which FTA's assessment of these factors is consistent with the factors that local stakeholders told GAO affect a project's results. To address these issues, GAO reviewed relevant literature and visited six federally funded case study transit projects in Baltimore, MD; Washington, DC; Charlotte, NC; Santa Clara County, CA; San Francisco, CA; and Houston, TX, selected for diversity in local programs, markets, and geography. During these visits, GAO met with stakeholders, such as local officials and developers. GAO also interviewed FTA officials. In commenting on a draft of this report, DOT noted FTA's long-standing commitment to encourage transit-oriented development. GAO found a wide range in the extent of new transit-oriented development that has occurred since transit operations began for GAO's six federally funded case-study transit projects. There are many examples of new transit-oriented development in San Francisco, CA; Washington, DC; and Charlotte, NC, that local officials attribute—at least in part—to transit in the area. However, in other cities GAO visited, local officials said that there has been very little development around transit stations—or that development took as long as 10 years. Stakeholders in these cities attributed transit-oriented development, or lack thereof, near the projects selected to the influence of several factors, including: conditions that support transit-oriented development, such as demand for nearby real estate, land available to develop, residents' support, and a transit system that provides a direct and efficient connection to jobs; challenges that hinder transit-oriented development, such as high associated costs, difficulty in obtaining financing, a difficult local-government review and approval process, an unsupportive local population, and a physical configuration around transit stations unattractive for development; and local government policies that support transit-oriented development, such as supportive zoning, planning, infrastructure investments, and tax incentives. The Federal Transit Administration (FTA) assesses projects for potential New Starts funding by evaluating several of the factors and local government policies GAO identified as supporting transit-oriented development on a five-point scale ranging from low to high. FTA evaluates access to jobs, available land, and transit-supportive plans and polices—among other things—in assessing each project for economic development and land use, which are two evaluation criteria FTA uses to determine whether a project will be funded. Among four case study projects GAO visited that were assessed by FTA for New Starts, two scored medium-high or better, while two scored medium-low or lower. GAO found that many of the factors or local government policies that supported or hindered transit-oriented development are generally consistent with FTA's summary assessment for economic development and land use. Further, GAO found two projects where transit-oriented development resulted in increased ridership, while projects with less transit-oriented development have fewer riders than expected. |
Under NCLBA, SES primarily includes tutoring provided outside of the regular school day that is designed to increase the academic achievement of economically disadvantaged students in low-performing Title I schools. These services must consist of high-quality, research-based instruction that aligns with state educational standards and district curriculum. Title I of ESEA, as amended and reauthorized by NCLBA, authorizes federal funds to help elementary and secondary schools establish and maintain programs that will improve the educational opportunities of economically disadvantaged children. Title I is the largest federal program supporting education in kindergarten through 12th grade, supplying $12.7 billion in federal funds in fiscal year 2006. According to Education, during the 2005-06 school year, nearly all U.S. school districts and approximately half of public schools received some Title I funding. In addition, the latest national data available from Education counted 16.5 million students as Title I participants in the 2002-2003 school year. Title I funds are distributed by formula to state education agencies, which retain a share for administration and school improvement activities before passing most of the funds on to school districts. Districts are required to distribute Title I funds first to schools with poverty rates over 75 percent, with any remaining funds distributed at their discretion to schools in rank order of poverty either districtwide or within grade spans. A school’s Title I status can change from year to year because school enrollment numbers and demographics may vary over time. Enactment of NCLBA strengthened accountability by requiring states and schools to improve the academic performance of their students so that all students are proficient in reading and math by 2014. Under NCLBA, each state creates its own content standards, academic achievement tests, and proficiency levels. In 2005-2006, states were required to test all children for reading and mathematics achievement annually in grades 3-8 and once in high school to determine whether schools are making adequate yearly progress (AYP). In addition to meeting the state’s performance goals by grade, subject, and overall student population, schools are responsible for meeting those goals for designated groups. These groups are students who (1) are economically disadvantaged, (2) are part of a racial or ethnic group that represents a significant proportion of a school’s student population, (3) have disabilities, or (4) have limited English proficiency. To make AYP, each school must also show that each of these groups met the state proficiency goals for both reading and math. In addition, schools must show that at least 95 percent of students in grades required to take the test have done so. Schools must also demonstrate that they have met state targets for at least one other academic indicator, including graduation rate in high schools and a state-selected measure in elementary or middle schools. For Title I schools that do not meet state AYP goals, NCLBA requires the implementation of specific interventions, and these interventions must continue until the school has met AYP for 2 consecutive years. Table 1 outlines the interventions applied after each year a Title I school misses state performance goals. At their discretion, states may also implement interventions for public schools that do not receive Title I funds and do not make AYP. Although districts are not required to offer SES until a Title I school has missed performance goals for 3 years, because some schools had not met state goals set under ESEA before the enactment of NCLBA, some Title I schools were first required to offer SES in 2002-2003, the first year of NCLBA implementation. States are also required to establish and implement AYP standards for school districts based on the performance of all of the schools in the district. If districts fail to meet these standards for 2 consecutive years, states may classify districts as needing improvement. A district identified for improvement must develop and implement an improvement plan and remain in this status until it meets AYP standards for 2 consecutive years. If a district remains in improvement status for 2 or more years, it may be identified for corrective action as deemed necessary by the state. Students are eligible for SES if they attend Title I schools that have missed AYP for 3 consecutive years and are from low-income families. School districts must determine family income on the same basis they use to make allocations to schools under Title I, for which many have historically used National School Lunch Program (NSLP) data. The NSLP is a federally funded program that annually collects family income data from students’ parents to determine student eligibility for free and reduced-priced lunch. A student’s state assessment scores, grades, and other academic achievement information are generally not considered when determining SES eligibility. However, if sufficient funds are not available to provide SES to all eligible children, school districts must give priority to the lowest-achieving eligible students. SES providers may include nonprofit entities, for-profit entities, school districts, public schools, public charter schools, private schools, public or private institutions of higher education, educational service agencies, and faith-based organizations. Under the Title I regulations that govern SES, a district identified as in need of improvement or corrective action may not be an SES provider, though its schools that are not identified as needing improvement may. In addition, individual teachers who work in a school or district identified as in need of improvement may be hired by any state- approved provider to serve as a tutor in its program. A district must set aside an amount equal to 20 percent of its Title I allocation to fund both SES and transportation for students who elect to attend other schools under school choice. This set-aside cannot be spent on administrative costs for these activities, and the district may reallocate any unused set-aside funds to other Title I activities after ensuring all eligible students have had adequate time to opt to transfer to another school or apply for SES. Funding available for SES is, therefore, somewhat dependent on costs for choice-related transportation, though as we found in our 2004 report on NCLBA’s school choice provisions, few students are participating in the school choice option. If a district does not incur any choice-related transportation costs, it must use the full 20 percent set- aside amount to pay for SES if sufficient demand for services exists. In addition, if the Title I set-aside is not sufficient to fund SES for interested students, both states and districts may direct other funds for these services at their discretion. For each student receiving SES, a district must spend an amount equal to its Title I per-pupil allocation or the actual cost of provider services, whichever is less. Education oversees SES implementation by monitoring states and providing technical assistance and support. OII leads SES policy development and coordinates the publication of SES guidance, and OESE oversees and monitors Title I, including SES. NCLBA and the Title I regulations and SES guidance outline the roles and responsibilities states, school districts, parents, and service providers have in ensuring that eligible students receive additional academic assistance through SES (see table 2). During the 2005-2006 school year, Education announced the implementation of two pilot programs intended to increase the number of eligible students receiving SES and generate additional information about the effectiveness of SES on students’ academic achievement. In the first, Education permitted four districts in Virginia to offer SES instead of school choice in schools that are in their first year of needs improvement. In the second, Education entered into flexibility agreements with the Boston and Chicago school districts, enabling them to act as SES providers while in improvement status. OII and OESE coordinated implementation of the pilots for the department. Both pilots were subject to review at the end of the 2005-2006 school year, at which time Education planned to evaluate their effect on student academic achievement. SES participation increased between 2003-2004 and 2004-2005, and most students receiving services were among the lower achieving students in school. Districts have taken multiple actions to encourage participation, such as offering services on or near the school campus or at various times. Despite these efforts, challenges to increasing participation remain, including notifying parents in a timely and effective manner, ensuring there are providers to serve certain areas and students, and encouraging student attendance. Nationally, the participation rate increased substantially from 12 percent of eligible students receiving SES in 2003-2004 to 19 percent in 2004-2005. In addition, the number of students receiving services almost quadrupled between 2002-2003 and 2004-2005 from approximately 117,000 to 430,000 students nationwide, based on the best available national data (see fig. 1). This increase may be due in part to the increase in the number of schools required to offer SES over that time period. Specifically, between 2004- 2005 and 2005-2006 the number of schools required to offer SES increased from an estimated 4,509 to 6,584. Although nationally SES participation is increasing, some districts required to offer SES have no students receiving services. Specifically, we estimate that no students received services in about 20 percent of the approximately 1,000 districts required to offer SES in 2004-2005. A majority of these districts were rural or had a total enrollment of fewer than 2,500 students. Our survey did not provide sufficient information to explain why these districts had no students receiving services in 2004- 2005; therefore, it is unclear whether their lack of participation was related to district SES implementation or other issues. Nationwide, we estimate that districts required to offer SES spent the equivalent of 5 percent of their total Title I funds for SES in 2004-2005 excluding administrative expenditures. Districts set aside an amount equal to 20 percent of their Title I funds for SES and choice-related transportation at the beginning of the school year, and the proportion of the set-aside spent on SES varied by district. Specifically, in 2004-2005, about 40 percent of districts spent 20 percent or less of the set-aside to provide SES and almost one-fifth of districts spent over 80 percent. Nationwide, of the total amount districts set-aside for SES, we estimate they spent 42 percent on SES, excluding administrative expenditures. Further, an estimated 16 percent of districts reported that the required Title I set-aside was not sufficient to fund SES for all eligible students whose parents requested services. For example, during our site visit to Newark, N.J., district officials reported budgeting the entire 20 percent Title I set-aside to fund SES in 2004-2005, but with this amount of funding, the district was only able to fund SES for 17 percent of the students eligible for services. In addition, according to Chicago, Ill., district officials, the district budgeted the entire 20 percent Title I set-aside to fund SES in 2005-2006, and because parents’ demand for services significantly exceeded the amount of funding available, the district also allocated $5 million in local funds to provide SES. While approximately 1,000 of the over 14,000 districts nationwide were required to offer SES in 2004-2005, SES recipients are concentrated in a small group of large districts, as 56 percent of recipients attended school in the 21 districts required to offer SES with more than 100,000 total enrolled students (see fig. 2). Further, states ranged from having 0 districts to 257 districts required to offer SES in 2004-2005, with most states having fewer than 10 districts required to offer SES. State differences in the number of districts required to offer SES may have resulted from differences in performance or differences in state proficiency standards and methods used to measure adequate yearly progress. Students receiving SES in 2004-2005 shared certain characteristics, as districts reported that most students receiving services were among the lower achieving students in school. Specifically, an estimated 91 percent of the districts that reviewed the academic records of students receiving SES classified most or all of the students receiving SES as academically low achieving. For example, Hamilton County, Tenn., school officials said that students receiving SES are frequently behind grade level in their skills and require special attention to increase their academic achievement. Further, we estimate that over half of SES recipients were elementary school students in the majority of districts and about 60 percent of schools required to offer SES in 2004-2005 were elementary schools. Districts varied in the percentage of students with limited English proficiency receiving services. In about one-third of districts, less than 5 percent of SES recipients were students with limited English proficiency; however, in about one-fifth of districts, over half of SES recipients were students with limited English proficiency. Students with disabilities made up less than 20 percent of students receiving services in about two-thirds of districts. Finally, in some districts, the majority of SES recipients were African- American or Hispanic. In about 40 percent of districts, over half of SES recipients were African-American, and in about 30 percent of districts, over half of SES recipients were Hispanic. Because we were unable to obtain comparable data on the characteristics of Title I students enrolled in these districts in 2004-2005, we were unable to determine whether certain groups of students were underserved. We estimate that about 2,800 providers delivered services to students nationwide in 2004-2005, and more providers were available to deliver services in the districts with the largest student enrollments. Specifically, about 80 percent of districts had between 1 and 5 providers delivering services in 2004-2005. However, the number of providers delivering services in the 21 districts with more than 100,000 total enrolled students ranged from 4 to 45, and averaged 15 providers per district in 2004-2005. Districts have taken multiple actions to encourage participation, as shown in table 3. In line with the federal statutory requirement that districts notify parents in an understandable format of the availability of SES, over 90 percent of districts provided written information in English, held individual meetings with parents, and encouraged school staff to talk with parents about SES. Some districts collaborated with providers to notify parents. For example, during our site visit, Illinois state officials described a provider and district sharing administrative resources to increase participation, which involved the provider printing promotional materials and the district addressing and mailing the materials to parents. In addition, we estimate that over 70 percent of districts lengthened the period of time for parents to turn in SES applications, held informational events for parents to learn about providers, and provided written information to parents in languages other than English. During our site visit to Woodburn, Ore., district officials reported extending the time parents had to sign up their children for SES and hosting an event where providers presented their programs to parents in English and Spanish. Further, Newark, N.J., district officials told us during our site visit that the district provided transportation for parents to attend informational events to increase participation. Also to encourage participation, an estimated 90 percent of districts offered services at locations easily accessible to students, such as on or near the school campus, and almost 80 percent of districts offered services at a variety of times, such as before and after school or on weekends. For example, Hamilton County, Tenn., worked with providers to offer an early morning tutoring program located at the school site in addition to providing services after school. Providers also reported delivering SES on school campuses and at various times. Specifically, over three-fourths of the 22 providers we interviewed reported delivering services at the school site, although providers also offered services off-site, such as in the home, online, or at the provider’s facility. In addition, providers generally delivered SES after school and some also offered SES at alternative times, such as before school, on weekends, or during the summer. Finally, about one-third of districts provided or arranged for transportation for participating students or worked with a local community partner to raise awareness of the services. For example, in Newark, N.J., the district worked with a local community organization to inform parents and students living in public housing and homeless shelters about SES. States also reported taking actions to increase participation in 2005-2006, as shown in table 4. Regarding parent notification, all states encouraged district staff to communicate with parents about SES. In addition, almost 90 percent of states provided guidance to districts on the use of school campuses for service delivery to encourage participation. Despite some districts’ promising approaches to encourage participation, notifying parents in a timely manner remains a challenge for some districts. An estimated 58 percent of districts did not notify parents that their children may be eligible to receive SES before the beginning of the 2005-2006 school year, which may be due in part to delays in states reporting which schools were identified for improvement. Specifically, about half of districts that did not notify parents before the beginning of the 2005-2006 school year did not receive notification from the state of the schools identified for improvement by that time. Moreover, district officials in three of the states we visited experienced delays in receiving school improvement information, and state officials agreed that providing timely information about whether schools have met state performance goals has been a challenge. Almost all of the districts that did not notify parents before the beginning of the 2005-2006 school year did so within the first 2 months of the year. Effectively notifying parents is also a challenge for some districts. For example, officials in all four districts we visited reported difficulties contacting parents to inform them about SES in part because some families frequently move and do not always update their mailing address with districts. In addition, some providers we interviewed indicated that confusing parental notification letters do not effectively encourage SES participation. For example, some of the providers we interviewed said some districts use confusing and poorly written letters to inform parents of SES or send letters to parents of eligible children but conduct no further outreach to encourage participation in SES. Four of the providers we interviewed also indicated that complicated district enrollment processes can discourage participation. For example, one provider said certain districts send parents multiple documents to complete in order for their child to receive SES, such as an enrollment form to select an SES provider and a separate contract and learning plan. Another challenge to increasing SES participation is attracting more SES providers for certain areas. Some rural districts surveyed indicated that no students received services last year because of a lack of providers in the area. We estimate that the availability of transportation for students attending supplemental services was a moderate, great or very great challenge for about half of rural districts. For example, one rural district commented in our survey that there are no approved providers within 200 miles of its schools. A few other rural districts commented in our survey that it was difficult to attract providers to their area because there were few students to serve or providers had trouble finding staff to serve as tutors. In addition, ensuring there are providers to serve students with limited English proficiency or disabilities has been a challenge for some districts. There were not enough providers to meet the needs of students with limited English proficiency in an estimated one-third of districts, and not enough providers to meet the needs of students with disabilities in an estimated one-quarter of districts. Many states also indicated that the number of providers available to serve these groups of students was inadequate. While over half of the providers we interviewed reported serving students with limited English proficiency or disabilities, some providers served these students on a limited basis and reported difficulties meeting their needs. For example, one provider reported serving few students with limited English proficiency and disabilities because the amount of funding the provider receives for SES was not sufficient to pay for specialized tutors to serve these students. Another provider said it was difficult to find tutors to meet the needs of students with limited English proficiency and its program was not designed for students with disabilities. Another provider said that it was difficult to serve students with disabilities because it required significantly modifying the tutoring lessons to meet their needs. Encouraging student attendance has also been a challenge, in part because students may participate in other afterschool activities, such as sports or work. Low parent and student demand for SES has been a challenge in about two-thirds of districts. For example, about one-quarter of districts reported that both competition from other afterschool programs and the availability of services that are engaging to students were challenges to implementing SES. In addition, providers, district and school officials in all four districts we visited told us that SES is competing for students with extracurricular and other activities. For example, a Chicago, Ill., high school official indicated that student attendance at SES sessions declined significantly as the school year progressed. To address this problem, providers sometimes offer students incentives for participation. For example, while 2 of the 22 providers we interviewed offered incentives for students to sign up for services, 19 providers used incentives to encourage student attendance, such as school supplies and gift certificates. To promote improved student academic achievement, providers aligned their curriculum with district instruction primarily by hiring district teachers and communicating with the teachers of participating students. Providers reported communicating with teachers and parents in person as well as mailing information and progress reports to them; however, districts indicated the extent of provider efforts varied, as some did not contact teachers and parents in 2004-2005. In addition, both providers and districts experienced contracting and coordination difficulties. In part because SES is often delivered in school facilities, providers and officials in the districts and schools we visited reported that involvement of school administrators and teachers can improve SES delivery and coordination. In order to increase student academic achievement, providers took steps to align their curriculum with school instruction by hiring and communicating with teachers, though the extent of their efforts varied. A majority of the 22 providers we interviewed hired certified teachers in the district as tutors. Some providers said hiring district teachers promoted curriculum alignment, in part because district teachers were apt to draw on district curriculum during tutoring sessions. School officials in three of our site visits also said providers’ use of district teachers as tutors helped to align the tutoring program with what the student learned in the classroom. In addition, some providers reported aligning curriculum by communicating with the teachers of participating students to identify student needs and discuss progress. The frequency of contact between tutors and teachers ranged from mailing teachers information once prior to the beginning of the program to contacting teachers at least weekly, according to the providers we interviewed. A few providers also used other methods to align their curriculum with district instruction, such as using the same tests to evaluate student progress and allowing principals to choose components of the tutoring curriculum for students receiving SES in their schools. However, not all providers worked with schools to align curriculum, as we estimate that some, most, or all providers did not contact teachers to align curriculum with school instruction in almost 40 percent of districts in 2004-2005. For example, Woodburn, Ore., district and school officials indicated during our site visit that instead of aligning their services with the district curriculum, certain providers openly questioned the district’s curriculum and teaching methods, which caused confusion among some parents and students. Providers reported mailing information as well as meeting with parents over the phone and in-person to communicate about student needs and progress; however, the frequency of communication with parents varied by provider. A majority of the providers we interviewed communicated with parents about student progress repeatedly, sometimes by sending home progress reports on a monthly basis or holding parent-tutor conferences. The frequency of contact between tutors and parents reported by the 22 providers we interviewed ranged from meeting with parents twice during the tutoring program to giving parents a weekly progress report. A few providers also reported communicating with parents by holding workshops for parents to learn about the SES program and in some cases having the parents sign their students’ learning plans. For example, one provider conducted workshops where parents received reading materials to share with their children and a parent guide in English and Spanish that explained the program and how to use the materials to enhance student learning. Some providers also reported hiring staff dedicated in part to maintaining communication with parents. However, some providers faced difficulties when communicating with parents about SES, such as language barriers or incorrect contact information. Districts confirmed that the degree to which providers communicated with parents varied, as we estimate that some, most, or all providers did not contact parents to discuss student needs and progress in about 30 percent of districts in 2004-2005. Despite these challenges, most districts had positive relationships with providers. Specifically, an estimated 90 percent of districts indicated that their working relationships with providers during 2004-2005 were good, very good, or excellent. In addition, many of the providers we interviewed during our site visits also reported having positive working relationships with district officials. Although other studies have found that districts reported certain difficulties working with providers, relatively few districts reported that their providers signed up ineligible students or billed for services not performed in 2004-2005, as shown in figure 3. Generally, states did not hear about these provider issues very often. Almost half of states said the issue of providers not showing up for SES sessions was rarely brought to their attention. Similarly, half of states said the issue of providers billing the district for services not performed was rarely brought to their attention. In addition, about 40 percent of states said the issue of providers using excessive incentives was rarely brought to their attention. Further, about 40 percent of states said the issue of providers signing up ineligible students rarely arose. Almost one-third of states heard about each of these issues sometimes, while few states had these issues brought to their attention very often. For example, during our site visits, state officials provided examples of issues that had been brought to their attention regarding provider practices, but these issues were often isolated incidents particular to one or a few providers in certain districts. While providers have taken steps to deliver quality services, both providers and districts reported experiencing difficulties during the contracting process. For example, some of the providers we interviewed said certain districts imposed burdensome contract requirements, such as requiring substantial documentation to be submitted with invoices, limiting the marketing they could do to parents and students, or restricting the use of school facilities to deliver services. Specifically, 7 of the 22 providers we interviewed experienced difficulties with districts restricting provider access to school facilities, by for example, not allowing providers to deliver services in school buildings or by charging providers substantial fees to do so. A few providers also said contracting with districts was a resource-intensive process, in part because contract requirements vary by district and state. Some of the multi-state providers we interviewed reported dedicating a team of staff to help them finalize and manage contracts with districts. These providers commented that, while they have the administrative capacity to manage this process, smaller providers may not have such capacity. In addition, one provider that delivered services exclusively online commented that contracting with districts across the country was a challenge, particularly because some states and districts require provider representatives to attend meetings in-person and be fingerprinted in their states. Contracting with providers was also a challenge for some districts. Specifically, negotiating contracts with providers was a moderate, great, or very great challenge in about 40 percent of districts nationwide. For example, Woodburn, Ore., district officials described having contractual discussions with providers around whether the district would charge fees for the use of school facilities, the types of incentives providers could use to encourage students to sign up, and whether the district would pay for services when students did not attend SES sessions. While states may review and define program design parameters as part of the provider approval process, district officials in three of our site visits expressed concern about their lack of authority to set parameters in provider contracts around costs and program design, such as tutor-to-student ratios and total hours of instruction. For example, during our site visit, a Hamilton County, Tenn., district official expressed frustration with providers that charged the maximum per-pupil amount but varied in the level of services provided, such as the number of instructional hours and tutor-to-student ratio. Chicago, Ill., district officials also expressed concern about the variation among providers in the hours of instruction and cost of services because the district does not have sufficient funds to serve all eligible students and officials would like to maximize the number of students they can serve. In part to help address district concerns, in 2005-2006, Illinois required approved providers to submit information on the cost of providing services in each of the districts they served and made this information available to districts and the public in order to improve transparency and accountability. While Tennessee state officials told us they were hesitant to set restrictions on providers and would like more federal direction on this issue, other states have set restrictions on the cost and design of SES programs. For example, Georgia set a maximum tutor-to-student ratio of 1:8 for non-computer based instruction and 1:10 for computer based instruction, and New Mexico adopted a sliding fee scale based on the educational level of tutors. Coordination of service delivery has also been a challenge for providers, districts, and schools. About 70 percent of states reported that the level of coordination between providers, districts, and schools implementing SES was a moderate to very great challenge. Sometimes these coordination difficulties have resulted in service delays. For example, services were delayed or withdrawn in three of the districts we visited because not enough students signed up to meet the providers’ enrollment targets and districts were not aware of these targets. In one district we visited, services were delayed because school teachers hired to be tutors did not provide evidence of their background checks and teaching certificates to providers in a timely manner. Coordination difficulties also occurred during the enrollment process. Though districts are responsible for arranging SES for eligible students, in two districts we visited, both the district and providers sent parents enrollment forms, which caused confusion among parents as well as additional work for the district staff processing the forms. In addition, a few providers told us they do not know how many students they will serve until enrollment forms are returned to district officials, which hinders planning and may delay services since they do not know how many tutors they will need to hire and train to deliver SES in each district. In part because SES can be delivered in school facilities, providers and officials in the districts and schools we visited reported that involvement of school administrators and other staff improves SES implementation. Although schools do not have federally-defined responsibilities for administering SES, many officials said SES implementation is hindered when school officials are not involved. Some providers we interviewed said that a lack of involvement of school principals can make it difficult for them to coordinate with schools to encourage student participation. In addition, a few providers said certain districts contributed to this problem by restricting communication with school officials or not defining a role for schools in SES implementation. Officials in one of the districts we visited also told us that encouraging participation and administering the program was more difficult when they did not designate school staff to assist the district with SES implementation. School officials from all four of our site visits also said the lack of a clear role for school officials, including principals, in administering SES has been a challenge. For example, Illinois and Oregon school principals told us they found it difficult to manage afterschool activities because they didn’t have sufficient authority to oversee SES tutors operating in their buildings at that time. Further, problems can arise when school officials are not fully informed about the SES program. For example, Woodburn, Ore., school officials told us that although the school was not provided SES tutoring schedules for students, parents and students have come to school officials for help when they were unclear about the schedule or when tutors failed to show up. A majority of the providers we interviewed told us that involvement of school principals can improve participation and make it easier to deliver services, in part because principals are familiar with the students and manage school staff. For example, certain providers reported providing principals with information about the tutoring program so that school staff can assist with the enrollment process, involving principals in selecting the curriculum used in their schools, and sending principals student progress reports. In addition, all four districts we visited had school site coordinators to assist with SES, such as helping with the enrollment process and assisting with the day-to-day administration of the SES program in the schools. For example, Woodburn, Ore., district officials told us implementation improved when the district designated school site coordinators to assist with parental notification and events where providers present their programs, and meet with parents and providers to help them complete individual student learning plans. A few providers we interviewed also assigned a staff person at the school site to communicate with teachers and parents. While helping to administer the SES program adds additional administrative burden on schools, school officials in all four of the districts we visited said they welcomed a stronger or more clearly defined role. While state monitoring of SES had been limited, more states reported taking steps to monitor both district and provider efforts to implement SES in 2005-2006. In addition, districts have taken a direct role in monitoring providers, and their monitoring activities similarly increased during this time. Although states are required to withdraw approval from providers that fail to increase student academic achievement for 2 years, many states reported challenges evaluating SES providers. In addition, the few states that have completed an evaluation have not yet produced reports that provided a conclusive assessment of SES providers’ effect on student academic achievement. State monitoring of district SES implementation, which is sometimes performed as part of state Title I monitoring, had been limited prior to 2005-2006, though more states reported conducting on-site reviews of districts in that year. While less than one-third of states conducted on-site reviews of districts to monitor their implementation of SES in 2004-2005, almost three-fourths reported conducting such reviews in 2005-2006. This increase reflects both those states that had already begun monitoring district SES implementation for 2005-2006 at the time of our survey and those states planning to conduct monitoring activities before the end of that school year. Because our data were collected during the middle of the 2005-2006 school year, we do not know whether all of the states that planned to complete these activities before the end of the year did so. In both years, a majority of the states that conducted on-site reviews visited few or some of their districts. Therefore, while more states reported conducting such reviews in 2005-2006 than in 2004-2005, the number of districts per state receiving reviews does not appear to have increased. In addition to on-site reviews, many states also reported reviewing information collected from several other sources to assess district SES implementation in 2005-2006. The most common source used by states was district officials, as almost all states reported reviewing or planning to review information collected from district officials to monitor their implementation of SES in 2005-2006. Further, many states were also collecting information from school principals, parents, and providers to monitor districts, with between 67 and 81 percent of states reviewing or planning to review information collected from these sources in 2005-2006. States also reported reviewing or planning to review information related to several aspects of district SES implementation in 2005-2006. For example, almost all states reported reviewing district notification of parents and SES expenditures, as shown in figure 4. States we visited reported that some districts have had difficulties implementing SES, in part because of district staff capacity limitations and the complexities of administering SES at the local level. When states find that a district is having difficulty implementing SES, most hold a meeting with the district and provide or arrange for assistance, including consultations or training. Half of the states also develop an action plan and time line with the district to help improve its efforts. During our site visits, state officials reported that notifying parents, maintaining a fair and competitive environment for providers, ensuring providers understand their SES roles and responsibilities, and determining an appropriate role for schools continue to challenge some districts as they implement SES. Although states and districts reported increasing their efforts to monitor SES providers between 2004-2005 and 2005-2006, over two-thirds of states reported that on-site monitoring of providers has been a challenge. In addition, several districts commented in our survey that more provider monitoring is needed. During all four of our site visits, state and district officials expressed concerns about their capacity to fully administer and oversee all required aspects of SES implementation, including provider monitoring. Officials explained that state and district capacity to implement SES is limited, because there is typically one staff person at each level coordinating all of SES, and sometimes that person may also oversee implementation of additional federal education programs. Further, several states commented in our survey that additional training, technical assistance, and national monitoring protocols from the federal government would assist their efforts to monitor providers. During our site visits, state officials noted that while they did not initially have structured plans or procedures in place to monitor SES providers, they took steps to develop and formalize procedures starting with the 2004-2005 and 2005-2006 school years. Nationally, in 2004-2005, states monitored providers primarily by collecting data from district officials, though many states reported using a more active monitoring approach in the next year. For example, while less than one-third of states conducted on-site reviews of providers in 2004-2005, over three-fourths had conducted or planned to conduct such reviews in 2005-2006, as shown in figure 5. In addition, while one-third or fewer states reviewed information collected from school staff, parents, and students in 2004-2005, the percentage that reported reviewing or planning to review information collected from these sources more than doubled the next year. Similar to 2004-2005, many states continued to rely on information collected from district officials to monitor providers in 2005-2006, with almost all states reviewing or planning to review information collected from districts in that year. Federal guidance suggests states may request district assistance in collecting data from providers to assist state monitoring activities. While the state is ultimately responsible for monitoring providers, most states reported that districts have taken a direct role in monitoring providers. Similar to states, although district monitoring of providers was limited in 2004-2005, districts used a more extensive and active approach in the next year, as shown in figure 6. For example, while we estimate that less than half of districts collected information from on-site reviews, school staff, parents, and students to monitor providers in 2004-2005, 70 percent or more were collecting or planning to collect information from these sources in 2005-2006. Although states and districts collected information from similar sources to monitor providers, districts collected information from more providers than states. Specifically, while a majority of the states that conducted on- site reviews observed only some or few providers, we estimate that a majority of districts that conducted on-site reviews observed most or all of their providers in 2004-2005. While states and districts may both have capacity limitations that affect their ability to conduct on-site reviews to monitor providers, conducting such reviews is likely easier for districts because services are often delivered on or near school campuses. States and districts collected information on several aspects of SES programs to monitor providers, as shown in table 5. While federal regulations provide states flexibility to design their own SES monitoring systems, over two-thirds or more of states and districts monitored or planned to monitor all program elements listed, including those related to service delivery and use of funds. For example, 94 percent of states monitored or planned to monitor parent or student satisfaction with providers, and 93 percent of districts monitored or planned to monitor billing and payment for services and student attendance records. Many states struggle to develop evaluations to determine whether SES providers are improving student achievement, though states are required to evaluate and withdraw approval from providers that fail to do so after 2 years. Specifically, federal law requires states to develop standards and techniques to evaluate the services delivered by approved providers, but it does not require states to use specific evaluation methods or criteria for determining provider effectiveness. Through our survey, states reported several challenges to evaluating SES providers. Specifically, over three-fourths of states reported that determining sufficient academic progress of students, having the time and knowledge to analyze SES data, and developing data systems to track SES information have been challenges. Further, during our site visits to Illinois and New Jersey, state officials noted they were currently in the process of improving their data collection systems to more effectively capture and analyze data for SES evaluations. In addition, several state officials reported that while they have collected some information to assess provider effectiveness, they have done little with that data. Others noted that they have not received sufficient federal guidance on effective models for SES provider evaluations, and because developing and implementing such evaluations can be both time-consuming and costly, additional assistance from Education would improve their efforts. At the time of our survey in early 2006, only a few states had drafted or completed an evaluation report addressing individual SES provider’s effects on student academic achievement, and we found that no state had produced a report that provided a conclusive assessment of this effect. New Mexico and Tennessee were the only two states that had completed final or draft SES evaluation reports that attempted to assess the impact of all SES providers serving students in their states in previous years. To measure student academic achievement, New Mexico’s report analyzed students’ grades as well as their scores on state assessments and provider assessments, which often differ by provider and are administered both before SES sessions begin and at the end of SES sessions each year. However, the report noted that these assessments produced different results related to student academic achievement gains. While Tennessee also planned to review students’ state assessment scores, the draft available at the time of our analysis did not include this information. In addition, both reports drew on information obtained through other sources, such as teacher surveys, to assess provider effectiveness. Due to their limitations, neither evaluation provided a conclusive assessment of SES providers’ effect on student academic achievement. In addition, at the time of our survey, over half of the states reported that they were in the process of conducting an evaluation of SES providers in order to meet the federal requirement of assessing each provider’s effect on student academic achievement. Similar to the state evaluations already undertaken, officials reported using different methods and criteria to evaluate SES providers. For example, some states were collecting each provider’s pre- and post-SES assessments of students while others were collecting student achievement data from districts or students’ state assessment scores. Further, while one state defined adequate student progress as 80 percent of a provider’s students making one-grade level of improvement after a year of SES, another state defined adequate student progress as 50 percent or more of a provider’s students having any positive academic achievement gain after a year of SES. While these states have yet to produce final results from their SES provider evaluations, it is unclear whether any of these efforts will produce a conclusive assessment of SES providers’ effect on student academic achievement. Likely because states are struggling to complete evaluations to assess SES providers’ effect on student academic achievement, states did not report that they have withdrawn approval from providers because their programs were determined to be ineffective at achieving this goal. Rather, though over 40 percent of states reported that they had withdrawn approval from some providers, they most frequently reported withdrawing provider approval because the provider was a school or district that had entered needs improvement status, the provider asked to be removed from the state-approved provider list, or because of provider financial impropriety. Several offices within Education monitor various aspects of SES activity across the country and provide support, but states and districts reported needing additional assistance and flexibility with program implementation. Education conducts SES monitoring in part through policy oversight and compliance reviews of states and districts, and provides SES support through guidance, grants, research, and technical assistance. However, many states and districts reported needing additional assistance and guidance regarding evaluation and administration of SES. Further, some states and districts voiced interest in expansion of Education’s pilot programs that increase SES flexibility, including the pilot that allows certain low-achieving districts to serve as SES providers. OII and OESE are primarily responsible for monitoring and supporting state and district SES implementation, and other Education offices also contribute to these efforts (see fig. 7). OII, which leads SES policy development and provides strategic direction, monitors SES policy issues primarily through what it calls “desk monitoring.” This monitoring is performed at its federal office and includes the review of SES-related research and media reports. OII also conducts more intensive monitoring of specific SES implementation challenges when states, districts, and providers bring them to Education’s attention and keeps a log documenting these issues. For example, during 2004-2005, Illinois and New Jersey officials contacted OII to clarify guidance regarding providers affiliated with districts in need of improvement, and OII staff provided assistance and clarification. In addition, several providers we interviewed also mentioned that they have contacted OII directly to discuss implementation challenges associated with enrollment, district contracts, and provider access to school facilities. OESE, which oversees and supports NCLBA implementation, is also involved in monitoring SES implementation through its overall monitoring of state compliance with Title I and NCLBA. To monitor Title I, OESE staff visit state departments of education and selected districts within each state to interview officials and review relevant documents. Once the review is complete, OESE issues a report to the state outlining any instances of Title I non-compliance, including those related to SES, and actions needed to comply with regulations. As of June 2006, OESE had visited and issued reports to over three-fourths of the states. In addition to its Title I monitoring, OESE also oversees the collection of state NCLBA data, including data on SES, through the annual Consolidated State Performance Report (CSPR). For the CSPR, each state is required to report the number of schools with students receiving SES, the number of students eligible for services, and the number that received services. However, although almost all states reported that they are collecting information on district SES expenditures as part of their oversight, Education does not require states to submit information on the percent or amount of Title I funds districts spent for SES through the CSPR or other means. Therefore, while Education tracks the extent to which states are providing SES to eligible students, the department does not collect data on the relative costs of serving them. Further, under NCLBA, Education is required to present an annual summary of the CSPR data to Congress. As of June 2006, the most recent report to Congress was for the 2002-2003 school year, though Education officials indicated they expect to submit reports for 2003-2004 and 2004-2005 in the near future. While OII and OESE monitoring of SES has been either limited to desk monitoring or combined with general Title I monitoring, OIG has conducted audits specifically focused on SES. During 2003-2004 and 2004- 2005, the office performed a series of SES implementation audits in six states, which involved site visits to state offices and selected districts within each state. Also during 2004-2005, OIG performed audits of five California districts and one SES provider within each district. These audits included an examination of district SES contracts with providers, provider services, and provider compliance with state SES regulations. Several Education officials reported coordinating internally to share information, including SES monitoring results. To facilitate coordination, OII leads an internal group comprised of staff members from other Education offices, who meet bi-weekly to exchange information. OESE shares its state Title I monitoring results and CSPR data with other Education offices. In addition, OIG makes recommendations to both OII and OESE in its state and district SES auditing reports and disseminates the reports throughout Education and on the department’s Web site. Since 2002, OII has coordinated the publication of four versions of non-regulatory SES guidance, each updated to address ongoing challenges with SES implementation. The latest and most comprehensive version of non-regulatory SES guidance was published in June 2005. In May 2006, Education issued a separate supplement to the guidance containing additional information on private school participation in providing SES and a policy letter clarifying the definition of a district-affiliated provider. In addition to its monitoring efforts, OII also provides SES implementation assistance, in part through presentations at conferences, and through grants to external organizations that assist states and districts. For example, OII staff have presented information on SES policy and promising practices at national meetings attended by SES coordinators and others involved in SES implementation. In addition, the office has issued grants to the Black Alliance for Educational Options, the Hispanic Council for Reform and Educational Options, and through the Star Schools Program to promote SES to minority students and those in rural areas. Further, OII funded the Supplemental Educational Services Quality Center (SESQC), which offered SES technical assistance through tool-kits, issue briefs, and a Web site containing SES information for state and district officials, schools, parents, and providers. SESQC also periodically convened representatives of organizations working on education issues to discuss SES national coordination, challenges, and promising practices. However, those meetings and all SESQC activities were discontinued in December 2005 when SESQC’s grant period ended. Other Education offices also provide SES support through various means. For example, OESE funded the Comprehensive Centers Program through grants that established technical assistance centers across the country to help low-performing schools and districts close achievement gaps and meet the goals of NCLBA. Of these, the Center on Innovation and Improvement provides support to regional centers that assist states with Education’s programs, including SES. In addition, Education’s Policy and Program Studies Service, within the Office of Planning, Evaluation and Policy Development, oversees several research studies that examine SES, either in whole or in part. These reports, such as the National Assessment of Title I: Interim Report and Case Studies of Supplemental Services under the No Child Left Behind Act, provide states and districts with information on SES implementation, challenges, and promising practices. Further, Education’s Center for Faith-Based and Community Initiatives offers technical assistance to faith- and community-based organizations interested in becoming state-approved SES providers. Given the technical assistance and support Education has already provided to states and districts for implementation of SES and school choice, and the department’s view that implementation of these provisions has been uneven throughout the country, in May 2006, Education issued a policy letter announcing the department’s plans to take significant enforcement action. Specifically, Education plans to use the data collected through its monitoring and evaluation efforts to take enforcement actions such as placing conditions on state Title I grants, withholding federal funds, or entering into compliance agreements. In the letter, the department noted that its various monitoring activities have identified several areas of noncompliance with SES requirements. For example, the OIG’s audits found that each of the six states reviewed failed to adequately monitor their districts for compliance. Consequently, nearly all of the parental notification letters reviewed failed to include the required key components, and several districts failed to budget sufficient funding for services. Through our own analysis of Education’s monitoring reports, we also found that some of the states reviewed were found to have inadequate or incomplete processes for monitoring and evaluating SES providers. Despite Education’s efforts, many states and districts reported needing more information and assistance to better comply with certain aspects of SES implementation, including SES evaluation (see table 6). Specifically, 85 percent of states and an estimated 70 percent of districts needed additional assistance with methods for evaluating SES, and over 60 percent also needed assistance with developing data systems. Many districts also needed more information on provider quality and effectiveness. Although OESE and OIG monitoring results have also continually indicated that states and districts struggle with SES evaluation, Education has yet to provide comprehensive assistance in this area, and during our site visits, officials mentioned that they have been relying on other states, organizations, or individuals for evaluation assistance. States and districts also indicated a need for more support and technical assistance to help them administer SES. Specifically, approximately three-fourths of states and two-thirds of districts reported needing funding to increase their capacity to implement SES. Many states also reported needing tool kits and model/sample documents, as well as training from Education, and a majority of districts needed effective parent outreach strategies. Further, most states reported a need for conferences or meetings where they could share lessons learned and promising practices with other states. A few Tennessee officials mentioned that conferences hosted by national organizations have been an effective means of allowing SES officials to gather and share knowledge. While three-fourths of states reported that the most recent version of Education’s SES guidance, published in June 2005, has been very or extremely useful, several states commented through our survey that they needed additional or clearer guidance on certain SES provisions. This included guidance on managing SES costs and fees, implementing SES in rural areas, and handling provider complaints. During three of our site visits, officials also expressed some concern about the lack of clarity in the SES guidance with regards to student eligibility requirements and how to craft a parental SES notification letter that is both complete and easy for parents to understand. Regarding parental notification letters, though both OESE and OIG found many states and districts to be non-compliant with the federal requirement that district SES parental notification letters include several specific elements, Education’s SES guidance, which is coordinated by OII, provides a sample that does not clearly specify all of the key elements required by SES law and regulations. For example, the sample letter does not include information on provider services, qualifications, and effectiveness. Furthermore, a few state and district officials commented that, when followed, the Title I regulations governing SES yield a letter that is unreasonably long and complex, which may be difficult for parents to understand. Many states and districts expressed interest in the flexibility offered through two pilot programs that Education implemented during 2005-2006. The department designed these pilots to increase the number of eligible students receiving SES and to generate additional information about the effect of SES on student academic achievement. For example, several state and district SES coordinators expressed interest in Education’s pilot program that allowed two districts in needs improvement status to act as SES providers in exchange for their expansion of student access to SES providers and collection of achievement data to determine SES program effectiveness. During three of our four site visits, state and district officials expressed concern that districts identified for needs improvement are excluded from delivering SES, and one state official noted that removing districts from the state approved provider list may result in lower SES participation. Further, in our surveys, three state SES coordinators and 17 district SES coordinators wrote in comments that permitting districts in needs improvement status to provide services would assist their efforts. Through both our surveys and site visits, officials suggested that allowing districts to act as providers may ease student access to SES for rural districts that do not have providers located nearby, allow more students to participate in SES because district costs to provide services are sometimes lower than other providers’ costs, and enable districts to continue their existing tutoring programs that they feel are effective and meet the same goals as SES. Overall, we estimate that 15 percent of districts were state- approved providers in 2004-2005. However, another national survey recently found the percentage of urban and suburban districts that are state-approved SES providers is declining. The other SES pilot allowed four districts in Virginia to offer SES instead of school choice in schools that have missed state performance goals for 2 years and are in their first year of needs improvement. During our site visits and through our surveys, many states and districts expressed interest in adjusting the order of the SES and school choice interventions. Specifically, half of states and over 60 percent of districts suggested that SES should be made available before school choice (see table 7). Further, approximately three-quarters of both states and districts indicated that SES should be offered either before or simultaneously with choice. As we found through our previous work on school choice, few students are opting to transfer schools in the first year of needs improvement, and therefore this change would provide students with another option to receive additional academic support in that year. Further, in a recent national study, district and school officials noted that parents and students are often not interested in changing schools, in part because of potential long commutes and satisfaction with their current schools, which suggests that parents and students would likely prefer to receive SES in their own schools and neighborhoods rather than school choice. In line with interest in increased flexibility with these interventions, in May 2006, Education announced that due to the positive results in Virginia districts under the pilot, the department plans to extend and expand this pilot in 2006-2007. Over the last few years, almost all states and approximately 1,000 districts have been required to implement SES across the country and, if current trends continue, more schools will be required to offer services in the future. Although some states and districts are beginning to gain experience in implementing SES and use promising approaches to increase SES participation, many students are still not receiving services, in part because providers are sometimes not available to serve certain areas and groups. In addition, some districts are unsure how to involve school officials in facilitating local coordination of SES implementation and providing effective parental notification. While Education has provided support to states and districts through guidance and technical assistance, many report needing additional assistance to address these challenges. Further, the lack of clarity between policy guidance issued by OII and criteria used by OESE in their compliance reviews of states’ implementation efforts creates additional challenges in meeting the federal requirements for parental notification letters. Providing states with clear guidance that has been coordinated across Education offices is especially important now that the department has announced plans to take significant enforcement actions to ensure states comply with federal SES requirements. While some districts do not have any students receiving services and, therefore, are not spending any Title I funds for SES, other districts are spending more than their entire set-aside and still have students on waiting lists to receive services. Two districts have been able to participate in Education’s pilot program waiving federal regulations that preclude districts in need of improvement from providing SES, which may help them provide services to more students at a lower cost. However, extending this flexibility to more districts depends on the evaluation of the quality of these services to determine if SES is having a positive impact on student academic achievement. In addition, the absence of strategies that states can use to set parameters around program design and costs further hinders their ability to stretch available funding to serve more students. Federal and state oversight of district efficiency in using federal funds to provide SES services is hindered by incomplete reporting requirements that require states to report on the number of eligible children receiving SES, but not the data they collect on the amount of Title I funding used to serve them. This information gap limits Education’s ability to track state and district compliance in spending funds for SES. Further, Education’s ability to ensure that federal dollars are effectively spent to improve student academic achievement is limited until states increase their capacity to monitor and evaluate provider performance. In the absence of additional federal technical assistance and access to information about state and district promising practices, some states may continue to struggle with implementation and evaluation of SES. To help states and districts implement SES more effectively, we recommend that the Secretary of Education use the department’s Web site and the Center on Innovation and Improvement, as well as other means of communication, to: Provide federal guidance on SES parental notification letters that is clear and has been coordinated internally between OII and OESE to provide additional assistance to states and districts to help them comply with federal requirements and ensure that letters are easy for parents to understand. Education might consider providing several samples of actual district notification letters that meet these criteria. Collect and disseminate information on promising practices used by states to attract more providers for certain areas and groups and promising practices used by districts to improve parental notification of SES services and providers’ ability to serve specific groups of students and to encourage student attendance. Provide examples of how districts can involve schools and school officials to facilitate local coordination with providers. To improve states’ and districts’ ability to make the most of funding for SES and provide services to the maximum number of students, we recommend that the Secretary of Education: Consider expanding the 2005-2006 pilot that allowed two districts in need of improvement to enter into flexibility agreements to serve as SES providers if evaluation results show that these districts can provide quality SES services. Clarify what states can do through the provider approval process to set parameters around program design and costs. For example, Education could issue guidance to states that clarifies their authority to set parameters on issues such as minimum hours of SES per student, minimum tutor qualifications, and cost ranges. In addition, Education could suggest to states that they coordinate these discussions with districts to address their concerns about program design and costs. To improve federal and state monitoring of SES, we recommend that the Secretary of Education: Require states to report information necessary to determine the amount of funds spent by districts to provide SES and the percentage of their Title I allocations that this amount represents. Because almost all states reported that they are planning to monitor district SES expenditures, Education could require the states to submit these data through the annual NCLBA Consolidated State Performance Reports. Provide states with technical assistance and guidance on how to evaluate the effect of SES on student academic achievement. For example, Education might require the Center on Innovation and Improvement to focus its SES assistance on providing states with suggested evaluation methods, measures to assess the impact of SES on achievement, and criteria for using this information to monitor and withdraw state approval from providers. Further, lessons learned and promising practices on evaluation could also be shared with states on the Center on Innovation and Improvement’s Web site or during national or regional meetings, trainings, or conferences. We provided a draft of this report to Education for review and comment. Educations’ written comments are reprinted in appendix II, and the department's technical comments were incorporated into the report as appropriate. In its written comments, Education expressed appreciation for the report’s recommendations and cited actions the department has already initiated or plans to take in addressing them. Specifically, Education noted several projects under development that might assist in carrying out our recommendations to provide more assistance to states on notifying parents, attracting providers for certain areas and groups, and involving schools. The department also said that is currently considering expanding the pilot allowing districts in need of improvement to apply to become SES providers, per our recommendation. Regarding our recommendation that Education clarify what states can do to set parameters around program design and costs, Education said it would consider addressing this issue further in the next set of revisions to the SES non-regulatory guidance. In addition, Education said it would address our recommendations to improve federal and state monitoring of SES by proposing that districts report on their SES spending and by providing more SES evaluation assistance to states through an updated issue brief as well as technical assistance provided by the Comprehensive Center on Innovation and Improvement and at a conference this fall. We are sending copies of this report to appropriate congressional committees, the Secretary of Education, and other interested parties. Copies will also be made available upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. If you or your staff have any questions about the report, please contact me at (202) 512-7215. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix III. To obtain nationally representative information on supplemental educational services (SES) participation, state and local implementation, and federal oversight, we conducted a Web-based survey of state SES coordinators and a mail survey of district SES coordinators from a nationally representative sample of districts with schools required to offer SES. We also conducted site visits during which we interviewed state, district, and school officials representing four school districts, and we conducted interviews with 22 SES providers both during the site visits and separately. In addition, we spoke with staff at Education involved in SES oversight and implementation and reviewed Education’s data on SES. We conducted our work from August 2005 through July 2006 in accordance with generally accepted government auditing standards. To better understand state SES implementation, particularly how states are monitoring and evaluating SES, we designed and administered a Web- based survey of state SES coordinators in all 50 states, the District of Columbia, and Puerto Rico. The survey was conducted between January and March 2006 with 100 percent of state SES coordinators responding. The survey included questions about student participation in SES, actions taken to increase participation, SES funding and expenditures, methods used to monitor and evaluate implementation, implementation challenges, and assistance received from Education. Because this was not a sample survey, there are no sampling errors. However, the practical difficulties of conducting any survey may introduce nonsampling errors, such as variations in how respondents interpret questions and their willingness to offer accurate responses. We took steps to minimize nonsampling errors, including pre-testing draft instruments and using a Web-based administration system. Specifically, during survey development, we pre-tested draft instruments with officials in Oregon, Maryland, and Washington between October and November 2005. In the pre-tests, we were generally interested in the clarity of the questions and the flow and layout of the survey. For example, we wanted to ensure definitions used in the surveys were clear and known to the respondents, categories provided in closed-ended questions were complete and exclusive, and the ordering of survey sections and the questions within each section was appropriate. On the basis of the pre-tests, the Web instrument underwent some slight revisions. A second step we took to minimize nonsampling errors was using a Web-based survey. By allowing respondents to enter their responses directly into an electronic instrument, this method automatically created a record for each respondent in a data file and eliminated the need for and the errors (and costs) associated with a manual data entry process. To further minimize errors, programs used to analyze the survey data and make estimations were independently verified to ensure the accuracy of this work. While we did not fully validate specific information that states reported through our survey, we took several steps to ensure that the information was sufficiently reliable for the purposes of this report. For example, after the survey was closed, we made comparisons between select items from our survey data and other national-level data sets. We found our survey data were reasonably consistent with the other data sets. On the basis of our checks, we believe our survey data are sufficient for the purposes of our work. To obtain national-level information on district implementation of SES, we administered a mail survey to a nationally representative sample of districts that had schools required to offer SES in school year 2004-2005. The survey was conducted between January and March 2006. To obtain the maximum number of responses to our survey, we sent a reminder postcard to nonrespondents approximately 1 week after the initial mailing of the survey instrument, a follow-up mailing with the full survey instrument to nonrespondents approximately 3 weeks after the initial mailing, and a second follow-up mailing with the full survey instrument approximately 4 weeks later. The survey included questions about student participation in SES, characteristics of students receiving SES, actions taken to increase participation, SES funding and expenditures, methods used to monitor and evaluate implementation, implementation challenges, and assistance received and still needed. The target population of 1,095 districts consisted of public school districts with at least one school in each of their jurisdictions required to provide SES in the 2004-2005 school year. To define our population, we collected school improvement information from state education agency Web sites and the NCLBA Consolidated State Performance Reports: Part I for Reporting on School Year 2003-2004 that states submitted to Education. When available, we checked both sources for school improvement information and used the source that provided the most recently updated data, as this data is often updated by states over the course of the school year. After constructing our population of districts, we used Education’s Common Core of Data Local Education Agency (School District) preliminary file and the Public Elementary/Secondary School preliminary file for the 2003-2004 school year to further define the characteristics of our population. On the basis of our review of these data, we determined these sources to be adequate for the purposes of our work. The sample design for the mail survey was a stratified random sample of districts with one certainty stratum containing all of the districts with 100,000 students or more and one stratum containing all other districts in the universe. We included the 21 districts with 100,000 or more students with certainty in the sample to ensure we gathered information from the largest districts required to offer SES. We selected a simple random sample of districts in the non-certainty stratum and calculated the sample size to achieve a precision of plus and minus 7 percent at the 95 percent confidence level for an expected proportion of 50 percent. To ensure the sample sizes were adequate, we increased the sample size assuming we would obtain a 70 percent response rate. The total sample size for this stratum was 237 districts. In the sample, each district in the population had a known, nonzero probability of being selected. Each selected district was subsequently weighted in the analysis to account statistically for all the schools in the population, including those that were not selected. Table 8 provides a description of the universe and sample of districts. Because we surveyed a sample of districts, our results are estimates of a population of districts and thus are subject to sampling errors that are associated with samples of this size and type. Our confidence in the precisions of the results from this sample is expressed in 95 percent confidence intervals, which are expected to include the actual results in 95 percent of the samples of this type. We calculated confidence intervals for this sample based on methods that are appropriate for a stratified random sample. We determined that 10 of the sampled districts were out of scope because they did not have any schools required to provide SES in the 2004-2005 school year. All estimates produced from the sample and presented in this report are for the estimated target population of 1,034 districts with at least one school required to provide SES in the 2004-2005 school year. All percentage estimates included in this report have margins of error of plus or minus 8 percentage points or less, except for those shown in table 9. All other numerical estimates, such as the total number of schools required to offer SES in 2004-2005, included in this report have margins of error of plus or minus 18 percent or less. We took steps to minimize nonsampling errors that are not accounted for through statistical tests, like sampling errors. In developing the mail survey, we conducted several pretests of draft instruments. We pretested the survey instrument with district officials in Woodburn, Ore.; Tacoma, Wash.; Baltimore, Md.; and Alexandria, Va., between October and November 2005. These pre-tests were similar to the state Web survey pre- tests in design and content. On the basis of the pre-tests, the draft survey instrument underwent some slight revisions. While we did not fully validate specific information that districts reported through our survey, we took several steps to ensure that the information was sufficiently reliable for the purposes of this report. For example, data from the surveys were double-keyed to ensure data entry accuracy, and the information was analyzed using statistical software. After the survey was closed, we also made comparisons between select items from our survey data and other national-level data sets. We found our survey data were reasonably consistent with the external sources. On the basis of our checks, we believe our survey data are sufficient for the purposes of our work. We received survey responses from 73 percent of the 258 district Title I/SES coordinators in our sample. The response rate, adjusted for the known and estimated districts that were out of scope, was 77 percent. After the survey was closed, we analyzed the survey respondents to determine if there were any differences between the responding districts, the nonresponding districts, and the population. We performed this analysis for three characteristics—total number of students enrolled, total number of special education students, and total number of English language learner students. We determined whether sample-based estimates of these characteristics compared favorably with the known population values. The population value for all of the characteristics we examined fell within the 95 percent confidence intervals for the estimates from the survey respondents. On the basis of the 77 percent response rate and this analysis, we chose to include the survey results in our report and produce sample-based estimates to the population of districts required to provide SES in the 2004-2005 school year. To understand SES implementation at the local level, we conducted site visits to four districts between October 17, 2005, and February 16, 2006. The districts visited included Woodburn School District (Woodburn, Ore.), Hamilton County Schools (Chattanooga, Tenn.), Newark Public Schools (Newark, N.J.), and Chicago Public Schools (Chicago, Ill.). The four districts visited were selected because they had experience implementing SES in their schools and were recommended by stakeholders as having promising parent outreach and/or monitoring practices. When viewed as a group, the districts also provided variation across characteristics such as geographic location, district size, student ethnicity, and the percentage of students with limited English proficiency or disabilities. During the site visits, we interviewed state officials, including the state SES coordinator, and district officials, including the superintendent and SES coordinator. We also interviewed officials representing 12 schools, including principals and other school staff involved with SES. In total, we visited several schools of each level, from elementary to high, and though district officials selected the schools we visited, all of the schools had experience implementing SES. Through our interviews with state, district, and school officials, we collected information on district efforts to notify parents and fulfill implementation responsibilities, student participation, providers, local implementation challenges, and implementation assistance received and needed. During the visits, we also interviewed providers and observed tutoring sessions in order to better understand implementation. During our visit to Woodburn, Ore., we also observed a provider fair. In addition to our site visits to four districts, we also visited the Rhode Island Department of Elementary and Secondary Education in March 2006 to gather additional information on state efforts to monitor and evaluate SES. Rhode Island invited us to attend two meetings the state held with districts implementing SES and providers serving students in Rhode Island, during which SES challenges, ways to improve implementation, and state efforts to evaluate providers were discussed. In total, we conducted interviews with 22 providers, including 15 providers during the site visits and 7 providers operating in multiple states. The Education Industry Association assisted our efforts to contact multi-state providers, and most of the multi-state providers we interviewed were association members. Multi-state provider interviews were conducted between November and December 2005. Through all of our provider interviews, we collected information on provider efforts to increase participation in SES, align services with state standards and district curriculum, and communicate with parents and schools to ensure students are receiving needed services. We also collected information on students served, tutor and program characteristics, and provider challenges to SES implementation. While the providers we interviewed reflect some variety in provider characteristics, our selections were not intended to be representative. Thus, the findings from our interviews cannot be used to make inferences about all providers. We analyzed state data submitted to Education through the NCLBA Consolidated State Performance Reports (CSPR) for school years 2002- 2003, 2003-2004, and 2004-2005. State reports from all 3 years included the number of students receiving SES and the number of schools those students attended, and state reports from 2003-2004 and 2004-2005 also included the number of students eligible for SES. Data from the 2003-2004 CSPRs were used to assist our analysis of SES participation. To assess the reliability of the 2003-2004 data, we performed a series of tests, which included checking to ensure that data were consistent, that subtotals added to overall totals and that data provided for 1 year bore a reasonable relationship to the next year’s data and to data reported elsewhere, including state education reports. We also spoke with Education officials about their follow-up efforts to verify the data. At the time of our review, Education was in the process of completing efforts to verify the 2003-2004 data. While we compared the 2004-2005 CSPR data to data obtained through our state and district surveys to further verify our data, we generally did not use the 2004-2005 CSPR data for our analysis. During this comparison analysis, where we found discrepancies or sought clarification, we followed up with state officials. In several states, officials revised the numbers that they had initially reported to us or to Education. On the basis of our review of these data, we determined these sources to be adequate for the purposes of our work. We also considered SES-related findings from Education studies, including the Evaluation of Title I Accountability Systems and School Improvement Efforts: Findings From 2002-03 (2005) and the National Assessment of Title I: Interim Report (2006). To ensure the findings from these studies were generally reliable, we reviewed each study’s methodology, including data sources and analyses, limitations, and conclusions. In addition, in designing our state and district surveys, we reviewed SES-related survey questions used by Education in these studies. Cindy Ayers, Assistant Director, and Rachel Frisk, Analyst-in-Charge, managed this assignment and made significant contributions to all aspects of this report. Cathy Roark, Ted Burik, and David Perkins also made significant contributions. Kevin Jackson, Jean McSween, Jim Ashley, and Jerry Sandau provided methodological expertise and assistance; Rachael Valliere assisted with message and report development; and Rasheeda Curry made contributions during study design. In addition, Jessica Botsford assisted in the legal analysis. No Child Left Behind Act: Assistance from Education Could Help States Better Measure Progress of Students with Limited English Proficiency. GAO-06-815. Washington, D.C.: July 26, 2006. No Child Left Behind Act: States Face Challenges Measuring Academic Growth that Education’s Initiatives May Help Address. GAO-06-661. Washington, D.C.: July 17, 2006. No Child Left Behind Act: Most Students with Disabilities Participated in Statewide Assessments, but Inclusion Options Could Be Improved. GAO-05-618. Washington, D.C.: July 20, 2005. No Child Left Behind Act: Education Needs to Provide Additional Technical Assistance and Conduct Implementation Studies for School Choice Provision. GAO-05-7. Washington, D.C.: December 10, 2004. No Child Left Behind Act: Improvements Needed in Education’s Process for Tracking States’ Implementation of Key Provisions. GAO-04-734. Washington, D.C.: September 30, 2004. No Child Left Behind Act: Additional Assistance and Research on Effective Strategies Would Help Small Rural Districts. GAO-04-909. Washington, D.C.: September 23, 2004. Disadvantaged Students: Fiscal Oversight of Title I Could Be Improved. GAO-03-377. Washington, D.C.: February 28, 2003. Title I Funding: Poor Children Benefit Though Funding Per Poor Child Differs. GAO-02-242. Washington, D.C.: January 31, 2002. | The No Child Left Behind Act of 2001 (NCLBA) requires districts with schools that have not met state performance goals for 3 consecutive years to offer their low-income students supplemental educational services (SES), such as tutoring, if these schools receive Title I funds. SES are provided outside of the regular school day by a state-approved provider, with responsibility for implementation shared by states and districts. GAO examined (1) how SES participation changed between school years 2003-2004 and 2004-2005; (2) how SES providers are working with districts to deliver SES; (3) how states are monitoring and evaluating SES; and (4) how the Department of Education (Education) monitors and supports state implementation of SES. To collect data on SES, GAO surveyed all states and a nationally representative sample of districts with schools required to offer SES. We also visited 4 school districts, interviewed 22 SES providers, reviewed SES-related research, and interviewed Education staff. SES participation among eligible students increased from 12 to 19 percent between school years 2003-2004 and 2004-2005, and the number of recipients also increased, due in part to a rise in the number of schools required to offer services. Districts have used some promising practices to inform parents and encourage participation, such as offering services on school campuses and at various times. However, challenges remain, including timely and effective notification of parents and attracting providers to serve certain areas and students, such as rural districts or students with disabilities. To promote improved student academic achievement, SES providers took steps to align their curriculum with district instruction and communicate with teachers and parents, though the extent of their efforts varied. A majority of the 22 providers we interviewed worked to align SES and district curriculum by hiring teachers familiar with the district curriculum as tutors. However, at least some providers did not have any contact with teachers in about 40 percent of districts. Both providers and district officials experienced challenges related to contracting and coordination of service delivery. Providers, districts, and schools reported that greater involvement of schools would improve SES delivery and coordination, as it has in some places where this is occurring. While state monitoring of district and provider efforts to implement SES has been limited in past years, more states reported conducting on-site reviews and other monitoring activities during 2005-2006. In addition, districts have taken a direct role in monitoring providers, and their monitoring efforts have similarly increased. Although states are required to withdraw approval from providers that fail to increase student academic achievement for 2 years, many states struggle to develop meaningful SES evaluations. While a few states have completed evaluations, none provides a conclusive assessment of SES providers' effect on student academic achievement. Several Education offices monitor SES activity across the country and provide SES support to states and districts through written guidance, grants, and technical assistance. However, states and districts reported needing additional SES evaluation support and technical assistance. For example, 85 percent of states reported needing assistance with methods for evaluating SES. Many also voiced interest in Education's pilot programs that increase SES flexibility, including the one that allowed certain districts identified as in need of improvement to act as providers. |
In our June 2006 report, we found that DOD and VA had taken actions to facilitate the transition of medical and rehabilitative care for seriously injured servicemembers who were being transferred from MTFs to PRCs. For example, in April 2004, DOD and VA signed a memorandum of agreement that established referral procedures for transferring injured servicemembers from DOD to VA medical facilities. DOD and VA also established joint programs to facilitate the transfer to VA medical facilities, including a program that assigned VA social workers to selected MTFs to coordinate transfers. Despite these coordination efforts, we found that DOD and VA were having problems sharing the medical records VA needed to determine whether servicemembers’ medical conditions allowed participation in VA’s vigorous rehabilitation activities. DOD and VA reported that as of December 2005 two of the four PRCs had real-time access to the electronic medical records maintained at Walter Reed Army Medical Center and only one of the two also had access to the records at the National Naval Medical Center. In cases where medical records could not be accessed electronically, the MTF faxed copies of some medical information, such as the patient’s medical history and progress notes, to the PRC. Because this information did not always provide enough data for the PRC provider to determine if the servicemember was medically stable enough to be admitted to the PRC, VA developed a standardized list of the minimum types of health care information needed about each servicemember transferring to a PRC. Even with this information, PRC providers frequently needed additional information and had to ask for it specifically. For example, if the PRC provider notices that the servicemember is on a particular antibiotic therapy, the provider may request the results of the most recent blood and urine cultures to determine if the servicemember is medically stable enough to participate in strenuous rehabilitation activities. According to PRC officials, obtaining additional medical information in this way, rather than electronically, is very time consuming and often requires multiple phone calls and faxes. VA officials told us that the transfer could be more efficient if PRC medical personnel had real- time access to the servicemembers’ complete DOD electronic medical records from the referring MTFs. However, problems existed even for the two PRCs that had been granted electronic access. During a visit to those PRCs in April 2006, we found that neither facility could access the records at Walter Reed Army Medical Center because of technical difficulties. As discussed in our January 2005 report, the importance of early intervention for returning individuals with disabilities to the workforce is well documented in vocational rehabilitation literature. In 1996, we reported that early intervention significantly facilitates the return to work but that challenges exist in providing services early. For example, determining the best time to approach recently injured servicemembers and gauge their personal receptivity to considering employment in the civilian sector is inherently difficult. The nature of the recovery process is highly individualized and requires professional judgment to determine the appropriate time to begin vocational rehabilitation. Our 2007 High-Risk Series: An Update designates federal disability programs as “high risk” because they lack emphasis on the potential for vocational rehabilitation to return people to work. In our January 2005 report, we found that servicemembers whose disabilities are definitely or likely to result in military separation may not be able to benefit from early intervention because DOD and VA could work at cross purposes. In particular, DOD was concerned about the timing of VA’s outreach to servicemembers whose discharge from military service is not yet certain. DOD was concerned that VA’s efforts may conflict with the military’s retention goals. When servicemembers are treated as outpatients at a VA or military hospital, DOD generally begins to assess whether the servicemember will be able to remain in the military. This process can take months. For its part, VA took steps to make seriously injured servicemembers a high priority for all VA assistance. Noting the importance of early intervention, VA instructed its regional offices in 2003 to assign a case manager to each seriously injured servicemember who applies for disability compensation. VA had detailed staff to MTFs to provide information on all veterans’ benefits, including vocational rehabilitation, and reminded staff that they can initiate evaluation and counseling, and, in some cases, authorize training before a servicemember is discharged. While VA tries to prepare servicemembers for a transition to civilian life, VA’s outreach process may overlap with DOD’s process for evaluating servicemembers for a possible return to duty. In our report, we concluded that instead of working at cross purposes to DOD goals, VA’s early intervention efforts could facilitate servicemembers’ return to the same or a different military occupation, or to a civilian occupation if the servicemembers were not able to remain in the military. In this regard, the prospect for early intervention with vocational rehabilitation presents both a challenge and an opportunity for DOD and VA to collaborate to provide better outcomes for seriously injured servicemembers. In our May 2006 report, we described DOD’s efforts to identify and facilitate care for OEF/OIF servicemembers who may be at risk for PTSD. To identify such servicemembers, DOD uses a questionnaire, the DD 2796, to screen OEF/OIF servicemembers after their deployment outside of the United States has ended. The DD 2796 is used to assess servicemembers’ physical and mental health and includes four questions to identify those who may be at risk for developing PTSD. We reported that according to a clinical practice guideline jointly developed by DOD and VA, servicemembers who responded positively to at least three of the four PTSD screening questions may be at risk for developing PTSD. DOD health care providers review completed questionnaires, conduct face-to-face interviews with servicemembers, and use their clinical judgment in determining which servicemembers need referrals for further mental health evaluations. OEF/OIF servicemembers can obtain the mental health evaluations, as well as any necessary treatment for PTSD, while they are servicemembers—that is, on active duty—or when they transition to veteran status if they are discharged or released from active duty. Despite DOD’s efforts to identify OEF/OIF servicemembers who may need referrals for further mental health evaluations, we reported that DOD cannot provide reasonable assurance that OEF/OIF servicemembers who need the referrals receive them. Using data provided by DOD, we found that 22 percent, or 2,029, of the 9,145 OEF/OIF servicemembers in our review who may have been at risk for developing PTSD were referred by DOD health care providers for further mental health evaluations. Across the military service branches, DOD health care providers varied in the frequency with which they issued referrals to OEF/OIF servicemembers with three or more positive responses to the PTSD screening questions------ the Army referred 23 percent, the Air Force about 23 percent, the Navy 18 percent, and the Marines about 15 percent. According to DOD officials, not all of the OEF/OIF servicemembers with three or four positive responses on the screening questionnaire need referrals. As directed by DOD’s guidance for using the DD 2796, DOD health care providers are to rely on their clinical judgment to decide which of these servicemembers need further mental health evaluations. However, at the time of our review DOD had not identified the factors its health care providers used to determine which OEF/OIF servicemembers needed referrals. Knowing these factors could explain the variation in referral rates and allow DOD to provide reasonable assurance that such judgments are being exercised appropriately. We recommended that DOD identify the factors that DOD health care providers used in issuing referrals for further mental health evaluations to explain provider variation in issuing referrals. DOD concurred with the recommendation. Although OEF/OIF servicemembers may obtain mental health evaluations or treatment for PTSD through VA when they transition to veteran status, VA may face a challenge in meeting the demand for PTSD services. In September 2004 we reported that VA had intensified its efforts to inform new veterans from the Iraq and Afghanistan conflicts about the health care services—including treatment for PTSD—VA offers to eligible veterans. We observed that these efforts, along with expanded availability of VA health care services for Reserve and National Guard members, could result in an increased percentage of veterans from Iraq and Afghanistan seeking PTSD services through VA. However, at the time of our review officials at six of seven VA medical facilities we visited explained that while they were able to keep up with the current number of veterans seeking PTSD services, they may not be able to meet an increase in demand for these services. In addition, some of the officials expressed concern because facilities had been directed by VA to give veterans from the Iraq and Afghanistan conflicts priority appointments for health care services, including PTSD services. As a result, VA medical facility officials estimated that follow-up appointments for veterans receiving care for PTSD could be delayed. VA officials estimated the delays to be up to 90 days. As discussed in our April 2006 testimony, problems related to military pay have resulted in overpayments and debt for hundreds of sick and injured servicemembers. These pay problems resulted in significant frustration for the servicemembers and their families. We found that hundreds of battle-injured servicemembers were pursued for repayment of military debts through no fault of their own, including at least 74 servicemembers whose debts had been reported to credit bureaus and private collections agencies. In response to our audit, DOD officials said collection actions on these servicemembers’ debts had been suspended until a determination could be made as to whether these servicemembers’ debts were eligible for relief. Debt collection actions created additional hardships on servicemembers by preventing them from getting loans to buy houses or automobiles or pay off other debt, and sending several servicemembers into financial crisis. Some battle-injured servicemembers forfeited their final separation pay to cover part of their military debt, and they left the service with no funds to cover immediate expenses while facing collection actions on their remaining debt. We also found that sick and injured servicemembers sometimes went months without paychecks because debts caused by overpayments of combat pay and other errors were offset against their military pay. Furthermore, the longer it took DOD to stop the overpayments, the greater the amount of debt that accumulated for the servicemember and the greater the financial impact, since more money would eventually be withheld from the servicemember’s pay or sought through debt collection action after the servicemember had separated from the service. In our 2005 testimony about Army National Guard and Reserve servicemembers, we found that poorly defined requirements and processes for extending injured and ill reserve component servicemembers on active duty have caused servicemembers to be inappropriately dropped from active duty. For some, this has led to significant gaps in pay and health insurance, which has created financial hardships for these servicemembers and their families. Mr. Chairman, this completes my prepared remarks. I would be happy to respond to any questions you or other members of the subcommittee may have at this time. For further information about this testimony, please contact Cynthia A. Bascetta at (202) 512-7101 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this statement. Michael T. Blair, Jr., Assistant Director; Cynthia Forbes; Krister Friday; Roseanne Price; Cherie’ Starck; and Timothy Walker made key contributions to this statement. High-Risk Series: An Update. GAO-07-310. Washington, D.C.: January 2007. VA and DOD Health Care: Efforts to Provide Seamless Transition of Care for OEF and OIF Servicemembers and Veterans. GAO-06-794R. Washington, D.C.: June 30, 2006. Post-Traumatic Stress Disorder: DOD Needs to Identify the Factors Its Providers Use to Make Mental Health Evaluation Referrals for Servicemembers. GAO-06-397. Washington, D.C.: May 11, 2006. Military Pay: Military Debts Present Significant Hardships to Hundreds of Sick and Injured GWOT Soldiers. GAO-06-657T. Washington, D.C.: April 27, 2006. Military Disability System: Improved Oversight Needed to Ensure Consistent and Timely Outcomes for Reserve and Active Duty Service Members. GAO-06-362. Washington, D.C.: March 31, 2006. Military Pay: Gaps in Pay and Benefits Create Financial Hardships for Injured Army National Guard and Reserve Soldiers. GAO-05-322T. Washington, D.C.: February 17, 2005. Vocational Rehabilitation: More VA and DOD Collaboration Needed to Expedite Services for Seriously Injured Servicemembers. GAO-05-167. Washington, D.C.: January 14, 2005. VA and Defense Health Care: More Information Needed to Determine If VA Can Meet an Increase in Demand for Post-Traumatic Stress Disorder Services. GAO-04-1069. Washington, D.C.: September 20, 2004. SSA Disability: Return-to-Work Strategies from Other Systems May Improve Federal Programs. GAO/HEHS-96-133. Washington, D.C.: July 11, 1996. This is a work of the U.S. government and is not subject to copyright protection in the United States. It may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | As of March 1, 2007, over 24,000 servicemembers have been wounded in action since the onset of Operation Enduring Freedom (OEF) and Operation Iraqi Freedom (OIF), according to the Department of Defense (DOD). GAO work has shown that servicemembers injured in combat face an array of significant medical and financial challenges as they begin their recovery process in the health care systems of DOD and the Department of Veterans Affairs (VA). GAO was asked to discuss concerns regarding DOD and VA efforts to provide medical care and rehabilitative services for servicemembers who have been injured during OEF and OIF. This testimony addresses (1) the transition of care for seriously injured servicemembers who are transferred between DOD and VA medical facilities, (2) DOD's and VA's efforts to provide early intervention for rehabilitation for seriously injured servicemembers, (3) DOD's efforts to screen servicemembers at risk for post-traumatic stress disorder (PTSD) and whether VA can meet the demand for PTSD services, and (4) the impact of problems related to military pay on injured servicemembers and their families. This testimony is based on GAO work issued from 2004 through 2006 on the conditions facing OEF/OIF servicemembers at the time the audit work was completed. Despite coordinated efforts, DOD and VA have had problems sharing medical records for servicemembers transferred from DOD to VA medical facilities. GAO reported in 2006 that two VA facilities lacked real-time access to electronic medical records at DOD facilities. To obtain additional medical information, facilities exchanged information by means of a time-consuming process resulting in multiple faxes and phone calls. In 2005, GAO reported that VA and DOD collaboration is important for providing early intervention for rehabilitation. VA has taken steps to initiate early intervention efforts, which could facilitate servicemembers' return to duty or to a civilian occupation if the servicemembers were unable to remain in the military. However, according to DOD, VA's outreach process may overlap with DOD's process for evaluating servicemembers for a possible return to duty. DOD was also concerned that VA's efforts may conflict with the military's retention goals. In this regard, DOD and VA face both a challenge and an opportunity to collaborate to provide better outcomes for seriously injured servicemembers. DOD screens servicemembers for PTSD but, as GAO reported in 2006, it cannot ensure that further mental health evaluations occur. DOD health care providers review questionnaires, interview servicemembers, and use clinical judgment in determining the need for further mental health evaluations. However, GAO found that 22 percent of the OEF/OIF servicemembers in GAO's review who may have been at risk for developing PTSD were referred by DOD health care providers for further evaluations. According to DOD officials, not all of the servicemembers at risk will need referrals. However, at the time of GAO's review DOD had not identified the factors its health care providers used to determine which OEF/OIF servicemembers needed referrals. Although OEF/OIF servicemembers may obtain mental health evaluations or treatment for PTSD through VA, VA may face a challenge in meeting the demand for PTSD services. VA officials estimated that follow-up appointments for veterans receiving care for PTSD may be delayed up to 90 days. GAO's 2006 testimony pointed out problems related to military pay have resulted in debt and other hardships for hundreds of sick and injured servicemembers. Some servicemembers were pursued for repayment of military debts through no fault of their own. As a result, servicemembers have been reported to credit bureaus and private collections agencies, been prevented from getting loans, gone months without paychecks, and sent into financial crisis. In a 2005 testimony GAO reported that poorly defined requirements and processes for extending the active duty of injured and ill reserve component servicemembers have caused them to be inappropriately dropped from active duty, leading to significant gaps in pay and health insurance for some servicemembers and their families. |
IDT refund fraud occurs in the context of several inter-related issues: the vulnerability of personal information, thieves’ ability to exploit IRS’s current compliance model, and the attractiveness of IDT refund fraud as a target. Theft of Personal Information. To successfully commit IDT refund fraud, thieves must exploit various sources of information to steal or otherwise obtain individuals’ identities. According to an official in IRS’s Criminal Investigation division, the sources of stolen identities are limitless. The Department of Justice has prosecuted cases ranging from an employee stealing information from his employer to organized cyber attacks that infiltrate computer systems. Exploitation of IRS Compliance Checks. After obtaining personal information belonging to legitimate taxpayers (or to individuals who do not have a tax filing obligation), identity thieves use this information to file fraudulent tax returns claiming refunds. Identity thieves are often able to exploit what IRS officials call a “look back” compliance model: rather than holding refunds until all compliance checks can be completed, IRS issues refunds after doing some selected, automated reviews of taxpayer- submitted information (see text box). IRS is under pressure from taxpayers who expect to receive their refunds quickly.normally issues refunds before matching tax returns to third-party information returns (such as W-2 data). Examples of automated reviews used Matching name and Social Security number (SSN) Correcting obvious errors—such as mathematical mistakes or exceeding the statutory limits of deductions and credits. Attractiveness of IDT Refund Fraud. IDT refund fraud crimes often involve large criminal enterprises that exploit the speed and relative anonymity of preparing and filing tax returns. For this reason, they are difficult to prosecute, according to the Department of Justice. In light of the complexity and fluidity of this threat, IRS addressed refund fraud and IDT in its strategic plan, identifying both issues as major challenges facing the nation’s tax system over the next several years (see text box). IRS: Addressing the Threat of Refund Fraud and Identity Theft “Assuring the accuracy of refunds and the security of taxpayer data remain our priorities going forward. We are committed to stopping this threat to tax administration, protecting our government’s revenue and safeguarding the identity of all taxpayers. We must bolster our efforts to prevent refund fraud and identity theft before they happen.” The plan further states that IRS is committed to building a stronger identity authentication process that will enable secure, timely processing of tax returns and improve other service interactions. IRS has also identified several strategic objectives relevant to its efforts to combat identity theft, including balancing the speed of refund delivery with the need to verify taxpayers’ identities; and using third-party data, risk modeling, and a historical view of taxpayer interactions to prevent fraud before issuing refunds. Further, IRS has allocated more than 3,000 employees to combat IDT refund fraud, including assigning staff to help IDT victims resolve their accounts. The agency has also requested an additional $64.9 million in its fiscal year 2015 budget request for staffing and advanced technologies to support its continued IDT and refund fraud efforts. In addition to identifying IDT refund fraud as a major issue and requesting additional resources, IRS has developed a number of tools to address IDT refund fraud throughout the tax return filing process—and has done so amidst budget reductions and other challenges.IDT refund fraud includes efforts to authenticate taxpayer identities as well as several tools used to detect and prevent IDT refund fraud, as described below (see appendix II for more detail on these IDT refund fraud tools). IRS’s response to Authenticating Taxpayer Identities. IRS has enhanced its authentication efforts to combat IDT refund fraud. For example, IRS provides IP PINs to past IDT victims who have confirmed their identities with IRS. IP PINs help prevent future IDT refund fraud because, once issued, the IP PIN must accompany an electronically filed (e-file) tax return. In addition, IRS conducts authentication checks on returns flagged by IDT and fraud filters. If flagged, IRS stops processing the return and sends a letter asking the taxpayer to confirm his or her identity. IRS then confirms the taxpayer’s identity by asking for personal information, such as the taxpayer’s previous addresses, mortgage lender, and family members. Taxpayer Alerts. Often, IRS becomes aware of IDT refund fraud when a legitimate taxpayer alerts IRS of an inability to e-file. Specifically, in cases where an identity thief has already e-filed a return using the taxpayer’s name and Taxpayer Identification Number—such as an SSN—IRS’s e-file system will reject the second, duplicate return (top of figure 1), thus preventing the legitimate taxpayer from filing. IRS officials are aware when their e-file system rejects returns; however, they do not know if the rejections are due to IDT refund fraud unless further investigation is conducted. Information Return Matching. IRS also finds IDT refund fraud as part of the Automated Underreporter (AUR) program, which matches tax return data to information returns, such as the W-2. These information returns are provided by third parties such as employers, financial institutions, and others. In many cases, IRS does not receive the information returns until well after the tax return and refund are processed (bottom of figure 1). In these types of cases, the legitimate taxpayer may not be aware of a stolen identity until after receiving a notice indicating that the income (or payment information) IRS has on file does not match the information reported on the tax return. We previously found that these post-refund compliance checks can take a year or more to complete, which can be a burden to taxpayers who receive a notice. IRS officials acknowledge that the longer the delay between filing a tax return and receiving an IRS notice, the harder it can be for taxpayers to locate tax records or other information necessary to respond to IRS. Fraud Filters. IRS also uses IDT and other fraud filters to detect IDT refund fraud. These filters are computerized automatic checks that screen returns using characteristics that IRS has identified in previous IDT refund fraud schemes. The filters also search for clusters of returns with similar characteristics, such as the same bank account or address, which could indicate potential fraud. Two of the tax-administration systems employing filters are the Dependent Database (DDb) and Electronic Fraud Detection System (EFDS). (RRP) to replace EFDS. In April 2014, IRS began a pilot of one of RRP’s planned fraud detection capabilities focused on detecting IDT refund fraud (e.g., RRP’s IDT model).RRP’s IDT model on all returns in filing season 2015. Returns flagged by the RRP IDT model will go through the same process as returns flagged by other filters (as previously described). DDb incorporates IRS, Department of Health & Human Services, and Social Security Administration data to identify compliance issues involving IDT, refundable credits, and prisoners. EFDS is a system built in the mid-1990s to detect taxpayer fraud. According to IRS officials, a vital component in the agency’s strategy to identify IDT refund fraud is its Identity Theft Taxonomy (Taxonomy). This research-based effort has several objectives, including (1) providing information to internal and external stakeholders about the effectiveness of IRS’s IDT defenses, (2) helping IRS identify IDT trends and evolving risks, and (3) refining IDT filters to better detect potentially fraudulent returns while reducing the likelihood of flagging legitimate tax returns. Taxonomy Methodology. Consisting of a matrix of IDT refund fraud categories (see figure 2), IRS’s Taxonomy estimates the number of identified IDT refund fraud cases where IRS (1) prevented or recovered the fraudulent refunds (turquoise band), and (2) paid the fraudulent refunds (purple band). IRS breaks these estimates into six categories associated with IDT detection strategies. These strategies occur at three key points in the life cycle of a tax refund: before accepting a tax return, during return processing, and post refund. Taxonomy Categories. Estimates in categories 1-3 are based on IRS’s Refund Fraud & Identity Theft Global Report (Global Report), which consolidates IRS administrative records of known IDT refund fraud. Category 4 estimates are based on duplicate returns, where IRS has received both a fraudulent IDT return and a legitimate return. Category 5 estimates are based on cases identified as part of a criminal investigation or as part of the AUR program. To estimate the AUR portion of category 5, IRS developed assumptions based on its analysis of the characteristics of past IDT refund fraud; IRS then used these assumptions to identify which information return mismatches were likely IDT returns.represents undetected IDT returns. Current Taxonomy Estimates. Based upon its Taxonomy, IRS estimated that $30 billion in IDT refund fraud was attempted in filing season 2013 (see figure 3). Of this attempted amount of IDT refund fraud, IRS estimated that it prevented or recovered $24.2 billion (81 percent) of the estimated total. IRS also estimated it paid $5.8 billion (19 percent) in IDT refunds on 1 million IDT returns during the same time frame. Taxonomy estimates do not include the amount of IDT refund fraud from schemes IRS cannot detect (e.g., schemes that involve reported income that IRS cannot confirm during information return matching). In October 2014, the administration announced a plan to combat identity theft and further strengthen the security of personal identifying information The plan is intended to ensure that all maintained by the government.agencies making personal data accessible to citizens online will require the use of multiple authentication steps and will have an effective identity proofing process. National Security Council staff, the Office of Science and Technology Policy, and the Office of Management and Budget (OMB) are tasked with developing this plan by January 2015, and relevant agencies shall complete any required implementation steps set forth in this plan by April 2016. Therefore, while this plan may aid IRS in its efforts to prevent identity theft, any implementation of the plan at the agency level is still a few years away. By providing insight into how IDT refund fraud is evading IRS defenses, estimates inform IRS decision making about how to improve fraud filters and other detection efforts. Objective estimates may also inform congressional decision making about IRS resources. To ensure that IRS information reporting is objective, the agency developed information quality guidelines. Objectivity involves ensuring that information is reliable, accurate, and unbiased, as defined in OMB information quality guidelines.appropriate, supporting data should include full, accurate, transparent documentation, and should disclose error sources affecting data quality. Further, OMB quality guidelines state that, where We evaluated Taxonomy estimates against selected GAO Cost Estimating and Assessment Guide (GAO Cost Guide) best practices that (1) are related to OMB’s definition of objectivity, and (2) are applicable to the Taxonomy. These best practices are intended to ensure the reliability of estimates—a key component of OMB’s definition of objectivity. While IRS is not required to follow the GAO Cost Guide best practices, following such practices could help the agency meet OMB and IRS information quality guidelines and could improve the reliability of IDT refund fraud estimates. We assessed the extent to which IRS provided evidence that the Taxonomy met each best practice and assigned ratings based on a five-point scale (Met, Substantially met, Partially met, Minimally met, or Not met). See appendix I for details on how we conducted our assessment. As shown in table 1, the Taxonomy met several GAO Cost Guide best practices. IRS documented the Taxonomy’s source data, identified the methodology used to develop the estimate, and described how the estimate was developed. With regard to the calculation of Taxonomy estimates, our data reliability testing did not find calculation errors or other mistakes. After initial development of the Taxonomy in 2013, IRS made methodology improvements that resulted in more comprehensive Taxonomy estimates. For example, the agency included categories of duplicate IDT returns that had not been in filing season 2012 estimates. IRS made these methodology changes to enable comparison across filing seasons in future years, and to respond to our data reliability questions, according to officials. As a result, 2013 filing season estimates of “IDT refunds paid” increased by about $1 billion from an original estimate of $4.8 billion to a revised estimate of $5.8 billion (see table 2 for details). IRS officials have considered using surveys to develop a more comprehensive estimate of unidentified IDT refund fraud, but have not been able to develop a survey method that would avoid significant taxpayer burden and administrative costs. Accordingly, while IRS has made several methodology changes and refinements to improve Taxonomy estimates, it is unlikely that IRS will be able to develop a completely comprehensive estimate, given potential administrative costs and other constraints. While Taxonomy documentation does not provide evidence of managerial review, IRS officials stated that the former IRS Acting Commissioner reviewed and approved the Taxonomy. Officials told us they are working on a new process to document management review and approval. Developing loss estimates of illicit activities is challenging because such activities are difficult to observe. For this reason, IRS makes various assumptions, including whether an information return mismatch is an IDT return. Taxonomy documentation thoroughly details IRS’s assumptions. For example, the Taxonomy describes the assumptions used to develop its “refund paid” estimates in category 5, which are based on AUR data (see figure 2). This part of the Taxonomy accounts for $3.0 billion of the estimated $5.8 billion in IDT refunds paid by IRS. However, the Taxonomy documentation for the AUR category does not provide information on the analysis or rationale used to develop the assumptions of past IDT refund fraud characteristics (see appendix III for examples showing how IRS assumptions affect Taxonomy results). Given the evolving nature of IDT refund fraud, documenting Taxonomy assumptions and the rationale used to develop the assumptions would help IRS management and policymakers to determine whether the assumptions remain valid or need to be revised or updated. IRS officials acknowledged they could have better documented their analysis and rationale for choosing assumptions. They stated that IRS did not document its rationale for selecting assumptions because of the time and resources required. Taxonomy assumptions also result in overestimates in some categories and underestimates in others. For example, while IRS’s estimate for refunds prevented includes e-file rejects that occurred due to an incorrect or missing Identity Protection Personal Identification Number (IP PIN) (see figure 2), legitimate taxpayers may also have their return rejected if they include an incorrect IP PIN, or forget to include an IP PIN on their tax return. In addition, the same return—regardless of whether the return is filed by a legitimate taxpayer or an identity thief—can be rejected multiple times, which would result in an over-count of IDT refunds prevented. Officials said they do not collect data that would allow them to break out the amount of e-file rejects due to IDT refund fraud. According to IRS officials, the costs of collecting these data may outweigh the benefits, as it would require major changes to IRS information technology systems. To gain a better understanding of the effects that changing assumptions had on its estimates, IRS conducted a sensitivity analysis for category 5 “IDT refunds paid” estimates (which are based on AUR data from filing season 2013). That analysis shows that making different assumptions could affect the estimate of category 5 IDT refunds paid by billions of dollars in either direction (see appendix III, example 1). However, IRS does not report a range or some other indication of the results of the sensitivity analysis when reporting the $5.8 billion estimate for IDT refund fraud detected after refunds were issued. IRS officials stated that their goal in developing the Taxonomy was to achieve a level of precision that would allow them to assess the effectiveness of IRS IDT defenses. Nor did IRS conduct sensitivity analyses for the other Taxonomy categories that include assumptions. Our analysis, shown in example 2 in appendix III, demonstrates that changes in these assumptions could affect estimates by billions of dollars. Also, IRS did not conduct a risk and uncertainty analysis showing the cumulative effect that assumptions have on the fraud estimate.with the Taxonomy estimates is unclear and users of the estimates may be left with a mistaken impression of their precision. As a result, the level of uncertainty associated IRS officials stated that they did not conduct such analyses because of resource constraints and methodological challenges. Specifically, IRS officials stated that it would be methodologically difficult—if not impossible—to calculate uncertainty surrounding category 5 estimates that are based on AUR data. However, officials acknowledged that these analyses are possible for other categories in the Taxonomy, such as categories that use average refund value assumptions, or assumptions about the percent of returns detected by IRS defenses that are IDT. We recognize that conducting an uncertainty analysis will be challenging and add some costs; however, better reporting of what is already known from sensitivity analyses would not be costly. Reporting the uncertainty that is known already, and conducting further sensitivity analyses when not cost prohibitive, might help IRS communicate the complexities inherent in combating the evolving threat of IDT refund fraud. Reporting uncertainty, quantitatively if possible and otherwise qualitatively, could also give decision makers in Congress and IRS a more accurate understanding of what is known and not known about the extent of the IDT refund fraud problem. A point estimate, compared to a range or some other indication of uncertainty, could provide a false sense of precision leading to different decisions about how to allocate resources to combat IDT refund fraud. Given methodological and resource constraints, there are various ways IRS could report the uncertainty in the IDT refund fraud estimates. One way would be to present a point estimate surrounded by quantitative estimates of the possible range. Another way would be to qualitatively describe the relative size of the uncertainty and the reasons for this uncertainty. For example, IRS could describe how changes in assumptions affect the Taxonomy’s minimum, point, and maximum estimates. While it is likely that no one tool will stop all attempts at fraud, we have found that implementing strong preventive controls can help defend against invalid refunds, increasing public confidence and avoiding the difficult “pay and chase” aspects of recovering invalid refunds. Recapturing a fraudulent refund after it is issued can be challenging—if not impossible—because identity thieves often spend or transfer the funds immediately, making them very difficult to trace. For this reason, IRS is in various stages of exploring several possible pre-refund tools. Three tools with significant potential are (1) pre-refund Form W-2, Wage and Tax Statement (W-2) matching (which we already noted was the subject of our August 2014 report), (2) device identification, and (3) improved taxpayer authentication. Based on suggestions from the tax software industry and internal stakeholders, IRS is beginning to implement device identification that would capture the unique number associated with the individual device, such as a laptop computer, used to e-file a return. IRS could use this information to determine when multiple fraudulent returns are filed from the same device. In November 2014, IRS published guidance for e-file providers that outlined IRS’s plans to collect device identification numbers along with tax returns for filing season 2015. IRS officials told us they will collect device identification numbers voluntarily for this first year. Beginning in filing season 2016, IRS plans to require these companies to submit a device identification number with each e-filed tax return. From a cost-benefit perspective, IRS’s implementation of device identification appears justified. One important benefit of device identification is that it will enhance IRS’s ability to monitor when multiple returns are filed from the same device or from devices previously associated with fraud. In addition, device identification analysis could aid in criminal investigations, according to officials from one software industry group we interviewed. Device identification will impose minimal, if any, costs on taxpayers, third parties, or IRS. It will not require additional taxpayer action, according to IRS. In addition, IRS and tax software companies told us that while tax software companies already capture device identification numbers when a taxpayer is preparing a return, that information is not currently transmitted to IRS. In contrast to some other options IRS is considering, such as earlier W-2 matching, IRS can use current information technology systems and processes to implement the device identification tool. For example, the device identification number will be transmitted to IRS via existing return transmission processes for e-filed returns. IRS could also use its existing filters as a low-cost method of determining patterns of device usage. IRS has developed various personal identification numbers (PIN) to authenticate taxpayers’ identities and help verify the legitimacy of tax returns (see text box). Typically, these PINs are used by taxpayers to sign e-filed tax returns. IRS programs its systems to not accept a tax return if a required PIN is missing or does not match agency records. However, according to our analysis of IRS information and interviews with experts from tax software companies and associations, IRS’s current authentication tools (such as the e-file PIN) have limitations. PINs and the Identity Authentication They Require Self-select PIN – Most taxpayers are eligible to use the Self-Select PIN. The Self- Select PIN requires taxpayers to provide their prior year’s adjusted gross income (AGI) amount or prior year’s self created PIN to authenticate the taxpayer’s identity. E-file PIN – If taxpayers do not have a self-select PIN or their prior year’s AGI, they can obtain an e-file PIN. The e-file PIN requires taxpayers to authenticate their name, SSN, date of birth, address, and filing status. IP PIN – IRS provides IP PINs to past IDT victims who have confirmed their identities with IRS, or to taxpayers who participated in a pilot program. In filing season 2014, IRS offered this pilot to taxpayers in Florida, Georgia, and the District of Columbia. Identity thieves may be able to falsely obtain e-file PINs. Identity thieves can easily find the information needed to obtain an e-file PIN, allowing them to bypass some, if not all of IRS’s current automatic checks, according to our analysis and interviews with tax software and return preparer associations and companies.identity thieves can find identifying information through public records or other easily accessible sources. Only a small number of taxpayers undergo knowledge-based authentication or receive IP PINs. Knowledge-based authentication—a more intensive authentication process—uses questions about personal information that only the taxpayer should know to confirm taxpayers’ identities. Examples of authentication questions are “Who is your mortgage lender?” or “Which of the following is your previous address?” IRS uses authentication questions to confirm the identities of taxpayers whose returns are flagged by IRS’s IDT and other fraud filters. Only a limited number of returns—about 1 percent—are currently subject to this more intensive authentication process. IRS also uses authentication questions to confirm the identities of taxpayers who request an IP PIN. Because IRS did not advertise the IP PIN pilot, the participation rate for the pilot was low. According to IRS officials, as of July 31, 2014, IRS had received about 21,000 requests out of about 13.9 million eligible taxpayers (or about 0.15 percent of eligible taxpayers), in 2014. IDT thieves can also obtain and use credit bureau information to answer the authentication questions, according to IRS officials. IRS officials and several third parties, including software providers and paid preparers, suggested IRS could enhance its taxpayer authentication approach by expanding some current tools and by exploring additional options. According to our review of IRS and third-party information, each of these options has strengths and weaknesses. Unlike the device identification tool, these options could require substantial changes to tax administration and may burden taxpayers by requiring individuals to track additional information or to take additional steps when filing a tax return. Similar to pre-refund W-2 matching, improved authentication tools could provide substantial benefits but require major investments in IRS systems and changes to work processes. One advantage of authentication is that it could be applicable to more tax returns than pre-refund W-2 matching, since W-2 matching only works for tax returns reporting wage income. Authentication options include: Expanding the use of current authentication questions to a wider set of taxpayers. IRS could use authentication questions for the entire individual taxpayer population or in conjunction with other tools. IRS is continually analyzing the effectiveness of its authentication questions, which may be a benefit if the program was expanded. However, IRS analysis of single filers whose returns were flagged by fraud filters and who answered authentication questions has shown limitations: some likely identity thieves were able to correctly answer authentication questions while some legitimate taxpayers were not. Expanding the availability of the IP PIN pilot to additional taxpayers. Currently, IP PIN distribution is limited to individuals who are IDT refund fraud victims or who participated in the IP PIN pilot. However, IRS is considering an expansion of the IP PIN to include more taxpayers. In responding to an open-ended question, 3 of the 18 associations we interviewed also suggested expanding the IP PIN pilot to all taxpayers as an optional effort.additional layer of security for taxpayers, according to IRS. However, the effectiveness of the IP PIN relies on the strength of authentication questions, which have the limitations described above. In addition, because taxpayers only use the IP PIN once a year when filing their returns, retrieving lost IP PINs creates additional burden for taxpayers and IRS. A third-party issued credential would be aligned with standards established by the National Strategy for Trusted Identities in Cyberspace (NSTIC), a White House initiative to develop an online environment where organizations follow agreed upon standards to obtain and authenticate their digital identities. returns would be processed. According to one analytics company we interviewed, because this option could be an automated, computerized match that would not require any action from taxpayers, it would limit burden on low-risk taxpayers because they would not be subject to additional authentication checks. Although the analytics company official stated that this authentication option has been used by some states, he also acknowledged that there are no data available about its effectiveness in combating IDT refund fraud at the state level. According to IRS officials, the agency is in the initial stages of creating an authentication group aimed at centralizing several prior ad hoc efforts to authenticate taxpayers across IRS services (e.g., online, telephone calls, walk-in services). While the group was not specifically designed in response to IDT refund fraud, improving authentication across IRS would likely advance IRS’s ability to combat such fraud. IRS officials anticipate the group will consider options for improving authentication and will make recommendations to senior IRS executives. As of October 2014, the group was operating as a task team, with staff detailed from other IRS units. In its draft planning documentation, the authentication group outlined several initial high-level goals. Generally, they include: Centralize protection of IRS and taxpayers through integrated identity Centralize decisions and a strategic approach for authentication; Provide an avenue for tax administration through identity Provide an operational foundation for authentication; Provide a consistent operational approach to implementing authentication processes, including updating relevant Internal Revenue Manual sections; Improve the security of IRS interactions and transactions with internal and external stakeholders; and Coordinate the testing of authentication techniques (e.g., in-person or remote authentication through the Post Office or other venues). The group has also documented short- and long-term priorities, including implementation plans. In recent discussions, agency officials said they would coordinate analysis of costs, benefits and risks with several IRS offices. However, a commitment to cost, benefit and risk analysis is not documented in the group’s short- and long-term priorities. The draft planning documentation that we were given by IRS makes no mention of where such analyses would be included in IRS’s priorities. Federal guidance directs agencies to assess the costs, benefits and risks of government systems. OMB provides guidance to agencies for conducting economic cost-benefit and cost-effectiveness assessments that promote efficient resource allocation through well-informed decision making. Specifically, these assessments should consider different alternatives to meet program objectives along with a discussion of costs and benefits. Further, OMB and NIST provide guidance for agencies to review new and existing electronic transactions to ensure that authentication processes provide the appropriate level of assurance.Agencies can determine the appropriate level of assurance by conducting an assessment, mapping identified risks to the applicable assurance level, and selecting technology based on e-authentication technical guidance, among other steps. While we recognize that developing quantitative cost, benefit and risk estimates can be challenging or may not always be possible, qualitative analysis can also be informative, as discussed by OMB guidance. Without analysis of costs, benefits and risks, IRS and Congress will not have quantitative information that could inform decisions about whether and how much to invest in the various authentication options. These decisions could include which authentication options to pursue (e.g., expanding the IP PIN or issuing a credential), where in the tax filing process authentication would be required (e.g., at the time of filing or after a return is flagged by IDT filters), and what level of assurance would be required (as detailed in OMB and NIST guidance). Cost, benefit and risk estimates for authentication would have the additional benefit of allowing comparisons with other options for combating IDT refund fraud, such as pre-refund W-2 matching. Both approaches could have significant costs for taxpayers and IRS, so more information about the tradeoffs would help inform IRS and congressional decision making. IDT refund fraud is a large, continually evolving threat that is costing taxpayers billions of dollars per year. Honest taxpayers who have had fraudulent tax returns filed in their name have the burden of proving to IRS who they are and waiting for delayed refunds. IRS has poured resources into trying to clean up the tax accounts of the honest victims and is playing a losing game of “pay and chase” with the thieves. A strategy that avoids these costs would be one to prevent fraudulent refunds from being issued in the first place. While IRS has a variety of preventive measures in place, the Taxonomy estimates show that additional preventative efforts could have significant benefits. IRS’s Taxonomy estimates are one part of improving IRS’s prevention strategies. Because the Taxonomy helps IRS understand how and to what extent IDT refund fraud is evading IRS defenses, it can focus attention on where the risk is greatest and can help improve the design of IRS’s IDT filters. To reap the most benefit from the Taxonomy, decision makers—both IRS managers and Congress—need to understand how reliable the estimates are. Given the difficulties in estimating refund fraud, reporting only point estimates risks misleading decision makers about the extent and nature of IDT refund fraud. While a point estimate might lead to one decision, a range that reflects the uncertainty may lead decision makers to a different decision. We previously recommended that IRS develop cost-benefit information on pre-refund W-2 matching, which IRS has committed to implementing. Another tool that IRS is beginning to implement is device identification, which has potential benefits at low costs. IRS has limited information about the costs, benefits and risks of a third option, taxpayer authentication. The lack of this information could hinder decision makers’ ability to select which option (or combination of options) is most cost beneficial. To improve the reliability of Taxonomy estimates for future filing seasons, the Commissioner of Internal Revenue should follow relevant best practices outlined in the GAO Cost Guide by taking the following two actions: Documenting the underlying analysis justifying cost-influencing Reporting the inherent imprecision and uncertainty of the estimates. For example, IRS could provide a range of values for its Taxonomy estimates. To ensure relevant information is available to decision makers, we recommend that the Commissioner of Internal Revenue estimate and document the costs, benefits and risks of possible options for taxpayer authentication, in accordance with OMB and NIST guidance. We provided a draft of this product to the Commissioner of Internal Revenue for review and comment. In written comments, reproduced in appendix IV, IRS agreed with our recommendations. With regard to our first recommendation, IRS stated that it will follow best practices in the GAO Cost Guide for documenting the rationale supporting assumptions used in the Taxonomy estimates. IRS also stated that it will supplement its revenue lost estimates by reporting the inherent imprecision and uncertainty of estimates, subject to the availability of data and resources. While we acknowledged IRS’s resource limitations in the report, we also stated that reporting a point estimate without a range or some other indication of uncertainty could provide a false sense of precision about refunds prevented and paid. This false sense of precision could affect decisions about how to allocate resources to combat IDT refund fraud. Given the importance of these estimates, providing the proper context is also important. With regard to our second recommendation, IRS stated that its authentication group will develop a repeatable process to estimate and document the costs, benefits and risks of possible options for taxpayer authentication, in accordance with OMB and NIST guidance. However, the scope and analysis may be limited due to available resources and time. IRS also provided technical comments on figure 1, which we revised to acknowledge that the examples provided are for IDT refund fraud cases detected after refund issuance. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies to the Commissioner of Internal Revenue. In addition, the report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff have any questions about this report, please contact me at (202) 512-9110 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made key contributions to this report are listed in appendix V. This report assesses (1) the quality of the Internal Revenue Service (IRS) Identity Theft Taxonomy’s (Taxonomy) estimates of the cost of identity theft (IDT) refund fraud, and (2) IRS’s progress in developing processes to track device identification numbers and to enhance taxpayer authentication. The report discusses IDT refund fraud and not employment fraud. To assess the quality of the Taxonomy’s estimates of IDT refund fraud, we reviewed the Taxonomy’s methodology and estimates for filing season 2013 and evaluated them against selected best practices in the GAO Cost Estimating and Assessment Guide (GAO Cost Guide) that were applicable to the Taxonomy and consistent with IRS and Office of Management and Budget (OMB) information quality guidelines (see text box).Taxonomy is an estimate of the amount of revenue lost to IDT refund fraud—a cost to taxpayers. To develop this guide, our cost experts assessed the measures consistently applied by cost-estimating organizations throughout the federal government and industry; based upon this assessment, cost experts then considered best practices for the development of reliable cost estimates. Selected Best Practices in Cost Estimating Objective, reliable cost estimates Include all relevant costs. Document all cost-influencing ground rules and assumptions. Capture the source data used. Describe in sufficient detail the calculations performed and the estimating methodology used to derive each element’s cost. Describe step by step how the estimate was developed so that a cost analyst unfamiliar with the program can understand what was done and replicate it. Provide evidence that the cost estimate was reviewed and accepted by management. Are regularly updated to reflect significant changes in the methodology. Contain few mistakes. Include a sensitivity analysis. Include a risk and uncertainty analysis. Are not overly conservative or optimistic, but are based on an assessment of most likely costs. During our assessment of the Taxonomy, we interviewed IRS officials to better understand IRS’s methodology. We also discussed the GAO Cost Guide’s best practices with IRS officials who generally agreed with their applicability to the Taxonomy. IRS officials said many of the best practices are relevant to the Taxonomy, but questioned the applicability of best practices related to sensitivity and uncertainty analyses. They also questioned whether the Taxonomy itself was a cost estimate. We consulted with our cost estimating experts and concluded that the Taxonomy is a cost estimate because it is IRS’s estimate of the amount of revenue lost due to IDT refund fraud. Further, given the importance of the Taxonomy and the fact that changes in the assumptions IRS makes and includes in the estimates substantially affect results, we believe providing information about the uncertainty of the Taxonomy estimates is warranted (as discussed in more detail in the report). To analyze IRS’s Taxonomy against the best practices, we reviewed Taxonomy documentation, conducted manual data testing for obvious errors, compared underlying data to IRS’s Refund Fraud & Identity Theft Global Report, and conducted numerous interviews with IRS officials to understand the methodology the IRS used to create estimates. We also confirmed Taxonomy components where we had data available to cross check. We developed an overall assessment rating for each best practice using the following definitions: Not met. IRS provided no evidence that satisfies any portion of the best practice. Minimally met. IRS provided evidence that satisfies a small portion of the best practice. Partially met. IRS provided evidence that satisfies about half of the best practice. Substantially met. IRS provided evidence that satisfies a large portion of the best practice. Met. IRS provided complete evidence that satisfies the entire best practice. To assess IRS’s progress in developing processes to track device identification numbers and to enhance taxpayer authentication, we reviewed Internal Revenue Manual sections detailing IRS’s Identity Protection Program and IRS documentation for several tools developed to combat IDT refund fraud. We also interviewed IRS officials to learn about these efforts. These included the Identity Protection Personal Identification Number, device identification, authentication group, and other efforts related to identity authentication. We compared IRS’s authentication group’s planning document to OMB’s guidance on cost- benefit analyses, as well as OMB and the National Institute for Standards and Technology (NIST) guidance on assessing levels of assurance for taxpayer authentication. We interviewed NIST officials to better understand the methodology used in their cost-benefit analysis of a credential-based taxpayer authentication system and to gather input on the advantages and disadvantages of this type of system. To learn about additional actions IRS could take to prevent IDT refund fraud, we interviewed associations representing software companies, return preparers, and financial institutions. To help ensure our analysis covered a variety of viewpoints, we selected a nonprobability sample of 18 associations and stakeholders with differing positions and characteristics, based on IRS documentation and suggestions, our prior work, and other information. For example, to select associations representing financial institutions, we considered (among other factors) the size and type of institutions they represented (e.g., large or small banks, credit unions, and prepaid debit card companies). Because we used a nonprobability sample, the views of these associations are not generalizable to all potential third parties. When possible, we used a standard set of questions in interviewing these associations and summarized the results of the semistructured interviews. However, as needed, we also sought perspectives on additional questions tailored to these associations’ expertise and sought their opinions on key issues. To determine the feasibility of various options and the challenges of pursuing them, we then communicated with IRS offices including (1) Privacy, Government Liaison, and Disclosure; (2) Customer Accounts Services, and (3) Return Integrity and Correspondence Services. We conducted this performance audit from August 2013 to January 2015 in accordance with generally accepted government auditing standards. Those standards require that we plan and perform the audit to obtain sufficient, appropriate evidence to provide a reasonable basis for our findings and conclusions based on our audit objectives. We believe that the evidence obtained provides a reasonable basis for our findings and conclusions based on our audit objectives. The Internal Revenue Service (IRS) has developed multiple tools to combat identity theft (IDT) refund fraud. IDT detection occurs at three stages of the refund process: (1) before the IRS accepts tax returns, (2) during IRS’s tax return processing, and (3) after IRS issues tax refunds to taxpayers (or fraudsters). IRS uses some of these tools currently, while others are under development or were recommended by one of our prior reports. Table 4 describes each tool and its status. The Internal Revenue Service (IRS) developed the Taxonomy for a number of reasons, including the need to monitor both the volume and cost of identity theft (IDT) refund fraud attempts and the effectiveness of IDT defenses over time. Taxonomy estimates are based on IRS’s administrative records of known IDT refund fraud (e.g., data on the number of duplicate returns). The Taxonomy also estimates IDT refunds by, for example, identifying returns with the characteristics of IDT refund fraud, as detected by the Automated Underreporter (AUR) program. Best practices within the GAO Cost Estimating and Assessment Guide suggest that sensitivity and uncertainty analyses should be used to determine whether assumptions are potentially introducing error into an estimate. makes (and includes in its estimates of IDT refund fraud) substantially affect Taxonomy results. A sensitivity analysis (also known as “what if” analysis) examines the effect changing assumptions has on the estimate by changing one assumption at a time. It involves recalculating the estimate using differing assumptions to develop ranges of potential estimates. Risk and uncertainty analysis recognizes the potential for error and captures the cumulative effect that assumptions have on the cost estimate. It involves using methods to develop a range of costs around a point estimate. See GAO Cost Estimating and Assessment Guide: Best Practices for Developing and Managing Capital Program Costs, GAO-09-3SP, (Washington, D.C.: March 2009). returns (the turquoise dots in figure 4) and which are IDT returns (the purple dots). As further illustrated in figure 4, IRS chose assumptions that it believed best balanced comprehensiveness (that most IDT returns are likely included but legitimate returns are also included) with certainty (that many of the returns selected were IDT and include few, if any, legitimate returns). A completely comprehensive estimate (as illustrated by the larger circle) would be an overcount and could result in an IDT refund estimate about 26 times greater than IRS’s current estimate, according to our analysis of the Taxonomy. In contrast, a completely certain estimate (as illustrated in the smaller circle) would be an undercount and would result in an IDT refund estimate that is 25 times less than IRS’s current estimate. Using these two extremes would likely result in an “IDT refunds paid” estimate range that is too broad. Since IRS has not conducted an uncertainty analysis, we do not know the range that likely encompasses most cases of IDT. IRS uses an average refund value in certain Taxonomy categories, instead of using the actual value of each individual refund counted in the estimate. Therefore, it is likely that the total estimates of “IDT refunds paid” and “IDT refunds prevented” are imprecise. For example, figure 5 demonstrates how IRS developed its estimate of the value of refunds To prevented by rejecting electronically filed returns (e-file reject).develop its $6.2 billion estimate, IRS multiplied the number of e-file rejects (1.06 million) by the average refund associated with IDT returns caught by IRS IDT filters and other fraud defenses ($5,804). However, the average refund value of e-file returns detected by IRS IDT defenses can vary—indicating uncertainty in this estimate. For example, if IRS used the different average refunds in table 5 to develop its e-file reject estimate, the total could range from $4.9 billion to $8.7 billion. James R. White, (202) 512-9110 or [email protected]. In addition to the individual named above, Neil Pinney, Assistant Director; Shannon Finnegan, Analyst-in-Charge; Dawn Bidne; Amy Bowser; Deirdre Duffy; Michele Fejfar; Timothy Guinane; Katharine Perl; Jason Lee; Donna Miller; Dae Park; Ellen Rominger; and Robyn Trotter made key contributions to this report. Gary Bianchi, Nina Crocker, Mary Evans, Ellen Grady, David Lewis, Paul Middleton, Sabine Paul, Sara Pelton, Bradley Roach, LaSonya Roberts, Susan Sato, and Julie Spetz also provided assistance. GAO. Identity Theft: Additional Actions Could Help IRS Combat the Large, Evolving Threat of Refund Fraud. GAO-14-633. Washington, D.C.: August 20, 2014. GAO. Financial Audit: IRS’s Fiscal Years 2013 and 2012 Financial Statements. GAO-14-169. Washington, D.C.: December 12, 2013. GAO. Internal Revenue Service: 2013 Tax Filing Season Performance to Date and Budget Data. GAO-13-541R. Washington, D.C.: April 15, 2013. GAO. Identity Theft: Total Extent of Refund Fraud Using Stolen Identities is Unknown. GAO-13-132T. Washington, D.C.: November 29, 2012. GAO. Financial Audit: IRS’s Fiscal Years 2012 and 2011 Financial Statements. GAO-13-120. Washington, D.C.: November 9, 2012. GAO. Taxes and Identity Theft: Status of IRS Initiatives to Help Victimized Taxpayers. GAO-11-721T. Washington, D.C.: June 2, 2011. GAO. Taxes and Identity Theft: Status of IRS Initiatives to Help Victimized Taxpayers. GAO-11-674T. Washington, D.C.: May 25, 2011. GAO. Tax Administration: IRS Has Implemented Initiatives to Prevent, Detect, and Resolve Identity Theft-Related Problems, but Needs to Assess Their Effectiveness. GAO-09-882. Washington, D.C.: September 8, 2009. | IRS estimated it prevented $24.2 billion in fraudulent identity theft (IDT) refunds in 2013, but paid $5.8 billion later determined to be fraud. Because of the difficulties in knowing the amount of undetected fraud, the actual amount could differ from these point estimates. IDT refund fraud occurs when an identity thief uses a legitimate taxpayer's identifying information to file a fraudulent tax return and claims a refund. GAO was asked to review IRS's efforts to combat IDT refund fraud. This report, the second in a series, assesses (1) the quality of IRS's IDT refund fraud cost estimates, and (2) IRS's progress in developing processes to enhance taxpayer authentication. GAO compared IRS's IDT estimate methodology to GAO Cost Guide best practices (fraud is a cost to taxpayers). To assess IRS's progress enhancing authentication, GAO reviewed IRS documentation and interviewed IRS officials, other government officials, and associations representing software companies, return preparers, and financial institutions. Identity Theft (IDT) Refund Fraud Cost Estimates. The Internal Revenue Service's (IRS) fraud estimates met several GAO Cost Guide best practices, such as documenting data sources and detailing calculations. However, the estimates do not reflect the uncertainty inherent in measuring IDT refund fraud because they are presented as point estimates. Best practices suggest that agencies assess the effects of assumptions and potential errors on estimates. Officials said they did not assess the estimates' level of uncertainty because of resource constraints and methodological challenges. Because making different assumptions could affect IDT fraud estimates by billions of dollars, a point estimate (as opposed to, for example, a range) could lead to different decisions about allocating IDT resources. Reporting the uncertainty that is already known from IRS analysis (and conducting further analyses when not cost prohibitive) might help IRS communicate IDT refund fraud's inherent complexity. While IRS's fraud estimates note the relevant cost assumptions used to develop estimates, they do not provide the rationale or analysis to support them. Officials stated they did not document the rationale because of the time and resources required. Best practices suggest that agencies should document assumptions. Given the evolving nature of IDT refund fraud, documenting assumptions' rationale would help IRS management and policymakers determine whether the assumptions remain valid or need to be updated. Taxpayer Authentication. IRS recently created a group aimed at centralizing several prior ad hoc efforts to authenticate taxpayers across its systems. IRS's planning documentation contains goals and short- and long-term priorities (including implementation plans). However, a commitment to cost, benefit and risk analysis is not documented in the group's short- and long-term priorities. The draft planning documentation makes no mention of where such analyses would be included in IRS's priorities. Office of Management and Budget guidance states that agencies should use cost-benefit analyses that consider alternatives to promote efficient resource allocation and that agencies should ensure that authentication processes provide the appropriate level of assurance by assessing risks. Without analysis of costs, benefits and risks, IRS and Congress will not have quantitative information that could inform decisions about whether and how much to invest in the various authentication options. Cost, benefit and risk estimates for authentication would have the additional benefit of allowing comparisons with other options for combating IDT refund fraud. IDT options could have significant costs for taxpayers and IRS, so more information about the tradeoffs would help inform IRS and congressional decision making. GAO recommends IRS improve its fraud estimates by (1) reporting the inherent imprecision and uncertainty of estimates, and (2) documenting the underlying analysis justifying cost-influencing assumptions. In addition, IRS should estimate and document the economic costs, benefits and risks of possible options for taxpayer authentication. IRS agreed with GAO's recommendations and provided technical comments that GAO incorporated, as appropriate. |
Critical infrastructures are systems and assets, whether physical or virtual, so vital to our nation that their incapacity or destruction would have a debilitating impact on national security, economic well-being, pubic health or safety, or any combination of these. Critical infrastructure includes, among other things, banking and financial institutions, telecommunications networks, and energy production and transmission facilities, most of which are owned by the private sector. As these critical infrastructures have become increasingly dependent on computer systems and networks, the interconnectivity between information systems, the Internet, and other infrastructures creates opportunities for attackers to disrupt critical systems, with potentially harmful effects. Because the private sector owns most of the nation’s critical infrastructures, forming effective partnerships between the public and private sectors is vital to successfully protect cyber-reliant critical assets from a multitude of threats, including terrorists, criminals, and hostile nations. Federal law and policy have established roles and responsibilities for federal agencies to work with the private sector and other entities in enhancing the cyber and physical security of critical public and private infrastructures. These policies stress the importance of coordination between the government and the private sector to protect the nation’s computer-reliant critical infrastructure. In addition, they establish the Department of Homeland Security (DHS) as the focal point for the security of cyberspace—including analysis, warning, information sharing, vulnerability reduction, mitigation efforts, and recovery efforts for public and private critical infrastructure and information systems. Federal policy also establishes critical infrastructure sectors, assigns federal agencies to each sector (known as sector lead agencies), and encourages private sector involvement. Table 1 shows the 18 critical infrastructure sectors and the lead agencies assigned to each sector. In May 1998, Presidential Decision Directive 63 (PDD-63) established critical infrastructure protection as a national goal and presented a strategy for cooperative efforts by the government and the private sector to protect the physical and cyber-based systems essential to the minimum operations of the economy and the government. Among other things, this directive encouraged the development of information sharing and analysis centers (ISAC) to serve as mechanisms for gathering, analyzing, and disseminating information on cyber infrastructure threats and vulnerabilities to and from owners and operators of the sectors and the federal government. For example, the Financial Services, Electricity Sector, IT, and Communications ISACs represent sectors or subcomponents of sectors. The Homeland Security Act of 2002 created the Department of Homeland Security. Among other things, DHS was assigned with the following critical infrastructure protection responsibilities: (1) developing a comprehensive national plan for securing the key resources and critical infrastructures of the United States, (2) recommending measures to protect those key resources and critical infrastructures in coordination with other groups, and (3) disseminating, as appropriate, information to assist in the deterrence, prevention, and preemption of or response to terrorist attacks. In 2003, the National Strategy to Secure Cyberspace was issued, which assigned DHS multiple leadership roles and responsibilities in protecting the nation’s cyber critical infrastructure. These include (1) developing a comprehensive national plan for critical infrastructure protection; (2) developing and enhancing national cyber analysis and warning capabilities; (3) providing and coordinating incident response and recovery planning, including conducting incident response exercises; (4) identifying, assessing, and supporting efforts to reduce cyber threats and vulnerabilities, including those associated with infrastructure control systems; and (5) strengthening international cyberspace security. PDD-63 was superseded in December 2003 when Homeland Security Presidential Directive 7 (HSPD-7) was issued. HSPD-7 defined additional responsibilities for DHS, sector-specific agencies, and other departments and agencies. The directive instructs sector-specific agencies to identify, prioritize, and coordinate the protection of critical infrastructures to prevent, deter, and mitigate the effects of attacks. It also makes DHS responsible for, among other things, coordinating national critical infrastructure protection efforts and establishing uniform policies, approaches, guidelines, and methodologies for integrating federal infrastructure protection and risk management activities within and across sectors. As part of its implementation of the cyberspace strategy and other requirements to establish cyber analysis and warning capabilities for the nation, DHS established the United States Computer Emergency Readiness Team (US-CERT) to help protect the nation’s information infrastructure. US-CERT is the focal point for the government’s interaction with federal and private-sector entities 24 hours a day, 7 days a week, and provides cyber-related analysis, warning, information-sharing, major incident response, and national-level recovery efforts. Threats to systems supporting critical infrastructure are evolving and growing. In February 2011, the Director of National Intelligence testified that, in the past year, there had been a dramatic increase in malicious cyber activity targeting U.S. computers and networks, including a more than tripling of the volume of malicious software since 2009. Different types of cyber threats from numerous sources may adversely affect computers, software, networks, organizations, entire industries, or the Internet itself. Cyber threats can be unintentional or intentional. Unintentional threats can be caused by software upgrades or maintenance procedures that inadvertently disrupt systems. Intentional threats include both targeted and untargeted attacks from a variety of sources, including criminal groups, hackers, disgruntled employees, foreign nations engaged in espionage and information warfare, and terrorists. The potential impact of these threats is amplified by the connectivity between information systems, the Internet, and other infrastructures, creating opportunities for attackers to disrupt telecommunications, electrical power, and other critical services. For example, in May 2008, we reported that the Tennessee Valley Authority’s (TVA) corporate network contained security weaknesses that could lead to the disruption of control systems networks and devices connected to that network. We made 19 recommendations to improve the implementation of information security program activities for the control systems governing TVA’s critical infrastructures and 73 recommendations to address specific weaknesses in security controls. TVA concurred with the recommendations and has taken steps to implement them. As government, private sector, and personal activities continue to move to networked operations, the threat will continue to grow. Recent reports of cyber attacks illustrate that the cyber-based attacks on cyber-reliant critical infrastructures could have a debilitating impact on national and economic security. In June 2011, a major bank reported that hackers broke into its systems and gained access to the personal information of hundreds of thousands of customers. Through the bank’s online banking system, the attackers were able to view certain private customer information. In March 2011, according to the Deputy Secretary of Defense, a cyber attack on a defense company’s network captured 24,000 files containing Defense Department information. He added that nations typically launch such attacks, but there is a growing risk of terrorist groups and rogue states developing similar capabilities. In March 2011, a security company reported that it had suffered a sophisticated cyber attack that removed information about its two- factor authentication tool. According to the company, the extracted information did not enable successful direct attacks on any of its customers; however, the information could potentially be used to reduce the effectiveness of a current two-factor authentication implementation as part of a broader attack. In February 2011, media reports stated that computer hackers broke into and stole proprietary information worth millions of dollars from the networks of six U.S. and European energy companies. In July 2010, a sophisticated computer attack, known as Stuxnet, was discovered. It targeted control systems used to operate industrial processes in the energy, nuclear, and other critical sectors. It is designed to exploit a combination of vulnerabilities to gain access to its target and modify code to change the process. In January 2010, it was reported that at least 30 technology companies—most in Silicon Valley, California—were victims of intrusions. The cyber attackers infected computers with hidden programs allowing unauthorized access to files that may have included the companies’ computer security systems, crucial corporate data, and software source code. Over the past 2 years, the federal government has taken a number of steps aimed at addressing cyber threats to critical infrastructure. In early 2009, the President initiated a review of the nation’s cyberspace policy that specifically assessed the missions and activities associated with the nation’s information and communication infrastructure and issued the results in May of that year. The review resulted in 24 near- and mid- term recommendations to address organizational and policy changes to improve the current U.S. approach to cybersecurity. These included, among other things, that the President appoint a cybersecurity policy official for coordinating the nation’s cybersecurity policies and activities. In December 2009, the President appointed a Special Assistant to the President and Cybersecurity Coordinator to serve in this role and act as the central coordinator for the nation’s cybersecurity policies and activities. Among other things, this official is to chair the primary policy coordination body within the Executive Office of the President responsible for directing and overseeing issues related to achieving a reliable global information and communications infrastructure. Also in 2009, DHS issued an updated version of its National Infrastructure Protection Plan (NIPP). The NIPP is intended to provide the framework for a coordinated national approach to addressing the full range of physical, cyber, and human threats and vulnerabilities that pose risks to the nation’s critical infrastructures. The NIPP relies on a sector partnership model as the primary means of coordinating government and private-sector critical infrastructure protection efforts. Under this model, each sector has both a government council and a private sector council to address sector-specific planning and coordination. The government and private-sector councils are to work in tandem to create the context, framework, and support for the coordination and information-sharing activities required to implement and sustain each sector’s infrastructure protection efforts. The council framework allows for the involvement of representatives from all levels of government and the private sector, to facilitate collaboration and information-sharing in order to assess events accurately, formulate risk assessments, and determine appropriate protective measures. The establishment of private-sector councils is encouraged under the NIPP model, and these councils are to be the principal entities for coordinating with the government on a wide range of CIP activities and issues. Using the NIPP partnership model, the private and public sectors coordinate to manage the risks related to cyber CIP by, among other things, sharing information, providing resources, and conducting exercises. In October 2009, DHS established its National Cybersecurity and Communications Integration Center (NCCIC) to coordinate national response efforts and work directly with federal, state, local, tribal, and territorial governments and private-sector partners. The NCCIC integrates the functions of the National Cyber Security Center, US-CERT, the National Coordinating Center for Telecommunications, and the Industrial Control Systems CERT into a single coordination and integration center and co-locates other essential public and private sector cybersecurity partners. In September 2010, DHS issued an interim version of its national cyber incident response plan. The purpose of the plan is to establish the strategic framework for organizational roles, responsibilities, and actions to prepare for, respond to, and begin to coordinate recovery from a cyber incident. It aims to tie various policies and doctrine together into a single tailored, strategic, cyber-specific plan designed to assist with operational execution, planning, and preparedness activities and to guide short-term recovery efforts. DHS has also coordinated several cyber attack simulation exercises to strengthen public and private incident response capabilities. In September 2010, DHS conducted the third of its Cyber Storm exercises, which are large-scale simulations of multiple concurrent cyber attacks. (DHS previously conducted Cyber Storm exercises in 2006 and 2008.) The third Cyber Storm exercise was undertaken to test the National Cyber Incident Response Plan, and its participants included representatives from federal departments and agencies, states, ISACs, foreign countries, and the private sector. Despite the actions taken by several successive administrations and the executive branch agencies, significant challenges remain to enhancing the protection of cyber-reliant critical infrastructures. Implementing actions recommended by the president’s cybersecurity policy review. In October 2010, we reported that of the 24 near- and mid-term recommendations made by the presidentially initiated policy review to improve the current U.S. approach to cybersecurity, only 2 had been implemented and 22 were partially implemented. Officials from key agencies involved in these efforts (e.g., DHS, the Department of Defense, and the Office of Management and Budget) stated that progress had been slower than expected because agencies lacked assigned roles and responsibilities and because several of the mid-term recommendations would require action over multiple years. We recommended that the national Cybersecurity Coordinator designate roles and responsibilities for each recommendation and develop milestones and plans, including measures, to show agencies’ progress and performance. Updating the national strategy for securing the information and communications infrastructure. In March 2009, we testified on the needed improvements to the nation’s cybersecurity strategy. In preparation for that testimony, we convened a panel of experts that included former federal officials, academics, and private-sector executives. The panel highlighted 12 key improvements that, in its view, were essential to improving the strategy and our national cybersecurity postures, including (1) the development of a national strategy that clearly articulates objectives, goals, and priorities; (2) focusing more actions on prioritizing assets and functions, assessing vulnerabilities, and reducing vulnerabilities than on developing plans; and (3) bolstering public-private partnerships though an improved value proposition and use of incentives. Reassessing the cyber sector-specific planning approach to critical infrastructure protection. In September 2009, we reported that, among other things, sector-specific agencies had yet to update their respective sector-specific plans to fully address key DHS cyber security criteria. In addition, most agencies had not updated the actions and reported progress in implementing them as called for by DHS guidance. We noted that these shortfalls were evidence that the sector planning process has not been effective and thus leaves the nation in the position of not knowing precisely where it stands in securing cyber critical infrastructures. We recommended that DHS (1) assess whether existing sector-specific planning processes should continue to be the nation’s approach to securing cyber and other critical infrastructure and consider whether other options would provide more effective results and (2) collaborate with the sectors to develop plans that fully address cyber security requirements. DHS concurred with the recommendations and has taken action to address them. For example, the department reported that it undertook a study in 2009 that determined that the existing sector-specific planning process, in conjunction with other related efforts planned and underway, should continue to be the nation’s approach. In addition, at about this time, the department met and worked with sector officials to update sector plans with the goal of fully addressing cyber-related requirements. Strengthening the public-private partnerships for securing cyber- critical infrastructure. The expectations of private sector stakeholders are not being met by their federal partners in areas related to sharing information about cyber-based threats to critical infrastructure. In July 2010, we reported that federal partners, such as DHS, were taking steps that may address the key expectations of the private sector, including developing new information-sharing arrangements. We also reported that public sector stakeholders believed that improvements could be made to the partnership, including improving private sector sharing of sensitive information. We recommended, among other things, that the national Cybersecurity Coordinator and DHS work with their federal and private-sector partners to enhance information-sharing efforts, including leveraging a central focal point for sharing information among the private sector, civilian government, law enforcement, the military, and the intelligence community. DHS concurred with this recommendation and officials stated that they have made progress in addressing the recommendation. We will be determining the extent of that progress as part of our audit follow-up efforts. Enhancing cyber analysis and warning capabilities. DHS’s US-CERT has not fully addressed 15 key attributes of cyber analysis and warning capabilities that we identified. As a result, we recommended in July 2008 that the department address shortfalls associated with the 15 attributes in order to fully establish a national cyber analysis and warning capability as envisioned in the national strategy. DHS agreed in large part with our recommendations and has reported that it is taking steps to implement them. We are currently working with DHS officials to determine the status of their efforts to address these recommendations. Addressing global cybersecurity and governance. Based on our review, the U.S. government faces a number of challenges in formulating and implementing a coherent approach to global aspects of cyberspace, including, among other things, providing top-level leadership, developing a comprehensive strategy, and ensuring cyberspace-related technical standards and policies do not pose unnecessary barriers to U.S. trade. Specifically, we determined that the national Cybersecurity Coordinator’s authority and capacity to effectively coordinate and forge a coherent national approach to cybersecurity were still under development. In addition, the U.S. government had not documented a clear vision of how the international efforts of federal entities, taken together, support overarching national goals. Further, we learned that some countries had attempted to mandate compliance with their indigenously developed cybersecurity standards in a manner that risked discriminating against U.S. companies. We recommended that, among other things, the Cybersecurity Coordinator develop with other relevant entities a comprehensive U.S. global cyberspace strategy that, among other things, addresses technical standards and policies while taking into consideration U.S. trade. In May 2011, the White House released the International Strategy for Cyberspace: Prosperity, Security, and Openness in a Networked World. We will be determining the extent that this strategy addresses our recommendation as part of our audit follow-up efforts. Securing the modernized electricity grid. In January 2011, we reported on progress and challenges in developing, adopting, and monitoring cybersecurity guidelines for the modernized, IT-reliant electricity grid (referred to as the “smart grid”). Among other things, we identified six key challenges to securing smart grid systems. These included, among others, a lack of security features being built into certain smart grid a lack of an effective mechanism for sharing information on cybersecurity within the electric industry, and a lack of electricity industry metrics for evaluating cybersecurity. We also reported that the Department of Commerce’s National Institute for Standards and Technology (NIST) had developed and issued a first version of its smart grid cybersecurity guidelines. While NIST largely addressed key cybersecurity elements that it had planned to include in the guidelines, it did not address an important element essential to securing smart grid systems that it had planned to include—addressing the risk of attacks that use both cyber and physical means. NIST officials said that they intend to update the guidelines to address the missing elements, and have drafted a plan to do so. While a positive step, the plan and schedule were still in draft form. We recommended that NIST finalize its plan and schedule for updating its cybersecurity guidelines to incorporate missing elements; NIST agreed with this recommendation. In addition to the challenges we have previously identified, we have ongoing work in two key areas related to the protection of cyber critical infrastructures. The first is to identify the extent to which cybersecurity guidance has been specified within selected critical infrastructure sectors and to identify areas of commonality and difference between sector- specific guidance and guidance applicable to federal agencies. The second is a study of risks associated with the supply chains used by federal agencies to procure IT equipment, software, or services, along with the extent to which national security-related agencies are taking risk- based approaches to supply-chain management. We plan to issue the results of this work in November 2011 and early 2012, respectively. In summary, the threats to information systems are evolving and growing, and systems supporting our nation’s critical infrastructure are not sufficiently protected to consistently thwart the threats. While actions have been taken, the administration and executive branch agencies need to address the challenges in this area to improve our nation’s cybersecurity posture, including enhancing cyber analysis and warning capabilities and strengthening the public-private partnerships for securing cyber-critical infrastructure. Until these actions are taken, our nation’s cyber critical infrastructure will remain vulnerable. Mr. Chairman, this completes my statement. I would be happy to answer any questions you or other members of the Subcommittee have at this time. If you have any questions regarding this statement, please contact Gregory C. Wilshusen at (202) 512-6244 or [email protected]. Other key contributors to this statement include Michael Gilmore (Assistant Director), Bradley Becker, Kami Corbett, and Lee McCracken. Cybersecurity: Continued Attention Needed to Protect Our Nation’s Critical Infrastructure and Federal Information Systems. GAO-11-463T. Washington, D.C.: March 16, 2011. High-Risk Series: An Update. GAO-11-278. Washington, D.C.: February 2011. Electricity Grid Modernization: Progress Being Made on Cybersecurity Guidelines, but Key Challenges Remain to be Addressed. GAO-11-117. Washington, D.C.: January 12, 2011. Information Security: Federal Agencies Have Taken Steps to Secure Wireless Networks, but Further Actions Can Mitigate Risk. GAO-11-43. Washington, D.C.: November 30, 2010. Cyberspace Policy: Executive Branch Is Making Progress Implementing 2009 Policy Review Recommendations, but Sustained Leadership Is Needed. GAO-11-24. Washington, D.C.: October 6, 2010. Information Security: Progress Made on Harmonizing Policies and Guidance for National Security and Non-National Security Systems. GAO-10-916. Washington, D.C.: September 15, 2010. Information Management: Challenges in Federal Agencies’ Use of Web 2.0 Technologies. GAO-10-872T. Washington, D.C.: July 22, 2010. Critical Infrastructure Protection: Key Private and Public Cyber Expectations Need to Be Consistently Addressed. GAO-10-628. Washington, D.C.: July 15, 2010. Cyberspace: United States Faces Challenges in Addressing Global Cybersecurity and Governance. GAO-10-606. Washington, D.C.: July 2, 2010. Cybersecurity: Continued Attention Is Needed to Protect Federal Information Systems from Evolving Threats. GAO-10-834T. Washington, D.C.: June 16, 2010. Cybersecurity: Key Challenges Need to Be Addressed to Improve Research and Development. GAO-10-466. Washington, D.C.: June 3, 2010. Information Security: Federal Guidance Needed to Address Control Issues with Implementing Cloud Computing. GAO-10-513. Washington, D.C.: May 27, 2010. Cybersecurity: Progress Made but Challenges Remain in Defining and Coordinating the Comprehensive National Initiative. GAO-10-338. Washington, D.C.: March 5, 2010. Critical Infrastructure Protection: DHS Needs to Fully Address Lessons Learned from Its First Cyber Storm Exercise. GAO-08-825. Washington, D.C.: September 9, 2008. Information Security: TVA Needs to Address Weaknesses in Control Systems and Networks. GAO-08-526. Washington, D.C.: May 21, 2008. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | Increasing computer interconnectivity, such as the growth of the Internet, has revolutionized the way our government, our nation, and much of the world communicate and conduct business. However, this widespread interconnectivity poses significant risks to the government's and the nation's computer systems, and to the critical infrastructures they support. These critical infrastructures include systems and assets--both physical and virtual--that are essential to the nation's security, economic prosperity, and public health, such as financial institutions, telecommunications networks, and energy production and transmission facilities. Because most of these infrastructures are owned by the private sector, establishing effective public-private partnerships is essential to securing them from pervasive cyber-based threats. Federal law and policy call for federal entities, such as the Department of Homeland Security (DHS), to work with private-sector partners to enhance the physical and cyber security of these critical infrastructures. GAO is providing a statement describing (1) cyber threats facing cyber-reliant critical infrastructures; (2) recent actions the federal government has taken, in partnership with the private sector, to identify and protect cyber-reliant critical infrastructures; and (3) ongoing challenges to protecting these infrastructures. In preparing this statement, GAO relied on its previously published work in the area. The threats to systems supporting critical infrastructures are evolving and growing. In a February 2011 testimony, the Director of National Intelligence noted that there has been a dramatic increase in cyber activity targeting U.S. computers and systems in the last year, including a more than tripling of the volume of malicious software since 2009. Varying types of threats from numerous sources can adversely affect computers, software, networks, organizations, entire industries, or the Internet itself. These include both unintentional and intentional threats, and may come in the form of targeted or untargeted attacks from criminal groups, hackers, disgruntled employees, hostile nations, or terrorists. The interconnectivity between information systems, the Internet, and other infrastructures can amplify the impact of these threats, potentially affecting the operations of critical infrastructure, the security of sensitive information, and the flow of commerce. Recent reported incidents include hackers accessing the personal information of hundreds of thousands of customers of a major U.S. bank and a sophisticated computer attack targeting control systems used to operate industrial processes in the energy, nuclear, and other critical sectors. Over the past 2 years, the federal government, in partnership with the private sector, has taken a number of steps to address threats to cyber critical infrastructure. In early 2009, the White House conducted a review of the nation's cyberspace policy that addressed the missions and activities associated with the nation's information and communications infrastructure. The results of the review led, among other things, to the appointment of a national Cybersecurity Coordinator with responsibility for coordinating the nation's cybersecurity policies and activities. Also in 2009, DHS updated its National Infrastructure Protection Plan, which provides a framework for addressing threats to critical infrastructures and relies on a public-private partnership model for carrying out these efforts. DHS has also established a communications center to coordinate national response efforts to cyber attacks and work directly with other levels of government and the private sector and has conducted several cyber attack simulation exercises. Despite recent actions taken, a number of significant challenges remain to enhancing the security of cyber-reliant critical infrastructures, such as (1) implementing actions recommended by the president's cybersecurity policy review; (2) updating the national strategy for securing the information and communications infrastructure; (3) reassessing DHS's planning approach to critical infrastructure protection; (4) strengthening public-private partnerships, particularly for information sharing; (5) enhancing the national capability for cyber warning and analysis; (6) addressing global aspects of cybersecurity and governance; and (7)securing the modernized electricity grid, referred to as the "smart grid." In prior reports, GAO has made many recommendations to address these challenges. GAO also continues to identify protecting the nation's cyber critical infrastructure as a governmentwide high-risk area. |
Most of HUD’s housing assistance payments were timely—HUD disbursed by the due date 75 percent of the 3.2 million monthly payments for fiscal years 1995 through 2004. However, 25 percent of its payments were late, and 8 percent (averaging about 25,000 payments per year) were significantly late—that is, they were delayed by 2 weeks or more, a time frame in which some owners indicated the late payment could affect their ability to pay their mortgages on time. HUD made payments on an average of about 26,000 contracts per month. About one-third of these contracts experienced at least one payment per year that was late by 2 weeks or more. The timeliness of HUD’s monthly housing assistance payments varied over the 10-year period, decreasing in 1998 shortly after HUD began implementing the Multifamily Assisted Housing Reform and Affordability Act of 1997, which contained new contract renewal and processing requirements. Timeliness gradually improved after 2001, after HUD began using performance-based contract administrators to administer a majority of the contracts. In the 3-year period of fiscal years 2002 through 2004, HUD disbursed 79 percent of payments by the due date, but 7 percent of these payments were significantly late. The primary factors affecting the timeliness of HUD’s housing assistance payments were the process of renewing owners’ contracts; internal HUD processes for funding contracts and monitoring how quickly each contract uses its funding; and untimely, inaccurate, or incomplete submissions of monthly vouchers by project owners. More specifically: Monthly housing assistance payments were more likely to be late when owners’ contracts to participate in HUD’s programs were not renewed by their expiration dates. For example, our analysis of available HUD data on the reasons that payments were 2 weeks or more late from fiscal years 2002 through 2004 found that the most common reason was the payment being withheld pending contract renewal. HUD officials and contract administrators said that delays on HUD’s part—stemming from a renewal process HUD officials agreed could be cumbersome and paper intensive—could cause (or exacerbate) late payments that resulted from the lack of a renewed contract. The timeliness, quality, and completeness of owners’ renewal submissions also could cause delays in contract renewals, particularly when an owner’s initial contract expired and it had to be renewed for the first time. HUD did not know exactly how much it would pay owners each year because the amounts varied with tenant turnover, so HUD estimated how much funding it would need to obligate, or commit, to each contract and how quickly the contract would use these funds. However, HUD often underestimated how much funding a contract would need in a given year, and the agency lacked consistent processes for field office staff to monitor contracts and allocate and obligate additional funds when contracts used funds faster than anticipated. Failure to allocate and obligate additional funds to contracts promptly could cause payments to be late. According to HUD officials and contract administrators, owners’ untimely, inaccurate, or incomplete monthly voucher submissions also might cause late housing assistance payments. However, the contract administrators with whom we spoke generally indicated they were able to correct errors in owners’ submissions ahead of time to ensure timely payments. According to project owners with whom we met, delays in HUD’s housing assistance payments had negative financial effects and may have compromised owners’ ability to operate their properties, but the delays were unlikely to cause owners to opt out of HUD’s programs or stop providing affordable housing. Some owners said they incurred late fees on their mortgages and other bills or experienced interruptions in services at their properties because of delayed payments. Effects of delayed payments could vary in severity, depending on the financial condition of the property owner and the extent to which the operation of the property was dependent on HUD’s subsidy. Further, owners said that HUD did not notify them of when or for how long payments would be delayed, which prevented them from taking steps to mitigate the effects of late payments. The owners and industry group officials generally agreed that the negative effects of delayed payments alone would not cause owners to opt out of HUD’s programs, although they could be a contributing factor. We made several recommendations to HUD designed to improve the timeliness of these subsidy payments, with which the agency concurred. My statement incorporates information on the status of HUD’s actions in response to these recommendations. HUD operates a variety of project-based rental assistance programs through which it pays subsidies, or housing assistance payments, to private owners of multifamily housing that help make this housing affordable for lower-income households. HUD entered into long-term contracts, often 20 to 40 years, committing it and the property owners to providing long-term affordable housing. Under these contracts, tenants generally pay 30 percent of their adjusted income toward their rents, with the HUD subsidy equal to the difference between what the tenants pay and the contract rents that HUD and the owners negotiate in advance. In the mid- to late-1990s, Congress and HUD made several important changes to the duration of housing assistance contract terms (and the budgeting for them), the contract rents owners would receive relative to local market conditions, and the manner in which HUD administers its ongoing project-based housing assistance contracts. Specifically: Because of budgetary constraints, HUD shortened the terms of subsequent renewals, after the initial 20- to 40-year terms began expiring in the mid-1990s. HUD reduced the contract terms to 1 or 5 years, with the funding renewed annually subject to appropriations. Second, in 1997, Congress passed the Multifamily Assisted Housing Reform and Affordability Act (MAHRA), as amended, in an effort to ensure that the rents HUD subsidizes remained comparable with market rents. Over the course of the initial longer-term agreements with owners, contract rents in some cases came to substantially exceed local market rents. MAHRA required an assessment of each project when it neared the end of its original contract term to determine whether the contract rents were comparable to current market rents and whether the project had sufficient cash flow to meet its debt as well as daily and long-term operating expenses. If the expiring contract rents were below market rates, HUD could increase the contract rents to market rates upon renewal (i.e., “mark up to market”). Conversely, HUD could decrease the contract rents upon renewal if they were higher than market rents (i.e., “mark down to market”). Finally, in 1999, because of staffing constraints (primarily in HUD’s field offices) and the workload involved in renewing the increasing numbers of rental assistance contracts reaching the end of their initial terms, HUD began an initiative to contract out the oversight and administration of most of its project-based contracts. The entities that HUD hired—typically public housing authorities or state housing finance agencies—are responsible for conducting on-site management reviews of assisted properties; adjusting contract rents; reviewing, processing, and paying monthly vouchers submitted by owners; renewing contracts with property owners; and responding to health and safety issues at the properties. As of fiscal year 2004, these performance-based contract administrators (PBCA) administered the majority of contracts—more than 13,000 of approximately 23,000 contracts. HUD also has two other types of contract administrators. “Traditional” contract administrators (typically local public housing authorities) were responsible for administering approximately 5,000 contracts until they expired; at which time, these contracts would be assigned to the PBCAs. Finally, HUD itself also administered a small number of contracts under specific types of project-based programs. To receive their monthly housing assistance payments, owners must submit monthly vouchers to account for changes in occupancy and tenants’ incomes that affect the actual amount of subsidy due. However, the manner in which the owners submit these vouchers and the process by which they get paid varies depending on which of the three types of contract administrators handles their contract. For HUD-administered contracts, the owner submits a monthly voucher to HUD for verification, and HUD in turn pays the owner based on the amount in the voucher. For PBCA-administered contracts, the owner submits a monthly voucher to the PBCA, which verifies the voucher and forwards it to HUD for payment. HUD then transfers the amount verified on the voucher to the PBCA, which in turn pays the owner. In contrast, for traditionally administered contracts, HUD and the contract administrator develop a yearly budget, and HUD pays the contract administrator set monthly payments. The owner submits monthly vouchers to the contract administrator for verification, and the contract administrator pays the amount approved on the voucher. At the end of the year, HUD and the contract administrator reconcile the payments HUD made to the contract administrator with the amounts the contract administrator paid to the owner, exchanging payment as necessary to settle any difference. Overall, from fiscal years 1995 through 2004, HUD disbursed by the due date 75 percent of the 3.2 million monthly housing assistance payments on all types of contracts (see fig. 1). However, 8 percent of payments, averaging 25,000 per year, were significantly late—that is, they were delayed by 2 weeks or more and therefore could have had negative effects on owners who relied on HUD’s subsidy to pay their mortgages. During this period, 6 percent of the total payments (averaging 18,000 per year) were 4 weeks or more late, including about 10,000 payments per year that were 8 weeks or more late. HUD does not have an overall timeliness standard, by which it makes payments to owners or its contract administrators, that is based in statute, regulation, or HUD guidance. However, HUD contractually requires the PBCAs (which administer the majority of contracts) to pay owners no later than the first business day of the month. HUD officials said that they also used this standard informally to determine the timeliness of payments on HUD-administered and traditionally administered contracts. Therefore, we considered payments to be timely if they were disbursed by the first business day of the month. Based on our discussions with project owners who reported that they relied on HUD’s assistance to pay their mortgages before they incurred late fees (generally, after the 15th day of the month), we determined that a payment delay of 2 weeks or more was significant. The timeliness of housing assistance payments varied over the 10-year period (see fig. 2). The percentage of payments that were significantly late increased in 1998, which HUD and PBCA officials indicated likely had to do with HUD’s initial implementation of MAHRA and new contract renewal procedures and processing requirements for project owners. Timeliness gradually improved after 2001, shortly after HUD first began using the PBCAs to administer contracts. The percentage of contracts experiencing at least one significantly late payment over the course of the year showed a similar variation over the 10-year period, rising to 43 percent in fiscal year 1998 and decreasing to 30 percent in fiscal year 2004 (see fig. 3). As with the percentage of late payments, the percentage of contracts with late payments increased in fiscal year 1998 when HUD implemented requirements pursuant to MAHRA. Over the 10-year period, about one-third of approximately 26,000 contracts experienced at least one payment per year that was delayed by 2 weeks or more. Payments on HUD-administered contracts were more likely to be delayed than those on contracts administered by the PBCAs and traditional contract administrators, based on HUD’s fiscal year 2004 payment data (see fig. 4). Further, HUD-administered contracts were more likely to have chronically late payments. In fiscal year 2004, 9 percent of HUD- administered contracts experienced chronic late payments, while 3 percent of PBCA-administered contracts and 1 percent of the traditionally administered contracts had chronic late payments. Late monthly voucher payments were more likely to occur when a contract had not been renewed by its expiration date, according to many of the HUD officials, contract administrators, and property owners with whom we spoke. HUD’s accounting systems require that an active contract be in place with funding obligated to it before it can release payments for that contract. Therefore, an owner cannot receive a monthly voucher payment on a contract that HUD has not renewed. Our analysis of HUD data from fiscal years 2002 through 2004 showed that 60 percent of the payments that were 2 weeks or more late was associated with pending contract renewals, among late payments on PBCA-and HUD- administered contracts for which HUD recorded the reason for the delay (see fig. 5). A contract renewal might be “pending” when one or more parties involved in the process—HUD, the PBCA, or the owner—had not completed the necessary steps to finalize the renewal. Based on our interviews with HUD officials, contract administrators, and owners, pending contract renewals might result from owners’ failing to submit their renewal packages on time. Often the delay occurred when owners had to submit a study of market rents, completed by a certified appraiser, to determine the market rent levels. However, late payments associated with contract renewals also might occur because HUD had not completed its required processing. For example, according to a HUD official, at one field office we visited, contract renewals were delayed because HUD field staff were behind in updating necessary information, such as the new rent schedules associated with the renewals and the contract execution dates in HUD payment systems. HUD’s contract renewal process was largely manual and paper driven and required multiple staff in the PBCAs and HUD to complete (see fig. 6). Upon receipt of renewal packages from owners, the PBCAs then prepared and forwarded signed contracts (in hard copy) to HUD field offices, which executed the contracts; in turn, the field offices sent hard copies of contracts to a HUD accounting center, which activated contract funding. To allow sufficient time to complete the necessary processing, HUD’s policy required owners to submit a renewal package to their PBCAs 120 days before a contract expires, and gives the PBCAs 30 days to forward the renewal package to HUD for completion (leaving HUD 90 days for processing). However, some owners told us that their contract renewals had not been completed by the contract expiration dates, even though they had submitted their renewal packages on time. While initial contract renewals (upon expiration of the owner’s initial long- term contract) often exceeded the 120-day processing time, subsequent renewals were less time-consuming and resulted in fewer delays, according to HUD officials, the PBCAs, and owners. Initial renewals could be challenging for owners because they often involved HUD’s reassessment of whether the contract rents were in line with market rents. Additionally, the initial renewal represented the first time that owners had to provide HUD with the extensive documentation required for contract renewals to continue receiving housing assistance payments. Further, in preparing our 2007 report, some property owners we contacted raised concerns about the renewal process, particularly on the clarity of the HUD policies and procedures and the way the policies were applied. Specifically, these owners were concerned that the contract renewal guide that was published in 1999 had not been updated despite many changes to HUD’s policies and procedures, which has led to confusion among some owners. To improve the timeliness of housing assistance payments, we recommended in our 2005 report that HUD streamline and automate the contract renewal process to prevent processing errors and delays and eliminate paper/hard-copy requirements to the extent practicable. In its response, HUD agreed with our recommendation and commented that streamlining and automating the renewal process would be accomplished through its Business Process Reengineering (BPR) effort. As we noted in our 2005 report, HUD launched this initiative in 2004 to develop plans to improve what it characterized as “inefficient or redundant processes” and integrate data systems. However, according to HUD, the agency has not received funding sufficient to implement the BPR initiative. As a result, HUD has been pursuing other solutions aimed at streamlining and simplifying the contract renewal process. According to HUD, the agency is planning to implement a Web-based contract renewal process that would be paperless, which it expects to complete in fiscal year 2010. HUD also told us that although it does not have funding in place to fully develop this automated renewal process, it has been implementing this new process in phases, as funding becomes available. The methods HUD used to estimate the amount of funds needed for the term of each of its project-based assistance contracts and the way it monitored the funding levels on those contracts also affected the timeliness of housing assistance payments. When HUD renews a contract, and when it obligates additional funding for each year of contracts with 5- year terms, it obligates an estimate of the actual subsidy payments to which the owner will be entitled over the course of a year. However, those estimates were often too low, according to HUD headquarters and field office officials and contract administrators. For example, an underestimate of rent increases or utility costs or a change in household demographics or incomes at a property would affect the rate at which a contract exhausted its funds, potentially causing the contract to need additional funds obligated to it before the end of the year. If HUD underestimated the subsidy payments, the department needed to allocate more funds to the contract and adjust its obligation upwards to make all of the monthly payments. Throughout the year, HUD headquarters used a “burn-rate calculation” to monitor the rate at which a contract exhausted or “burned” the obligated funds and identify those contracts that may have had too little (or too much) funding. According to some HUD field office and PBCA officials, they also proactively monitored contract fund levels. Based on the rate at which a contract exhausted its funds, HUD obligated more funds if needed. However, based on our analysis of available HUD data and our discussions with HUD field office officials, owners, and contract administrators, payments on some contracts were still delayed because they needed to have additional funds allocated and obligated before a payment could be made. As shown in figure 5, our analysis of HUD’s payment data showed that, where the reasons for delayed payments on PBCA-and HUD- administered contracts were available, 11 percent of delays of 2 weeks or more were due to contracts needing additional funds obligated. That is, those payments were delayed because, at the time the owners’ vouchers were processed, HUD had not allocated and obligated enough funding to the contracts to cover the payments. One potential factor that likely contributed to payment delays related to obligating contract funding was staff at some HUD field offices—unlike their counterparts in other field offices and staff at some of the PBCAs— lacking access to data systems or not being trained to use them to monitor funding levels. At some of the field offices we visited, officials reported that they did not have access to the HUD data systems that would allow them to adequately monitor contract funding levels. HUD field offices reported, and headquarters confirmed, that some field officials had not received training to carry out some functions critical to monitoring the burn rate. A HUD headquarters official reported that changes in the agency’s workforce demographics posed challenges because not all of the field offices had staff with an optimal mix of skill and experience. We recommended in our 2005 report that HUD develop systematic means to better estimate the amounts that should be allocated and obligated to project-based housing assistance payment contracts each year, monitor the ongoing funding needs of each contract, and ensure that additional funds were promptly obligated to contracts when necessary to prevent payment delays. HUD agreed that this recommendation would improve the timeliness of payments, noting that it planned on achieving improvements through training, data quality reviews, and data systems maintenance. To determine how best to improve the current estimation/allocation system, HUD stated that it had obtained a contractor to analyze current data systems and make recommendations on improvements that would allow better identification of emerging funding requirements as well as improved allocation of available resources. As of October 2007, HUD reported that it was in the process of verifying and correcting data critical to renewing project-based rental assistance contracts in its data systems to produce a “clean universe of contracts.” Based on its preliminary results, HUD officials told us that the data appeared to be reasonably accurate for the purposes of estimating renewal funding amounts. In addition, HUD has evaluated the current methodology for estimating its budget requirements for the project-based programs and developed a “budget calculator” to estimate renewal funding amounts. HUD has been pursuing contracting services to implement this “calculator” using the recently verified contract data; however, HUD could not provide a specific date by which it expected to complete these improvements. The PBCAs with which we met estimated that 10 to 20 percent of owners submitted late vouchers each month. For example, one PBCA reported that about 20 percent of the payments it processed in 2004 were delayed due to late owner submissions. However, the PBCAs also reported that they generally could process vouchers in less than the allowable time—20 days—agreed to in their contracts with HUD and resolve any errors with owners to prevent a payment delay. According to PBCA officials, they often participated in several “back-and-forth” interactions with owners to resolve errors or inaccuracies. Typical owner submission errors included failing to account correctly for changes in the number of tenants or tenant income levels, or failing to provide required documentation. Because HUD’s data systems did not capture the back-and-forth interactions PBCA officials described to us, we could not directly measure the extent to which owners’ original voucher submissions may have been late, inaccurate, or incomplete. HUD officials and the PBCAs reported that owners had a learning curve when contracts were transferred to the PBCAs because the PBCAs reviewed monthly voucher submissions with greater scrutiny than HUD had in the past. The timeliness of payments also might be affected by a PBCA’s internal policies for addressing owner errors. For example, to prevent payment delays, some of the PBCA officials with whom we spoke told us that they often processed vouchers in advance of receiving complete information on the owners’ vouchers. In contrast, at one of the PBCAs we visited, officials told us that they would not process an owner’s voucher for payment unless it fully met all of HUD’s requirements. In preparing our 2005 report, some owners reported that they had not been able to pay their mortgages or other bills on time as a result of HUD’s payment delays. Three of the 16 owners with whom we spoke reported having to pay their mortgages or other bills late as a result of HUD’s payment delays. One owner reported that he was in danger of defaulting on one of his properties as a direct result of late housing assistance payments. Another owner was unable to provide full payments to vendors (including utilities, telephone service, plumbers, landscapers, and pest control services) during a 3-month delay in receiving housing assistance payments. According to this owner, her telephone service was interrupted during the delay and her relationship with some of her vendors suffered. This owner also expressed concern about how the late and partial payments to vendors would affect her credit rating. If owners were unable to pay their vendors or their staff, services to the property and the condition of the property could suffer. At one affordable housing property for seniors that we visited, the utility services had been interrupted because of the owner’s inability to make the payments. At the same property, the owner told us that she could not purchase cleaning supplies and had to borrow supplies from another property. One of the 16 owners with whom we spoke told us that they were getting ready to furlough staff during the time that they were not receiving payments from HUD. According to one HUD field office official, owners have complained about not being able to pay for needed repairs or garbage removal while they were waiting to receive a housing assistance payment. According to one industry group official, payment delays could result in the gradual decline of the condition of the properties in instances where owners were unable to pay for needed repairs. According to owners as well as industry group and HUD officials, owners who were heavily reliant on HUD’s subsidy to operate their properties were more severely affected by payment delays than other owners. Particularly, owners who owned only one or a few properties and whose operations were completely or heavily reliant on HUD’s subsidies had the most difficulty weathering a delay. For example: Two of the 16 owners with whom we spoke reported that they could not pay their bills and operate the properties during a payment delay. These owners were nonprofits, each operating a single property occupied by low-income seniors. In both cases, the amount of rent they were receiving from the residents was insufficient to pay the mortgage and other bills. Neither of these owners had additional sources of revenue. In contrast, owners with several properties and other sources of revenue were less severely affected by HUD’s payment delays. Three of the owners with whom we spoke reported that they were able to borrow funds from their other properties or find other funding sources to cover the mortgage payments and other bills. All three of these owners had a mix of affordable and market-rate properties. According to HUD and PBCA officials, owners who receive a mix of subsidized and market rate rents from their properties would not be as severely affected by a payment delay as owners with all subsidized units. While HUD’s payment delays had negative financial effects on project owners, the delays appeared unlikely to result in owners opting out of HUD’s programs. Project owners, industry group officials, contract administrators, and HUD officials we interviewed generally agreed that market factors, not late payments, primarily drove an owner’s decision to opt out of HUD programs. Owners generally opt out when they can receive higher market rents or when it is financially advantageous to convert their properties to condominiums. For profit-motivated owners, this decision can be influenced by the condition of the property and the income levels of the surrounding neighborhood. Owners were more likely to opt out if they could upgrade their properties at a reasonable cost to convert them to condominiums or rental units for higher-income tenants. In preparing our 2007 report, we also found that although the majority of the owners who opted out of the program did so for economic or market factors, growing owner frustration over a variety of administrative issues, including late payments, could upset the balance causing more owners to consider opting out even when economic conditions could be overcome or mitigated. However, most of the owners with whom we spoke, including some profit-motivated owners, reported that they would not opt out of HUD programs because of their commitment to providing affordable housing. Industry group officials also stated that most of their members were “mission driven,” or committed to providing affordable housing. HUD had no system for notifying owners when a payment delay would occur or when it would be resolved, which industry associations representing many owners as well as the owners with whom we met indicated impeded their ability to adequately plan to cover expenses until receiving the late payment. Most of the owners with whom we spoke reported that they received no warning from HUD that their payments would be delayed. Several of the owners told us that notification of the delay and the length of the delay would give them the ability to decide how to mitigate the effects of a late payment. For example, owners could then immediately request access to reserve accounts if the delay were long enough to prevent them from paying their mortgages or other bills on time. Industry group officials with whom we met agreed that a notification of a delayed payment would benefit their members. To mitigate the effects on owners when payments were delayed, we recommended in our 2005 report that HUD notify owners if their monthly housing assistance payments would be late and include in such notifications the date by which HUD expected to make the monthly payment to the owner. HUD agreed with the recommendation and noted it would examine the feasibility of notifying project owners if HUD anticipated that there would be a significant delay in payment due to an issue beyond the control of the owner. Based on discussions with HUD, the agency does not appear to have made significant progress in implementing this recommendation. HUD stated that it had begun notifying owners regarding the amount of funding available under their contracts, which would allow owners to judge when their contracts are likely to experience shortfalls (and thus possibly experience late payments). However, the notification would not warn owners that their payments would be delayed or advise them on the length of the delay. Without this information, it would be difficult for owners to plan for such a contingency. Madam Chairwoman, this concludes my prepared statement. I would be happy to answer any questions at this time. For further information on this testimony, please contact David G. Wood at (202) 512-8678 or [email protected]. Individuals making key contributions to this testimony included Andy Finkel, Daniel Garcia-Diaz, Grace Haskins, Roberto Piñero, Linda Rego, and Rose Schuville. This is a work of the U.S. government and is not subject to copyright protection in the United States. The published product may be reproduced and distributed in its entirety without further permission from GAO. However, because this work may contain copyrighted images or other material, permission from the copyright holder may be necessary if you wish to reproduce this material separately. | The Department of Housing and Urban Development (HUD) provides subsidies, known as housing assistance payments, under contracts with privately owned, multifamily projects so that they are affordable to low-income households. Project owners have expressed concern that HUD has chronically made late housing assistance payments in recent years, potentially compromising owners' ability to pay operating expenses, make mortgage payments, or set aside funds for repairs. This testimony, based primarily on a report issued in 2005, discusses the timeliness of HUD's monthly housing assistance payments, the factors that affected payment timeliness, and the effects of delayed payments on project owners. From fiscal years 1995 through 2004, HUD disbursed three-fourths of its monthly housing assistance payments on time, but thousands of payments were late each year, affecting many property owners. Over the 10-year period, 8 percent of payments were delayed by 2 weeks or more. Payments were somewhat more likely to be timely in more recent years. The process for renewing HUD's subsidy contracts with owners can affect the timeliness of housing assistance payments, according to many owners, HUD officials, and contract administrators that HUD hires to work with owners. HUD's renewal process is largely a manual, hard-copy paper process that requires multiple staff to complete. Problems with this cumbersome, paper-intensive process may delay contract renewals and cause late payments. Also, a lack of systematic internal processes for HUD staff to better estimate the amounts that HUD needed to obligate to contracts each year and monitor contract funding levels on an ongoing basis can contribute to delays in housing assistance payments. Although HUD allows owners to borrow from reserve accounts to lessen the effect of delayed housing assistance payments, 3 of 16 project owners told GAO that they had to make late payments on their mortgages or other bills--such as utilities, telephone service, or pest control--as a result of HUD's payment delays. Owners who are heavily reliant on HUD's subsidy to operate their properties are likely to be more severely affected by payment delays than other, more financially independent, owners. Owners reported receiving no warning from HUD when payments would be delayed, and several told GAO that such notification would allow them to mitigate a delay. Nonetheless, project owners, industry group officials, and HUD officials generally agreed that late housing assistance payments by themselves would be unlikely to cause an owner to leave HUD's housing assistance programs, because such a decision is generally driven primarily by local market factors. |
The military services and defense agencies, such as the National Security Agency and the National Imagery and Mapping Agency, collect and use intelligence data—either in the form of photographic, radar, or infrared images or electronic signals—to better understand and react to an adversary’s actions and intentions. This data can come from aircraft like the U-2 or Global Hawk or satellites or other ground, air, sea, or spaced- based equipment. The sensors that collect this data are linked to ground- surface-based processing systems that collect, analyze, and disseminate it to other intelligence processing facilities and to combat forces. (See figures 1 and 2.) These systems can be large or small, fixed, mobile, or transportable. For example, the Air Force operates several large, fixed systems that provide extensive analysis capability well beyond combat activities. By contrast, the Army and Marine Corps operate smaller, mobile intelligence systems that travel with and operate near combat forces. A key problem facing DOD is that these systems do not always work together effectively, thereby slowing down the time it takes to collect data and analyze and disseminate it sometimes by hours or even days, though DOD reports that timing has improved in more recent military operations. At times, some systems cannot easily exchange information because they were not designed to be compatible and must work through technical patches to transmit and receive data. In other cases, the systems are not connected at all. Compounding this problem is the fact that each service has its own command, control, and communications structure that present barriers to interoperability. Among the efforts DOD has underway to improve interoperability is the migration to a family of overarching ground-surface systems, based on the best systems already deployed and future systems. DCGS will not only connect individual systems but also enable these systems to merge intelligence information from multiple sources. The first phase of the migration effort will focus on connecting existing systems belonging to the military services—so that each service has an interoperable “family” of systems. The second phase will focus on interconnecting the families of systems so that joint and combined forces can have an unprecedented, common view of the battlefield. DOD’s Office of the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence is leading this effort. Successfully building a compatible ground-surface system is extremely challenging. First, DOD is facing a significant technical challenge. The ground-surface-based systems must not only have compatible electronic connections, but also compatible data transfer rates and data formats and vocabularies. At the same time it modifies systems, DOD must protect sensitive and classified data and be able to make fixes to one system without negatively affecting others. All of these tasks will be difficult to achieve given that the systems currently operated were designed by the individual services with their own requirements in mind and that they still own the systems. Second, sufficient communications capacity (e.g., bandwidth) must exist to transmit large amounts of data. DOD is still in the early stages of adding this capacity through its bandwidth expansion program. Third, DOD must have enough qualified people to analyze and exploit the large volumes of data modern sensors are capable of collecting. Lastly, DOD must still address interoperability barriers that stretch well beyond technical and human capital enhancements. For example, the services may have operating procedures and processes that simply preclude them from sharing data with other services and components, or they may have inconsistent security procedures. Formulating and following common processes and procedures will be difficult since the services have historically been reluctant to do so. Given the multi-billion-dollar commitment and many technical and operational challenges with the migration initiative, it is critical that DOD have effective plans to guide and manage system development. These would include such things as a comprehensive architecture, migration plan, and investment strategy. However, even though it initiated DCGS in 1998 and is fielding new intelligence systems, DOD is still in the beginning stages of this planning. It is now working on an enterprise architecture, a high level concept of operations for the processing of intelligence information, and an overarching test plan, and it expects these to be done by July 2003. DOD has not yet focused on an investment strategy or on a migration plan that would set a target date for completing the migration and outline activities for meeting that date. By fielding systems without completing these plans, DOD is increasing the risk that DCGS systems will not share data as quickly as needed by the warfighter. Successfully moving toward an interoperable family of ground-surface- based processing systems for intelligence data is a difficult endeavor for DOD. The systems now in place are managed by many different entities within DOD. They are involved in a wide range of military operations and installed on a broad array of equipment. At the same time, they need to be made to be compatible and interoperable. DOD’s migration must also fit in with long-term goals for achieving information superiority over the enemy. Several elements are particularly critical to successfully addressing these challenges. They include an enterprise architecture, or blueprint, to define the current and target environment for ground-based processing systems; a road map, or migration plan to define how DOD will get to the target environment and track its progress in doing so; and an investment strategy to ensure adequate resources are provided toward the migration. Each of these elements is described in the following discussions. Enterprise architecture. Enterprise architectures systematically and completely define an organization’s current (baseline) or desired (target) environment. They do so by providing a clear and comprehensive picture of a mission area—both in logical (e.g., operations, functions, and information flows) terms and technical (e.g., software, hardware, and communications) terms. If defined properly, enterprise architectures can assist in optimizing interdependencies and interrelationships among an organization’s operations and the underlying technology supporting these operations. Our experience with federal agencies has shown that attempting to define and build systems without first completing an architecture often results in systems that are duplicative, not well integrated, and unnecessarily costly to maintain and interface, and do not optimize mission performance. DOD also recognizes the importance of enterprise architectures and developed a framework known as the Command, Control, Communications, Computers, Intelligence, Surveillance, and Reconnaissance (C4ISR) Architecture Framework for its components to use in guiding efforts similar to DCGS. DOD’s acquisition guidance also requires the use of architectures to characterize interrelationships and interactions between U.S., allied, and coalition systems. Migration plan or road map. Given the size and complexity of DCGS, it is important that the migration be planned in convenient, manageable increments to accommodate DOD’s capacity to handle change. At a minimum, a plan would lay out current system capabilities, desired capabilities, and specific initiatives, programs, projects, and schedules intended to get DOD and the services to that vision. It would also define measures for tracking progress, such as testing timeliness and the status of modifications, roles and responsibilities for key activities, and mechanisms for enforcing compliance with the migration plan and ensuring that systems conform to technical and data standards defined by the architecture. Such plans, or road maps, are often developed as part of an enterprise architecture. Investment strategy. To ensure the migration is successfully implemented, it is important to know what funds are available—for the initial phases of migration, for interoperability testing, and for transition to the target architecture. It is important as well to know what constraints or gaps need to be addressed. By achieving better visibility over resources, DOD can take steps needed to analyze its migration investment as well as funding alternatives. DOD is in the process of developing an architecture for DCGS. It expects the architecture to be completed by July 2003. As recommended by DOD’s C4ISR Architecture Framework, the architecture will include a (1) baseline, or as-is, architecture and (2) a target, or to-be, architecture. The architecture will also include a high-level concept of operations. The architecture will to also reflect DOD’s future plans to develop a web-based intelligence information network. This network would substantially change how intelligence information is collected and analyzed and could therefore substantially change DOD’s requirements for DCGS. Currently, ground-surface-based systems process intelligence data and then disseminate processed data to select users. Under the new approach, unprocessed data would be posted on a Web-based network; leaving a larger range of users to decide which data they want to process and use. DOD has started implementing its plans for this new network but does not envision fully implementing it until 2010-2015. In addition, DOD has created a DCGS Council comprised of integrated product teams to oversee the migration. A team exists for each type of intelligence (imagery, signals, measurement, and signature); test and evaluation; and infrastructure and working groups to study specific issues. In tandem with the architecture, DOD has also issued a capstone requirements document for the migration effort. This document references top-level requirements and standards, such as the Joint Technical Architecture with which all systems must comply. DOD is also developing an overarching test plan called the Capstone Test and Evaluation Master Plan, which will define standards, test processes, test resources, and responsibilities of the services for demonstrating that the systems can work together and an operational concept for processing intelligence information. An enterprise architecture and overarching test plan should help ensure that the ground-surface-based processing systems selected for migration will be interoperable and that they will help to achieve DOD’s broader goals for its intelligence operations. But there are gaps in DOD’s planning that raise risks that the migration will not be adequately funded and managed. First, the planning process itself has been slower than DOD officials anticipated. By the time DOD expects to complete its architecture and testing plan, it will have been proceeding with its migration initiative for 4 years. This delay has hampered DOD’s ability to ensure interoperability in the systems now being developed and deployed. Second, DOD still lacks a detailed migration plan that identifies which systems will be retained for migration; which will be phased out; when systems will be modified and integrated into the target system; how the transition will take place—how efforts will be prioritized; and how progress in implementing the migration plan and architecture will be enforced and tracked. Until DOD puts this in place, it will lack a mechanism to drive its migration. Moreover, the DCGS Council will lack a specific plan and tools for executing its oversight. Third, DOD has not yet developed an integrated investment strategy for its migration effort that would contemplate what resources are available for acquisitions, modifications, and interoperability testing and how gaps in those resources could be addressed. More fundamentally, DOD still lacks visibility over spending on its intelligence systems since spending is spread among the budgets of DOD’s services and components. As a result, DOD does not fully know what has already been spent on the migration effort, nor does it have a means for making sure the investments the services make in their intelligence systems support its overall goals; and if not, what other options can be employed to make sure spending is on target. DOD officials agreed that both a migration plan and investment strategy were needed but said they were concentrating first on completing the architecture, test plan, and the operational concept. DOD has a process in place to test and certify that systems are interoperable, but it is not working effectively for ground-surface-based intelligence processing systems. In fact, at the time of our review, only 2 of 26 DCGS systems have been certified as being interoperable. The certification process is important because it considers such things as whether systems can work with systems belonging to other military services without unacceptable workarounds or special interfaces, whether they are using standard data formats, and whether they conform to broader architectures designed to facilitate interoperability across DOD. DOD has placed great importance on making intelligence processing systems interoperable and requires that all new (and many existing) systems demonstrate that they are interoperable with other systems and be certified as interoperable before they are fielded. DOD relies on the Joint Interoperability Test Command (JITC, part of the Defense Information Systems Agency) to certify systems. In conducting this certification, JITC assesses whether systems can interoperate without degrading other systems or networks or being degraded by them; the ability of systems to exchange information; the ability of systems to interoperate in joint environments without the use of unacceptable workaround procedures or special technical interfaces; and the ability of systems to interoperate while maintaining system confidentiality and integrity. In doing so, JITC reviews testing already conducted as well as assessments prepared by independent testing organizations. It may also conduct some of its own testing. The results are then submitted to the Joint Staff, who validate the system’s certification. Systems are generally certified for 3 years—after which they must be re-certified. The certification is funded by the system owner—whether it is a service or DOD agency. The cost depends on the size and complexity of a system and generally requires 10 percent of funding designated for testing and evaluation. Generally, certification costs are small relative to the total cost of a system. The cost to certify the Army’s $95 million Common Ground Station, for example, was $388,000. To help enforce the certification process, DOD asked 4 key officials (the Under Secretary of Defense for Acquisition, Technology and Logistics; the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; the Director of Operational Test and Evaluation; and the Director, Joint Staff) in December 2000 to periodically review systems and to place those with interoperability deficiencies on a “watch list.” This designation would trigger a series of progress reviews and updates by the program manager, the responsible testing organization, and JITC, until the system is taken off the list. Other DOD forums are also charged with identifying systems that need to be put on the list, including DOD’s Interoperability Senior Review Panel, which is composed of senior leaders from the offices of the Under Secretary of Defense for Acquisition Technology and Logistics; the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence; the Joint Staff; the Director for Programs, Analysis, and Evaluation; the Director, Operational Test and Evaluation; and U. S. Joint Forces Command. At the time of our review, only 2 of 26 DCGS systems had been certified by JITC. Of the remaining 24 systems; 3 were in the process of being certified; 14 had plans for certification; and 7 had no plans. (See table 1.) Because 21 systems that have not been certified have already been fielded, there is greater risk that the systems cannot share data as quickly as needed. Some of the systems in this category are critical to the success of other intelligence systems. For example, software modules contained in the Army’s tactical exploitation system are to be used to build systems for the Navy, Marine Corps, and the Air Force. DOD officials responsible for developing intelligence systems as well as testing them pointed toward several reasons for noncompliance, including the following. Our previous work in this area has identified the following similar reasons. Some system managers are unaware of the requirement for certification. Some system managers do not believe that their design, although fielded, was mature enough for testing. Some system managers are concerned that the certification process itself would raise the need for expensive system modifications. DOD officials do not always budget the resources needed for interoperability testing. The military services sometimes allow service-unique requirements to take precedence over satisfying joint interoperability requirements. Various approval authorities allow some new systems to be fielded without verifying their certification status. DOD’s interoperability watch list was implemented after our 1998 report to provide better oversight over the interoperability certification process. In January 2003, after considering our findings, DOD’s Interoperability Senior Review Panel evaluated DCGS’s progress toward interoperability certification and added the program to the interoperability watch list. Making its intelligence systems interoperable and enhancing their capability is a critical first step in DOD’s effort to drive down time needed to identify and hit targets and otherwise enhance joint military operations. But DOD has been slow to plan for this initiative and it has not addressed important questions such as how and when systems will be pared down and modified as well as how the initiative will be funded. Moreover, DOD is fielding new systems and new versions of old systems without following its own certification process. If both problems are not promptly addressed, data sharing problems may still persist, precluding DOD from achieving its goals for quicker intelligence dissemination. Even for the DCGS systems, which are supposed to be interconnected over time, noncompliance with interoperability requirements continues to persist. We believe DOD should take a fresh look at the reasons for noncompliance and consider what mix of controls and incentives, including innovative funding mechanisms, are needed to ensure the interoperability of DCGS systems. To ensure that an effective Distributed Common Ground-Surface System is adequately planned and funded, we recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence to expand the planning efforts for DCGS to include a migration plan or road map that at a minimum lays out (1) current system capabilities and desired capabilities; (2) specific initiatives, programs, projects and schedules to get DOD and the services to their goal; (3) measures to gauge success in implementing the migration plan as well as the enterprise architecture; and (4) mechanisms for ensuring that the plan is followed. We also recommend that the Secretary of Defense direct the Assistant Secretary of Defense for Command, Control, Communications, and Intelligence to develop an investment strategy to identify what funds are available, both for the initial phases of the DCGS migration and transition to the target architecture, and whether there are gaps or constraints that need to be addressed. To ensure that systems critical to an effective DCGS are interoperable, we recommend that the Secretary of Defense take steps needed to enforce its certification process, including directing the service secretaries in collaboration with the Joint Staff, Acquisition Executives, and the Joint Interoperability Test Command to (1) examine reasons the services are slow to comply with its certification requirement and (2) mechanisms that can be implemented to instill better discipline in adhering to the certification requirement. If lack of funding is found to be a significant barrier, we recommend that the Secretary of Defense consider centrally funding the DCGS certification process as a pilot program. In commenting on a draft of this report, DOD concurred with our recommendations to expand the planning efforts for DCGS to include a migration plan and an investment strategy. It stated that it has already funded both projects. DOD also strongly supported our recommendation to take additional steps to enforce its certification process and described recent actions it has taken to do so. DOD partially concurred with our last recommendation to consider centrally funding the certification process if funding is found to be a significant barrier. While DOD supported this step if it is warranted, DOD believed it was premature to identify a solution without further definition of the problem. We agree that DOD needs to first examine the reasons for noncompliance and consider what mix of controls and incentives are needed to make the certification process work. At the same time, because funding has already been raised as a barrier, DOD should include an analysis of innovative funding mechanisms into its review. To achieve our objectives, we examined Department of Defense regulations, directives, instructions as well as the implementing instructions of the Chairman, Joint Chiefs of Staff, regarding interoperability and the certification process. We visited the Joint Interoperability Test Command in Fort Huachuca, Arizona, and obtained detailed briefings on the extent that intelligence, surveillance, and reconnaissance systems, including DCGS systems, have been certified. We visited and obtained detailed briefings on the interoperability issues facing the Combatant Commanders at Joint Forces Command in Norfolk, Virginia; Central Command in Tampa, Florida; and Pacific Command in Honolulu, Hawaii, including a videoconference with U.S. Forces Korea officials. We discussed the interoperability certification process and its implementation with officials in the Office of the Director, Operational Test and Evaluation; the Under Secretary of Defense for Acquisition, Technology and Logistics; and the Assistant Secretary of Defense for Command, Control, Communications and Intelligence. During these visits and additional visits to the intelligence and acquisition offices of the services, the National Imagery and Mapping Agency, and the National Security Agency, we obtained detailed briefings and examined documents such as the capstone requirements document involving the status and plan to implement the ground systems strategy. We conducted our review from December 2001 through February 2003 in accordance with generally accepted government auditing standards. As agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 7 days from the date of this report. At that time, we will send copies of this report to the other congressional defense committees and the Secretary of Defense. We will also provide copies to others on request. In addition, the report will be available at no charge on the GAO Web site at http://www.gao.gov. Please contact me at (202) 512-4841 if you or your staff have any questions concerning this report. Key contributors to this report were Keith Rhodes, Cristina Chaplain, Richard Strittmatter, and Matthew Mongin. The General Accounting Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. The fastest and easiest way to obtain copies of GAO documents at no cost is through the Internet. GAO’s Web site (www.gao.gov) contains abstracts and full- text files of current reports and testimony and an expanding archive of older products. The Web site features a search engine to help you locate documents using key words and phrases. You can print these documents in their entirety, including charts and other graphics. Each day, GAO issues a list of newly released reports, testimony, and correspondence. GAO posts this list, known as “Today’s Reports,” on its Web site daily. The list contains links to the full-text document files. To have GAO e-mail this list to you every afternoon, go to www.gao.gov and select “Subscribe to GAO Mailing Lists” under “Order GAO Products” heading. | Making sure systems can work effectively together (interoperability) has been a key problem for the Department of Defense (DOD) yet integral to its goals for enhancing joint operations. Given the importance of being able to share intelligence data quickly, we were asked to assess DOD's initiative to develop a common ground-surface-based intelligence system and to particularly examine (1) whether DOD has adequately planned this initiative and (2) whether its process for testing and certifying the interoperability of new systems is working effectively. DOD relies on a broad array of intelligence systems to study the battlefield and identify and hit enemy targets. These systems include reconnaissance aircraft, satellites, and ground-surface stations that receive, analyze, and disseminate intelligence data. At times, these systems are not interoperable--either for technical reasons (such as incompatible data formats) and/or operational reasons. Such problems can considerably slow down the time to identify and analyze a potential target and decide whether to attack it. One multibillion-dollar initiative DOD has underway to address this problem is to pare down the number of ground-surface systems that process intelligence data and upgrade them to enhance their functionality and ensure that they can work with other DOD systems. The eventual goal is an overarching family of interconnected systems, known as the Distributed Common Ground-Surface System (DCGS). To date, planning for this initiative has been slow and incomplete. DOD is developing an architecture, or blueprint, for the new systems as well as an overarching test plan and an operational concept. Although DCGS was started in 1998, DOD has not yet formally identified which systems are going to be involved in DCGS; what the time frames will be for making selections and modifications, conducting interoperability tests, and integrating systems into the overarching system; how transitions will be funded; and how the progress of the initiative will be tracked. Moreover, DOD's process for testing and certifying that systems will be interoperable is not working effectively. In fact, only 2 of 26 DCGS systems have been certified as interoperable. Because 21 of the systems that have not been certified have already been fielded, DOD has a greater risk that the new systems will not be able to share intelligence data as quickly as needed. Certifications are important because they consider such things as whether a system can work with systems belonging to other military services without unacceptable workarounds and whether individual systems conform to broader architectures designed to facilitate interoperability across DOD. |
This section provides information on (1) the types of wells and structures in the Gulf, (2) offshore leasing, (3) financial assurance requirements, (4) decommissioning requirements, and (5) oil and gas infrastructure installed and removed in the Gulf. Lessees drill wells to access and extract oil and gas from geologic formations. According to an Interior publication, “exploratory” wells are drilled in an area with potential oil and gas reserves, while “development” wells are drilled to produce oil and gas from a known reserve. An exploratory well may not actually produce any oil or gas, while a successful development well produces oil or gas. Wellheads that are located on a fixed platform (typically in shallow water) are referred to as “dry tree” wells, and wellheads that are located on the seafloor (typically in deep water) are referred to as “subsea” or “wet tree” wells. Offshore oil and gas structures in the Gulf vary in size and complexity. The simplest structures are found in shallow water and include caissons and well protectors. A caisson is a cylindrical or tapered large diameter steel pipe enclosing a well conductor and is the minimum structure for offshore development. A well protector provides support to one or more wells with no production equipment and facilities. A more complex structure in shallow water is a fixed platform, which uses a jacket and pilings to support the superstructure, or deck. The deck is the surface where work is performed and provides space for crew quarters, a drilling rig, and production facilities. Most of the large fixed platforms have living quarters for the crew, a helicopter pad, and room for drilling and production equipment. A typical platform is designed so that multiple wells may be drilled from it. Wells from a single platform may have bottom-hole locations many thousands of feet (laterally displaced) from the surface location. Structures in deep water rely on other methods to anchor to the ocean floor. For example, a “compliant tower” structure supports the deck using a narrow, flexible tower and a piled foundation. According to an industry publication, the flexible nature of the compliant tower allows it to withstand large wind and wave forces associated with hurricanes. Other common deep-water structures include the tension leg platform, floating production system, and spar platform. Illustrations of these structures are shown in figure 1. Management of offshore oil and gas resources is primarily governed by the Outer Continental Shelf Lands Act, which sets forth procedures for leasing, exploration, and development and production of those resources. The act calls for the preparation of an oil and gas leasing program designed to meet the nation’s energy needs while also taking into account a range of principles and considerations specified by the act. Specifically, the act provides that “anagement of the outer Continental Shelf shall be conducted in a manner which considers economic, social, and environmental values of the renewable and nonrenewable resources contained in the outer Continental Shelf, and the potential impact of oil and gas exploration on other resource values of the outer Continental Shelf and the marine, coastal, and human environments.” The Outer Continental Shelf Lands Act also requires the Secretary of the Interior to prepare a 5-year schedule of proposed lease sales, indicating the size, timing, and location of leasing activity as precisely as possible. Every 5 years, Interior selects the areas that it proposes to offer for leasing and establishes a schedule for individual lease sales. These leases may be offered for competitive bidding, and all eligible companies are invited to submit written sealed bids for the lease and rights to explore, develop, and produce oil and gas resources on these leases. These rights last for a set period of time, referred to as the initial period of the lease, and vary depending on the water depth. Historically, Interior’s Minerals Management Service managed offshore federal oil and gas activities and collected royalties for all producing leases. In May 2010, in an effort to separate major functions of offshore oil and gas management, Interior announced the reorganization of the Minerals Management Service into the Bureau of Ocean Energy Management, Regulation, and Enforcement, responsible for offshore oil and gas management, and the Office of Natural Resources Revenue, responsible for revenue collections. Subsequently, in October 2011, the Bureau of Ocean Energy Management, Regulation, and Enforcement was separated into BOEM and BSEE. BOEM oversees resource management activities, including preparing the 5-year outer continental shelf oil and gas leasing program; reviews oil and gas exploration and development plans and environmental studies; and conducts National Environmental Policy Act analyses. BSEE oversees operations and environmental compliance, including reviewing drilling permits, inspecting offshore drilling rigs and production platforms, assessing civil penalties, developing regulations and standards for offshore drilling (including those related to decommissioning), and ensuring the conservation of natural resources. The Outer Continental Shelf Lands Act authorizes the Secretary of the Interior to promulgate regulations necessary to administer the outer continental shelf leasing program, including regulations concerning financial assurance. Under this authority, Interior promulgated regulations and developed financial assurance procedures to protect the government from incurring costs if a lessee fails to meet its lease obligations, including its obligation to decommission offshore infrastructure. Under these regulations and procedures, BOEM regional directors may require a lessee to provide a bond —referred to as a “supplemental bond”—that covers the estimated costs of decommissioning for a lease. BSEE is responsible for estimating costs associated with decommissioning liabilities. If a lessee is unable to accomplish decommissioning obligations as required, the federal government can use the bond to cover decommissioning costs. However, if BOEM determines that at least one lessee has sufficient financial strength to accomplish decommissioning obligations on the lease, BOEM may waive the requirement for a supplemental bond. Under BOEM and BSEE regulations, lessee liability is “joint and several”—that is, each lessee is liable for all decommissioning obligations that accrue on the lease during its ownership, including those that accrued prior to its ownership but had not been performed. In addition, a lessee that transfers its ownership rights to another party will continue to be liable for the decommissioning obligations it accrued. According to BOEM officials, BOEM ensures that all decommissioning obligations on offshore leases are required to be covered by either a supplemental bond or a current lessee that has the financial ability to conduct decommissioning. According to Interior regulations, lessees must permanently plug all wells, remove all platforms and other structures, decommission all pipelines, and clear the seafloor of all obstructions created by the lease and pipeline operations when this infrastructure is no longer useful for operations. Lessees must also permanently plug wells and remove platforms within 1 year after a lease terminates. BSEE refers to infrastructure that is no longer useful for operations on active leases as idle infrastructure (or “idle iron”) and infrastructure on expired leases as terminated lease infrastructure. In general, BSEE’s guidance defines idle infrastructure as follows: A well is considered idle if it has not been used in the past 5 years for operations associated with exploration or development and production of oil or gas, and if the lessee has no plans for such operations. A platform is considered idle if it has been toppled or otherwise destroyed, or it has not been used in the past 5 years for operations associated with exploration or development and production of oil or gas. Companies may postpone decommissioning idle wells and platforms to defer the cost of removal, increase the opportunity for resale, or reduce decommissioning costs through economies of scale and scheduling, among other reasons. However, postponing decommissioning can be costly because the longer a structure is present in the Gulf the greater the likelihood it will be damaged by a hurricane. According to Interior documentation, decommissioning a storm-damaged structure may cost 15 times or more the cost of decommissioning an undamaged structure. In 2005, Hurricanes Katrina and Rita destroyed 116 structures and significantly damaged another 163 structures and 542 pipelines in the Gulf, according to Interior documentation. According to BSEE officials, as of April 2015, the Gulf contained 13 destroyed structures with 16 associated wells. Storm-damaged or toppled structures present a greater risk to safety and require difficult and time-consuming salvage work. After preliminary salvage work that can take weeks, divers cut and remove structural components while crane assemblies remove the components and place them on a barge for transport and disposal. Additionally, when working in areas with strong currents and unconsolidated material, coffer dams are often constructed on the seabed to prevent material from slumping back in on the dive crews and equipment. Figure 2 shows the annual number of wells drilled and plugged in the Gulf from 1947 through 2014. During this time period, lessees drilled a total of 52,223 wells in the Gulf (including 18,447 exploratory wells and 33,776 development wells) and plugged a total of 29,879 wells (including 4,017 temporarily abandoned wells and 25,862 permanently abandoned wells). Figure 3 shows the annual number of structures installed and removed in the Gulf from 1947 through 2014. During this time period, lessees installed a total of 7,038 structures in the Gulf. In addition, starting in the 1970s, lessees began removing structures from the Gulf. Specifically, lessees removed a total of 4,611 structures from 1973 through 2014. Most of the structures installed and removed were fixed platforms and caissons installed in shallow water. Between the late 1940s and early 1960s, lessees only drilled wells in shallow water. However, starting in the mid-1960s, lessees began drilling wells in deep water. Figure 4 shows the annual number of wells drilled and plugged in deep water in the Gulf from 1966 through 2014. During this time period, lessees drilled a total of 6,468 wells (including exploratory and development wells) and plugged a total of 2,489 wells (including temporary and permanently abandoned wells) in deep water. Lessees also installed 112 structures—mostly fixed platforms, spar, tension leg platforms, and floating production systems—and removed 19 structures in deep water during this time period. Since 1985, oil production from deepwater wells has increased significantly, as shown in figure 5. While the number of wells drilled has decreased in recent years, offshore production has increased as lessees have drilled wells in deep water that are more productive than wells in shallower water. In 2014, over 80 percent of Gulf oil production occurred in deep water, up from 6 percent in 1985. According to BSEE officials, activities in deep water, including drilling and decommissioning, are significantly more expensive than those in shallow water because of the technology required and challenges associated with deep water, such as very high pressures at significant water and well depths. Interior’s BSEE has developed procedures to oversee the decommissioning of offshore oil and gas infrastructure and estimate costs associated with decommissioning liabilities, but limitations in its data system may affect the accuracy and completeness of some cost estimates. In addition, BSEE has not documented some of its procedures for identifying and tracking infrastructure that needs to be decommissioned and for estimating the related costs. Officials in BSEE’s Gulf regional office have developed procedures for overseeing the activities of lessees in decommissioning oil and gas infrastructure in the Gulf and estimating the costs of doing so, but limitations in its data system for estimating costs may affect the accuracy and completeness of some cost estimates. Under BSEE’s regulations, lessees must apply for approval before plugging wells, removing platforms and clearing sites, and decommissioning pipelines. According to BSEE regional officials, they review applications to ensure that they contain the required information (see table 1 below). Once this process is complete, BSEE officials approve a lessee’s application, which authorizes the lessee to begin decommissioning activities. After lessees complete all planned decommissioning, they are required to report to BSEE on the outcome of these activities so that BSEE may verify that all their decommissioning obligations have been met, including clearing the seafloor around wells, platforms, and other facilities. According to BSEE regional officials, they review lessee reports on decommissioning activities to ensure that the results are consistent with the information presented as part of the application process. Table 2 summarizes BSEE’s reporting requirements related to the results of decommissioning activities. According to BSEE regional officials, during the process of reviewing lessee reports, BSEE may issue a notice of an “incident of noncompliance” in cases where lessees have not provided all of the required information or when lessee activities are not consistent with BSEE regulations. If BSEE officials determine that the violation is not severe or threatening, they will issue a “warning” notice that requires the lessee to correct the violation within a specified period of time. If BSEE officials determine that the violation is more serious, they will issue a “shut-in” notice that requires the lessee to correct the violation before resuming activities. In addition, BSEE officials can assess a civil penalty of up to $40,000 per violation per day if the lessee fails to correct the violation in the period of time specified in the notice, or if the violation resulted in a threat of serious harm to human life or damage to the environment. In addition to reviewing lessee applications and reports, the BSEE Gulf region identifies and tracks idle and terminated lease infrastructure. According to BSEE regional officials, the BSEE Gulf region began identifying and tracking idle lease infrastructure in 2010 and currently updates a list of this infrastructure on an annual basis. BSEE began identifying and tracking terminated lease infrastructure prior to 2010, according to BSEE regional officials. At the beginning of each calendar year, BSEE regional officials obtain data from Interior’s main data system—the Technical Information Management System (TIMS)—on wells and structures on leases that meet the criteria for idle and terminated lease infrastructure. Based on these data, BSEE sends a list of idle and terminated lease infrastructure to each lessee, requesting a decommissioning plan and schedule for decommissioning the lessee’s inventory. According to BSEE regional officials, BSEE works with lessees to verify the accuracy of their inventory of idle and terminated lease infrastructure, and BSEE tracks lessees’ progress in meeting their schedules. According to BSEE regional officials, BSEE estimates the costs associated with decommissioning liabilities by counting the number and types of wells, pipeline segments, and structures on a lease and using data on the water depth associated with this infrastructure. Using these data, BSEE then calculates the costs associated with (1) plugging and abandoning wells, (2) removing platforms and other structures, (3) decommissioning pipelines, and (4) clearing debris from the site. In general, the cost to plug wells and remove structures increases as the water depth increases. For example, according to BSEE’s current methodology, its estimate of the cost to plug a dry tree well attached to a fixed structure in shallow water is $150,000, while its estimate of the cost to plug a subsea well in deep water is a minimum of about $21 million. Likewise, BSEE’s estimates of the costs to remove fixed platforms in shallow water range from approximately $85,000 to $4.6 million, while its estimate of the cost to remove a floating structure (and associated equipment) in deep water is a minimum of $30 million. According to BSEE regional officials, a number of events can trigger BSEE’s review of the costs associated with decommissioning liabilities on a lease. Examples of these events include the following: BSEE determines that a lessee is planning a potential sale or acquisition of leases. BOEM or BSEE detect indications of financial stress for a lessee. BOEM requests a review of a pending request for lease assignment and bond cancellations. A lessee requests a review from BSEE when some but not all infrastructure is decommissioned on a lease. BSEE enters and stores its cost estimates of decommissioning liabilities in TIMS. However, according to BSEE regional officials, TIMS is limited in its ability to accurately and completely record cost estimates of decommissioning liabilities, as follows: TIMS contains three data fields to record cost estimates for each offshore lease—one for estimates of the cost of removing existing structures, one for estimates of the cost of plugging existing wells, and one for estimates of the cost of clearing debris from sites. TIMS uses algorithms developed in the 1990s to calculate cost estimates for each of these data fields. However, BSEE officials said that the cost estimates are too low compared to BSEE’s current estimates. For example, TIMS calculates the cost to plug a well is $100,000, regardless of water depth or the type of well, while BSEE estimates the cost to plug a subsea well in deep water is approximately $21 million. TIMS does not contain separate data fields for recording the estimated cost to plug a planned well (as opposed to an existing well) or to decommission pipelines. BSEE officials said that both of these costs are important to consider and to estimate a lessee’s potential decommissioning liability. Because of these limitations, BSEE regional officials said that, in 2009, they began investing more time and resources into manually updating cost estimates of decommissioning liabilities in TIMS. Currently, BSEE officials use separate spreadsheets—containing updated methodologies for estimating costs in shallow and deep water—to estimate costs to decommission leases. They then manually enter the cost estimates into TIMS using separate data fields entitled “adjusted decommissioning liability” for each type of cost estimate; for example, plugging wells, removing structures, and site clearance. In addition, they add estimated costs for (1) plugging planned wells into the “adjusted decommissioning liability” data field for existing wells and (2) decommissioning pipelines into the “adjusted decommissioning liability” data field for site clearance. Once they enter these data, TIMS automatically populates the date of that entry into an “updated” data field. According to BSEE regional officials, they have manually entered updated cost estimates for most leases in the Gulf. Specifically, as of July 8, 2015, BSEE officials said that they had entered updated cost estimates for 3,460 (86 percent) of the 4,021 leases in the Gulf with decommissioning liabilities. BSEE officials characterized their efforts to update cost estimates as an “ongoing process” and said that their activities related to cost estimating have increased dramatically over the past decade. Officials said that while there was no set time frame by which they plan to update cost estimates for all the leases in the Gulf, the number of leases changes over time, and BSEE prioritizes its efforts on those leases that BOEM and BSEE determine pose higher financial risk. BSEE regional officials told us that Interior is transitioning to a new data system (the National Consolidated Information System) to manage offshore oil and gas activities and that BSEE plans to use the new data system to improve how decommissioning liabilities are calculated and recorded. However, officials were unable to provide details on how the new data system will address the existing data limitations in TIMS or when they expect to implement these improvements in the new data system. Internal control standards in the federal government call for agencies to ensure that all transactions and events are completely and accurately recorded. Without the ability to completely and accurately record data on decommissioning costs, some of BSEE’s estimates of decommissioning liabilities may not be complete or accurate, and BOEM may not have reasonable assurance that it is requiring sufficient amounts of financial assurance based on BSEE’s estimates. BSEE officials in the Gulf regional office told us BSEE does not have documented procedures for identifying and tracking idle and terminated lease infrastructure or finalized documented procedures for estimating costs associated with decommissioning liabilities. Specifically, BSEE regional officials told us the bureau did not have documentation, such as standard operating procedures or operating manuals that described their process for identifying and tracking infrastructure. BSEE regional officials provided draft documentation outlining their approach to estimating costs associated with plugging wells, removing structures, and decommissioning pipelines; however, they told us that these documents had not been finalized and were a “work in progress.” According to these officials, these documents replace an older policy manual and were developed in 2014 after BSEE established the Decommissioning Support Section within the Gulf regional office. In addition, BSEE’s draft documents outlining its approach to estimating the costs of decommissioning liabilities do not address how BSEE regional officials plan to periodically assess the methodology for estimating costs, as recommended by an internal Interior review. Specifically, in fiscal year 2009, Interior conducted an internal review of its procedures related to its financial accountability and risk management program. In an internal report, Interior stated that program officials estimated costs using data that had not been updated in over 14 years. The report recommended that the program develop and implement a formal policy to review and revise all assessments at least once every 5 years for all regions. It also recommended that program officials consider adjusting assessments to reflect the cost of inflation during the period between the 5-year updates. To date, BSEE regional officials have not developed and implemented formal procedures addressing these recommendations. Internal control standards in the federal government call for agencies to clearly document internal controls, and the documentation should appear in management directives, administrative policies, or operating manuals. According to BSEE regional officials, they plan to establish documented procedures to identify and track idle and terminated lease infrastructure and estimate costs, but have not done so due to competing priorities, among other reasons. Without finalized, documented procedures, BSEE does not have reasonable assurance that it will consistently conduct such activities in the future, which could limit the effectiveness of Interior’s oversight of the decommissioning process and its ability to obtain sufficient financial assurances to cover decommissioning liability. Interior’s procedures for obtaining financial assurances for offshore decommissioning liabilities pose financial risks to the federal government. Officials from Interior’s BOEM told us that the bureau plans to revise its procedures that determine how much financial assurance a lessee must provide, and that they expect these procedures to reduce the risk that the government could incur costs associated with decommissioning. BOEM’s procedures for obtaining financial assurances for offshore decommissioning liabilities pose financial risks to the federal government in three ways. First, as of October 2015, according to BOEM officials, BOEM had identified approximately $2.3 billion in decommissioning liabilities in the Gulf that may not be covered by financial assurances but was unable to determine in a timely manner the extent to which these liabilities were valid. Specifically, after identifying data on potentially uncovered decommissioning liabilities in TIMS, BOEM officials analyzed these data over several months to determine their validity. That is, BOEM officials tried to determine the extent to which these liabilities were accurate and the extent to which valid liabilities were covered by financial assurances. BOEM officials told us that, based on their analyses, some of the $2.3 billion in decommissioning liabilities may be valid and uncovered by financial assurances. However, according to BOEM officials, they were unable to quantify how much of the $2.3 billion in decommissioning liabilities were valid and uncovered by financial assurances due to limitations with the TIMS data system and inaccurate data, among other things. For example, BOEM officials stated that existing reports generated by the TIMS data system did not provide all the necessary information for determining the validity of data on decommissioning liabilities and financial assurances. As a result, officials said that they had to create new reports to access additional data stored in TIMS, and that these efforts were time consuming. In addition, BOEM officials said that they identified leases that did not have wells or platforms but for which TIMS contained estimates of decommissioning liabilities. BOEM officials said that data associated with these decommissioning liabilities may not be valid but that they would need to consult with BSEE officials to determine their validity, which would take additional time. BOEM officials stated that, in order to determine the validity of the data in TIMS, they plan to consult with BSEE officials and continue to analyze relevant data. Once they have determined the validity of the data, they said that they will take steps to obtain financial assurances for any uncovered decommissioning liabilities. However, officials were unable to provide details on how or when they planned to address existing limitations with the TIMS data system or determine the accuracy of data on decommissioning liabilities. Internal control standards in the federal government call for agencies to ensure that pertinent information is identified, captured, and distributed in a form and time frame that permits people to perform their duties efficiently. Without timely access to valid data on decommissioning liabilities in the Gulf and associated financial assurances, BOEM does not have reasonable assurance that it has sufficient financial assurances in place, putting the federal government at risk. For the purposes of ensuring that there is at least one responsible party with the financial ability to fulfill lease decommissioning obligations, BOEM attributes all lease decommissioning liabilities to any waived lessee on a lease (even if other responsible parties are present on the lease). The waived lessee is, with all other lessees, jointly and severally liable for decommissioning and relies on its financial strength to secure the costs of this decommissioning, on behalf of all the jointly and severally liable parties. Under Interior regulations, regional directors may determine that a supplemental bond is necessary to ensure compliance with a lessee’s obligations. According to Interior officials, supplemental bonding becomes a requirement once the regional director determines that it is necessary. Adjusted net worth includes a percentage of a lessee’s proven oil and gas reserves added to a lessee’s audited net worth. BOEM varies the total liability ratio it will accept based on adjusted net worth—for example, a lessee with between $65 million and $100 million in adjusted net worth can possess total lessee liabilities of no more than 2 or 2.5 times its adjusted net worth, depending on the size of the company’s potential decommissioning liability. Alternatively, BOEM allows a lessee to use a substitute criterion—the lessee must demonstrate that it produces in excess of an average of 20,000 barrels of oil equivalent per day on its leases. However, according to BOEM officials, of the 51 waived lessees only 1 or 2 chose to use this alternative criterion. demonstrate reliability, as shown by a record of compliance with laws, regulations and lease terms, among other factors. If a lessee passes the financial strength test by demonstrating its financial ability to pay for decommissioning on its leases, BOEM waives its requirement for the lessee to provide supplemental bonds. Other responsible parties on the lease will also be waived from the requirement to provide supplemental bonds. According to BOEM officials, BOEM waives these parties as well because the waived lessee could be held responsible if another party on a lease does not fulfill its decommissioning obligations. In addition, a waived lessee may provide financial assurance in the form of a corporate guarantee of the lease obligations of a lessee on another lease. After BOEM waives a lessee from the requirement to provide supplemental bonding, it monitors the financial strength of the lessee to ensure it continues to pass BOEM’s financial strength test. BOEM conducts quarterly financial reviews for the first 2 years after a lessee receives a waiver and then an annual review thereafter. In addition, on a weekly basis, BOEM compares the decommissioning obligations (as determined by BSEE) of all waived lessees with the financial information provided by lessee audited financial statements. If BOEM finds that a lessee no longer passes its financial strength test, BOEM will conduct a more in-depth review of a lessee’s financial status by reviewing financial statements, credit ratings, and other financial information. BOEM may also conduct an unscheduled financial review if: (1) BSEE revises its estimate of a lessee’s decommissioning liability, (2) a lessee’s financial status changes as reported by credit rating agencies, or (3) a lessee does not pay the required royalties to the federal government. According to BOEM officials, these reviews could cause BOEM to revoke a lessee’s waiver from the requirement to provide supplemental bonding. For example, in May 2015, BOEM revoked the waiver of one lessee and, according to BOEM officials, the waived lessee and related parties could be required to provide as much as $1 billion in supplemental bonds. Our prior reports have found that the use of financial strength tests and corporate guarantees in lieu of bonds poses financial risks to the federal government. Specifically, we found, in August 2005, that the financial assurance mechanisms that impose the lowest costs on the companies using them— such as financial strength tests and corporate guarantees— also typically pose the highest financial risks to the government entity accepting them. In that report, we found that, if a company passes a financial strength test but subsequently files for bankruptcy or becomes insolvent, the company in essence is no longer providing financial assurance because it may no longer have the financial capacity to meet its obligations. Such financial deterioration can occur quickly. While companies no longer meeting the financial test are to obtain other financial assurance, they may not be able to obtain or afford to purchase it. In addition, in May 2012, we found that, according to the Bureau of Land Management and the Environmental Protection Agency, corporate guarantees are potentially risky because they are not covered by a specific financial asset such as a bond. BOEM’s use of the financial strength test and corporate guarantees in lieu of bonds raises the risk that the federal government may have to pay for offshore decommissioning if lessees do not. The third way BOEM’s procedures pose financial risks to the federal government is that BOEM’s financial strength test relies on measures that may not provide an accurate indication of a lessee’s ability to pay for decommissioning. As described above, BOEM uses net worth (from a lessee’s audited financial statements) as a key measure in its financial strength test. However, according to representatives from credit rating agencies we spoke to, net worth provides limited value to assess a company’s financial strength and ability to pay future liabilities. Specifically, these representatives said that net worth is “backward looking” and can be skewed by the volatile nature of commodity prices, among other factors. Credit rating agencies use financial measures that emphasize the evaluation of cash flow, such as debt-to-earnings and debt-to-funds from operations to evaluate whether a company will be able to pay its liabilities. Without the use of similar measures in its financial assessments, BOEM may not have reasonable assurance that the lessees it waives from the requirement to provide supplemental bonds have the financial abilities to fulfill decommissioning obligations, which may increase the financial risk to the government. According to BOEM officials, BOEM recognizes the financial risks associated with its current financial assurance procedures and plans to revise its procedures to reduce risk. Specifically, BOEM officials told us that BOEM’s planned revisions would eliminate the use of financial strength tests to completely waive lessees from the requirement to provide supplemental bonding. Instead, BOEM plans to conduct financial reviews of lessees’ financial status and, based on those reviews, assign lessees an amount of credit that may be used to reduce required bonding associated with decommissioning liabilities on leases. Lessees would be able to apportion this credit to leases, in coordination with other responsible parties on those leases, to ensure that lease decommissioning liabilities are fully covered by apportioned credit or supplemental bonds. As part of BOEM’s financial review of lessees, these officials told us that BOEM plans to use criteria that emphasize the use of measures such as cash flow and company liquidity while deemphasizing the use of net worth. In addition to these planned revisions, in August 2014, BOEM announced its intent to update its regulations and program oversight for offshore financial assurance requirements. BOEM solicited stakeholder comments in response to this proposal and has held industry forums to discuss potential changes to its financial assurance regulations and procedures. According to BOEM officials, if BOEM were to use these criteria as part of its financial strength test, some of the lessees currently waived from the requirement to provide supplemental bonds could lose their waivers. BOEM officials also stated that, if the revised procedures are implemented as planned, lessees could be required to provide several billion dollars in additional supplemental bonds. BOEM officials told us they plan to update the bureau’s financial assurance procedures in late 2015 or early 2016. In commenting on a draft of this report, Interior officials stated that on September 22, 2015, BOEM issued proposed guidance to clarify its financial assurance procedures. However, it is too soon to evaluate the specific details of BOEM’s proposed changes to its financial assurance procedures because BOEM has not issued any final revisions to its procedures. Until BOEM revises and implements new procedures, the federal government remains at greater risk of incurring costs should lessees fail to decommission offshore oil and gas infrastructure as required. Interior faces two key challenges managing potential decommissioning liabilities. First, BSEE does not have access to all relevant data from lessees on costs associated with decommissioning activities in the Gulf. Second, BOEM’s requirements for reporting the transfers of lease rights may impair its ability to manage decommissioning liabilities. BSEE does not have access to all relevant current data on costs associated with decommissioning activities in the Gulf. Internal control standards in the federal government call for agencies to obtain information from external stakeholders that may significantly affect their abilities to achieve agency goals. Obtaining accurate and complete information on the decommissioning costs is critical to Interior being able to achieve its goals. Specifically, BSEE needs accurate and complete information on decommissioning costs to estimate decommissioning liabilities in the Gulf, and BOEM relies on BSEE’s estimates to ensure that it is requiring sufficient amounts of financial assurance to cover decommissioning liabilities. However, BSEE generally has not had access to current data on decommissioning costs. Prior to December 2015, under BSEE’s regulations, lessees were not required to report costs associated with decommissioning activities to BSEE. According to BSEE regional officials, data on decommissioning costs were considered proprietary, and companies generally did not share this information with BSEE. Instead, BSEE regional officials relied on other sources of data—some of which are decades old and, as a result, likely inaccurate—to estimate costs associated with decommissioning liabilities. According to BSEE regional officials, their estimates for decommissioning liabilities in shallow water were based on data provided by the oil and gas industry in 1995. For decommissioning liabilities in water depths of 400 to 1,400 feet, their estimates were based on information in a 2009 report that Interior contracted. For decommissioning liabilities for subsea wells, BSEE officials said that they had developed their own models for estimating costs based on an analysis of a variety of factors, such as the daily cost of hiring a vessel in the Gulf to plug wells. During the course of our audit, BSEE regional officials told us that they planned to improve this process and the resulting data by issuing a regulation requiring such data to be submitted. Specifically, Interior issued a proposed rule in May 2009 to establish new requirements for lessees to submit expense information on costs associated with plugging and abandonment, platform removal, and site clearance. In December 2015, BSEE issued a final rule establishing these requirements. However, according to BSEE regional officials, the rule does not require lessees to submit expense information on costs associated with decommissioning pipelines, and officials were unable to provide details as to when or whether BSEE would issue a new rule to require the reporting of such costs. Unless and until BSEE obtains all relevant cost data, BSEE may continue to use outdated information to assess decommissioning liabilities. Without access to accurate and complete information on decommissioning costs, BSEE may not have reasonable assurance that its estimates of decommissioning liabilities in the Gulf are accurate, and BOEM may not have reasonable assurance that it is requiring sufficient amounts of financial assurance based on BSEE’s estimates. The absence of a clear deadline for reporting transfers of rights to lease production revenue may impair BOEM’s ability to manage decommissioning liabilities. Under BOEM’s financial assurance procedures, BOEM must obtain accurate information on a lessee’s financial status to determine whether the lessee has sufficient financial strength to meet its decommissioning obligations, and BOEM may waive its requirement for the lessee to provide supplemental bonds based on this information. However, the transfer of rights to a lease may affect a lessee’s financial status. For example, lessees may transfer lease ownership and the right to operate on a lease, which also obligates the new owner to decommission infrastructure on the lease. Under Interior regulations, these transfers must be approved by BOEM. Lessees can also transfer rights to lease production revenue. Transfers of these revenue rights generally allow the receiving party to obtain a portion of the revenue from oil and gas production over a period of time and the lessee, in turn, is paid in advance of production. The more revenue rights a lessee transfers to other parties, the less revenue the lessee has to cover its other obligations, including decommissioning. However, unlike transfers of lease ownership and operating rights, transfers of revenue rights do not obligate the new owner to decommission, and lessees are not required to obtain BOEM’s approval for these transfers. BOEM requires lessees to report these transfers, but its regulations do not establish a clear deadline for the reporting. As a result, BOEM is not always aware of such transfers in a timely manner. For example, in one recent case, a waived lessee that had previously transferred most of its revenue rights to other parties subsequently declared bankruptcy. BOEM was unaware of these transfers until bankruptcy court proceedings. Had BOEM been aware of these transfers during its weekly review of the waived lessee, it could have revoked the lessee’s waiver if it determined the lessee no longer passed the financial strength test. Consequently, BOEM then could have required the lessee or its co-lessees to provide supplemental bonds to cover its decommissioning obligations. In this case, the transfer of revenue rights left the lessee with insufficient assets to pay all of its liabilities during bankruptcy, including decommissioning. Though other lessees were held liable for decommissioning costs under joint and several liability, the government was at increased risk of incurring costs if the other lessees had been unwilling or unable to perform decommissioning. BOEM officials told us that they created an internal group to help improve BOEM’s knowledge of revenue rights transfers and the effect of transfers on a lessee’s financial status. In commenting on a draft of this report, BOEM officials stated that they believe that current regulations could be interpreted as imposing a reporting deadline but recognize the need to clarify the regulations. Without a clear reporting deadline, lessees have little incentive to report revenue rights transfers to BOEM in a timely manner, and this could limit BOEM’s ability to effectively evaluate a lessee’s financial strength. Decommissioning offshore oil and gas infrastructure is expensive and poses potential financial liabilities to the federal government. BSEE officials in the Gulf region have developed procedures for reviewing idle and terminated lease infrastructure to ensure that this infrastructure is decommissioned. In addition, in December 2015, BSEE issued final regulations (proposed in 2009) requiring lessees to report decommissioning costs directly to BSEE. However, several problems remain. First, BSEE’s recent regulations do not require lessees to report costs associated with decommissioning pipelines. Unless and until BSEE obtains all relevant cost data, it may continue to use outdated data to assess decommissioning liabilities. Second, limitations of Interior’s current data system restrict BSEE’s ability to record estimates of decommissioning costs, and it is unclear how BSEE’s new data system will address these limitations or when it will be available. Without access to complete data on decommissioning costs, and without the ability to accurately and completely record data in Interior’s main data system, BSEE does not have reasonable assurance that its estimates of decommissioning liabilities in the Gulf are accurate, and BOEM may not have reasonable assurance that it is requiring sufficient amounts of financial assurance based on BSEE’s estimates. Third, BSEE does not have finalized, documented procedures for identifying and tracking idle and terminated lease infrastructure and estimating decommissioning liabilities. Without such documented procedures, BSEE does not have reasonable assurance that it will consistently conduct such activities in the future, which could limit the effectiveness of BSEE’s oversight of the decommissioning process. Moreover, while BOEM is taking important steps to ensure that the financial assurance procedures used by the federal government are reducing the government’s exposure to decommissioning costs by updating its procedures to assess the financial strength of lessees, we continue to have three concerns. First, BOEM identified roughly $2.3 billion in decommissioning liabilities in the Gulf that may not be covered by financial assurances but was unable to determine the extent to which these liabilities were valid after several months of analysis due to limitations with the TIMS data system and inaccurate data. As a result, it is unclear whether BOEM has obtained sufficient financial assurances to cover decommissioning liabilities in the Gulf. Without timely access to valid data on decommissioning liabilities and associated financial assurances, BOEM cannot ensure that it has sufficient financial assurances in place, putting the federal government at financial risk. Second, to date BOEM has not taken concrete steps to revise its current procedures. As a result, it is unclear whether BOEM’s planned revisions will improve its procedures and the extent to which these revisions will increase the amount of bonding that lessees provide. Until BOEM revises its financial assurance procedures, the federal government remains at increased risk of incurring costs should lessees fail to decommission oil and gas infrastructure. Third, BOEM is not always aware when lessees transfer rights to lease production revenue. While BOEM’s current regulations require lessees to report such transfers, these regulations do not clearly establish a deadline for reporting. Without a clear reporting deadline, lessees have little incentive to report revenue rights transfers to BOEM in a timely manner, and this could limit BOEM’s ability to effectively evaluate a lessee’s financial strength. To improve the effectiveness of Interior’s oversight of the decommissioning process, we recommend that the Secretary of the Interior direct BSEE to establish documented procedures for identifying and tracking idle and terminated lease infrastructure. To better ensure that the government obtains sufficient financial assurances to cover decommissioning liabilities in the event of lessee default, we recommend that the Secretary of the Interior take the following six actions: Ensure that BSEE collects all relevant data associated with decommissioning from lessees. Direct BSEE to establish documented procedures for estimating decommissioning liability. Develop a plan and set a time frame to ensure that Interior’s data system for managing offshore oil and gas activities includes processes to accurately and completely record estimated decommissioning liabilities. Develop a plan and set a time frame to ensure that Interior’s data system for managing offshore oil and gas activities will be able to identify, capture, and distribute data on decommissioning liabilities and financial assurances in a timely manner. Ensure that BOEM completes its plan to revise its financial assurance procedures, including the use of alternative measures of financial strength. Revise BOEM’s regulations to establish a clear deadline for the reporting of transfers to require that lessees report the transfer of rights to lease production revenue. We provided a draft of this report to Interior for review and comment. Interior provided written comments, which are reproduced in appendix I, and generally agreed with our findings and concurred with our recommendations. As agreed with your offices, unless you publicly announce the contents of this report earlier, we plan no further distribution until 30 days from the report date. At that time, we will send copies of this report to the appropriate congressional committees, the Secretary of the Interior, and other interested parties. In addition, this report will be available at no charge on the GAO website at http://www.gao.gov. If you or your staff members have any questions about this report, please contact me at (202) 512-3841 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff members who made major contributions to this report are listed in appendix II. In addition to the individual named above, Christine Kehr (Assistant Director), Jason Holliday, and David Messman made key contributions to this report. Also contributing to this report were Philip Farah, Cindy Gilbert, Paul Kinney, Risto Laboski, Alison O’Neill, and Barbara Timmerman. | Oil and gas produced on federal leases in the Gulf of Mexico are important to the U.S. energy supply. Historically, most offshore production was in shallow water, but more than two-thirds of the more than 5,000 active oil and gas leases in the Gulf are now located in deep water. When oil and gas infrastructure is no longer in use, Interior requires lessees to decommission it so that it does not pose safety and environmental hazards. Decommissioning can include plugging wells and removing platforms, which can cost millions of dollars. Interior requires lessees to provide bonds or other financial assurances to demonstrate that they can pay these costs; however, if lessees do not fulfill their decommissioning obligations, the federal government could be liable for these costs. GAO was asked to review Interior's management of liabilities from offshore oil and gas production. This report examines Interior's (1) procedures for overseeing decommissioning and estimating its costs, (2) procedures for obtaining financial assurances for these liabilities, and (3) challenges managing these liabilities. GAO reviewed agency regulations and procedures and interviewed officials from Interior, credit rating agencies, academia, and trade associations. The Department of the Interior (Interior) has developed procedures to oversee the decommissioning of offshore oil and gas infrastructure and estimate costs associated with decommissioning liabilities but has not addressed limitations with its system for tracking cost estimates. According to officials, Interior's procedures include (1) identifying and tracking unused infrastructure, (2) reviewing lessee plans to decommission infrastructure, and (3) using different cost estimates for decommissioning in shallow and deep water. However, inconsistent with internal control standards, Interior officials must manually enter cost estimates into Interior's main data system to override inaccurate estimates automatically calculated by the system. Without a more accurate data system, Interior does not have reasonable assurance that it will consistently estimate the costs associated with decommissioning. Interior's procedures for obtaining financial assurances for decommissioning liabilities pose financial risks to the federal government, and Interior is planning to revise its procedures to address these risks but has not finalized its approach. As of October 2015, for an estimated $38.2 billion in decommissioning liabilities in the Gulf, Interior officials identified about $2.3 billion in liabilities that may not be covered by financial assurances. However, these officials were unable to determine the extent to which these data were valid due to limitations with Interior's data system, among other things. Of the remaining $35.9 billion in decommissioning liabilities, Interior held or required about $2.9 billion in bonds and other financial assurances, and had foregone requiring about $33.0 billion in bonds for the remaining liabilities. Interior has procedures that allow it to waive its requirement for a lessee to provide a bond if the lessee passes a financial strength test. Prior GAO work has shown that the use of financial strength tests in lieu of bonds poses risks to the federal government. Interior recognizes the risks associated with its procedures, and Interior officials stated that they issued draft guidance to clarify their procedures in September 2015. Interior has not issued any final revisions to its procedures; therefore, it is too soon to evaluate the details of these proposed changes. Until Interior improves its ability to obtain valid data from its data system and revises and implements its financial assurance procedures, the federal government remains at increased risk of incurring costs should lessees fail to decommission oil and gas infrastructure. Interior faces challenges managing potential decommissioning liability. For example, until December 2015, Interior did not have a requirement for lessees to report on costs associated with decommissioning activities in the Gulf. Instead, Interior contracted studies to obtain data on decommissioning costs, but some data were decades old. Federal internal control standards call for agencies to obtain information from external stakeholders that may significantly affect their ability to achieve agency goals. However, in December 2015, Interior issued final regulations (proposed in 2009) requiring lessees to report data on most, but not all, decommissioning costs to Interior. Unless and until Interior obtains accurate and complete data on decommissioning costs, Interior may not have reasonable assurance that its cost estimates of decommissioning liabilities in the Gulf are accurate, or that it is requiring sufficient amounts of financial assurance based on these estimates. GAO recommends that Interior take several steps to improve its data system, complete plans to revise its financial assurance procedures, and revise its cost reporting regulations, among other things. Interior concurred with GAO's recommendations. |
Agent Orange is one of several herbicides sprayed by the U.S. government in Vietnam in the 1960s and 1970s as a defoliant. It contains tetrachlorodibenzo-para-dioxin (dioxin), a chemical that the Environmental Protection Agency and the Occupational Safety and Health Administration have classified as highly toxic and carcinogenic. DOD sprayed an estimated 11 million gallons of Agent Orange in Vietnam during the war. In the ensuing years, dioxin has been a focus of research and has been associated with a number of latent illnesses, including cancer and most recently diabetes, which have developed among people who have been exposed to the chemical. The use of Agent Orange has also spawned much litigation over the years, including suits against the manufacturers of the product and against the United States. Until 1991, when Congress passed the Agent Orange Act, military veterans who believed their illnesses were caused by dioxin exposure had limited success in obtaining medical benefits and other compensation. Previously, the VA had denied benefits to most veterans who claimed adverse health effects from the herbicide because poor records made it difficult for many of them to demonstrate where and when they had come into contact with the chemical, and because VA had not accepted proof of a direct link between certain illnesses and dioxin. The Agent Orange Act subsequently authorized awards on the presumption that any veteran who served in Vietnam and who develops certain diseases identified by the National Academy of Sciences’ Institute of Medicine (IOM) and accepted by VA had been exposed to Agent Orange. The act also gave VA responsibility for providing information to veterans about health conditions related to Agent Orange exposure and assistance in preparing their claims. Over time, the body of research on the health effects of dioxin exposure has grown, and in recent years, research organizations such as IOM have learned more about positive associations between exposure and certain medical conditions. Further, both the National Institutes of Health and the Environmental Protection Agency consider dioxin a carcinogen on the basis of studies showing associations between exposure and medical conditions such as lung cancer. Under the Agent Orange Act, IOM is required to review and analyze all medical research on dioxin exposure every 2 years and advise VA on the degree to which it believes Agent Orange is associated with certain health conditions. On the basis of this research, VA has accepted a number of medical conditions associated with Agent Orange exposure. Most of these conditions are types of cancers, such as non-Hodgkin’s lymphoma and soft-tissue sarcomas, or skin disorders, such as chloracne. More recently, prostate cancer and diabetes were added to the list after research showed a higher than expected rate of these conditions among those exposed to dioxin. (See fig. 1.) Federal employees and employees who worked under contract to the U.S. government in Vietnam are not covered by the Agent Orange Act. Rather, federal employees who are injured or become ill as a result of their employment, including those who worked in Vietnam, may file a claim under FECA, a comprehensive workers’ compensation law for federal employees. To obtain benefits under FECA, claimants must show that (1) they were employed by the U.S. government, (2) they were injured (exposed) in the workplace, (3) they have filed a claim in a timely manner, (4) they have a disabling medical condition, and (5) there is a causal link between their medical condition and the injury or exposure. Unlike veterans, federal employees who file claims under FECA based on Agent Orange exposure must demonstrate that they were personally exposed to Agent Orange while in Vietnam and that their medical conditions were “proximately caused” by this exposure, (i.e., that there was a causal link between the exposure and their condition). Labor has primary responsibility for processing all FECA claims and has assigned the processing of special types of claims, such as those for Agent Orange exposure, to specific OWCP offices. Labor also processes all appeals from claimants regarding claims that were denied. Claimants have three levels of appeal: (1) reconsideration by an OWCP claims examiner, (2) a hearing or review of the written record by OWCP’s Branch of Hearings and Review, and (3) a review by the Employees’ Compensation Appeals Board. Either a request for reconsideration by a senior claims examiner not involved in the initial decision or a hearing request is generally the first level of appeal, followed by an appeal to the Employees’ Compensation Appeals Board. A decision of the Employees’ Compensation Appeals Board is final—claimants cannot appeal Labor’s decisions in federal court. However, if new evidence becomes available after the decision, the claimant can request the claim be reopened for reconsideration and further review by Employees’ Compensation Appeals Board. Workers’ compensation coverage for employees who work under contract to the U. S. government outside the United States is provided by the employing contractor under DBA. Under DBA, individuals who can show that they were harmed and that working conditions could have caused this harm are entitled to a presumption that their claims are work-related and valid. Claimants must also establish that their claim was filed timely and show proof of employment, exposure to Agent Orange, a disabling medical condition, and that their condition arose naturally out of employment (i.e., that their condition was related to their employment in Vietnam). Under DBA, Labor is required to license the insurance carriers that provide the employers’ workers’ compensation coverage. To prevent employers and insurance carriers from an undue financial burden for insuring employees during a time of armed conflict, Congress enacted the War Hazards Compensation Act, which allows insurance carriers to obtain reimbursement from Labor when a claim is paid for an injury or death caused by a “war-risk hazard.” Contract employees who are injured file workers’ compensation claims directly with their employers and their employers’ private insurance carriers. The insurance carrier may either accept or “controvert” (deny) the claim. Claimants may request that OWCP review the insurance carrier’s decision and may ask for a hearing with one of Labor’s administrative law judges. The administrative law judge issues a decision and order awarding or denying benefits. Claimants may appeal an administrative law judge’s decision to Labor’s Benefits Review Board. Claimants may also obtain review of the Benefits Review Board’s decisions in federal court. Many of the agencies we contacted were unable to locate records on federal and contract workers employed in Vietnam, but on the basis of the limited data available, we estimated that at least 72,000 civilian employees and as many as 171,000 may have worked in Vietnam between 1964 and 1974. We developed these estimates using data we obtained from the Department of State and DOD but were unable to determine the reliability of the data. Most of the federal agencies we identified as likely to have had employees in Vietnam—DOD, CIA, and the Departments of State, Agriculture, and Treasury—were unable to provide us with the exact number of civilian employees they had working in Vietnam during the war. Agency officials told us they had difficulty identifying these workers because personnel records were kept solely on paper, as computers were not in common use at that time. Agency officials told us that these paper records may have been destroyed or, if such records still exist, were not indexed or organized in searchable formats. In addition, the location of some records was unknown because of the loss of institutional knowledge resulting from staff turnover over the years. Both the State Department and DOD located some historical data that we used to develop estimates of the number of civilians who worked in Vietnam. Three of the five agencies we contacted—CIA and the Departments of Agriculture and Treasury—were unable to provide us with any data on the number of federal and contract employees they had working in Vietnam during the war. The Department of State was able to identify its federal employees who worked in Vietnam between January 1964 through November 1965 and January 1967 through November 1974 from published quarterly lists of employees, but the agency was unable to determine the number of employees working for the agency in Vietnam under contract. Although DOD officials were unable to locate data, we located historical reports of civilian personnel strength by year at DOD’s Directorate for Information, Operations, and Reports but were not able to obtain an unduplicated count of civilians who were in Vietnam between 1964 and 1974. This office later located service contract amounts during the Vietnam War period published in historical reports, from which we were able to estimate the number of contract employees. Using data from the Department of State and DOD, we estimated that at least 72,000 and as many as 171,000 civilian employees may have worked in Vietnam during the war. From the quarterly lists of employees provided to us by the Department of State, we estimated that the agency had about 6,000 employees in Vietnam between 1964 and 1974. To estimate the number of DOD federal employees, we used annual civilian personnel strength data from historical DOD reports and assumed a 2-year rotation similar to that of military personnel to develop an unduplicated count of about 4,600 employees. We obtained the personnel strength data from published DOD reports but were unable to determine how the data were collected; therefore, we were unable to determine the reliability of these data. To estimate the number of DOD contract employees, we obtained from DOD the dollar amount of DOD service contracts, by year from 1966 to 1974, where the workplace was Vietnam, and divided these annual amounts by a range of “burdened labor rate” estimates to calculate the number of employees represented by these contracts each year. However, DOD was unable to provide us with information on the range of salaries paid to contract employees in Vietnam. Therefore, for our analysis, we assumed annual salaries of $7,500, $15,000 and $25,000—-which represent a range of low, middle, and high salaries of federal employees during that time—to obtain burdened labor rates of $15,000, $30,000 and $50,000 per person. As with the annual estimates of federal DOD employees, we assumed a 2-year rotation to obtain an unduplicated count, which ranged from about 43,000 to 142,000 contract workers. To determine the number of federal and contract employees from the CIA and the Departments of Agriculture and Treasury, we used numbers from the Department of State as a proxy, assuming that these agencies all had roughly the same number of employees in Vietnam and would not have had as many employees in Vietnam as the much larger number of DOD contract employees needed to support military operations. On the basis of these assumptions, we estimated that these four agencies may have had about 24,000 employees in Vietnam during the war. See appendix I for additional information on the methods we used to develop these estimates. Although Labor’s claims examiners and the insurance carriers we interviewed had difficulty identifying claims, our review of the claims identified showed that civilians faced difficulty in pursuing them because of difficulty obtaining information about the claims process, their former employers, and their employers’ insurance carriers, and because of processing delays. Labor denied 11 of the 12 claims filed by federal employees (1 was withdrawn), primarily because the claimants were not able to prove a direct relationship between exposure to Agent Orange and their medical conditions, as required by FECA. Of the 20 claims filed by contract employees, 9 were initially denied by the insurance carriers and 1 was approved for payment. We were unable to review the case files for the remaining 10 cases to determine whether or not they were paid because they were identified too late in our review to include them. Labor and the insurance carriers we contacted had difficulty identifying Agent Orange claims using their databases but were able to identify 12 claims from federal employees and 20 claims from contract employees. However, because we were unable to determine whether additional claims that were not identified exist, the information we obtained about these claims does not necessarily represent the nature of all Agent Orange claims or their disposition. Most of the claims they identified were filed in the past 10 years. Because Labor does not assign a unique code to identify Agent Orange claims in its database, the agency was unable to locate any of the claims filed by federal employees under FECA by querying its database. Although Labor has a code for injuries caused by exposure to chemicals and toxins, this code is used for many claims involving toxins other than dioxin and therefore was not useful in identifying Agent Orange claims. In addition, this code was not used for several of the Agent Orange claims identified. Unable to locate claims using Labor’s database, we asked the claims examiners in OWCP assigned to review Agent Orange claims from federal employees if they could recollect how many of these claims they had processed. They identified 12 claims using information from e-mails, personal notes, and personal recollections of information about the claims. However, we were unable to confirm that they had identified all Agent Orange claims from federal employees. Of the 12 claims identified, most were filed in the past 10 years, although 2 were filed in 1988 and 1 in 1991. In addition, inaccurately coded claims and inconsistent coding procedures prevented identification of Agent Orange claims. For example, for 9 of the 12 claims identified by the claims examiners, the “cause of injury” code recorded in Labor’s database was “99—cause unknown,” a catch-all code used to identify the type of injury when the cause of injury reported by the claimant on the claim form is not clear. Other fields in the database, such as the type of medical condition, were not useful in identifying Agent Orange claims because such exposure could cause more than one type of condition, and because most of the medical conditions associated with Agent Orange exposure could also have other causes. One clerk who codes the claims told us she was sometimes uncertain which codes should be used for Agent Orange claims and that she received limited guidance on how to code them. For example, two of the claims files showed that Labor coded the same condition, diabetes, with two different nature of injury codes, “cardiovascular disease—other” for one, and “blood disorder” for the second claim. In addition, the agency has no procedures for checking for data entry errors, and our review of Agent Orange claims identified errors. For example, one claim coded as “exposure to chemicals and toxins” was actually a heart condition. One Agent Orange claim for breast cancer was coded “sprain/strain of ligament, muscle, tendon, not back.” Claims examiners told us that although they can request that the clerks who entered the codes go back and correct coding errors, there is little incentive for them to request that errors be corrected because it does not affect their ability to process claims. Labor and representatives from insurance carriers had difficulty identifying Agent Orange claims filed by contract employees under DBA largely because they did not have a unique code to identify these claims. However, with our assistance, Labor was able to identify 20 claims. Ten of the claims were initially identified by Labor using its database and recollections of claims by Labor officials. Labor located 5 claims by—upon our request—querying its database for claims where the date of injury was during the Vietnam War (January 1, 1964, through December 31, 1975) and the nature of the injury was an occupational disease, and then reviewing the list of claims produced to identify claims they remembered as being related to Agent Orange. In addition, Labor officials remembered the names of 3 claimants that were not identified in their query of the database. The insurance carriers we interviewed identified 2 additional Agent Orange claims. Labor located 1 of these claims but was not able to find the other claim because, according to Labor officials, it was not sent to the agency by the insurance carrier, as required. All but 1 of these 10 claims was filed in the past 10 years. In addition, we assisted Labor in identifying 10 more claims from contract employees. Although 7 of these claims appeared on the printout from their initial database query, Labor officials initially told us they were not Agent Orange claims. In addition, because the employer noted on the printout for some of these claims was the same as the employer for 1 of the Agent Orange claims we reviewed, we asked Labor to go back and review the other claims to make sure that they were not Agent Orange claims. From this second review, Labor identified 3 additional claims. However, because they were identified so late in our review, we were not able to include these 10 claims in our analysis of the disposition of the claims. Both federal and contract employees faced difficulties pursuing claims for Agent Orange exposure because they lacked key information on the filing process, had difficulty identifying responsible parties and obtaining needed documentation, and experienced processing errors and delays. Our review of the files showed that several claimants had little information about the claims process because their first point of contact, their former employer, was difficult to locate. Although claims processing for both federal and contract employees begins with their former employer, the process differs thereafter. As shown in figure 2, federal employees obtain the appropriate forms and documentation from their former employers and file claims with those agencies or departments, which then forward the claims to Labor for a decision. As shown in figure 3, contract employees also obtain the appropriate forms and documentation from their former employers but file their claims with their employer’s insurance carriers. Our review of the claims files showed that federal and contract employees sometimes filed their claims incorrectly because they were unable to locate their former employers in order to obtain information about the filing process. Although the first source of information in filing workers’ compensation claims is the employer, since the Vietnam War, some employers have reorganized or are no longer in business. Of the claims we reviewed, 6 claimants had difficulty locating their former employer. Even federal employees can have difficulties locating their employer because of the many government reorganizations over the 30 years since the end of the Vietnam War. For example, one claimant who worked for DOD in Vietnam had difficulty determining which office to send his claim to because the workers’ compensation office of his former employer, the U.S. Army Audit Agency, had been renamed and relocated. He initially filed his claim with his current DOD employer, the Defense Finance and Accounting Service, which advised him to send the claim to the Department of the Army’s Personnel and Employee Services, the office that now handles claims for former employees of the U.S. Army Audit Agency. Our review of the claims files also showed that contract employees and Labor had difficulty locating the responsible insurance carriers because of industry mergers, changes in carriers over time, and lack of easily accessible records. Some employers changed insurance carriers over time, so their current carrier was not the one that had provided coverage during the Vietnam War. Although Labor licensed the insurance carriers that provided coverage for contract employees during the war, the agency does not track information about the carriers in a format that is easily researchable. Labor officials told us that they keep the information on the licensed insurance carriers on handwritten 3 x 5 cards that are filed by employer name in filing cabinets. Searching for a carrier is a time- consuming effort because there are hundreds of cards for multiple policies covering various periods of time. In addition, Labor does not track historical changes in the ownership of the insurance carriers over time, and companies may have been acquired by other companies—a common practice in the insurance industry, according to Labor officials. For example, an insurance company that provided coverage for contract employees for 3 of the claims we reviewed was purchased by another company, which could not locate claims for these individuals from the old company’s records. Labor had no information about the company being purchased by another company and had difficulty locating the insurance carrier liable for payment. Difficulties identifying insurance carriers can add up to extensive delays for claimants. Of the 10 claims we reviewed from contract employees, 4 claimants had difficulty locating their insurance carrier. For example, one contract employee’s claim was delayed 13 months before the correct carrier was identified. Initially, the claimant mistakenly sent his claim directly to Labor instead of his employer and the employer’s insurance carrier. Once notified by Labor of the claim, the employer requested Labor’s assistance in locating the carrier. One of OWCP’s district offices searched its paper records (the 3 x 5 cards it retains on the carriers it licenses) and identified the correct carrier. At the same time, however, the employer asserted that another carrier was the responsible party. The claim was filed with this carrier, who later denied the claim, asserting that it was not the employer’s carrier during the period when the claimant worked for the employer. During the months that this carrier was deciding the claim, another of OWCP’s district offices, apparently unaware of the other district office’s efforts, identified yet a different carrier as the responsible party. When presented with the claim, this carrier also denied it because the carrier had not been the employer’s carrier during that time. Over a year since the claim was first filed, the employer correctly identified the correct carrier. The claim was filed with the correct carrier and was ultimately denied (see table 1). Employer and insurance carrier processing errors and difficulty locating records further delayed employees’ claims. For the claims we reviewed, several employers had difficulty verifying the claimant’s employment because they were unable to locate personnel records for employees who had worked in Vietnam. For example, one employer denied that the claimant had been one of its employees, although the claimant provided copies of pay stubs, employee identification documents, and several letters of recommendation from the company. Eventually, Labor interceded on behalf of the employee and insisted that the employer recognize the claimant as an employee. Insurance carriers also had difficulty determining if they had provided coverage to employers and claimants because of difficulties locating old records. Even federal employees can experience difficulty finding their employers and locating records. For example, one federal employee’s claim was delayed over 2 years while the Department of Agriculture determined that he was an employee during the Vietnam War but was on detail to the Department of State. In its reply to Labor regarding the delay, the Department of Agriculture noted that it no longer had records for the period in question. Another federal employee, who was unable to obtain relevant medical records from his employer or the National Personnel Records Center, eventually withdrew his claim stating “at this time, I am under Hospice care and have not the energy to fight you anymore.” Once claims were submitted to Labor, both federal and contract employees faced additional delays because of processing errors at Labor, including claims being sent to the wrong office and information on the claims forms being typed incorrectly. For example, for one claim from a federal employee, Labor incorrectly processed the claimant’s request for reexamination of the written record by Labor’s Branch of Hearings and Review (typically, a claimant’s second level of appeal), instead sending it to the Employees’ Compensation Appeals Board (a claimant’s final level of appeal). This error created confusion and delayed processing of the claim for 11 months while the error was identified and the claim sent to the correct location. For the same claim, Labor continued to send notices to the claimant’s former federal employer at the wrong address for over a year, even though the post office returned these letters stamped “undeliverable” and the employer notified Labor of the correct address. Of the 12 claims filed by federal employees for medical conditions related to Agent Orange exposure, Labor denied 11 of them for failure to meet at least one of FECA’s five requirements, and 1 claim was withdrawn by the claimant. Of the 11 claims that were denied, Labor denied 10 of them because the claimant failed to prove a causal link between his medical condition and exposure to Agent Orange, and 1 claim was denied because it was not filed within the time limits prescribed by FECA. Furthermore, 5 of the claims denied by Labor were appealed by the claimants. Of those that were appealed, Labor upheld the denial of 4 claims, and a decision is still pending on 1 claim. All of the claims that were appealed were initially denied because of the claimants’ failure to prove a causal link between exposure and their medical conditions. Three of the 5 claimants requested reconsideration of their claims by a claims examiner. Labor upheld its initial denial after reconsidering 2 of these claims, and to date, neither claimant has sought a hearing by OWCP’s Branch of Hearings and Review or a review by the Employees’ Compensation Appeals Board. The third claim for which a reconsideration was requested is still pending. Of the 2 remaining claims that were appealed, one of the claimants requested an oral hearing; the denial was upheld. The other claimant sought redress through both a written review by the Branch of Hearings and Review and an appeal to the Employees’ Compensation Appeals Board. The board upheld Labor’s decision. Almost all of these claims from federal employees—10 of the 11 claims— were denied because the claimants failed to prove a causal link between their medical conditions and exposure to dioxin. Under FECA, to prove causation, claimants must provide “medical evidence establishing that the employment factors identified by the claimant were the proximate cause of the condition for which compensation is claimed, or, stated differently, medical evidence establishing that … the diagnosed condition is causally related to the employment factors identified by the claimant.” To determine whether a claimant has shown proximate cause, Labor’s claims examiners and hearings representatives told us that they examine the medical research and the “rationalized medical opinions” provided by the claimants’ doctors to demonstrate an explicit cause and effect relationship between the medical conditions and alleged exposure. Claims examiners and hearing representatives told us that the claimants’ doctors may use medical literature to support these rationalized opinions, but the doctors must apply this research to the claimants’ specific circumstances. Claimants, however, have faced three challenges to proving a causal link between their medical conditions and their exposure to dioxin. First, some of the claimants’ doctors are not familiar with the link between dioxin exposure and the development of some illnesses. In one case file we reviewed, one of the claimant’s doctors stated: “I have very little training in epidemiology and cannot tell you much about the coincidence of Agent Orange exposure with the development of prostate cancer,” and another said he was “certainly unable to provide any kind of expert opinion” on the relationship between Agent Orange and the development of prostate cancer. Second, according to Labor, some of the claimants’ doctors relied on general medical research to support their opinions without applying the research to the individual claimant. For example, in one case, the claimant’s doctor stated that he had reviewed the research on Agent Orange, relying primarily on the IOM biennial report that showed an association between prostate cancer and exposure to dioxin to support his opinion that the claimant’s prostate cancer was related to his exposure to Agent Orange. Labor denied the claim because the doctor failed to give his opinion but rather inferred a connection by presenting an excerpt from an article published by the National Academies Press. The decision letter also stated that Labor has long established that causality cannot be inferred and publications are of no evidentiary value, as they are not case specific. The third challenge the claimants faced is ruling out other factors that could have caused their medical conditions. For long-latency illnesses, such as the cancers associated with dioxin exposure, it is difficult for the claimants’ doctors to definitively rule out other factors that could have caused the medical condition during the intervening years between Agent Orange exposure and the development of the medical condition. For example, in one case that was denied by Labor, five different doctors— including one doctor to whom the claimant was referred by Labor— asserted an association between the claimant’s medical condition and his exposure to Agent Orange. The doctor to whom the claimant was referred by Labor stated that “it is reasonable to assume that his exposure to Agent Orange and to other herbicides are the causative agent for his transitional cell carcinoma .” Another doctor provided his opinion that the claimant’s bladder cancer was a consequence of his exposure to dioxin and other environmental toxins during his tenure in Vietnam. A third doctor stated in his written opinion that “chemical exposures in the course and scope of his duties as a federal employee are the cause of his bladder cancer.” However, the claim was denied because Labor determined that the claimant failed to submit medical evidence that attributed his bladder cancer to his exposure to herbicides in Vietnam. The decision letter stated that although one of the doctors provided a medical opinion stating a cause and effect relationship between the claimant’s medical conditions and his federal employment, the doctor “cannot state with certainty that non-work related factors have no connection to the claimed conditions. Specifically, he admits that cigarette smoking and exposure to asbestos are also bladder carcinogens. Therefore, his opinion is considered speculative and equivocal in nature, and has little probative value.” The claimant requested four different reconsiderations by OWCP’s claims examiners, and after his death, his widow requested a fifth reconsideration; Labor’s decision was upheld each time. Although Labor and the insurance carriers identified a total of 20 claims from contractor employees, we were not able to include 10 of them in our analysis of the disposition of the claims because Labor identified them too late for us to include them. For the 10 claims we reviewed, 1 was accepted and 9 were initially denied by the insurance carriers. Of the 9 claims denied, 5 of the claimants asked Labor to review the insurance carriers’ decisions, and 4 claimants took no further action on the claims. Of the 5 claims that the claimants asked Labor to review, 3 claimants are waiting for a hearing by one of Labor’s administrative law judges. For the other 2 claims, Labor upheld the insurance carriers’ decisions—1 because the claim was not filed within the 2-year time period allowed under the law and the other because the claimant had not sufficiently proved that he had been exposed to Agent Orange in Vietnam. For the one claim accepted for payment, the claimant asked Labor to intervene because his employer, a self-insured contractor for the CIA, was no longer in business. Absent an employer or insurance carrier, the CIA— acting in the role of the employer and the insurance carrier—stated that it “had no objections” to paying the claim. In accepting the claim, Labor referenced VA’s policy regarding Agent Orange claims and an Environmental Protection Agency report on the health effects of dioxin exposure to justify its approval of compensation. Noting VA’s presumption that any veteran who served in Vietnam and developed certain medical conditions associated with Agent Orange had been exposed, the claims examiner stated that it would be difficult for Labor to take a contrary position. This claim was also accepted for reimbursement under the War Hazards Compensation Act. Under the act, an insurer who pays a claim for an injury from a war risk may be reimbursed for the costs it bears in connection with the claim. However, according to Labor officials, some insurance carriers may not be aware that they can obtain reimbursement under the War Hazards Compensation Act. If Congress chooses to address this issue, several legislative options could provide more similar consideration of civilian claims as compared with the claims of their veteran counterparts and improve civilian access to workers’ compensation or other benefits. However, these options have cost implications, although the lack of data on the number of civilians in Vietnam and the difficulty potential claimants have in locating the information needed to file claims make it difficult to accurately assess their potential costs. In addition, these options should be carefully considered in the context of the current federal fiscal environment, as well as the significant policy and cost implications any changes could have for civilian employees involved in wars and conflicts since the Vietnam era. Congress could amend the Agent Orange Act and related legislation that authorizes benefits for veterans to include civilians. However, including civilians under these laws may raise concerns for those who feel that civilians should not be entitled to the same benefits as military veterans. Alternatively, Congress could create a separate program to cover claims for medical conditions that civilians develop as a result of their exposure to Agent Orange. In addition to the Agent Orange Act for veterans, Congress has established programs for some special populations exposed to toxic substances in the workplace that develop into serious medical conditions after long latency periods. For example, Congress passed the Radiation Exposure Compensation Act in 1990 to provide payments to individuals who contracted certain cancers and other serious diseases as a result of their exposure to radiation released during nuclear weapons tests or as a result of their employment in the uranium mining industry. More recently, Congress passed the Energy Employees Occupational Illness Compensation Program Act of 2000, as amended, which provides payments to contract employees working in Department of Energy facilities who were exposed to radioactive and hazardous materials and subsequently developed illnesses such as cancer and lung disease. Some key components of these special programs are Providing restitution: The Radiation Exposure Compensation Act was enacted to establish a procedure for making partial restitution to individuals who became ill because of radiation exposure from aboveground nuclear tests or uranium mining. Restitution payments range from $50,000 for testing victims to $100,000 for uranium miners. The Energy Employees Occupational Illness Compensation Program Act also makes payments to eligible claimants and provides medical coverage for specific illnesses. Creating eligibility criteria based on a less stringent standard of proof for the causal link between exposure and medical conditions: Because of the inherent difficulties of proving a link between exposure to radiation or toxic substances and occupational diseases that occur after long latency periods, other compensation programs rely on a less stringent burden of proof than FECA or DBA. For example, the Energy Employees Occupational Illness Compensation Program Act allows payments if employment at an energy facility was “as least as likely as not” to have caused, contributed to, or aggravated the claimed medical condition. Using ongoing research on conditions associated with exposure to determine eligibility: On the basis of recent research findings, the Radiation Exposure Compensation Act Amendments of 2000 expanded the list of diseases that may qualify individuals for compensation and decreased the level of radiation exposure that is necessary to qualify for compensation. Under the Agent Orange Act, VA uses IOM’s biennial review of research on dioxin exposure and recommendations to add to its list of accepted medical conditions related to Agent Orange exposure. Assisting claimants in processing their claims: The Energy Employees Occupational Illness Compensation Program Act, as amended, created an ombudsman position to provide information to claimants. According to the Director of Labor’s Energy Employees Occupational Illness Compensation Division, the agency provides information and assistance to claimants in a variety of ways, including resource centers located throughout the country that assist claimants in completing claim forms and obtaining the documentation needed to support their claims. He also stated that Labor has provided pamphlets, public service announcements, and direct mailings to potential claimants that explain the program, benefits available, procedures for filing claims, and where they can obtain assistance. The Radiation Exposure Compensation Act also provides for outreach and information to potential claimants. The Department of Justice administers this program and has established an Internet Web site, conducts on-site visits to groups and organizations to promote the program, and operates a toll-free telephone line for program queries. Congress could amend the GI Bill Improvement Act of 1977, which allows DOD to retroactively grant military status and authorize full VA benefits to certain civilian groups that support the military during armed conflicts. Women who served in the Women’s Air Forces Service Pilots during World War II are the model for the statute, because they comprised a quasi- military group that rendered service to the United States during wartime, but at the time, were excluded from joining the armed forces because of their gender. In 1977, Congress specifically recognized the service of that group as active military duty and directed DOD to issue regulations under which similarly situated groups could be recognized. In 1987, a federal court determined that DOD had failed to clarify the factors and criteria used in implementing this statute. As a result, DOD clarified the rules for accepting groups and issued DOD Directive 1000.20. Under this directive, a group must submit an application showing that it meets the criteria, including the criterion that it provided service to the U. S. government during a period of armed conflict, was subject to military control, and was integrated into the military organization (see table 2). Groups do not, however, have to meet all of the criteria in order to be accepted, but it remains unclear how many of the criteria must be met for a group to be accepted. Although five groups of civilians who worked in Vietnam during the war have applied for consideration under DOD Directive 1000.20, none has been accepted. To date, Slick Airways, a division of Airlift International; U.S. civil servants on temporary duty at Long Binh, Vietnam; U.S. and foreign civilian employees of CAT, Inc.; U.S. civilian crewmembers of the Flotilla Alaska Barge and Transport Company; and Vietnamese citizens who served in Vietnam as commandos under contract with the U.S. armed forces have applied for consideration under the directive. In its application, one of these groups claimed to have met all seven criteria for acceptance. In its decision, the DOD Civilian/Military Service Review Board stated that the group met the “organizational authority over the group” criterion, and that board members disagreed over whether the group met the “uniqueness of service” criterion. In addition, the board acknowledged that there was evidence of military command authority over the group but asserted that the group was not integrated into the military organization and was not subject to military discipline or military justice. The application was denied. The options presented above could have significant cost and policy implications. However, with little data available on the actual number of civilians in Vietnam, their exposure levels, and the number of claims that would be filed, it is difficult to estimate the costs of these options. According to information provided to us by VA officials, of the 2.3 million living military veterans who were in Vietnam during the war approximately 160,000 (less than 10 percent) are receiving disability compensation benefits from VA for the four most common medical conditions associated with Agent Orange exposure. VA’s average annual cost of providing workers’ compensation and medical expenses to veterans receiving benefits under the act for the four most common medical conditions is about $8,500 for disability compensation and $1,000 for medical expenses. Although these costs do not include the costs of administering the claims, when VA added diabetes as a condition related to Agent Orange exposure, it estimated that the administrative costs for each claim processed would be about $350. Including civilian employees who worked in Vietnam under these options also has policy implications. It could set a precedent that might prompt other federal and contract employees who have worked for the U. S. government in war zones since the Vietnam War—such as the Gulf War and the current conflict in Iraq—to seek similar benefits. Such a precedent could prove costly because the U.S. military has employed a much larger number of contractor personnel in recent wars and conflicts than in Vietnam. The fact that Labor does not collect data on Agent Orange claims that allow it to identify the claims using its database makes it difficult to identify trends in the number and disposition of claims. The coding errors in Labor’s database also make it difficult to identify and track these claims. In addition, while Labor is the licensor of insurance carriers for government contract employees, it is difficult, without proper records, to help claimants identify the insurance carriers or determine how well insurers are following through on their obligations. Both Labor and claimants are burdened by the difficulties the agency has in providing information to claimants—particularly contract employees filing claims under DBA—on how to file claims, locate their former employers, and identify the employers’ insurance carriers, difficulties that leave room for delays and errors in processing claims. Federal and contract employees who may have been exposed to Agent Orange while working for the United States during the Vietnam War have clearly had a different experience than their military counterparts in requesting compensation under the Agent Orange Act. In short, these employees must meet more stringent standards in pursuing claims under FECA and DBA. The cost implications of options designed to increase access to compensation for civilians exposed to Agent Orange should be carefully considered in the context of the current and projected fiscal environment. The lack of information available about the number of possible civilian Agent Orange claims, however, makes it difficult for us to estimate the potential costs were such options to be adopted. In addition, any consideration of these options should include an assessment of the policy and cost implications the changes could have for other civilian employees involved in wars and conflicts since the Vietnam War, such as the war in Iraq. Setting a precedent for expanding benefits to civilian employees could have a much larger impact in the future as the U.S. military increases its reliance on contract employees. To improve the handling of civilian Agent Orange claims, the Secretary of Labor should direct OWCP to assign a unique identifying code to Agent Orange claims and develop procedures to ensure that these claims are coded correctly; provide better oversight of licensed DBA insurance carriers by requiring the Office of Longshore and Harbor Workers to track the information it retains on licensed insurance carriers for Vietnam era employers in an easily searchable format, such as in an automated file, and track changes in ownership for each licensed carrier in order to be able to determine liability for payments; and direct the appropriate offices to provide contract employees with the information needed to file Agent Orange claims by taking such measures as posting information on Labor’s Web sites or developing informational brochures that include information on how to file a claim under DBA, such as which forms to use, and information on Vietnam era contractors with the names of their insurance carriers licensed by Labor. We provided a draft of this report to Labor, DOD, and VA for comment. Labor and VA provided written comments on the draft, which are reproduced in appendixes II and III. Labor generally agreed with our recommendations. The agency agreed to improve its handling of civilian Agent Orange claims by developing a unique code to use in identifying these claims, improving its oversight of licensed DBA insurance carriers, and assisting contract employees in obtaining information on filing claims by enhancing the information on its Web site. Regarding our recommendation to develop a better system for tracking information on licensed DBA insurance carriers, Labor stated that it does not have the funding needed to create a relational database or the resources to enter these data into such a database. However, it also stated that a current evaluation of its processes may provide some recommendations for enhancing its data capability in this area. Given the availability of easy to use, off-the-shelf database packages, we continue to believe that Labor could implement this recommendation with relatively little expense and that data entry could be phased in over time or contracted out. VA expressed serious concerns about the legislative options for easing civilians’ access to workers’ compensation benefits. It highlighted the additional costs and administrative burdens associated with the options. VA also expressed concern about the precedent-setting implications these options could have for civilian employees involved in other wars and conflicts since the Vietnam War. As noted in the report, we agree that the cost and policy implications of these options should be carefully considered. DOD provided only an informal technical comment on the report. Labor and VA also provided a few technical clarifications, which we incorporated as appropriate. We will send copies of this report to the Secretaries of Labor, Defense, Veterans Affairs, and other interested parties. We will also make copies available to others upon request. In addition, the report will be available at no charge on GAO’s Web site at http://www.gao.gov. Please contact me or Revae Moran on (202) 512-7215 if you or your staff have any questions about this report. Other contacts and staff acknowledgments are listed in appendix IV. Many of the agencies we contacted were unable to locate records on federal and contract workers employed in Vietnam, primarily because of the age of the records and the fact that they were not automated. However, using the limited historical data provided to us by the Department of State and the Department of Defense (DOD), we developed estimates of the number of civilian employees who worked in Vietnam during the war. The Department of State was not able to provide the total number of contract employees who had worked in Vietnam but was able to identify the names of federal employees who had worked there between January 1964 through November 1965 and January 1967 through November 1974 from its quarterly Foreign Service reports. As these are historical reports, we were unable to assess the reliability of these data for several reasons: Most records were not computerized in the 1960s or 1970s, most paper records have either been destroyed or were not organized in a way that would facilitate the identification of personnel, and most officials who were knowledgeable about employees in Vietnam are no longer with the agency. We entered the names from these quarterly lists into an automated file, sorted out likely duplicates, and counted the remainder. On the basis of our analysis, we estimated that about 6,000 employees of the Department of State worked in Vietnam during the war. In the absence of information from the Central Intelligence Agency (CIA) and the Departments of Agriculture and Treasury, we used the Department of State estimate as a proxy for the number of federal and contract employees each agency employed in Vietnam. We also assumed that these agencies did not have as many employees in Vietnam as the much larger number of DOD contract employees needed to support the military operations. On the basis of these assumptions, we estimated that these four agencies employed about 24,000 workers in Vietnam during the war. Although DOD officials were unable to locate information on the number of federal employees who had worked for the agency during the Vietnam War, we located historical reports of civilian personnel strength by year at DOD’s Directorate for Information, Operations, and Reports and used these data to develop estimates of the number of federal civilian employees who worked for DOD in Vietnam. These data provide a count of the number of employees for one point in time during the year. However, DOD officials told us that civilians likely stayed in Vietnam for a 2-year rotation before returning to the United States, so totaling these annual counts would overestimate the total number of employees. To obtain an unduplicated count, we used the annual civilian personnel strength data and assumed a 2-year rotation. For example, in 1964 DOD had 44 federal employees in Vietnam, but in 1965 had 51 employees—an addition of 7 new employees. In 1966, DOD had a total of 444 federal employees. However, assuming the 44 employees from 1964 had completed their 2-year rotation and returned home, they would not be included in this count. Therefore, the 444 is composed of the 7 employees who arrived in 1965 and 437 new employees who arrived in 1966. Using this methodology, we estimated that about 4,600 DOD employees were in Vietnam during the war (see table 3). We obtained the personnel strength data from published DOD reports but were unable to assess the reliability of the data for several reasons: Most records were not computerized in the 1960s and 1970s, most paper records have either been destroyed or were not organized in a way that would facilitate the identification of personnel, and most officials who were knowledgeable about employees in Vietnam are no longer with the agency. DOD was unable to provide information on the number of contract employees it had working in Vietnam during the war. However, from DOD’s Directorate for Information, Operations, and Reports we were able to obtain the annual dollar amount of DOD service contracts provided to companies between 1966 and 1974 for work in Vietnam, and we used these data to develop estimates of the number of contract workers. DOD officials told us that service contracts were the most likely type of contract to be used to pay salaries to contract workers, as opposed to other types of contracts that would have been used to purchase items such as equipment and supplies. We were unable to assess the reliability of these data for reasons similar to those noted for the data we obtained for federal employees. In addition, the data are further limited because we were unable to determine if the service contracts would have been for salaries to U.S. citizens or foreign nationals and because 3 years of data (1964, 1965, and 1975) were not available. Using the limited data available, we divided these annual amounts by a range of “burdened labor rates” to estimate the number of employees represented by these contracts each year. DOD officials told us the burdened labor rate—-salary, subsistence expenses, company overhead, profit, insurance, travel, and other costs that would have been included in the total contract amount—-could vary among contracts. However, a DOD official with experience administering contracts advised us that doubling an employee’s annual salary would approximate this burdened labor rate. However, DOD was unable to provide us with information on the range of salaries paid to contract employees in Vietnam. Therefore, to estimate annual salaries for contract employees, we obtained available salary scales for federal employees from 1964 to 1975 and selected a range of low, middle, and high salaries. For our analysis, we assumed annual salaries of $7,500, $15,000, and $25,000 and doubled them to obtain burdened labor rates of $15,000, $30,000, and $50,000 per person. We divided these burdened labor rates into the annual contract amounts to get an estimated number of contract employees employed in Vietnam each year. As with the annual estimates of federal DOD employees, we assumed a 2-year rotation to obtain an unduplicated count, which ranged from about 43,000 to 142,000 contract employees (see table 4). Nina E. Horowitz made significant contributions to this report. In addition, Margaret L. Armen, Susan C. Bernstein, Benjamin A. Bolitzer, Christina Cromley, and Jean L. McSween provided key technical and legal assistance throughout the engagement. | Concerns about difficulties civilian employees of the U.S. government may have in obtaining workers' compensation benefits for medical conditions they developed as a result of their exposure to Agent Orange in Vietnam led to GAO being asked to determine (1) what is known about the number of civilians who served in Vietnam, both those employed directly by the U.S. government and those employed by companies that contracted with the government; (2) what is known about the number, processing, and disposition of claims filed by these civilians; and (3) what options are available if Congress chooses to improve access to benefits for civilians exposed to Agent Orange in Vietnam who developed illnesses as a result of their exposure, and what are their cost implications? While many federal agencies that were likely employers of civilian federal and contract workers during the Vietnam War had little information on these employees, a few provided us with limited information on federal employees and the amounts of contracts for companies that provided services to the military in Vietnam. We were unable to determine the reliability of the data provided. However, we used these data for the limited purpose of estimating that between 72,000 and 171,000 civilians may have worked for the U.S. government in Vietnam between 1964 and 1974. Our ability to provide more accurate information on the size of this workforce was limited because most agency records maintained during this period were not computerized, and because so much time has elapsed that many paper records have been destroyed and many agency personnel knowledgeable of the period are no longer working at these agencies. For the 32 Agent Orange-related claims identified (12 from federal civilians and 20 from contract employees), we found that these claimants faced many difficulties and delays because of a lack of readily available information on how to file a claim, their Vietnam era employers, and their exposure to Agent Orange, as well as processing delays caused by employers, insurance carriers, and Labor. Both Labor and private insurance carriers had difficulty identifying the number of claims they had received, largely because they do not assign a unique code to Agent Orange claims that would enable easy identification. Most of the claims we identified were filed in the past 10 years, and most have been denied. Denials of the claims stemmed, in part, from the fact that under the laws governing these claims, claimants must demonstrate a causal link between their exposure to Agent Orange and their medical conditions, which is difficult to prove so many years later. If Congress chooses to address this issue, several legislative options could be considered to attempt to improve access to compensation for civilians who were exposed to Agent Orange and developed medical conditions as a result, although they could have significant cost and policy implications. Congress could amend current law authorizing benefits for veterans to cover certain civilians or set up a separate program to cover them. Another option is for Congress to amend the GI Bill Improvement Act of 1977, which allows DOD to retroactively grant military status and authorize full VA benefits to certain civilian groups that support the military during armed conflicts. However, it is difficult to assess the potential costs of these options because of the limited data available on the number of civilians and their claims for compensation. Despite the difficulty of assessing the potential costs, before any of these options are pursued, their fiscal impact and the precedent-setting implications for individuals involved in other wars and conflicts since the Vietnam era should be carefully considered. |
Since the 1960s, there have been significant advances in protecting the rights and welfare of human subjects in biomedical and behavioral research. The federal presence has grown in this area, establishing and enforcing regulations for protecting human subjects in federally funded and federally regulated research. HHS’ regulation of biomedical and behavioral research consists of two principal tiers of review: one at the federal level and one at the research institution level. Both tiers are responsible for ensuring that individual researchers and their research institutions comply with federal laws and regulations for protecting human subjects. When the core of HHS’ human protection regulations was adopted by 15 other federal departments and agencies in 1991, it became known as the Common Rule. Within the HHS oversight system there are several entities overseeing compliance with human protection regulations. At the federal level are the NIH’s OPRR and the FDA. At the local level, institutional review boards (IRB)—that is, review panels that are usually associated with a particular university or other research institution—are responsible for implementing federal human subject protection requirements for research conducted at or supported by their institutions. In general, IRB members are scientists and nonscientists who volunteer to review proposed studies. The Common Rule requires research institutions receiving federal support and federal agencies conducting research to establish IRBs to review research proposals for risk of harm to human subjects and to perform other duties to protect human research subjects. It also stipulates requirements related to informed consent—how researchers must inform potential subjects of the risks to which they, as study participants, agree to be exposed. HHS regulations contain additional protections not included in the Common Rule for research involving vulnerable populations—namely, pregnant women, fetuses, subjects of in vitro fertilization research, prisoners, and children. Preventing harm to human subjects’ rights and welfare is the overarching goal of HHS’ protection system. The organizational components of the system—OPRR, FDA, and local IRBs—have heightened the compliance of the research community with human protection guidelines through a variety of activities. OPRR’s chief preventive measure is its assurance process. Assurances are contract-like agreements made by research institutions to comply with federal human subject protection requirements. Assurances include the following: a statement of ethical conduct principles, a guarantee that an IRB has been designated to approve and periodically review the institution’s studies, and the specifics of the IRB’s membership, responsibilities, and process for reviewing and approving proposals. An institution must have an assurance approved by OPRR before the institution can receive HHS research funding. Depending on an institution’s willingness and expertise, as well as the requirements of specific research studies, OPRR can negotiate several different types of assurances. Through a multiple project assurance, for example, OPRR can delegate broad authority to an institution, allowing it to approve a wide array of research studies. Or, through a single project assurance, OPRR can retain the authority to approve studies one by one. As of November 1995, OPRR had 451 active multiple project assurances and over 3,000 active single project assurances. OPRR also had over 1,300 active cooperative project assurances, which pertain to multiple-site research projects. FDA works to prevent the occurrence of human subject protection violations in the drug research it regulates. Before permitting drug research with human subjects, FDA requires researchers to submit a brief statement that they will uphold ethical standards and identify the IRB that will examine their study. FDA can request modifications to proposals or reject proposals deemed to present unacceptable risk. IRBs play a major role in the protection of patients and healthy volunteers, according to federal officials and members of the research community alike. For each study conducted using human subjects, researchers must first get IRB approval. In fact, HHS will neither fund new human subject research nor authorize ongoing research to continue without IRB approval. The IRB’s basic role when deciding whether to approve new research is to determine if the rights and welfare of subjects will be safeguarded. IRB members ensure that a study’s procedures are consistent with sound research design and that the consent document conforms to federal rules for adequate informed consent. IRB reviews, however, generally do not involve direct observation of the research study or the process in which a subject’s consent is obtained. IRB members are expected to recognize that certain research subjects—such as children, prisoners, the mentally disabled, and individuals who are economically or educationally disadvantaged—are likely to be vulnerable to coercion or undue influence. The local nature of most IRBs enables members to be familiar with the research institution’s resources and commitments, the investigators’ capabilities, and community values. IRBs are also required to review previously approved research periodically. The purpose of these continuing reviews is for IRBs to keep abreast of a study’s potential for harm and benefit to subjects so that boards can decide whether the study should continue. No system of prevention is foolproof. Therefore, FDA’s and OPRR’s monitoring and enforcement efforts include review of results of IRB operations, clinical trials, and allegations of researcher misconduct. FDA’s primary tool for monitoring human subject protection is its on-site inspections of the IRBs that oversee drug research. FDA’s inspections of IRBs demonstrate that, at some institutions, compliance with federal oversight rules is uneven. Between January 1993 and November 1995, FDA issued 31 Warning Letters to institutions regarding significant deficiencies in the performance of their IRBs’ oversight of drug research. Among the more serious violations cited were the following: participation of researchers as IRB members in reviewing their own studies, absence of a process for tracking ongoing studies, and failure to ensure that required elements of informed consent were contained in consent documents. The FDA Warning Letters terminated the IRBs’ authority to approve new studies or to recruit new subjects into ongoing studies until FDA received adequate assurance of corrective action. From October 1993 to November 1995, FDA found less serious deficiencies involving about 200 other IRBs, such as failure to document the names of IRB members and failure of IRB minutes to identify controversial issues discussed. In addition to monitoring IRBs, FDA must be satisfied that manufacturers have complied with human subject protection regulations during clinical trials. To this end, FDA conducts on-site inspections of individual drug studies. When examining how a trial was conducted, FDA determines, for example, if subject selection criteria were followed, if subjects’ consent was documented, and if adverse events were reported. FDA’s principal focus in these efforts, however, is to verify the accuracy and completeness of study data as well as the researcher’s adherence to the approved protocol. Most of the drug study violations FDA identifies are relatively minor. From 1977 to 1995, about one-half of the violations related to the adequacy of the informed consent forms. FDA also identifies more serious violations. Since 1980, FDA has taken 99 actions against 84 clinical investigators regarding their conduct of drug research with human subjects. It cited such instances of serious misconduct as failure to obtain informed consent; forgery of subjects’ signatures on informed consent forms; failure to inform patients that a drug was experimental; and failure to report subjects’ adverse reactions to drugs under study, including a subject’s death. FDA has used four types of actions to enforce its regulations: (1) obtaining a promise from a researcher to abide by FDA requirements for conducting drug research, (2) invoking a range of restrictions on a researcher’s use of investigational drugs, (3) disqualifying a researcher from the use of investigational drugs, and (4) criminally prosecuting a researcher. OPRR also responds to inquiries and investigates allegations of potential harm to human subjects. These inquiries and investigations are largely handled by telephone and correspondence; few investigations result in site visits. Over the past 5 years, OPRR has investigated numerous allegations of serious human subject protection violations. One such example was OPRR’s investigation of whether informed consent procedures clearly identified the risk of death to volunteers in the tamoxifen breast cancer prevention trial. OPRR found that informed consent documents at some sites failed to identify some of tamoxifen’s potentially fatal risks, such as uterine cancer, liver cancer, and embolism. In another instance, OPRR compliance investigators found deficiencies in informed consent and in IRB review procedures in a joint NIH-French study of HIV-positive subjects in Zaire. Among cases currently under investigation are allegations that researchers at a university-based fertility clinic transferred eggs from unsuspecting donors to other women, without consent of the donors. In many cases, OPRR has required institutions to take corrective action. In some instances, OPRR has suspended an institution’s authority to conduct further research in a particular area until problems with its IRBs were fixed. From 1990 to mid-1995, there were 17 instances in which OPRR imposed some type of restriction on an institution’s authority to conduct human subject research. Oversight systems are by nature limited to minimizing, rather than fully eliminating, the potential for mishap, and HHS’ system for protecting human subjects is no exception. Various factors reduce or threaten to reduce the effectiveness of IRBs, OPRR, and FDA. First, pressure from heavy workloads and competing priorities can weaken IRB oversight. In some cases, the sheer number of studies necessitates that IRBs spend only 1 or 2 minutes of review per study. Some IRBs allow administrative staff with no scientific expertise—not board members themselves—to review continuing review forms, ensuring only that the information has been provided. The independence of IRB reviews can be compromised in cases in which IRB members have close collegial ties with researchers at their institutions, when there are pressures from institution officials to attract and retain funding, when IRB members have financial ties to the study, and when IRB members are reluctant to criticize studies led by leading scientists. The increasing complexity of research makes it difficult for some IRBs to adequately assess human subject protection issues when members are not conversant with the technical aspects of a proposed study, or when studies raise ethical questions that have not been satisfactorily resolved within the research community. Given the growing number of large-scale trials, if most involved IRBs have approved a proposed study, then IRBs at other institutions may feel pressured to mute their concerns about the study. Pressures to recruit subjects can lead some researchers and IRBs to overlook informed consent deficiencies. Second, various factors may hamper OPRR oversight. OPRR staff make no site visits during assurance negotiations; instead, they review an institution’s written application and conduct written or oral follow-up. In contrast, on the basis of experience gained from on-site investigations for compliance purposes, OPRR staff told us that their ability to evaluate an institution’s human protection system is greatly enhanced by direct observation and personal interaction with IRB staff, IRB members, and researchers. In the future, OPRR expects to conduct from 12 to 24 technical assistance visits annually to institutions holding OPRR assurances. NIH’s organizational structure may hamper the independence of OPRR with respect to its oversight of studies conducted by NIH’s Office of Intramural Research. From a broad organizational perspective, a potential weakness exists because NIH is both the regulator of human subject protections as well as an agency conducting its own research programs. The NIH Director, therefore, has responsibility for both the success of NIH’s intramural research programs and the enforcement of human subject protection regulations by OPRR. Third, FDA’s inspections of drug research may permit violations to go undetected. FDA’s inspection program is geared more toward protecting the eventual consumer of the drug than the subjects on whom the drug was tested. FDA does not inspect all drug studies but concentrates its efforts on commercial products likely to be approved for consumer use. Furthermore, FDA’s routine on-site inspections of drug studies are conducted only after clinical trials have concluded and subjects have completed their participation. Gaps also exist in FDA’s inspection of IRBs. FDA’s Center for Drug Evaluation and Research annually issues the results of about 158 inspections of the approximately 1,200 IRBs reviewing drug studies, although its goal has been to complete and issue reports on about 250 inspections each year. We found that in one of FDA’s 21 districts—one that contains several major research centers conducting studies with human subjects—12 IRBs had not been inspected for 10 or more years. Furthermore, FDA is 3 to 5 years behind in its scheduled reinspection of some IRBs with which it had noted problems. FDA officials told us that some of its inspectors may be inadequately prepared to understand the human subject protection implications of drug studies and to ask meaningful follow-up questions on the research protocols they review. Fourth, additional pressures make it difficult to guarantee the protection of human subjects. When seriously ill individuals, such as some HIV patients, equate experimental and proven therapies, some question the need for protections that appear only to restrict their access to therapy. When physician-researchers do not clearly distinguish between research and treatment in their attempt to inform subjects, the possible benefits of a study can be overemphasized and the risks minimized. When physicians use an innovative but unproven technique to treat patients, they may not consider the procedure to be research. Such treatments, however, could constitute unregulated research, placing people at risk of harm from unproven techniques. Our work suggests that over the last 3 decades federal regulators and members of the research community have improved the protection of human research participants. However, holes inevitably exist in the regulatory net because no oversight system can guarantee complete protection for each individual. The goals remain to encourage researchers’ ethical behavior without hobbling scientific research and to refine regulations and oversight activities to further improve subject protections. Given the many pressures that can weaken the effectiveness of the protection system, continued vigilance is critical to ensuring that subjects are protected from harm. Mr. Chairman, this concludes my prepared statement. I will be happy to answer any questions you or the other Members may have. For more information about this testimony, please call Bruce D. Layton, Assistant Director, at (202) 512-7119. Other major contributors included Frederick K. Caison, Linda S. Lootens, and Hannah F. Fein. The first copy of each GAO report and testimony is free. Additional copies are $2 each. Orders should be sent to the following address, accompanied by a check or money order made out to the Superintendent of Documents, when necessary. VISA and MasterCard credit cards are accepted, also. Orders for 100 or more copies to be mailed to a single address are discounted 25 percent. U.S. General Accounting Office P.O. Box 6015 Gaithersburg, MD 20884-6015 Room 1100 700 4th St. NW (corner of 4th and G Sts. NW) U.S. General Accounting Office Washington, DC Orders may also be placed by calling (202) 512-6000 or by using fax number (301) 258-4066, or TDD (301) 413-0006. Each day, GAO issues a list of newly available reports and testimony. To receive facsimile copies of the daily list or any list from the past 30 days, please call (202) 512-6000 using a touchtone phone. A recorded menu will provide information on how to obtain these lists. | GAO discussed the Department of Health and Human Services' (HHS) efforts to protect human research subjects, focusing on the prevention, monitoring, and enforcement activities of the National Institutes of Health's Office for Protection from Research Risks (OPRR) and the Food and Drug Administration (FDA). GAO noted that: (1) to ensure the protection of human research subjects, the agencies require researchers to make assurance agreements that they will comply with federal human subject protection requirements and uphold ethical standards; (2) the agencies also use institutional review boards (IRB), local review panels that review research plans to ensure that human subjects are protected; (3) both FDA and OPRR conduct on-site visits and inspections, clinical trials, investigations of allegations of researcher misconduct, and IRB reviews to identify violations of protection requirements; (4) to enforce the regulations, FDA and OPRR have requested modifications to research plans, restricted researchers' use of drugs, disqualified, suspended, or criminally prosecuted researchers; and (5) oversight effectiveness is hampered by heavy IRB workloads and competing priorities, organizational conflicts-of-interest, limited site visits and inspections, and pressures resulting from differing perceptions on the need for research versus treatment. |
Since the FSM and the RMI became sovereign nations, the U.S. relationship with the two countries has been defined by the original Compact of Free Association and the subsequent amended Compacts of Free Association. In 1986, the United States, the FSM and the RMI entered into the Compact of Free Association. This compact represented a new phase of the unique and special relationship that has existed between the United States and these island areas since World War II. The compact provided a framework for the United States to work toward achieving its three main goals: (1) to secure self-government for the FSM and the RMI, (2) to ensure certain national security rights for all of the parties, and (3) to assist the FSM and the RMI in their efforts to advance economic development and self- sufficiency. The first goal was met; the FSM and the RMI are independent nations and are members of international organizations such as the United Nations. The second goal was also achieved. At the time that the compact was negotiated, the United States was concerned about the use of the islands of the FSM and the RMI as “springboards for aggression” against the United States, as they had been used in World War II, and the Cold War incarnation of this threat—the Soviet Union. The compact and its related agreements established several key defense rights for all three countries. For example, the compact obligates the United States to defend the FSM and the RMI against an attack, or the threat of attack, in the same way it would defend its own citizens. Further, through a compact-related agreement, the United States secured access to military facilities on Kwajalein Atoll in the RMI through 2016. The third goal of the compact—advancing economic development and self- sufficiency for both countries—was to be accomplished primarily through U.S. direct financial payments to the FSM and the RMI. For 1987 through 2003, U.S. assistance to the FSM and the RMI to support economic development was estimated, on the basis of Interior data, to be about $2.1 billion. We found previously that many compact-funded projects in the FSM and the RMI experienced problems because of poor planning and management, inadequate construction and maintenance, or misuse of funds. Economic self-sufficiency had advanced but had not been achieved; although total U.S. assistance as a percentage of total government revenue fell in both countries, the two nations remained dependent on U.S. funds. U.S. direct assistance maintained standards of living that were higher than could be achieved in the absence of U.S. support. Another aspect of the special relationship between the FSM and the RMI and the United States involves the unique immigration rights that the compact grants. Under the original compact, citizens of both nations were allowed to live and work in the United States as “nonimmigrants” and could stay for long periods of time, with few restrictions. Further, the compact exempted FSM and RMI citizens from meeting U.S. passport, visa, and labor certification requirements when entering the United States. In recognition of the potential adverse impacts that Hawaii and nearby U.S. commonwealths and territories could face as a result of an influx of FSM and RMI citizens, the Congress authorized compact impact payments to address the financial impact of these nonimmigrants on Guam, Hawaii, and the Commonwealth of the Northern Mariana Islands (CNMI). In the fall of 1999, the United States, represented by the Department of State, and the two Pacific island nations began negotiating economic assistance and defense provisions of the compact that were due to expire in 2003. The negotiations also addressed immigration issues. Separate compacts were completed for the RMI and the FSM and went into effect on May 1, 2004, and June 25, 2004, respectively. Prior to formal implementation of the amended compacts, the United States provided funding via a continuing resolution and the Department of the Interior’s fiscal year 2004 appropriation legislation. According to the Department of State, the aims of the amended compacts are to (1) continue economic assistance to advance self-reliance, while improving accountability and effectiveness; (2) continue the defense relationship, including a 50-year lease extension (beyond 2016) of U.S. military access to Kwajalein Atoll in the RMI; (3) strengthen immigration provisions; and (4) provide assistance to lessen the impact of Micronesian migration on Guam, Hawaii, and the CNMI. The amended compacts’ second objective, continuing the U.S.-RMI defense relationship, has been addressed, as expiring defense provisions of the compact have been renewed and U.S. access to Kwajalein Atoll has been extended. However, one notable difficulty remains regarding this objective; although the U.S. government negotiated an agreement with the RMI government that allows for U.S. access to Kwajalein Atoll until 2086, the RMI government has not reached an agreement with Kwajalein Atoll landowners (who own the land under use by the U.S. government) that allows for this long-term access. The U.S. government is not involved in efforts to negotiate such an agreement, and neither the RMI government nor the Kwajalein Atoll landowners are actively pursuing resolution of this issue. The third and fourth objectives have also been addressed. Compact immigration provisions have been strengthened by, for example, requiring passports from FSM and RMI citizens entering the United States and clarifying requirements for bringing FSM and RMI children into the United States for adoption. Further, the amended compacts’ enabling legislation appropriates specific annual nonimmigrant impact compensation of $30 million for Guam, Hawaii, and the CNMI for fiscal years 2004 through 2023, with the distribution of funding between the locations based on periodic surveys identifying the number of FSM and RMI nonimmigrants in each location. The U.S. government intends to achieve its first objective—continuing economic assistance to advance self-reliance, while improving accountability and effectiveness under the amended compacts—by annually providing direct financial assistance, in the form of grant agreements, to the FSM and the RMI, for 20 years (fiscal years 2004 through 2023) (see tables 1 and 2). Grant assistance to the FSM and RMI is targeted to six specific sectors—education, health, public infrastructure, the environment, public sector capacity building, and private sector development—although the priority sectors are education and health. RMI grants must also target some funding to Ebeye and other Marshallese communities within Kwajalein Atoll. The U.S. Congress, in approving the amended compacts, also authorized a supplemental education grant for each country. The Congress determined that rather than remaining eligible for appropriations under certain education and labor program assistance, such as Head Start and Job Corps, the FSM and the RMI would instead receive supplemental direct grant assistance. In addition to providing sector grant funds, the amended compacts provide for the establishment of trust funds for both countries. While providing the direct grant assistance, the U.S. government will also contribute to the trust funds for both countries, and the FSM and the RMI will replace the grant assistance with trust fund earnings beginning in 2024. In addition, the FSM and the RMI must each make one-time contributions to its trust fund of $30 million, and other donors can contribute to the funds as well. Except for the fixed amounts set aside as audit grants, the amounts listed in tables 1 and 2 will be partially adjusted for inflation, with fiscal year 2004 as the base year. Grant funding can be fully adjusted for inflation after fiscal year 2014 under certain economic conditions. Including estimated inflation adjustments, total U.S. assistance to both countries combined is projected at more than $3.5 billion over the 20-year assistance period. The amended compacts and their subsidiary fiscal procedures agreements (FPA) also establish numerous new accountability requirements. For example, under the amended compacts, the United States established a Joint Economic Management Committee (JEMCO) with the FSM and a Joint Economic Management and Financial Accountability Committee (JEMFAC) with the RMI to strengthen management and accountability and to promote the effective use of the compact funding. Each committee comprises five members, three from the United States and the other two from the FSM for the JEMCO and from the RMI for the JEMFAC. The Departments of the Interior, State, and HHS supply the three U.S. representatives, with the Department of the Interior representative serving as Chairman. The FSM and RMI governments select their respective representatives. The amended compacts require the committees to meet at least once annually, no later than 30 days before the beginning of the fiscal year, to review the budgeting and development plans of each of the governments, approve grant allocations and performance objectives, attach special conditions to any or all annual grant awards to improve program performance and fiscal accountability, and evaluate progress made under the amended compacts. JEMCO and JEMFAC render decisions by majority vote, except decisions regarding the division of RMI grants, which are made by consensus. Budget consultations with each country are also required prior to JEMCO and JEMFAC meetings to ensure that proposed compact budgets estimate sector grant requirements for the upcoming fiscal year. In addition, trust fund committees are required to address issues associated with the operations and investments of the FSM and RMI trust funds. The trust fund committee for each country is comprised of representatives from the United States and the FSM or the RMI, and other contributors may also join the committees. Language contained in the amended compacts’ enabling legislation states that it is the sense of the U.S. Congress that U.S. appointees to the trust fund committees “should be designated from the Department of State, the Department of the Interior, and the Department of the Treasury.” The FSM and RMI must also adhere to specific financial and performance reporting requirements as part of the amended compacts and the FPAs. The FPAs state that financial management systems must meet several standards addressing financial reporting, accounting records, internal and budget controls, cash management, and source documentation, and also specify applicable procedures regarding real property, equipment, and procurement where compact funds are involved. As part of their budgeting process, both countries must submit plans for the division of annual economic assistance among sectors. Additionally, per the terms of the FPAs, the FSM and RMI must submit quarterly financial status and cash transaction reports, and final annual financial reports and single audits must be completed following the end of each fiscal year. Further, for each sector grant, the FSM and RMI must submit quarterly performance reports comparing actual accomplishments with program objectives and identifying any problems or issues encountered during the reporting period. The FSM and RMI are responsible for the management and monitoring of the day-to-day operations of all sector grants and their activities to ensure compliance with all grant terms and conditions. In addition, the FSM and RMI must prepare and submit an annual report to the President of the United States on the use of grant assistance and describe progress toward mutually agreed-upon program and economic goals. Similarly, the President of the United States must submit an annual report to the Congress regarding several issues such as general social, political, and economic conditions in each country; the use and effectiveness of financial assistance; status of efforts to increase investments; and recommendations on ways to increase the effectiveness of assistance and to meet overall economic performance objectives. (See fig. 1 for a time line of key funding and accountability events that are required for each fiscal year.) OIA staff work closely with Department of State staff in Washington, D.C. and the U.S. embassies in the FSM and the RMI regarding compact matters. Department of State officials emphasized to us that they are primarily responsible for conducting foreign relations with the two countries and safeguarding U.S. strategic interests in the region, and these objectives necessarily include involvement in compact issues. An executive order is currently under preparation that identifies the specific responsibilities of U.S. agencies regarding compact matters. Further, OIA coordinates with HHS, a U.S. JEMCO and JEMFAC member, and in February 2005 a senior official from HHS began work in OIA’s Honolulu field office (which opened in 2003) and told us that he provides support to the OIA health sector efforts under the amended compacts, provides technical assistance for an array of U.S. federal health grants in the Pacific, and works to improve coordination with other public health entities in the region, such as the World Health Organization. The amended compacts differ from the original compact chiefly in that they provide for direct assistance through sector grant agreements, establish trust funds, and strengthened accountability and reporting provisions (all discussed earlier). In addition, unlike the original compact, the amended compacts do not include a “full faith and credit” guarantee, which had made it impracticable for the U.S. government to withhold compact funds. Instead, the FPAs contain provisions that explicitly allow for the withholding of funds if compact, FPA, or grant requirements are not met. Further, the FPAs allow for the suspension of funds if the FSM or RMI engage in gross negligence, willful misconduct, or material breach of terms and conditions with respect to the use of financial assistance provided under the amended compacts. In addition, funds can be withheld if the FSM and RMI do not cooperate in investigations regarding whether funds are being used for purposes outside what is authorized in the compact. Finally, the FPAs prohibit the FSM and RMI from issuing negotiable or transferable obligations evidencing indebtedness or encumbrance of compact economic assistance funds. In 2000, we found that under the original compact, the FSM and the RMI issued compact revenue-backed bonds in order to obtain greater funding in the earlier years of the compact. The funding was used to retire existing debt, pay for capital projects, and make financial investments. In later compact years, FSM and RMI bond debt payments (especially for the RMI) limited the availability of compact funds for other uses. The U.S. government has signed sector grant agreements with the FSM and RMI as provided for in the amended compacts, and trust funds for both countries have been established. The two countries did not spend about one-third of available funding in fiscal year 2004. Some of this unspent funding resulted from a lack of planning required to obtain access to certain grants—the FSM did not complete plans to obtain infrastructure grant funding and for the RMI did not complete plans and reforms for the use of funds targeted to address the special needs of Kwajalein Atoll. The U.S. government has not provided either country with a supplemental education grant established in the amended compact’s enabling legislation. Strategic planning issues that impact the long-term, effective use of funds have not been addressed by the three governments: (1) the allocations of sector grants are not linked to amended compact development goals such as the promotion of economic advancement and budgetary self-reliance, (2) the FSM and RMI have not developed strategic plans to manage required annual grant funding decreases, and (3) the trust funds have not been placed with investors that can maximize trust fund earnings (although efforts are under way to resolve this issue). The U.S. government signed grant agreements with the FSM and the RMI for fiscal years 2004 and 2005 in the compact-designated areas of health, education, infrastructure, environment, private sector, and public sector capacity building (see fig. 2 for FSM and RMI fiscal year 2005 grant allocations). FSM sector grant funding totaled $76 million annually for both years. The FSM national government, which directly signs grant agreements with the U.S. government and is the “grantee,” provides the majority of grant funds to the four FSM states, which are “subgrantees.” RMI grant funding totaled about $35 million annually for the 2 years. The RMI’s public sector capacity building grant was $103,514. This amount accounts for under 1 percent of total grant funding. While section 211(b)(2) of the amended compact with the RMI provides for an annual $1.9 million (with a partial inflation adjustment) for Kwajalein impact, these funds have not yet been provided pending the completion of a spending plan for these funds. The FSM’s largest grant for fiscal years 2004 and 2005 is in the area of education. This grant accounted for over a third of total sector grants. The health sector received the second highest grant amount for 2005, at 23 percent of total grant funding. The FSM has not yet met the goals outlined in the amended compacts’ enabling legislation, which states that it is the sense of the U.S. Congress that infrastructure improvements and maintenance should account for not less than 30 percent of all sector grant funding each year; the amount of funding intended for infrastructure for 2005 is slightly smaller than the funding for health grants and also accounted for about 23 percent of grant funding in that year (a grant in this area was awarded by Interior on May 13, 2005, and accepted by the FSM national government on May 26, 2005). A resolution adopted by the JEMCO during an August 2004 meeting requires the FSM to move to reach the goal of funding infrastructure at not less than 30 percent of annual compact grant funding by fiscal year 2006. In addition, the United States agreed to an FSM request for fiscal year 2004 to spend about 90 percent of its $11.6 million public sector capacity building grant to fund basic government operations, rather than to support this sector’s principal compact objective of promoting effective, accountable, and transparent government. According to a senior OIA official, the FSM needed to use these grant funds for basic government operations to be able to adequately support the use of other sector grant funds. As a 2004 grant condition, the FSM is required to stop funding basic government operations from Compact grant assistance over a 5-year period. Similarly, in 2004, the FSM also had to commit to shifting basic government operations out of its much smaller private sector development grant—a grant primarily intended to support efforts to attract new foreign investment and increase indigenous business activity. The RMI’s largest grant for fiscal years 2004 and 2005 is in the area of infrastructure. The RMI has easily met the “sense of the U.S. Congress” language regarding infrastructure for fiscal years 2004 and 2005, with an infrastructure grant of about $13.5 million accounting for around 39 percent of total sector grant funding in 2005. The next largest grant is in the area of education, which represents more than 30 percent of total grant funding for both years, followed by health grants at 20 percent of the total funding. An additional grant of $1.9 million authorized in amended compact section 211(b)(2) (representing 6 percent of total grant funds in fiscal year 2005) exists specifically to address needs on Kwajalein Atoll, although grant documents had not been signed as of mid-May 2005. In contrast to the FSM, the RMI allocated no compact funding to a public sector capacity building grant in fiscal year 2004 and less than 1 percent of compact sector grant funding to such a grant in fiscal year 2005. (For a more detailed description of FSM and RMI sector grant allocations for fiscal years 2004 and 2005, see app. II.) As provided by the amended compacts, trust funds have been established for both countries, the earnings from which are to replace sector grants when grant assistance ends in 2023. According to an OIA official, the RMI trust fund was incorporated in April 2004, and the FSM trust fund was incorporated in August of that year. The FSM government contributed $30 million to its trust fund in October 2004, while the RMI government, as of March 2005, had contributed $26.5 million to its trust fund and was $1 million behind with its scheduled trust fund contributions. As provided in the amended compacts, the U.S. government has provided $32 million to the FSM trust fund and $14.5 million to the RMI trust fund for fiscal years 2004 and 2005. In addition, according to a State official, the RMI has signed an agreement that will provide for a $50 million trust fund contribution from Taiwan (which has also provided economic assistance to the RMI). The FSM and the RMI each did not spend about one-third of authorized grant funding for fiscal year 2004 (the only completed year under the amended compacts). Some of this unspent funding resulted from a lack of planning required to obtain access to certain grants—the FSM did not complete plans to obtain infrastructure grant funding, and the RMI did not complete plans and reforms for the use of funds targeted to address the special needs of Kwajalein Atoll. Further, both countries did not spend (obligate) some portion of other available sector grants for 2004; the FSM spent a smaller percentage of each of these grants than the RMI (see fig. 3 for FSM and RMI use of sector grants for fiscal year 2004). These funds remain available for use in future years. The FSM did not spend almost $25 million (33 percent) of its authorized sector grant funding of $76 million for fiscal year 2004. This amount includes more than $17 million in infrastructure funding (100 percent of the grant amount) that was not provided to the country because of the time it has taken the FSM to complete a required infrastructure development plan that identified infrastructure projects that adequately integrated state and national priorities. Further, the FSM has only recently established a required project management unit to oversee individual infrastructure projects. Finally, the FSM did not spend more than $7.7 million in other available sector funds (primarily in health and education); OIA officials have expressed frustration that financial management practices in the FSM allowed over 10 percent of the available compact grant funds to go unused for fiscal year 2004. Of this amount, Yap state had the largest unobligated, or carryover, compact fund balance, at more than $4 million. The RMI did not spend about $12 million (35 percent) of its total authorized grant funds of $35 million. The RMI, which met compact requirements related to infrastructure spending, did not spend $9.6 million (66 percent) of its infrastructure grant, owing to the time involved in bidding and initiating infrastructure projects. According to an OIA official, infrastructure activity is now well under way in the RMI. Further, the RMI government did not spend $1.9 million targeted for special needs on Kwajalein Atoll. These funds remain with OIA until the RMI government submits a plan regarding how the funds will be spent. The funds will be used by a local government agency, the Kwajalein Atoll Development Authority (KADA), which has experienced problems in effectively and efficiently using funds in the past. As of early 2005, legislation had been passed that contains plans for KADA’s restructuring, but the agency was not operating. Finally, the RMI had a carry-over balance of about $750,000 from other available fiscal year 2004 sector grants, chiefly in the education sector (5 percent of funding under this grant, the RMI’s second largest for 2004, was unspent for the year). In addition, the U.S. government has not provided one grant established in the amended compacts’ enabling legislation. Neither the FSM nor the RMI has received a supplemental education grant (SEG) that is to begin in fiscal year 2005. The Departments of the Interior, Education, Labor, and Health and Human Services are still finalizing an interagency agreement to determine how funds authorized under the amended compacts’ enabling legislation for this grant will be transferred from other agencies to Interior. The annual SEG amount--$12.23 million for the FSM and $6.1 million for the RMI--is substantial, compared with the funding amounts provided for other compact sector grants. The U.S., FSM, and RMI governments have not addressed several strategic issues that impact the long-term, effective use of funds. Fiscal year 2004 and 2005 allocation of compact sector grant allocations were not clearly tied to broad development goals, and therefore the extent to which existing grants contribute to the FSM’s and the RMI’s long-term development is unclear. The JEMCO and JEMFAC reviews of sector grant allocations for fiscal years 2004 and 2005 did not include discussions of FSM and RMI plans to establish goals regarding the amended compacts’ primary objectives of economic advancement and budgetary self-reliance, and how grant allocations in each sector will help to achieve these larger goals. FSM and RMI plans that could assist in this effort are incomplete. The required development plan for the FSM and the medium-term budget and investment framework (MTBIF) for the RMI are to be strategic in nature and identify how the countries will use compact funds to promote broad compact development goals such as economic advancement and budgetary self-reliance. However, JEMCO has not considered the FSM development plan. Further, U.S. officials are unclear as to whether JEMFAC has approved RMI’s framework plans for the use of grant funds and have acknowledged that this issue needs attention. U.S. government officials have noted that the issue of linking the use of grant funds to the achievement of long-term development goals has not been addressed to this point. Further, while the amended compact states that grant funding is provided to assist the economic advancement of the people of the FSM, the FSM’s process for internally distributing sector grant funding does not address national sector priorities or consider sector disparities between the FSM states. Compact funds are allocated among the five FSM governments—the FSM national government and the four state governments—primarily according to a formula used under the original compact. In addition to providing funds to the four states, the formula established funding to the FSM national government, which resulted in a funding allocation percentage for Chuuk and Pohnpei states that is notably lower than their percentage of the FSM’s population. An FSM law enacted in January 2005 establishes a very similar distribution among the five governments. Although the U.S. government has signed grant agreements for fiscal years 2004 and 2005 that provide for the distribution of funds to the five governments according to this formula, U.S. government officials have stated that this formula may not result in grant allocations that reflect national needs. For example, there are currently substantial differences in sector per capita funding in the FSM states. We calculated that the Yap state compact education grant provides at least twice as much funding per student as the Chuuk state education grant, and almost three times as much funding per person regarding health grants. The extent to which such variances between states benefit the nation or reflect differences in state needs is not clear. Lack of strategic planning in both countries to address necessary grant decreases could result in funding allocations that do not facilitate the most critical and effective use of remaining compact resources. For example, the FSM and the RMI have not developed a strategy to manage the annual sector grant decreases—for the FSM, $800,000 starting in fiscal year 2007 and for the RMI, $500,000 since fiscal year 2005—mandated in the amended compacts. A senior RMI official told us that although the government recognizes that the decrements should be of major concern, government officials are not addressing the problem. Likewise, a senior FSM official reported that although the government has created a task force to examine ways to increase tax revenues to, among other things, compensate for lost compact grant funding, no plan is currently being devised to determine how to respond to the annual decreases. This official also noted that such issues are up to each of the five governments to address as they see fit. In addition, the FSM has no strategic plan to shift basic government operations expenditures from the public sector capacity building grant to local revenues. Although the FSM, according to the terms of a grant condition, provided OIA with a document that calculates percentage decreases of these expenditures from the grant through 2009, there is no additional plan describing the policy steps that will be taken or the agencies and activities that will be affected. Funding for this grant began decreasing in fiscal year 2005, and some officials have expressed concern over the consequences of reduced compact funding to support routine government activities. The FSM and RMI trust funds are earning low returns on trust fund contributions, raising concerns about the future adequacy of the trust funds to ultimately replace grant assistance. All trust fund contributions are currently in commercial bank accounts earning up to 2.63 percent in interest, because neither trust fund has been placed with an investment advisor that will work to maximize returns. According to an OIA official, this circumstance has resulted from the time it took the FSM and the RMI to approve the amended compacts as well as the process involved in selecting an investment advisor and placing funds with money managers. In February 2005, the RMI trust fund committee selected a trust fund investment advisor; no advisor has been selected for the FSM as of mid- May 2005, although the process to select one is under way. This situation is important in the context of our prior analysis that raised questions about the sufficiency of the trust funds to generate earnings that could replace compact grants beginning in 2024. For example, assuming an annual return of 7.9 percent realized by the trust funds at the beginning of fiscal year 2004, we projected that the FSM trust fund earnings by 2048 would be inadequate. However, future earnings in excess of 7.9 percent could counterbalance the slow start for the trust funds. The FSM appears to be in a weaker position relative to the RMI, in that it has not selected a trust fund investment advisor and has not yet obtained additional contributions from other donors. Regarding a separate trust fund issue, U.S. membership in the FSM and RMI trust committees is not yet aligned with language contained in the amended compacts’ enabling legislation, which states that it is the sense of the U.S. Congress that U.S. appointees to the trust fund committees “should be designated from the Department of State, the Department of the Interior, and the Department of the Treasury.” Current U.S. government trust fund committee participants are from the same U.S. agencies that participate in the JEMCO and JEMFAC: the Departments of the Interior, State, and Health and Human Services. An OIA official noted that an effort is under way to eventually include the Department of the Treasury as an additional member of the RMI trust fund committee when Taiwan contributes to the RMI trust fund and can become a member of the committee. (The trust fund agreements allow additional donors to become members of the committees but also require a U.S. majority vote in trust fund committees; therefore, the U.S. government will add another member if Taiwan joins the RMI trust fund committee.) The U.S., FSM and RMI governments have taken several actions to fulfill key accountability requirements, such as meeting annually to approve grants, establishing special grant terms and conditions, and preparing various reports. Further, the U.S. government has withheld grant funding for noncompliance with compact and grant requirements and initiated an investigation into the possible misuse of compact funds in the FSM state of Chuuk. However, a few important requirements, such as the preparation of annual compact spending and development reports, remain uncompleted. (See app. III for a table listing requirements that have and have not been met.) In August 2003 and 2004, the U.S. government held bilateral meetings with the FSM through JEMCO and with the RMI through JEMFAC to discuss and approve fiscal year sector grants allocations. The minutes for the August 2004 JEMCO and JEMFAC meetings showed a discussion of committee procedures and approval of specific sector grant levels. JEMCO and JEMFAC have focused on grant approval and performance assessment, while other committee duties, such as reviewing other donor assistance or audit findings, have received limited attention. Although the JEMFAC meetings with RMI reached consensus on grant issues, the JEMCO meetings with the FSM showed areas of strong disagreement between the U.S. and FSM representatives; these disagreements were decided by a vote, split between the countries, that adopted the U.S. position. The FSM government sent a letter to the U.S. government expressing frustration over the 2004 JEMCO meeting and the manner in which decisions were reached. Special meetings can be called by three JEMCO or two JEMFAC members. A special bilateral meeting with the FSM was held in Honolulu on March 11, 2005, to discuss grant management problems regarding one of the FSM subgrantees, Chuuk state, and a special JEMCO meeting was held that same day to reach decisions regarding the FSM infrastructure development plan and the use of fiscal year 2004 carry-over funds. In addition, the amended compacts require budget consultation meetings before the compact budgets are submitted and the formal JEMCO and JEMFAC meetings are held. These consultations were held with the FSM before the 2005 JEMCO meeting. However, no consultations were held with the RMI because that government was late in providing a draft budget to the U.S. government; a budget was not provided until 1 week before the JEMFAC meeting. Budget consultations were held with both countries in 2003 in preparation for fiscal year 2004. JEMCO and JEMFAC specified additional accountability requirements by including special terms and conditions that were included in the fiscal year 2004 and 2005 individual grants agreements. These special terms and conditions ranged widely, from requiring information on the three FSM health insurance programs to requiring that both countries submit appropriate environmental performance measures and baseline data for approved activities to OIA. According to OIA officials, the RMI met most of the special grant terms and conditions attached to the country’s grants; however, the FSM met only some of its specific terms and conditions. For example, according to OIA staff, the FSM has had difficulty identifying useful performance baseline data for most sectors because of information disorganization and fragmentation. OIA officials reported that the FSM was unable to satisfy more conditions because of a lack of skilled staff in all four FSM states and the national government. They stated that the staff members with responsibility for sector grant compliance did not always have the requisite level of understanding or skill to make sure that problems were being addressed. The FSM and the RMI have submitted their annual compact budgets to the U.S. government, as well as all quarterly financial and performance status reports, and annual financial reports. OIA has asked for FSM to revise its budgets to include more specific data, such as the number of people working on a particular program. OIA officials have found the FSM’s 2004 quarterly financial and performance reports to be in need of improvement, while such reports from the RMI were viewed as adequate. A senior HHS official noted that the FSM has had significant difficulty in providing standardized performance data between the states that can be compared. FSM officials told us that the national government does not assess the quarterly performance reports prepared by the five governments and simply compiles them for transmission to OIA. Both countries have submitted financial and performance reports to the U.S. government on time, and Pohnpei and Chuuk states have withheld pay for officials responsible for performance reports that were not provided on time to the FSM national government. OIA has been working with the FSM to improve and standardize the FSM’s performance reporting format; and, as of the first quarter of fiscal year 2005, all FSM governments were using a uniform reporting format that was approved by OIA. Officials in both countries told us that the requirement to produce performance reports was a positive step and would help to create a linkage between expenditures and their impact. However, the officials acknowledged that they are still in the process of learning how to generate such reports, and that, although the reports have the potential to be used as a management tool, the governments are not yet able to use the reports in this capacity. In several instances, the U.S. government has not provided compact funds to the FSM or RMI in order to ensure compliance with compact requirements, and accountability over sector grants. In two instances, OIA withheld compact funding from the FSM when the country was slow to meet grant conditions. Further, OIA suspended FSM funding due to possible misuse in another situation. Finally, in an effort to ensure prudent financial operations, OIA has delayed providing FSM and RMI grant funding due to cash management concerns. A Department of State official noted that the FSM and RMI governments are definitely taking note as the U.S. government makes use of this new tool to ensure the appropriate use of compact funding. In the first instance, in approving FSM use of most of its public sector capacity-building grant funds for basic government operations rather than for the principal compact objectives for this sector, as mentioned earlier, JEMCO also adopted a grant condition for the fiscal year 2004 public sector capacity building grant. This condition required a “transition plan” by March 2004 explaining how these expenses would be removed from this grant. When the FSM did not provide such a plan, OIA withheld FSM public sector capacity-building grant funding, totaling approximately $1.9 million in May and June 2004 combined. After the FSM provided the plan to the U.S. government in July, OIA released the funding. The second, similar instance occurred simultaneously with a much smaller grant. JEMCO attached a special grant condition to the FSM’s private sector development grant, requiring that the FSM provide a 5-year transition plan for shifting basic government operating costs away from this grant to local revenues. When the FSM did not provide the plan on time, OIA withheld about $630,000 of sector funding in May and June 2004 until the FSM provided a plan in June 2004. Further, as of March 2005, OIA suspended the Chuuk education grant’s meal service program funding, because of questions surrounding the delivery of meals to students. The program was allocated almost $1 million in fiscal year 2005. Because OIA staff were unable to verify that food purchased by the program was received by the Chuuk Education Department or served to students, OIA has suspended—following a bilateral meeting that addressed this issue—$80,380 each month until the FSM national government reports on corrective actions to ensure that the meal service program operates effectively. As of May 2005, this issue, which was uncovered during a field visit to Chuuk by an OIA Honolulu office employee, had not been resolved. OIA also contacted Interior’s Office of the Inspector General for a follow-up investigation to determine whether Chuuk is misusing compact grant funds. According to a senior OIA official, the FSM national government is cooperating with this investigation. Finally, OIA took action in response to FSM and RMI cash management issues (an area not directly related to fulfillment of grant conditions or misuse of funds). OIA delayed payments to the FSM and the RMI in August 2004, when the required third-quarter cash transactions report showed that both countries had notable excess grant sector funding that had not been spent. OIA subsequently resumed funding when the governments reported that they needed cash to meet their obligations. OIA also stopped payments to the FSM in May 2005 when an OIA review showed that the FSM had about $9.7 million in cash on hand. Compact payments will be delayed until the FSM demonstrates its need for additional funding. Despite progress in many areas, a few important accountability reporting requirements have not been met, preventing the U.S., FSM, and RMI governments from fully gauging FSM and RMI performance in utilizing compact funds and from beginning to assess the impact of compact funding. Required broad annual reports summarizing compact spending and progress in meeting development goals have not been completed by any of the three governments. The U.S. government has not provided its fiscal year 2004 report from the President to the U.S. Congress, due in December 2004, though a draft is being circulated for interagency approval. Similarly, the FSM and the RMI have not submitted fiscal year 2004 reports to the U.S. President, although they were due in February 2005. Key development planning efforts remain incomplete, as mentioned in the previous section. These plans were due no later than 90 days after the amended compacts went into effect. The FSM has prepared a development plan, and the FSM Congress approved transmittal of this plan to the U.S. government in May 2005. JEMCO has not yet considered the plan. The RMI has provided the U.S. government with a required medium-term budget and investment framework, as well as a policy framework paper and annual plans for each sector, but it is unclear whether the JEMFAC has approved RMI planning documentation addressing the use of grant funds. OIA officials have provided contradictory views; while one senior official reported that the RMI’s approach was approved during the 2003 bilateral meeting, another official disagreed, and no record exists to document this meeting. No subsequent action has been taken to approve the RMI’s planning efforts. A senior OIA official noted that this particular issue has not received the attention it requires. Required audits that OIA intends to use to gauge compact compliance in specific areas such as procurement, remain outstanding or have been late. Single audits for fiscal year 2004 were due on April 1, 2005. The FSM has not completed its fiscal year 2004 single audit. The RMI has been late in meeting this requirement; the RMI completed its fiscal year 2004 single audit in June 2005. In October 2003, OIA took a significant step toward facilitating implementation and oversight of the amended compacts by opening a Honolulu field office to manage compact issues. However, OIA has not conducted a review to determine the extent of oversight of compact activities in the FSM and the RMI that would adequately promote compliance with compact requirements, though officials from all three governments told us that OIA staff should be spending more time in the two countries. Staff are currently spending about 15 percent of their time in the two countries. The FSM and the RMI governments have subsequently acted to create or identify central offices responsible for compact matters. The RMI government is progressing more quickly than the FSM government in this regard, and it has also taken other actions to facilitate compact implementation, such as creating an infrastructure project management unit. In October 2003, OIA opened a new Honolulu field office specifically intended to facilitate implementation and oversight of the amended compacts, although OIA has not determined how much on-site review of compact activities in the FSM and the RMI is necessary. During the congressional approval process for the amended compacts in 2003, in addressing why OIA should open an office in Honolulu rather than placing OIA staff in the FSM and the RMI, the Deputy Assistant Secretary for Insular Affairs reported to the House Committee on International Relations, Subcommittee on Asia and the Pacific, that “The Honolulu team will be able to travel frequently to the . While travel costs are high from Honolulu, additional travel costs are offset by not having to supply permanent housing, post differential, home leave, and education for dependents that come with foreign posts.” The office has five professional staff—specialists in health, education, infrastructure, private sector development, the environment, and financial management— that provide program and financial expertise along with a knowledge and understanding of the region, and work with the OIA Compact Coordinator in Washington, D.C. The Honolulu staff perform activities such as analyzing FSM and RMI budgets and other required reports, traveling to the islands to discuss and review expenditures and performance with FSM and RMI government officials and conduct site visits, providing briefings and advice to OIA and State officials regarding progress and problems, and providing support for bilateral meetings. However, in conjunction with establishing the Honolulu office, OIA did not determine the extent of on-site review of compact activities in the FSM and the RMI that would adequately promote compliance with compact and grant requirements. OIA fieldwork in the FSM and the RMI is necessary to ensure accountability over funds and compliance with compact and grant requirements, and is one of the principle reasons why the office was established in Honolulu. According to a cable from the U.S. Ambassador to the FSM “The constant flow of compact-related queries highlights the need for continued, intensive hands-on involvement… ffective oversight by Interior’s staff in Hawaii will be critical in realizing the compact’s full potential… staff will need to meet regularly with state officials from both the executive branch and the legislatures. Working more closely with state officials as they develop their budgets would enable staff to spot and resolve problems well before budgets are finalized… Oversight by e-mail is not an option.” Officials from all three countries told us that while they view the creation of OIA’s Honolulu office as a positive development, they believe that the Honolulu staff should spend more time in the FSM and the RMI than they currently do, to provide additional guidance on meeting compact requirements and conduct site visits. For example: The Deputy Assistant Secretary for Insular Affairs told us that he is not satisfied with the amount of on-site review that his staff is able to conduct but that his office must deal with the budget available to it. The OIA Compact Coordinator and staff from the Honolulu office report that on-site time in the field is inadequate and does not allow for detailed reviews of federal funds in the various remote islands. The U.S. Ambassadors to the FSM and the RMI both told us that OIA Honolulu staff should have the resources to conduct more work in the two countries. For example, more on-site work by OIA staff with country budget and finance issues is needed, as well as sufficient time to conduct site visits to schools. The HHS official that participates in the JEMCO and the JEMFAC noted the value of OIA on-site review in Chuuk and said that there needs to be more on-the-ground work. FSM and RMI officials also noted a need for additional on-site review and inspection by OIA staff, including site visits to schools in Pohnpei and infrastructure projects that are under way in the RMI. For fiscal year 2005, the OIA Honolulu office has a travel budget of $170,000, and for fiscal years 2004 and 2005 (through mid-April), staff in OIA’s Honolulu office spent about 15 percent of their total work time reviewing compact-related activities in the islands. OIA officials report that they are allocating their travel based on available funds for travel, while the OIA Honolulu office reports that they have had no input into the preparation of OIA’s budget or the allotment process. Examples of the impact of on-site review include the previously mentioned visit to Chuuk state by OIA Honolulu staff that uncovered possible misuse, as well as meetings OIA program specialists have held in the islands to discuss key issues, such as standardizing and improving both financial and performance measurement reporting, with FSM and RMI officials. According to OIA officials, the office has no assessment under way to establish if this amount of time spent in the FSM and the RMI meets oversight needs. While OIA officials believe the funding for on-site review is insufficient, the department has not supported increased funds for this purpose. Both the FSM and the RMI are seeking to centralize their government contact with the U.S. government and provide for day-to-day management of grant operations, as required in the FPAs. Although the RMI is making more rapid progress than the FSM in this area, both countries are in the early stages of establishing centralized offices responsible for compact matters. In early 2005, the RMI government identified the Office of the Chief Secretary as the official point of contact for all communication and correspondence between the U.S. government and the RMI government concerning compact sector grant assistance. The Chief Secretary is the head of RMI public service and will coordinate and direct the various ministries receiving compact funding with respect to the FPA and compact provisions. The Chief Secretary will also work closely with the RMI Economic Policy, Planning, and Statistics Office to develop the annual budget and sector portfolios and quarterly and annual monitoring and evaluation reports. While the Office of the Chief Secretary will provide oversight and coordination, the Chief Secretary has reported that most of the daily activities and compliance will be conducted by the ministries themselves. The Chief Secretary has outlined his plan to coordinate with agencies and reported to us that he will hold weekly meetings with all secretaries to address compact implementation issues, review reports on specific issues, and provide guidance to the ministries and agencies of the RMI government on compact matters. The FSM Congress recently enacted legislation to establish a Compact Management Board and a supporting Office of Compact Management. The board will consist of seven members; the FSM President will appoint two members, each state will appoint one member, and the final member will be the head of the Office of Compact Management. Whereas the board will be responsible for actions such as formulating JEMCO guidelines for FSM members, the compact office will be responsible for daily communications with JEMCO and the United States with regard to JEMCO and compact matters. A senior FSM official told us that although he expects compact office staff to undertake actions such as compliance visits to the FSM states, he does not expect the constitution of the board to be completed and the office ready to function until October 2005. Although there are ongoing differences between the FSM executive and legislative branches over which branch the compact office should be accountable to, the FSM Congress appropriated $100,000 in 2005 for the operation of the board. Although both countries have taken steps to provide for a centralized approach to addressing compact implementation and day-to-day management of grant operations, neither government’s efforts in this important area are yet under way, and the ultimate effectiveness of such efforts is unknown. The FPAs state that the FSM and RMI are responsible for the management and monitoring of the day-to-day operations of all sector grants to ensure compliance with all applicable grant terms and conditions; however, officials from both countries told us that this issue had not received much attention. Further, a senior FSM government official told us that the national government is not monitoring the day-to-day implementation of the compact by the states. Notably, a senior OIA official emphasized that the FSM’s and the RMI’s partnership with OIA in monitoring compact implementation is key to the success of the amended compacts. The RMI has also made more rapid progress than the FSM in managing implementation of its infrastructure grant. The RMI government hired a foreign firm to be the project management unit that designs and oversees individual infrastructure projects and work is under way. Following an extensive survey to assess the state of RMI education and health infrastructure and determine priority infrastructure projects, several contracts have been awarded, for example, for the construction and maintenance of schools and a hospital. The FSM just established a project management unit in June 2005. Per a JEMCO resolution, such a unit must be established in order to receive infrastructure grant funds. In addition, the FSM and RMI are each working to improve their accounting software systems. The RMI government has adopted a new accounting software system that meets with OIA’s approval and is currently being reviewed within the RMI to ensure that it allows for compliance with compact FPA requirements. Further, the RMI Ministry of Finance has hired fixed-asset and procurement specialists and established a satellite office in Ebeye to handle the specific needs of that area. The FSM, which currently has three different accounting software programs spread among the four states and the national government, is in the process of purchasing a unified accounting system. It will install the program and train each government’s personnel to satisfy compact reporting requirements. The amended compacts differ significantly from the original compact in that they target funding to identified priority areas; require grant agreements; substantially increase accountability requirements to include new dimensions, such as performance measurement; and allow for the withholding of funds for noncompliance with compact or grant requirements. Diligent and sustained effort by the U.S., FSM, and RMI governments will be required to adapt fully to this new approach for providing and accounting for U.S. economic assistance to the FSM and the RMI. Within this new environment, all three countries have demonstrated a commitment to meeting new compact funding and accountability requirements. The U.S. government has undertaken notable actions during the early stages of compact implementation that reflect its commitment. It has embraced new accountability options in the amended compacts by, for example, requiring data that will facilitate performance measurement and suspending funds as a result of possible misuse. Further, by holding infrastructure funding until the countries provide sufficient infrastructure project and identification management, the U.S. government has taken a new approach to ensuring the effective use of compact funds. In addition, by establishing a Honolulu field office and investing in staff to provide monitoring and oversight, OIA has demonstrated its commitment to successful implementation of the amended compacts. Such staff are critical to conducting work in the field to monitor performance and financial accountability, as OIA’s review of education expenditures in the FSM state of Chuuk has demonstrated. However, officials from all three governments believe that more OIA field work is in order. OIA needs to determine the extent of on-site work in the FSM and the RMI necessary to adequately promote compliance with amended compact and grant requirements. The FSM and the RMI have also acted to meet compact requirements, although many of these actions are in an early stage. Both countries have taken steps to establish centralized offices responsible for ensuring compact implementation and day-to-day oversight; however, it is too early to assess how well these offices will meet this goal. Further, both countries have responded in a positive fashion to many new reporting requirements. For example, the FSM and the RMI expressed a desire to provide useful performance reports and have been responsive to working with OIA to strengthen and improve this new approach to accounting for compact funds. In addition, both countries have been timely in providing quarterly financial and performance reports. While both countries are moving to meet compact requirements, to date the RMI is progressing more quickly than the FSM in spending authorized grant funding, meeting special grant conditions, preparing adequate required reports, taking steps to centralize compact management, and selecting an investment advisor who can work to maximize trust fund returns. Although the three governments’ commitment to meeting compact requirements is clear, challenges for future performance exist. The failure of all three governments to complete required annual compact spending and development reports means that, for the first year under the amended compacts, there is no assessment of the use of U.S. assistance and initial performance in key areas such as health and education. Similarly, the lack of timely single audits deprives the United States of a key source of information on the FSM’s and the RMI’s compliance with detailed compact requirements. Additionally, the FSM’s difficulties in preparing a national infrastructure development plan to obtain substantial infrastructure grant funding demonstrate the difficulty the country is having integrating state and national priorities and using compact funds to advance national goals. Finally, it is unclear why strategic issues, such as the need for planning to use compact funds to achieve long-term economic advancement or to address annual grant decreases, are not being actively considered by all three governments, regardless of the early stage of the amended compacts’ implementation. The U.S. government has not pursued resolution of these issues, which have implications for the FSM’s and the RMI’s long-term, effective use of funds. To effectively use Interior staff resources and to maximize the effectiveness of U.S. monitoring of compact expenditures, we recommend that the Secretary of the Interior direct the Deputy Assistant Secretary for Insular Affairs to determine, relative to other office responsibilities, the extent of OIA on-site review in the FSM and the RMI of compact activities that is required in order to adequately promote compliance with compact and grant requirements. To improve grant administration and oversight and to facilitate planning for the effective use of compact funding, we recommend that the Secretary direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management Committee, in coordination with other U.S. agencies that participate in this committee, to work with the FSM government to take the following four actions: establish sector grant levels for each of the five governments that are consistent with national priorities and will assist in promoting long-term development goals such as economic advancement and budgetary self- reliance, establish a time frame for the completion of required and overdue FSM establish a time frame for the completion of FSM government plans to manage decreasing annual grant amounts and to shift basic government operations under the public sector capacity building to local revenues in a strategic fashion, and outline specific actions that the FSM government will take in managing and monitoring day-to-day sector grant operations to ensure compliance with all grant terms and conditions. To improve grant administration and oversight and to facilitate planning for the effective use of compact funding, we recommend that the Secretary direct the Deputy Assistant Secretary for Insular Affairs, as Chairman of the Joint Economic Management and Financial Accountability Committee, in coordination with other U.S. agencies that participate in this committee, to work with the RMI government to take the following three actions: establish sector grant levels that will assist in promoting long-term development goals such as economic advancement and budgetary self- reliance, establish a time frame for the completion of an RMI government plan to manage decreasing annual grant amounts in a strategic fashion, and outline specific actions that the RMI government will take in managing and monitoring of day-to-day sector grant operations to ensure compliance with all grant terms and conditions. We received technical comments from the Departments of the Interior, State, and HHS, as well as the FSM and RMI governments. The RMI submitted particularly extensive technical comments that stressed, among other things, that government’s detailed strategic planning efforts and provided suggestions to improve the factual accuracy of this report. We incorporated technical comments into our report, as appropriate. We also received formal comment letters from all parties. All letters found our work to be useful, although the RMI remarked that the report overstated long- term strategic planning issues, provided insufficient emphasis on economic components of the amended compact that have not been fully implemented, and included passages that were in need of factual correction. The Department of the Interior concurred with our recommendations and stated its intention to implement them. State, HHS, and the FSM government did not comment on our recommendations to Interior. The RMI government stated that some of the recommendations did not reflect the purpose or intent of the amended compact. In addition to providing copies of this report to your offices, we will send copies of this report to other appropriate committees. We will also provide copies to the Secretaries of the Interior, State, and Health and Human Services, as well as the President of the Federated States of Micronesia and the President of the Republic of the Marshall Islands. We will make copies available to other interested parties upon request. If you or your staff have any questions regarding this report, please contact me at (202) 512-4128 or [email protected]. Contact points for our Offices of Congressional Relations and Public Affairs may be found on the last page of this report. GAO staff who made major contributions to this report are listed in appendix IX. The Chairman and Ranking Minority Member of the House Committee on Resources, and the Chairman and Ranking Minority Member of the Senate Committee on Energy and Natural Resources requested that we report on the progress of initial efforts to implement the amended compacts. This report evaluates actions taken by the United States, Federated States of Micronesia, and the Republic of the Marshall Islands governments since fiscal year 2004 to (1) meet funding requirements and plan for the use of this funding, (2) meet accountability requirements, and (3) establish operations to facilitate compliance with funding and accountability requirements. To identify actions taken by the three governments to meet funding requirements, we reviewed the amended compacts as well as the subsidiary fiscal procedures agreements and subsidiary trust fund agreements to identify such requirements as well as expectations of the U.S. Congress in this area. We reviewed all fiscal year 2004 and 2005 grant agreements with both countries, including special terms and conditions included in these agreements, and identified instances where no grant agreement had been signed. We examined annual financial data prepared by the FSM and the RMI to determine the amount of funding that was not spent for fiscal year 2004 and what sectors were affected by this circumstance. We discussed the FSM and RMI data with an Office of Insular Affairs official who has used this information, and determined that the data are sufficiently reliable for the purposes of our report. We also corroborated our calculations of unspent funds with this official. We did not review funding provided to Kwajalein landowners in exchange for U.S. military access to Kwajalein Atoll. This funding is for landowner use and is not included as part of U.S. economic assistance that is subject to sector grants and accountability requirements. To identify issues that impact planning for the use of compact funds, we discussed planning efforts with U.S., FSM, and RMI government officials and also identified issues through our own analysis (such as the use of the distribution formula in the FSM). We then reviewed such issues by examining documents such as FSM and RMI legislation and documentation provided to the U.S. government (such as the FSM’s transition plan to shift ineligible spending under the public sector capacity building grant to local revenues). To identify FSM education spending per capita, we used FSM education grant data and divided grant amounts provided to each state by the student population for each state—the latter data were provided to us by OIA, which received them directly from the FSM. To identify FSM health spending per capita, we assessed health grant amounts against FSM population data. We determined that these data were sufficiently reliable for the purposes of our report. To identify actions taken by the three governments to meet accountability requirements, we reviewed the amended compacts as well as the subsidiary FPAs to identify such requirements. We also reviewed the briefing documents created by the U.S. government in preparation for the annual bilateral meetings with the two countries, as well as the minutes and resolutions, when available, related to the meetings. We further reviewed FSM and RMI documents—such as budget justifications and portfolios, quarterly financial forms and performance reports, and annual financial reports—submitted by the FSM and RMI governments to the U.S. government to confirm compliance with accountability reporting requirements. We discussed the sufficiency of such reports with OIA officials. We also examined FSM and RMI laws and letters exchanged between the FSM and U.S. governments. To identify actions the three governments have taken to establish operations to facilitate compliance with funding and accountability requirements, we reviewed the amended compacts and FPAs to identify specific monitoring responsibilities. In the case of the OIA Honolulu office, we reviewed senior management statements regarding the purpose and function of this office and job descriptions for all staff. To identify the extent of Honolulu office staff travel to the FSM and the RMI, we obtained the travel records and start dates of all five program specialists and discussed this information with OIA officials to ensure that the data was sufficiently reliable for our use. We calculated the percentage of time spent conducting on-site review in the two countries over fiscal years 2004 and 2005 (through mid-April) time span and compared this to the total work time for the program specialists. We obtained OIA travel budget data for the Honolulu office from OIA officials. We reviewed FSM and RMI laws that address structural changes to compact management, as well as unclassified cables from the Department of State. To address all objectives, we held extensive interviews with officials from the U.S. Department of the Interior (Washington, D.C., Honolulu, Hawaii, the FSM, and the RMI) and the Department of State (Washington, D.C., the FSM, and the RMI). We also interviewed officials from the U.S. Department of Health and Human Services (Washington, D.C., and Honolulu, Hawaii). We traveled to the FSM (Pohnpei and Chuuk) and the RMI (Majuro and Ebeye). We had detailed discussions with FSM (national, Pohnpei, and Chuuk governments) and RMI officials from foreign affairs, finance, budget, health, education, public works, and audit agencies. Further, we met with the presidents of the FSM and the RMI. We also met with officials from the U.S. Army Kwajalein Atoll to discuss compact implementation issues. We met with representatives from private sector businesses within the Marshall Islands and with leaders from the Micronesian Seminar, a nonprofit organization in Pohnpei, FSM that provides public education on current FSM events, to obtain their views on compact implementation and development issues. We also met with officials from the Interior Inspector General’s Office (Guam, Honolulu, Hawaii, and Washington, D.C.) to discuss ongoing investigations in the FSM and RMI. We conducted our review from August 2004 through May 2005 in accordance with generally accepted U.S. government auditing standards. We requested written comments on a draft of this report from the Departments of the Interior, State and Health and Human Services, as well as the governments of the FSM and RMI. All comments are discussed in the report and are reprinted in appendixes IV through VIII. Further, we considered all comments and made changes to the report, as appropriate. Compact budget by sector grant Budget consultations with U.S. government Quarterly performance reports by sector Annual compact report to the U.S. President Approved FSM Development Plan or Approved RMI Medium-Term and Investment Framework (MTBIF) Approved FSM Infrastructure Development Plan and RMI Infrastructure Development and Maintenance Plan N/A = Nonapplicable. The following is GAO’s comment on the letter from the Department of the Interior dated June 13, 2005. We recognize that the Department of the Interior has supported the creation of the OIA Honolulu field office to assist in compact implementation. However, officials from OIA have stated that budgetary constraints have prevented staff from conducting sufficient on-sight review in the FSM and the RMI and that the department has not supported increased funds for this purpose. The following is GAO’s comment on the letter from the Department of State dated July 1, 2005. We agree that the amended compacts and their subsidiary agreements contain no commitments regarding the level of revenue that will be generated by the trust funds, and they do not speak of the revenue from the trust funds as “replacing” annual U.S. grant assistance after fiscal year 2023. However, for the sake of assessing the possible difficulty of transitioning from grant assistance to trust fund earnings, we have performed calculations based on U.S., FSM, and RMI trust fund contributions and various rates of return, to forecast the possibility that trust fund earnings will fully replace grant assistance beginning in 2024 (see p. 25). The following is GAO’s comment on the letter from the Department of Health and Human Services dated June 7, 2005. We have made the requested corrections. Specifically, we now use the term “health grant” to characterize this particular compact sector grant throughout the report, and we have deleted the footnote describing travel to the FSM and the RMI by the HHS representative stationed in Honolulu. The following is GAO’s comment on the letter from the government of the Federated States of Micronesia dated June 27, 2005. The report notes that the FSM government submitted a document to OIA that calculates percentage decreases for basic government operations expenditures from the FSM’s public sector capacity building grant through 2009. We also note that there is no additional plan describing what policy steps will be taken or the agencies and activities that will be affected by the decreases. Therefore, we do not believe that this schedule can be construed as a “strategy” that identifies where spending decreases will occur and how they will be managed. The following are GAO’s comments on the letter from the government of the Republic of the Marshall Islands dated June 28, 2005. 1. We made several factual corrections to the report, based on the RMI’s technical comments (see comment 5). 2. The RMI’s technical comments emphasize the government’s detailed strategic planning efforts. We do not dispute that the RMI government has undertaken planning initiatives regarding the use of compact funds in each sector. Our point remains that (1) it is unclear whether JEMFAC has approved RMI planning documentation addressing the use of grant funds and (2) there have been no bilateral discussions addressing how the RMI will achieve the amended compact’s stated goals of economic advancement and budgetary self-reliance. 3. Our recommendations, which are intended to further ensure planning for the effective use of compact funding, are directed to the Department of the Interior. In its formal comment letter, Interior concurred with the recommendations and stated its intention to implement them through the department’s internal budget and planning process and, to the extent possible, through the joint economic management committees. 4. We intend to review the trust funds, the supplemental education grant, and the judicial training funding in more detail during subsequent work. 5. Per an agreement with the RMI government, we are not reproducing the RMI’s technical paper. However, we have used comments in the paper to make factual corrections to the report. In addition to the contact named above, Emil Friberg, Leslie Holen, Eddie Uyekawa, Reid Lowe, Kendall Schaefer, and Mary Moutsos made key contributions to this report. | From 1987 to 2003, the United States provided economic aid to the Federated States of Micronesia (FSM) and the Republic of the Marshall Islands (RMI) through a Compact of Free Association. A previous GAO report found little accountability for the assistance provided by the U.S. Department of the Interior under this compact. In 2004, amended compacts with the FSM and RMI went into effect and will provide $3.5 billion in assistance over 20 years, consisting of grants and contributions to trust funds that are to replace the grants after 2023. The amended compacts include funding and accountability requirements that were not present in the original compact. To better understand the status of the compacts' implementation, GAO evaluated actions taken by the U.S., FSM, and RMI governments since fiscal year 2004 to (1) meet funding requirements and plan for the use of this funding, (2) meet accountability requirements, and (3) establish operations to implement the new agreements. In fiscal years 2004 and 2005, the U.S. government signed grant agreements with the FSM and the RMI focused on six sectors, such as health and education, as provided for in the amended compacts. Authorized grant amounts for each year were about $76 million for the FSM and about $35 million for the RMI. Required trust funds were also established. Strategic planning issues impacting the long-term, effective use of funds have not been addressed. The allocations of the grants to the sectors have not been linked to the countries' development goals; the FSM and RMI have not planned for annual required decreases in grant funding; and trust funds have not been invested to maximize interest earnings (though efforts are currently under way to resolve this final issue). The U.S., FSM, and RMI governments have taken actions to meet compact accountability requirements. For example, the FSM and the RMI have provided financial and performance reports, and the U.S. government has withheld funding to ensure compliance with grant requirements. However, a few important accountability requirements have not been met. For instance, the FSM's development plan has not been approved by the U.S. government, and it is unclear whether the U.S. government has assessed the RMI's planning documents. Finally, the FSM has not completed single audits for fiscal years 2003 or 2004, and none of the three governments has submitted its required annual compact spending and development report for fiscal year 2004. The Department of the Interior took a significant step in October 2003 to facilitate implementation and oversight of the amended compacts by opening a new office in Honolulu, Hawaii. However, Interior has not determined how much oversight of compact activities in the FSM and the RMI is necessary, though the current level of on-site review is viewed as insufficient. The FSM and RMI governments have each taken actions to establish centralized compact management offices; the RMI government is progressing more rapidly in these efforts than the FSM government. |
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